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Pivotal Events

The following is part of Pivotal Events that was published for our subscribers July 24, 2014.


Signs Of The Times

"Social reform, which the country welcomed and still demands, seems to have been perverted by lesser members of the New Deal general staff to the purposes of making war upon the existing social and economic order, a war inspired by nothing more than the existing malice against any measure of personal success."

- Wall Street Journal, March 6, 1935, repeat 1935

"Six Years of a New Deal"

"Recovery has yet to be fully achieved after the expenditures of some $25,000,000,000 of borrowed money. The conclusion is that what we have done so far in our attempts to secure it not having succeeded, the only recourse is to change the policies."

- Wall Street Journal, July 17, 1939

"He sees overall value in the corporate bond space, arguing it is unlikely that the kind of bubble that formed in 2007 has once again emerged."

- Financial Post, July 2

"China's corporate bond market is facing its second default after a builder said it may fail to make a payment."

- Bloomberg, July 1


The view that a bond bubble similar to the one that blew out in 2007 is "unlikely" seems impressionistic and not based upon thorough research. Numbers show it to be the biggest bond bubble in history and we are working on a special study. Junk yields at 5 percent and record amounts are being issued - really.

And as Bloomberg recently reported, "Deals packaging junk-rated corporate loans into securities with ratings as AAA are being done at a record pace."

The above 1935 condemnation of the "New Deal" is a classic. Staffers against personal success seems all too familiar today.

A couple of weeks ago, the estimable Ambrose Evans-Pritchard covered the startling differences between utterances from the Bank of England and the Bank for International Settlements. The former was the first central bank with the powers of issuance. The latter was originally chartered to clean up the mess of "reparations" following the First World War. It then became involved in clearing the mess following excesses by all central banks during the "Roaring Twenties".

The head of the BIS is now concerned that the "debt surge" is setting up another collapse. Over at the Bank of England, the chief economist boasted:

"Has monetary policy aided and abetted risk-taking? I hope so. That is why we did it."

Usually it is at a dangerous time in financial history when policymakers brag about their policies. It is usually precedes the brutal transfer of power from central bankers to margin clerks.

We'll leave the next word to Janet Yellen, which is rather condescending:

"I come from an intellectual tradition where public policy is important, it can make a positive contribution, it's our social obligation. We can help make the world a better place."

Sure, but it is mainly lofty ambition. Actually, the policy compulsion has been absurd in depreciating the purchasing power of the dollar by more than 95 percent.

The guy at the BoE boasts about fostering risk-taking. The BIS says it is strange and the Fed's Yellen says intrusion is a noblesse oblige.

And the last words are by James Caruana, head of the BIS cleanup committee:

"There is something strange about fighting debt by incentivizing more debt."

Some would call the Fed's manipulations and statements as bureaucratic ritual, merchants in the early 1600s called it "tyrannical duncery".

Stock Markets

How did we get here?

The last material defining moment for the S&P was the Springboard Buy of last October. By definition, it occurs in an uptrend. Seasonality suggested a rally out to around January-February. The momentum and sentiment surge was very good and resulted in speculative highs in March. Significant corrections followed.

The next "carrier" of the bull market has been the seasonal bond rallies and spread narrowing that can run into May-June. Depending upon which spread you look at, narrowing ended in June. The following charts show this has been followed by a quiet widening trend.

As in previous important turns, the key to the stock market is when the action in spreads becomes dramatic.

Where are we now?

The S&P continues its robust rally somewhat past sentiment and momentum readings found only at cyclical peaks. A nearby chart highlights the rundown in corporate liquidity.

Cole Porter's classic song "I Get A Kick Out Of You" includes a fascinating line: "Fighting vainly the old ennui."

One could change it to "fighting the old complacency" and become contemplative.

Our guess has been that business reports and the stock market would be positive until the action in spreads becomes dramatic.


This year's low for the DX was set at 78.9 in May. Perhaps this was the "best" the Fed could do to in its endless quest to stimulate speculation. Time will tell.

That low bounced off the level of support set in October and February 2013. Last week we noted that rising above 80.9 would be constructive for the chart. It has increased from 80.5 to 80.9 and with the breakout the target becomes 85, which was reached with the bond mini-panic in June 2013.

The rally in the Canadian dollar become very overbought at the first of the month. A correction has followed and it has further to go.

Credit markets

Some credit spreads have reversed trend and have been quietly widening. This is an alert, and we are watching for some drama.

The bond future got rid of its overbought and could rally to the 140 level.

As we have been emphasizing, the action in lower-grade bonds has become technically excessive. Just because Spanish yields got down the lowest level since the late 1700s does not mean it ranks as AAA. We could not confirm that 2.56% is such a low, but recall that the financial media got ecstatic when Japan's long-dated bond declined to a yield of something like 1.5%.

It was reported to be the lowest since that level was recorded by the Bank of St. George in the middle ages. The irony was that that yield history was of the bank stock, not a bond, yield.

Whatever, the action in lower-grade bonds is essentially inflation in financial assets. And this has become extreme inflation and long-dated instruments should be considered as commodities. And commodities have never been ranked as AAA.

The Spanish yield declined to 2.58% in June, increased to 2.81% and has declined to 2.56% today. This seems to be a test of the low. Similar action holds for the Italian noted as well.

Russia, Portugal and Greece have slightly increased their yields since setting important lows in June.

This writer has read a lot of financial history and stands infinitely amazed at the recklessness of today's senior central bankers. As frequently noted, they don't understand that financial collapses always follow a great speculation and a panic will clear on its own. The notion that panics won't end without intervention is absurd. Just as absurd as the notion that a financial mania can be "managed".

The latter is again becoming preposterous and policymakers are again needful of financial instruction.

The classroom is open, but it is unsure when the lesson will end.

Precious Metals

There have been some outstanding trades in the precious metals sector.

The first was on our "Rotation" theme of last November, with the first rally from the oversold in December to an overbought in February.

The next rally was from the end of May and into June when the Daily RSI on the silver/gold ratio soared to 84. We noted that this indicated that speculation had reached dangerous levels.

Today, the silver/gold ratio declined by 1.5%, which is an alert. In order to offset the excess, the RSI should decline to around 30 and today's decline is a distinctive step.

Last week, we thought the rally in the sector had too much to do with alarming reports from Gaza and Ukraine. In order to breakout, gold needed to exceed 1326; it made it to 1325. Such precision is more fluke than calculation.

However, the market has turned down.

Our story remains that the cyclical bear market for precious metals is bottoming as the cyclical bull in the orthodox world is maturing.

Let's call this the "Mother" of all "Rotations".

With this, gold's real price should begin to outperform. This shows up in our Gold/Commodities Index, which after declining since February 2009, turned up in early June. This got ahead of itself last week and has been correcting.

Nevertheless, the reversal seems to have been accomplished and the new bull market for gold's real price is underway.

Precious metal stocks could be vulnerable as the excesses into June are corrected.

Precious metal stocks are also vulnerable to the eventual weakness in the big stock markets.

By way of a "heads up" on change, today the gold/silver ratio rose above the 200-Day ma.

We are looking for the next oversold in precious metals stocks.

Where Is The Wall Of Corporate Cash?

US Corporate Cash Holdings

  • Too many companies have been borrowing to pay for stock buybacks.
  • Executive compensation rarely includes options on debt.

Credit Spreads

B of A Merrill Lynch US Corporate BBB Option-Adjusted Spread

  • By this measure, spreads narrowed into June and have been quietly working on a reversal.
  • The last reversal, shown in the second chart, shows the quiet reversal beingworked on in April-May 2007. The trend became dramatic in that fateful June.
  • The Fed was very accommodating throughout that phase of outstanding speculation.

Credit Spreads: 2005 to Date

B of A Merrill Lynch US High Yield Master II Option-Adjusted Spread

Boom in Cars

Motor Vehicle and Parts Dealers Chart

  • The previous rally in vehicle sales ran for six years and ended before the stock market did.
  • This rally has been very steep and has run for six years.


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