The following is part of Pivotal Events that was published for our subscribers August 27, 2015.
Signs of The Times
"U.S. Auto Sales Blow Past Expectations in July"
- Forbes, August 3.
"Premature to speak of Chinese crisis."
- IMF, August 12.
One would think that the IMF would have the research abilities to anticipate rather than belittle such setbacks.
Perhaps the establishment's mandate is limited to just isolating them.
"I will say that China's markets still are separated from world markets."
- Treasury Secretary Jack Lew, Reuters, July 8.
"KKR Losses May Reach $5 Billion From Energy Bust"
- Bloomberg, August 18.
In 2007, KKR acquired Energy Future Holdings for $48 billion. The largest ever LBO became the largest ever non-financial bankruptcy. This is small change compared to:
"After 6 Years of QE, And A $4.5 Trillion Balance Sheet, St. Lois Fed Admits QE Was A Mistake"
- Zero Hedge, August 19.
"The Tooth Fairy is Cutting Back This Year"
- CNBC, August 18.
At $3.19 the average paid for each tooth is down 24 cents from last year.
Another sign of deflation?
The Fed admitting that massive Fed easing was a mistake is profound.
When you've read about one financial crash you will have known all you need to know about them. When you experienced only one such crash you will have learned all there is to know about them in a different way. As spectacular as the Tech-Mania that blew out in 2000 was, it was not a classic bubble. The bubble that completed in 2007 had all of the characteristics of a great bubble. Previous examples include 1929 and 1873, as well as right back to the 1720 extravaganza.
In the US, the bull market that began in 2009 has been equivalent to the first one out of the crash that ended in 1932. It became mature on its own and using the NYSE Comp set a big Rounded Top¹ and has taken out the low of last October. This is serious and should be studied as a changing event and not considered as another "Buy the dip" opportunity.
¹ Veteran readers will appreciate the transition from Rounding Top to Rounded Top.
This has coincided with the accomplishment of a huge and classic bubble in Shanghai. As it began to go vertical earlier in the year we considered that the SSEC could blow-out in June, with one last set of Upside Exhaustion readings. Only one registered, but it was enough.
Officialdom could lay on some massive support going into September. It could also lay on even more massive support in October, much as the Fed and Treasury did in 2007 and 2008. But global financial markets are likely to suffer heavy liquidation in the fall - the traditional period when central bank ambitions are trumped by margin clerks.
The trading floor cynic shudders to think that the Fed's role is to get individual accounts "out of line". This contrasts with the margin clerk's job description, which is to get the accounts "in line".
The government's broker is corrupt.
Although it happens at the end of every bubble, it has been amazing to this writer when credit spreads actually reverse to widening. On schedule, as in 1998, 2007 and 2008. This time around, it occurred in May and the first breakout was likely to occur in early June. It did and the next and critical breakout would likely occur in late July-early August.
That occurred at 216 bps on August 16th. The breakout became dramatic at 220 bps on August 19th - just last Wednesday. It is now at 228 bps as widening becomes more dramatic.
And as the saying goes "the rest is history", and should it stay on this methodical course the dislocation could encompass all of the speculative games. Including all forms of real estate.
The long bond was expected to rally with the arrival of concerns. At the least, our target was overhead resistance at the 123 level on the TLT. Then on the serious hit to the stock market it jumped to 128.92 on Monday.
The August 19th ChartWorks noted the technical excesses and concluded the top would be accomplished within a week or so.
The initial target was around 122. The low was 121.36 yesterday.
A big picture chart follows.
Long Bond: Flight To Quality?
- The recent rally has been the "Flight".
- At 128, the TLT became overbought and gave a technical sell. (ChartWorks, August 19).
- The gambit has been to bid long Treasuries up as stocks go down.
- This was the case in 2001 and 2008, with a minor example in 1987.
- We question that as the US stock market declines further this will work "one more time"?
- Our late January study "Ending Action" outlined that the great bull market for government bonds was reaching a cyclical peak.
- Technical readings were "out of sight".
- This happened to be associated with the initial crash in crude oil and may have pre-empted the big bond rally with problems in the stock market.
- In which case, the latest rally to overbought may have fully discounted stock problems.
- The zoom to 128 seems to be a test of the January peak and is failing.
- Back in the day, the careful money went to Treasury bills in a financial storm.