The following is part of Pivotal Events that was published for our subscribers February 8, 2018.

Perspective

We have been watching for credit conditions to deteriorate - enough to prompt the establishment to claim that there are no problems. It took a jump in long-dated rates and a hit to the stock markets to prompt some such defensive claims. The advice to ignore the break and focus on the economy seems naïve. In ordinary conditions the top of the stock market leads the peak in the economy by some 12 months. That is why the S&P is included in the formal list of "Leading Indicators" (number 7 in the Conference Board's determination).

But there are times when the stock market does not lead the recession.

In an age of inflation in financial assets typically the economy peaks close to the top of the stock market. Using the NBER determination of the business cycle the economy peaked in August 1929 and we all know about that blow-off. The previous one was the 1873 Bubble, which in NY climaxed in that fateful September and the recession started in that fateful October. By 1884, the contraction in England, the senior economy, was so persistent that economists began calling it the "Great Depression".

It lasted to 1895 and even as late as 1939, senior economists were still considering how the "Great Depression" could have been prevented. And then the prevailing one got their attention.

This history worked for us in 2007 when we expected the recession to start virtually with the bear market. The S&P topped in October and the recession started in December. That was the month when Harvard's Greg Mankiw boasted that nothing could go wrong. As he praised it, the Fed had a "dream team" of economists. There are examples from the summers of 1929 and 1873 that "nothing can go wrong".

Going the other way, we thought in 2009 that with the panic ending the next business expansion would be soon. The crash ended in March and the recession was declared over in June. No 8 to 12-month lag. In a "New Era" financial speculation drives the economy.

A few more "nothing can go wrongs" would be part of this topping process.

Stock Markets

Our October 4th Pivot outlined that even the Dow could get "bubbled" and reviewed the pattern where some outstanding speculations completed in the December-January window. On the Bitcoin, the ChartWorks has been comparing last year's behavior with the final stages of gold's huge rallies into January 1980. The chart was also overlaid with the final stages of the Nikkei to December 1989 and the Dow to 1929.

We have used the overlay approach many times. Shanghai in 2007 is one example.

The Upside Exhaustion model was outstanding going into the peak in crude oil in July 2008.

The key to the Bitcoin peak was that the action was generating Upside Exhaustions, which is a momentum determination. Then, on December 19th the Sequential (13) Sell completed, which is pattern. The latter was the first in two years and we concluded that, at least, it would be the biggest setback in as many years. The question was would a peak in Bitcoin precede a loss of speculative energies in other sectors?

Also, reviewed in December was that every boom concludes with a change in the credit markets. That key question was would the reversal in credit markets precede the peak in the stock market by some months as in 2007? Or would it be virtually instantaneous as in the Dot-Com Bubble in March 2000?
Treasury curve flattening reached its maximum in the middle of December. That's on the 2s to 20s and the chart took out the 50-Day ma at the first of February. Too early to call it a trend change but it has been part of the hit. The CCC spread reached its best at 7.64% on January 26th. It has since widened 60 beeps to 8.24%.

Then the next feature of change would be industrial commodities ending their rally.

Base metals rallied to January 29th and have taken out the 50-Day ema. Crude oil rallied to a high on January 25th and has dropped 5 dollars to the 50-Day ema. Lithium rallied to January 3rd and has declined. Cobalt is still rising.

Lumber is still rising.

On the bigger picture, credit markets are reversing, the dollar is firming and industrial commodities are faltering. In November, we thought action in these would support the stock rally, and they did. Now they are not. To look to the positive side, when this initial liquidation of highly speculative position completes there can be positive action in spreads in the May-June window.

The job-description of reckless central bankers is to get the accounts out of line. The job-description of responsible Mr. Margin is to get the accounts in line. In a liquidity crisis, the real power shifts to the latter.

The unusual nemesis is that the establishment's attempt to depose a sitting president did not have solid evidence. Within this, leaders in DOJ and FBI became political operatives, which is the ultimate in corruption. Over the past few weeks, evidence continues to mount.

As we have been noting, the market peaked in January 1973 and the bear market was accompanied by the "Watergate" scandal that forced Nixon's resignation in August 1974. The current attempt by the state to influence the election is orders of magnitude greater than that. The attempt by the state to depose a duly elected president is extraordinary that must be countered by an equally extraordinary response.

America is facing a constitutional struggle, without precedent. It will take many months before the MSM-dominated audience begins to become fully informed. And then there will be the long legal process.

In 1973 to 1974, the media were out to take down President Nixon. This time around, the MSM are defending the corrupt Obama administration.

We have published a series of articles under the title of "America's Cold Civil War" which described decades of one-way intrusion by authoritarian government. For the first time, this now has serious opposition in the form of another popular uprising. The uprising has gained a bare majority in the Senate and a determined executive in the White House.

The struggle has been and will continue to be intense. The Left has never faced such a firm "No!", and is very troubled. As with the uprising that brought down the Berlin Wall and Communism, American authoritarians will not resort to guns and tanks. All they have is loud propaganda, now becoming very tedious.

Very Pretty Chart

Source: Mark J. Perry

"A group of frackers, relying on market cures rather than government direction, achieved dramatic advances by focusing on fossil fuels."

- The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters, Gregory Zuckerman.

"U.S. Oil Exports Pour into Markets Worldwide"

- Reuters, February 8.

"Russia and Saudi Arabia Forge Energy Pact to Counter U.S. Shale Boom"

- Financial Times, February 8.

Municipal Bonds
Taking Out the 20-Week EMA

• In anticipation of the defaults of so many Democrat-controlled cities and counties?

Ten-Year Yield Break Out Extends

• Our July 2016 review of the technical excesses concluded that the secular decline in interest rates was ending.
• We recalled our presentations of 1982 when the conclusion was that "No matter how much the Fed prints, financial assets will outperform commodities".
• When this bubble fails the line will be "No matter how much the Fed tries to print, most tangible and financial assets will deflate".
• There has been five Great Bubbles and each was followed by deflation.

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