Author Archives: Pater Tenebrarum

     

 

 

Unanimity Syndrome

If there is one thing apparently no-one believes to be possible, it is a resurgence of consumer price inflation. Actually, we are not expecting it to happen either. If one compares various “inflation” data published by the government, it seems clear that the recent surge in headline inflation was largely an effect of the rally in oil prices from their early 2016 low. Since the rally in oil prices has stalled and may well be about to reverse, there seems to be no obvious reason to expect the increase in CPI to continue, or heaven forbid, to accelerate.

 

Buying an egg in Berlin, circa early 1923.

Photo credit: DPA

 

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A Case of Botched Timing, But…

When last we wrote about the gold sector in mid February, we discussed historical patterns in the HUI following breaches of its 200-day moving average from below. Given that we expected such a breach to occur relatively soon, the post turned out to be rather ill-timed. Luckily we always advise readers that we are not exactly Nostradamus (occasionally our timing is a bit better). Below is a chart of the HUI Index depicting the action since the January 2016 bear market low, with lateral support/resistance lines relevant to the recent action.

 

After the HUI turned down from its 200-dma, we thought the red line would hold as support, but it was not to be. However, the area between the two blue lines has provided support, so there is a higher low in place for now, due to the “buy the news” response to the payrolls data and the rate hike. It is a bit difficult to see on this chart, but the advance on Wednesday stopped exactly at the 20-day ma, and the gap up open on Thursday (as we write this) stopped right at the 50-day ma. In spite of its volatility, the HUI is actually quite well behaved in terms of the technical picture, this is to say it often respects support and resistance levels, trend lines and moving averages and is quite amenable to Elliott Wave counts as well – click to enlarge.

 

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Blow-Off Pattern Recognition

As noted in Part 1, historically, blow-patterns in stock markets share many characteristics.  One of them is a shifting monetary backdrop, which becomes more hostile just as prices begin to rise at an accelerated pace, the other is the psychological backdrop to the move, which entails growing pressure on the remaining skeptics and helps investors to rationalize their exposure to overvalued markets. In addition to this, the chart patterns of  stock indexes before and after blow-off moves are displaying noteworthy similarities as well.

 

“On Margin” – a late 1929 cartoon illustrating the widespread obsession with the stock market at the time. There was just a 10% margin requirement, i.e., investors could leverage their capital at a ratio of 10:1. The demand for margin credit was so strong, that it pushed call money lending rates in New York up quite noticeably. This in turn made it increasingly difficult to maintain extremely leveraged positions.

 

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Defying Expectations

Why is the stock market seemingly so utterly oblivious to the potential dangers and in some respects quite obvious fundamental problems the global economy faces? Why in particular does this happen at a time when valuations are already extremely stretched? Questions along these lines are raised increasingly often by our correspondents lately. One could be smug about it and say “it’s all technical”, but there is more to it than that. It may not be rocket science, but there are a few issues that are probably not getting the attention they deserve.

 

The stock market has blown widespread expectations out of the water by embarking on a seemingly unstoppable rally since Donald Trump was elected POTUS.

Cartoon by Frank Hanley

 

As you can see below, we have marked “Brexit day” on the chart as well, which was another noteworthy juncture. Not only was the success of the “Leave” campaign just as big a surprise as Trump’s election victory, but it was yet another occasion on which the market ended up fooling most observers by dramatically reversing course after a mere two days of relatively mild panic selling.

 

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The Technical Picture – a Comparison of Antecedents

We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of late. In light of past experience, such market behavior certainly deserves to be scrutinized. We felt reminded of another occasion though, when a negative divergence prompted a flood of mails to us as well (not every divergence does).

 

The HUI compared to gold. It is a good rule of thumb that positive divergences between the HUI and gold are bullish signals and negative divergences are bearish signals. Also, gold stocks should ideally lead gold in order to confirm the prevailing trend. They should be strong relative to gold in uptrends and weak relative to gold in downtrends. As you can see above though, not every negative divergence is meaningful. It can even turn out to be a major misdirection, as happened in early 2016. We published a great many posts  on the sector between August and December of 2015, stressing that we felt a great opportunity was at hand. The brief break of support in January 2016, coupled with a negative divergence,  prompted many people to write in and express concern – click to enlarge.

 

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Looming Currency and Liquidity Problems

The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into account.

 

USD-CNY, the onshore exchange rate of the yuan vs. the USD. After years of relentless appreciation, the yuan topped in early 2014 and has weakened just as relentlessly ever since. The yuan’s top coincided with the beginning of the “tapering” of the Fed’s QE3 debt monetization program and the peak in China’s foreign exchange reserves at just below $4 trillion. There was practically no lead time involved, which is rare. Although the yuan is not convertible and therefore by definition a “manipulated currency” (is there a fiat currency that isn’t manipulated?), the assertion that China’s authorities are deliberately weakening the yuan is erroneous. The opposite is true: they are trying to keep it from falling or are at least trying to slow down its descent with every trick in the book (every intermittent phase of yuan strength since the beginning of the decline was triggered by intervention). Understandably so: due to the close correlation between the level of forex reserves and credit and money supply growth in China, a rapid depletion of reserves is likely to impact the country’s giant credit bubble. One of the moving parts in this equation are bank reserve requirements, which the PBoC essentially uses to control the extent of credit growth triggered by the accumulation of reserves (a.k.a. “sterilization”). These peaked at 21.5% in June 2011 and were since then lowered to 17% to keep domestic credit expansion going – click to enlarge.

 

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A Shift in Expectations

When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump’s election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election result has strongly boosted certain market expectations.

 

 

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Sentiment Extremes

Below is an update of a number of interesting data points related to the gold market. Whether “interesting” will become “meaningful” remains to be seen, as most of gold’s fundamental drivers aren’t yet bullishly aligned. One must keep in mind though that gold is very sensitive with respect to anticipating future developments in market liquidity and the reaction these will elicit from central banks. Often this involves very long lead times.

 

Blackbeard’s treasure chest.

 

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A Quick Chart Overview

Below is an overview of charts we picked to illustrate the current market situation. The selection is a bit random, but not entirely so. The first set of charts concerns positioning and sentiment. As one would expect, these look fairly stretched at the moment, but there are always ways in which they could become even more stretched. First a look at the NAAIM exposure index:

 

At 101.6% net long (responses can range from 200% leveraged short to 200% leveraged long), fund managers taking part in this survey have reached a fairly one-sided extreme – click to enlarge.

 

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Surface Temperatures Plunge – the Great Pause Continues

Last year’s El Nino phenomenon temporarily provided succor to climate alarmists, who were increasingly bothered by the “Great Pause” – the fact that the tiny amount of warming experienced since the last cooling cycle ended in the late 1970s had apparently stopped. Despite trace amounts of CO2 in the atmosphere continuing to climb, mother nature decided to disobey alarmist models and temperatures went sideways for about 20 years (or even longer, depending on the data set).

 

Too bad penguins actually don’t live at the North Pole! One probably should refrain from obtaining climate information from rabidly leftist blogs. Incidentally, the same very same ice-floe has carried lost polar bears in the past, in particular the species “ursus bogus”. If one looks around a bit, there’s also a version with three penguins…

 

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A Very Odd Growth Spurt in the True Money Supply

The growth rates of various “Austrian” measures of the US money supply (such as TMS-2 and money AMS) have accelerated significantly in recent months.  That is quite surprising, as the Fed hasn’t been engaged in QE for quite some time and year-on-year growth in commercial bank credit has actually slowed down rather than accelerating of late. The only exception to this is mortgage lending growth – at least until recently. Growth in mortgage loans is still very slow though, especially compared to historical growth rates. It cannot really account for the recent surge in money supply growth either.

 

1-tms-2-and-total-loans-and-leases-y-y-changeYear-on-year growth rates of TMS-2 (11.19%, black line) and total loans and leases at commercial banks (7.7%, red line) as of October. In absolute terms money TMS-2 has soared by a staggering $840 billion since the beginning of the year – click to enlarge.

 

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Hidden Motives

It is well-known that India’s government wants to coerce its population into “modernizing” its financial behavior and abandoning its traditions. The recent ban on large-denomination banknotes was not only meant to fight corruption.

 

very-bad-boyObviously, this very bad Indian has way too much cash. Just look at him, he looks suspicious!

Photo via thenewsminute.com

 

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