Chart Update

     

 

 

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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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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Mini-Panic Over Inflation After Trump’s Election Victory

We have witnessed truly astonishing short term market conniptions following the Donald Trump’s election victory. In this post we want to focus on one aspect that seems to be exercising people quite a bit at present, namely the recent surge in  inflation expectations reflected in the markets. Will we have to get those WIN buttons out again?

 

winA 1970s “whip inflation now” button. The only thing that was actually needed to “whip inflation” was for the Federal Reserve to stop printing money in ever greater quantities (or to stop supporting rapid money creation by the commercial banking system). It started doing so about 2 years before Mr. Paul Volcker took the helm – true money supply growth began to slow down considerably. Volcker then exacerbated this slowdown and briefly even pushed broad true money supply growth into negative territory. By that time, the decline in price inflation had already gotten underway and the public’s inflationary psychology soon underwent a sea change – right on the eve of one of the strongest increases in manufacturing productivity in modern history.

 

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Pre-Election Market Movers – Mr. Comey and the Trio Infernal

Before this Monday, the S&P 500 Index went down nine days in a row. While this was almost unprecedented (or in any case, a very rare event) the decline was quite small overall. The timing of the pullback and the subsequent strong rebound on Monday suggests that Mr. Comey’s letters to Congress regarding the FBI investigation into official emails by Hillary Clinton – which have found their way unto a computer owned by Anthony Weiner (the former husband of Clinton’s right-hand woman Huma Abedin) –  were the “trigger” for these moves.

 

comey-and-the-trio-infernalFBI chief Comey and the Trio Infernal: Huma Abedin, Anthony Weiner and Hillary Clinton. Weiner is embroiled in a rather unsavory scandal – allegedly he has inter alia mailed pictures of his unclothed reproductive organs to a minor. The FBI has detected some 650,000 emails on his computer that seem to have come from Ms. Clinton’s private email server, which she in turn used in her official capacity as Secretary of State (her use of this device violated regulations and testified to her lack of sound judgment).

Image credit: Robyn Beck, Don Emmert / AFP / Getty Images

 

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Sentiment and Positioning

When we last discussed the gold sector correction (which had only just begun at the time), we mentioned we would update sentiment and positioning data on occasion. For a while, not much changed in these indicators, but as one would expect, last week’s sharp sell-off did in fact move the needle a bit.

 

gold_bullionGold – just as nice to look at as it always is, but slightly cheaper since last week.

Photo via The Times Of India

 

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The Long Term Outlook for the Asset Bubble

Due to strong internals, John Hussman has given the stock market rally since the February low the benefit of the doubt for a while. Lately he has returned to issuing warnings about the market’s potential to deliver a big negative surprise once it runs out of greater fools. In his weekly market missive published on Monday (entitled “Sizing Up the Bubble” – we highly recommend reading it), he presents inter alia the following eye-popping chart:

 

1-wmc161003cThe median price-sales ratio of S&P 500 component stocks – click to enlarge.

 

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A Litany of Failures

It was widely expected that the BoJ would announce something this week after it promised to perform a comprehensive review of its monetary policy. It certainly did deliver a major tweak to its inflationary program, but its implications were seemingly not entirely clear to everybody (probably not even to the BoJ).

 

b-bojcurrency-a-20160131-870x641This picture was taken back when the BoJ first introduced NIRP, but it has the appropriate horror movie atmosphere. Kuroda’s press conferences with these nifty little placards remind us a bit of school. As an aside, the term “quality” evidently got there by mistake. One cannot improve a money’s quality by increasing its quantity and enforcing negative rates (these are a particularly dangerous abomination).

Photo credit: Yuya Shino / Reuters

 

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The Long Awaited Correction is Underway

The gathering of central planners at Jackson Hole was widely expected to bring some clarity regarding the Fed’s policy intentions. This is of course a ridiculous assumption, since these people have not the foggiest idea what they are doing or what they are going to do next. Like all central planners, they are forever groping in the dark.

 

U.S. Federal Reserve Chair Janet Yellen (L) congratulates Stanley Fischer as he is sworn in a vice chairman at the U.S. central bank in WashingtonHi there! Stanley Fischer finds chief central planner Janet Yellen deep in the bowels of the Eccles building. In Jackson Hole, they played “good cop, bad cop”.

Photo credit: Federal Reserve / Reuters

 

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