Non-Confirmations Still Persist

The S&P 500 has recently made a new high, in short the rebound from the mid October low has not failed at a lower high. Therefore, the clock has so to speak been reset. However, as our updated comparison chart between SPX and the major euro-land indexes shows, there is now a third divergence in place between them, and this one is even more glaring than the first two. Keep in mind that there such divergences have not always been meaningful in the past. However, when global markets are drifting apart, it is a sign that the global economy is no longer well-synchronized. Given that the Fed’s “QE inf.” is in relative pause mode (we hesitate to say it has ended), the situation is certainly worth keeping an eye on.

 

1-Euroland vs. SPXA third divergence between the SPX and the major continental European stock markets is now in place – click to enlarge.

 

ECB Meeting and Central Bank Coordination

There will be an ECB meeting this week, and possibly the central bank plans another surprise announcement, although we actually doubt that at this point. While the rate of change of euro-land CPI has continued to decline, the BuBa is implacably opposed to “QE” involving government bonds, and with three different liquidity pumping measures already in place, there is surely a case to be made for the ECB to wait for their “success” before embarking on even crazier schemes.

We only mention this because it seems highly likely that the recent Fed, ECB and BoJ actions were subject to coordination. Let us not forget, these people regularly meet (in secret) at the BIS. It is not a secret that these meetings are taking place on a regular basis – secret are only the details and what is discussed there. Let us just say that everything that has recently happened in terms of central bank decisions smacks of a coordinated effort. Even the jawboning seemed to be coordinated at times.

As noted in this recent report at Der Spiegel, “deep divisions have emerged at the ECB” over putative plans to expand QE into the sovereign bond arena. The usual pablum about the alleged “dangers of deflation” is mentioned of course, but as the article also points out, the “success” of QE is actually impossible to gauge, since no-one can possibly know what would have happened without it.

The technical differences between Fed QE and BoJ QE are of course not touched upon, but it seems to us that they are rather important. It is a lot easier to restart bubble activities in the economy when QE not only crates bank reserves, but also creates deposit money directly, as is the case in the US. How relevant the BoJ’s success in boosting asset prices will be to economic activity in Japan remains to be seen, but past experience indicates that it usually appears to work up until the time when monetary pumping is abandoned again.

Note here that we don’t believe that economic activity is per se a useful measure of economic progress. After all, aggregate economic statistics always look good during boom times, and yet, they tend to mask a lot of capital consumption. In aggregated statistics, malinvestment of capital cannot be differentiated from wise capital investment. We do however know with certainty that monetary pumping distorts relative prices and that unless the entire business community decides not to play along, capital malinvestment inevitably ensues.

As an aside to this, even if all businessmen were fully aware of Austrian capital and business cycle theory and were to agree with its conclusions, a majority of them would likely still decide to come out and play, in the belief that they will make hay while the sun is shining and will be able to jump off the train in time. Many institutional investors find themselves in an exactly similar position. A number of surveys have shown that many fund managers are indeed well aware that asset bubbles induced by monetary pumping are bound to end in tears – and yet, they are playing along, presumably not least because not doing so would represent a career risk for many.

 

Junk Bonds Diverge As Well

High yield credit also continues to diverge slightly from the stock market. To be sure, this divergence is small enough that it could be easily erased, but for the moment it persists:

 

2-JNK,SPXJNK, SPX and the JNK-IEF ratio (we are using IEF instead of TLT, as this provides us with a more accurate proxy of credit spreads. The maturity profile of IEF’s holdings is closer to that of JNK’s holdings). A number of divergences between JNK and SPX have emerged as well recently click to enlarge.

 

Conclusion:

With the major US stock indexes at new highs, the coast seems superficially clear for the market, but there is certainly a significant element of uncertainty left. There have also been instances in the past when marginal new highs turned out to be traps (the most prominent fairly recent occurrence was the October 2007 peak), so as such, they are not sufficient to sound the all clear. Given the ongoing divergences with European markets and high yield bond spreads, caution continues to be advisable.

The recent explosive move higher in the Nikkei (as we recently discussed, Japanese stocks had been heavily shorted, which undoubtedly played a role in the ferocity of the advance) on the other hand is a “confirming” move, but we suspect that the Japanese stock market has some potential for marching to its own drummer, at least over the medium to longer term.

As a final remark, although we plan to discuss market sentiment in more detail on another occasion, the Rydex bull-bear asset ratio has just closed at a new all-time high again. While it has only slightly exceeded its previous highs, this is worth noting because the market started at least a short term pullback every time a new high in the ratio above the 18 level has been reached this year (this means more than 18 times more Rydex assets are currently in bull and sector funds than in bear funds).

 

Charts by: StockCharts

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “SPX, European Stocks and Junk Bonds Continue to Diverge”

  • TheLege:

    It’s a curious thing but Kyle Bass, at the recent Barefoot Economic Summit, announced that Kuroda would do precisely this, so while it came as a ‘surprise’ to many, Mr Bass evidently had a reasonable idea that this stimulus boost was on the cards. It certainly didn’t sound speculative on his part.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • What Do “Think Tanks” Think About?
      “Russiagate” WEST RIVER, MARYLAND – We’re back at our post – watching... reading... trying to connect the dots. And we begin by asking: What do “think tanks” think about? The answer in a minute. First, there is a dust-up in the Washington, D.C., area. “Russiagate,” it is called. As near as we can make out, some people think the Trump team had or has illegal or inappropriate contacts with the Russian government.   It's all very obvious, if one looks...
  • Parabolic Coin
      The Crypto-Bubble - A Speculator's Dream in Cyberspace When writing an article about the recent move in bitcoin, one should probably not begin by preparing the chart images. Chances are one will have to do it all over again. It is a bit like ordering a cup of coffee in Weimar Germany in early November 1923. One had to pay for it right away, as a cup costing one wheelbarrow of Reichsmark may well end up costing two wheelbarrows of Reichsmark half an hour later. These days the question is...
  • Quantitative Easing Explained
      [Ed. note: This article was originally posted in November of 2010 - we have decided to republish it with updated charts, as it has proved to be very useful as a reference - the mechanics of QE are less well understood than they should be, and this article explains them in detail.]   Printing Money We have noticed that lately, numerous attempts have been made to explain the mechanics of quantitative easing.  They range from the truly funny as in this by now 'viral' You Tube...
  • The Three Headed Debt Monster That’s Going to Ravage the Economy
      Mass Infusions of New Credit   “The bank is something more than men, I tell you.  It’s the monster.  Men made it, but they can’t control it.” – John Steinbeck, The Grapes of Wrath   Something strange and somewhat senseless happened this week. On Tuesday, the price of gold jumped over $13 per ounce.  This, in itself, is nothing too remarkable.  However, at precisely the same time gold was jumping, the yield on the 10-Year Treasury note was slip sliding down...
  • Jayant Bhandari on Gold, Submerging Markets and Arbitrage
      Maurice Jackson Interviews Jayant Bhandari We are happy to present another interview conducted by Maurice Jackson of Proven and Probable with our friend and frequent contributor Jayant Bhandari, a specialist on gold mining investment, the world's most outspoken emerging market contrarian, host of the highly regarded annual Capitalism and Morality conference in London and consultant to institutional investors.   As soon as Jayant touches down in London, he is accosted by...
  • Monetary Madness and Rabbit Consumption
      Down the Rabbit Hole “The hurrier I go, the behinder I get,” is oft attributed to the White Rabbit from Lewis Carroll’s, Alice in Wonderland.  Where this axiom appears within the text of the story is a mystery.  But we suspect the White Rabbit must utter it about the time Alice follows him down the rabbit hole.   Pick a rabbit to follow...   No doubt, today’s wage earner knows what it means to work harder, faster, and better, while slip sliding behind. ...
  • Central Banks – Tiptoeing Toward the Exit
      Frisky Fed Hike-o-Matic We haven't commented on central bank policy for a while, mainly because it threatened to become repetitive; there just didn't seem anything new to say. Things have recently changed a bit though. A little over a week ago we received an email from Brian Dowd of Focus Economics, who asked if we would care to comment on the efforts by the Fed and the ECB to exit unconventional monetary policy and whether they could do so without triggering upheaval in the markets and...
  • The Anatomy of Brown’s Gold Bottom – Precious Metals Supply and Demand
      The Socialist Politician-Bureaucrat with the Worst Timing Ever As most in the gold community know, the UK Chancellor of the Exchequer Gordon Brown announced on 7 May, 1999 that HM Treasury planned to sell gold. The dollar began to rise, from about 110mg gold to 120mg on 6 July, the day of the first sale. This translates into dollarish as: gold went down, from $282 to $258. It makes sense, as the UK was selling a lot of gold... or does it?   Former UK chancellor of the...
  • The Valium Era
      Don’t Be Fooled by These Calm Markets What is happening in the world of money? Well - the most striking thing is: nothing. It doesn’t seem to matter what happens. Dysfunction in Washington. Meltdown of the techs. No matter how rough the seas get, the markets glide along... scarcely noticing the storm-tossed waves below.   Thankfully the world's central planners are so well-versed in egging on the creation of an ever greater mountain of debt and seemingly limitless asset...
  • Is Trump a Modern Caesar?
      Putting on the Purple   Mayor: Drebin, I don’t want any more trouble like you had last year on the South Side. Understand? That’s my policy. Drebin: Yes. Well, when I see five weirdos dressed in togas stabbing a guy in the middle of the park in full view of 100 people, I shoot the bastards. That’s my policy. Mayor: That was a Shakespeare in the Park production of Julius Caesar, you moron! You killed five actors! Good ones. – The Naked Gun   Laura Loomer,...
  • The Fed Rate Hike and Gold – Precious Metals Supply and Demand
      Shrinking the Balance Sheet? The big news last week came from the Fed, which announced two things. One, it hiked the Fed Funds rate another 25 basis points. The target is now 1.00 to 1.25%, and there will be further increases this year. Two, the Fed plans to reduce its balance sheet, its portfolio of bonds.   Assets held by Federal Reserve banks and commercial bank reserves maintained with the Fed – note that while asset purchases and bank reserve creation are connected,...
  • How to Discover Unknown Market Anomalies
      Seasonax Event Studies As our readers are aware by now, investment and trading decisions can be optimized with the help of statistics. After all, market anomalies that have occurred regularly in the past often tend to occur in the future as well. One of the most interesting and effective opportunities to increase profits while minimizing risks at the same time is offered by the event studies section of the Seasonax app.   A recent event that had quite an impact on certain...

Support Acting Man

Austrian Theory and Investment

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com