Anecdotal Flags are Waved

 

“If a shoeshine boy can predict where this market is going to go, then it’s no place for a man with a lot of money to lose.”

– Joseph Kennedy

 

It is actually a true story as far as we know – Joseph Kennedy, by all accounts an extremely shrewd businessman and investor (despite the fact that he had graduated in economics*), really did get his shoes shined on Wall Street one fine morning, and the shoe-shine boy, one Pat Bologna, asked him if he wanted a few stock tips. Kennedy was amused and intrigued and encouraged him to go ahead. Bologna wrote a few ticker symbols on a piece of paper, and when Kennedy later that day compared the list to the ticker tape, he realized that all the stocks on Bologna’s list had made strong gains. This happened a few months before the crash of 1929.

 

Joseph Kennedy in 1914, at age 25 – at the time reportedly “the youngest ever bank president in the US”

Photo credit: John F. Kennedy Presidential Library and Museum, Boston.

 

Kennedy sold all his stock market investments over the next several months and put the money in what he considered the safest banks. He had already made a fortune in the bull market, and reportedly augmented it later by going short in the bear market. We are pretty sure his meeting with the market-savvy shoe-shine boy wasn’t the only reason for which he decided to sell. He did mention the anecdote later in life though and the experience served to solidify a conclusion he had already arrived at: It was very late in the game and the market was likely to  crack badly fairly soon.

We felt reminded of this story when a good friend (who invests for a living) visited us this summer. He inter alia told us about an acquaintance of his, whom he described as an autopilot investor who only very rarely looks at the market and has a record of getting the wrong ideas at the wrong time. His latest idea was noteworthy: he thought it would be a good idea to “sell volatility” (by writing puts, if memory serves). This was in July, just before the VIX reached a new all time low.

 

In 2008, the VIX hit a high of 90 points, which was in fact the technical target we were eying at the time. In both 2010 and 2011 it jumped to approximately 47 points. In 2014 it made a high at 32 points, and in 2015 it streaked to 52 points. On these occasions put writing was not very popular with the people mentioned above. But they loved the idea with the VIX between 9 and 11.50. Go figure – click to enlarge.

 

One shouldn’t jump to conclusions from this just yet – if it wasn’t well-known before, it should be by now: the VIX can remain subdued for a very long time. It only tells us that there is very little concern in the market – there is little demand for option hedges and traders are more inclined to sell volatility than to buy it. And similar to how high bullish sentiment during a bull market is not a contrary indicator most of the time, the lack of concern can be well founded for extended time periods.

We have good reason though to suspect though that this particular game is quite long in the tooth as well. We are going to discuss developments in sentiment data in detail in a separate post. Still, here are a few observations in this context. Sentiment has become even more lopsided lately, with the general public joining the party. It may not “feel” like the mania of the late 1990s to early 2000, but in terms of actually measurable data, the overall bullish consensus seems to be even greater than it was back then.

For instance, mutual fund inflows rose to record highs earlier this year. Along similar lines, here is a recent chart that aggregates the relative cash reserves of several groups of market participants (including individual investors, mutual fund managers, fund timers, pension fund managers, institutional portfolio managers, retail mom-and-pop type investors). It shows that there is simply no fear of a downturn:

 

Cash is still trash – to a record extent. Investors evidently don’t believe the market could possibly go down. Not surprisingly, a few years ago, when the S&P 500 index was nearly 1900 points lower than it is today, they had the exact opposite opinion. As always, keep in mind that this is not a timing indicator. What this indicator shows us is how big the danger is once the market’s trend reverses. As a rule such extremes in complacency precede crashes and major bear markets, but they cannot tell us when precisely the denouement will begin – click to enlarge.

 

With respect to market sentiment we would like to share a remark by renowned Citi credit market analyst Matt King, which strikes us as an example of investors basing their decisions on a wrong premise. It also illustrates why investors should either invest their money on their own, or be very careful which administrators of other people’s money they trust to look after their savings. It also shows that the incentives driving the decisions of fund managers have become hopelessly distorted.

 

“Indeed, many investors we speak to seem almost to have given up on valuation as a metric. Rather like real estate in London or New York or Hong Kong, they are resigned to it: it may look expensive on paper, but the price is what it is, and they buy anyway. Several told us they would rather lose lots of money in company with the rest of the market than underperform slightly in a continuing rally and then suffer a fall in assets under management as investors move elsewhere.”

 

This attitude may have implications for the market’s near term prospects.

 

US Money Supply Growth Continues to Falter Rapidly

Most of the broad true money supply data for August have been reported, and it seems the slowdown in the year-on-year growth rate of the money supply is accelerating. The annual growth rate of TMS-2 lost a chunky 1.3% in August alone, falling from 5% y/y to 3.7% y/y. Just as we suspected, it is following the steep decline in the growth rate of the narrow money supply measure AMS which we discussed a few weeks ago with a lag.

 

The year-on-year growth rates of TMS-2 (broad true US money supply, black line) and commercial and industrial loans in the US (red line). Money supply growth is nearly at a 10 year low – click to enlarge.

 

As we always point out, this is the most important fundamental datum one needs to be aware of. Everything else is secondary, because money supply growth leads both asset prices and economic activity. The current height of asset prices and the current strength of economic data tell us nothing about tomorrow (or only very little, at any rate). When these trends turn, they will do so quite suddenly, with very little warning. Some warning signs will of course be noticeable prior to a major trend change.

In the stock market we can observe internals, sentiment, certain ratios (e.g. the performance of non-cyclical vs. cyclical sectors) and technical divergences. Note that two so-called “Hindenburg omens” have recently occurred in close succession – the Hindenburg omen mainly gives us an indication of the degree of intra-market correlation, as a major feature of the signal is the fact that it is triggered when the number of new 52-week highs and lows is almost similar despite the indexes trading close to new highs.. Here is the definition of a “confirmed” Hindenburg omen (via Bob Hoye):

 

  1. The 50-day moving average of the NYSE must be rising.
  2. The number of new 52-week lows must be at least 2.2% of all issues that traded and changed in value.
  3. The new 52-week highs must also be at least 2.2% of all issues that traded and changed in value.
  4. The McClellan Oscillator ($NYMO) must be negative on the day.
  5. A confirmed signal occurs when a second signal is given within 36 days.

 

There was a confirmed signal in May/June. Another signal has occurred in the NYSE index ($NYA) in mid August on the heels of a close shave in early August (on a less strict definition, the early August signal would have counted as an “omen” as well).

 

The number of Hindenburg signals across major indexes has soared this year – click to enlarge.

 

The most recent rally has resulted in an improvement of market internals – but their divergence with prices remains firmly in place. Here are some internals of the S&P 500 Index as an example – the SPX is the strongest index in terms of internals, as big cap stocks have significantly outperformed small and medium cap stocks this year (note that the NYSE cumulative a/d line still looks fine, but it is a lone exception):

 

Fewer and fewer stocks support rallies to new highs – click to enlarge.

 

Our point is that the ice is getting quite thin. The Fed is reportedly set to announce the beginning  of “quantitative tightening” at the upcoming FOMC meeting, which is bound to pressure money supply growth even more. It should be obvious that this cannot be bullish, even if the process will be a very gradual one.

And yet, even with free liquidity weakening, sentiment at extremes and internals dubious, the market is consolidating close to all time highs in mid September  – which is statistically the weakest month of the year. It seems therefore possible that the investors Matt King referred to (see above) will once again pile into stocks with whatever cash reserves they have left, so as to “make their year”.

This is what happened in Japan in 1989, when the Nikkei streaked to a final high at the end of the year despite an inverted yield curve, sharply rising interest rates and deteriorating liquidity. Nine months later it traded below the low of the 1987 crash. What the chart below doesn’t show: after a five month bounce off the 1990 crash low, the index was absolutely crushed over the next twelve months. By mid 1993 it had lost 65% from the peak. In March 2009 it was a full 83% below its peak of 30 years earlier – n.b., in nominal terms, while the BoJ was on QE5 or QE6 (depending on how one counts its QE programs).

 

The Nikkei’s late 80s – early 90s blow-off and crash – note the “final lurch to the peak” – click to enlarge.

 

Back in the late 1980s, when the Nikkei index seemed invincible, Japanese mutual fund managers  – similar to the ones Matt King heard from recently –  “had given up on valuation as a metric”.  They went down with the ship big time, and eventually lost more than 90% of their AUM. And Japanese investors learned that “buy and hold stocks for the long term” is a potentially quite dangerous mantra. Oh well, at least they still have time before they beat the record long bear market of 1721 – 1789.

 

Conclusion

It is clear that since our last “heads-up” when it became obvious that growth in the domestic USD money supply was slowing rather dramatically, the situation has deteriorated further – hence asset prices are on even thinner ice than before.   Other warnings signs continue to proliferate as well.

We wish we could tell you in which month the exhaustion point will be reached and the denouement will commence, but we can’t. There are too many moving parts; in the euro area, money supply growth (narrow money M1) is at a still hefty 9% y/y (down from a near 15% y/y peak) and while that can do nothing directly for assets priced in dollars, it underpins sentiment by keeping European high yield bonds well supported.

Could a final blow-off move be in the offing? It is possible, but a crash over the coming eight weeks is at least just as likely. Since the interim peak in money supply growth in November 2016 there has been a massive decrease in the growth of money and credit. Perhaps the coming announcement of the partial reversal of QE will serve as a “trigger” (since no-one seems to be taking it very seriously). We don’t know of course, but we suspect the exhaustion point is now very close.

Footnotes:

 

*of course, when he graduated in 1912, economic science wasn’t yet fully pressed into the service of the State, so it was comparatively free of arrant nonsense.

 

Charts by: StockCharts, SentimenTrader, St. Louis Fed

 

 

 

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: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

One Response to “21st Century Shoe-Shine Boys”

  • Hans:

    A very important piece by Mr Pater T. Read and study this information
    as it shall serve you well.

    Following this theory should and must be confirmed with other data.

    If one is to utilize a single indicator, then this is the one. As for the
    General Hindenburg Omelet, it has already been severely discounted
    as a supposition – full of gas and hazardous to one’s strategy.

    The Central Bank is solely responsible for this over extended bull market
    and the bubblicious assets growth and they shall be party to it’s demise.

    The longer the bull runs, the greater the exhaustion.

    http://tsi-blog.com/2017/09/the-most-useful-leading-indicator-of-the-global-boom-bust-cycle/

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Gold Sector Remains at an Interesting Juncture
      Technical Divergence Successfully Maintained In an update on gold and gold stocks in mid June, we pointed out that a number of interesting divergences had emerged which traditionally represent a heads-up indicating a trend change is close (see: Divergences Emerge for the details). We did so after a big down day in the gold price, which actually helped set up the bullish divergence; this may have felt counter-intuitive, but these set-ups always do. Consider now the updated chart below...
  • Confronting the Dragon with Peter Navarro
      Of No Real Use A young man might go to business school believing he is obtaining some sort of academic training that will enable him to make a comfortable living.  His degree may gain him entry into a large corporation, where he can work his way up to a good income.  This may even put him on the fast track to what he envisions as success.   Don't knock it: Being useless can lead to unexpected career opportunities... [PT]   But his academic training likely won't...
  • Trouble in Paradise
      Impressive Zeal for Faded Ideals Uncompromising independence, rugged individualism, and limitless personal freedom were once essential to the American character.  According to popular American folklore, they still are.  We have some reservations.   Rugged individualists suffer mid-life identity crisis. [PT]   The principles that gave rise to the American character died long ago.  Freedom.  Liberty.  Independence.  Limited representative government. Sound...
  • Gold – Macroeconomic Fundamentals Improve
      A Beginning Shift in Gold Fundamentals A previously outright bearish fundamental backdrop for gold has recently become slightly more favorable. Ironically, the arrival of this somewhat more favorable situation was greeted by a pullback in physical demand and a decline in the gold price, after both had defied bearish fundamentals for many months by remaining stubbornly firm.   The eternal popularity contest...   The list of gold fundamentals that have improved is...
  • The United States of Terror
      Bombs Away! Two recent articles* have again demonstrated that the greatest “terrorist” entity on earth are not the bogymen – Russia, China, Iran, North Korea – so often portrayed by Western presstitutes and the American government, but the United States itself!   This is an old cartoon, but still a good one. It perfectly describes the trigger-happy Western political class and the depth of its “thinking”. By happenstance we recently reviewed the Libya intervention...
  • Capitulation and Currency Pain - Precious Metals Supply and Demand
      Waving the White Flag The price of gold rose two bucks last week, though the price of silver fell 10 cents. We have seen several analyses recently predicting big price drops, in one case by at least $500 in gold by the end of the year. Is this what capitulation looks like? It’s said they don’t ring a bell at the top, but they don’t ring a bell at the bottom either.   The give-up moment arrives... [PT]   We have also seen technical analysis arguing that...
  • Maurice Jackson Interviews Rick Rule – Investing in Natural Resources
      Contrarian Investment Opportunities in Natural Resources Maurice Jackson of Proven and Probable has recently interviewed Sprott U.S. Holdings CEO Rick Rule, a well known specialist and “old hand” in the natural resource space. This is quite a wide-ranging and interesting interview, so we decided to present it to our readers. Below you find a summary and our comments on the main topics discussed, a video/podcast of the interview,  as well as a download link to a PDF file of the...
  • The True Sport of MAGA
      Chest Bumps One of the more extraordinary things that investors have seen in living memory is unfolding at this precise moment. This goes for business leaders, money managers, veteran Wall Streeters, value investors, 401(k) holders, momentum traders, FX guys, gold bugs, technical gurus, chartists, pork belly speculators, quants, astrologists, Larry Summers, put option sellers, dweebs and geeks, millennial index fund enthusiasts, and everyone in between.   Pork belly speculators...
  • Black Holes for Capital - Precious Metals Supply and Demand
      Race to the Bottom Last week the price of gold fell $17, and that of silver $0.30. Why? We can tell you about the fundamentals. We can show charts of the basis. But we can’t get into the heads of the sellers.   Other people's fiat: in the global race to the bottom, it was recently the turn of emerging market currencies to tank. [PT]   We can say that in the mainstream view, the dollar is rising. The dollar, in their view, is not measured in gold but in rupees in...
  • US Money Supply and Fed Credit – the Liquidity Drain Becomes Serious
      US Money Supply Growth Stalls Our good friend Michael Pollaro, who keeps a close eye on global “Austrian” money supply measures and their components, has recently provided us with a very interesting update concerning two particular drivers of money supply growth. But first, here is a chart of our latest update of the y/y growth rate of the US broad true money supply aggregate TMS-2 until the end of June 2018 with a 12-month moving average.   US TMS-2: y/y growth rate with...

Support Acting Man

Item Guides

j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

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

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]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com