Another Early Warning Siren Goes Off

Our friend Jonathan Tepper of research house Variant Perception (check out their blog to see some of their excellent work) recently pointed out to us that the volume of mergers and acquisitions has increased rather noticeably lately. Some color on this was provided in an article published by Reuters in late May, “Global M&A hits record $2 trillion in the year to date”, which inter alia contained the following chart illustrating the situation. This snapshot was taken shortly after a particularly busy “Merger Monday” in May, which saw $28 billion in takeover announcements:

 

Getting frisky: captains of industry and private equity funds evidently feel supremely confident again and have embarked on a major shopping spree. This mainly goes to show that no-one ever learns a thing in financial markets (presumably this goes for “learning from history” generally, but the remarkable thing in this case are the small time intervals between the markets teaching lessons and the subsequent collective forgetting exercise). The people responsible for all this breathless activity get paid more than at any other time in history, both in nominal and real terms – and one of their major characteristics is apparently that they have the attention span of gnats.

 

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Redefined Terms and Absurd Targets

At one time, the Federal Reserve’s sole mandate was to maintain stable prices and to “fight inflation.”  To the Fed, the financial press, and most everyone else “inflation” means rising prices instead of its original and true definition as an increase in the money supply.  Rising prices are a consequence – a very painful consequence – of money printing.

 

Fed Chair Jerome Powell apparently does not see the pernicious effects of inflation (at least he seems to be looking around… [PT])

Photo credit: Andrew Harrer / Bloomberg

 

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A Purely Technical Market

Long time readers may recall that we regard Bitcoin and other liquid big cap cryptocurrencies as secondary media of exchange from a monetary theory perspective for the time being. The wave of speculative demand that has propelled them to astonishing heights was triggered by market participants realizing that they have the potential to become money. The process of achieving more widespread adoption of these currencies as a means of payment and establishing appropriate (and potentially more stable) exchange rates relative to state-managed fiat currencies is still underway.

 

A snapshot of cryptocurrency market caps as of June 12 – they made local lows two trading days later. After the small rebound since then, market caps are now slightly higher than those shown on this map, but it is still roughly in the right ballpark. Note: XRP has the third highest market cap, but we do not regard it as a true “cryptocurrency”. It is not a decentralized currency at all, it is a token under control of the company that issued it (it can be traded though and for a while there was a big burst of speculative demand for it, oddly enough mainly from South Korea). Bitcoin Cash (BCH) is the most important fork from the original BTC blockchain and in our opinion the better Bitcoin. It has a much larger block size, avoiding the scaling problems BTC encountered late last year (which were associated with long waiting times for transactions and soaring fees). BTC still enjoys a first mover advantage and trades at a far higher level as a result. There is no logical reason why it should, but that is a topic for another occasion.

 

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Wrong-Way Event

Last week we said something that turned out to be prescient:

 

This is not an environment for a Lift Off Event.

 

An unfortunate technical mishap interrupted the latest moon-flight of the gold rocket. Fear not true believers, a few positive tracks were left behind. [PT]

 

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Bad Hair Day Produces Positive Divergences

On Friday the ongoing trade dispute between the US and China was apparently escalated by a notch to the next level, at least verbally. The Trump administration announced a list of tariffs that are supposed to come into force in three week’s time and China clicked back by announcing retaliatory action. In effect, the US government said: take that China, we will now really hurt our own consumers!  – and China’s mandarins replied: just you wait, we can hurt our consumers just as badly!

 

Left: the US administration releases details of its upcoming domestic consumer mistreatment measures; Right: China immediately shoots back with an image of the infamous ankle crusher which it plans to unleash on its own population in retaliation.

 

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Futility with Purpose

Plebeians generally ignore the tact of their economic central planners.  They care more that their meatloaf is hot and their suds are cold, than about any plans being hatched in the capital city.  Nonetheless, the central planners know an angry mob, with torches and pitchforks, are only a few empty bellies away.  Hence, they must always stay on point.

 

Watch for those pitchfork bearers – they can get real nasty and then heads often roll quite literally. [PT]

 

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Small Crowds, Shrinking Premiums

The prices of gold and silver rose five bucks and 37 cents respectively last week. Is this the blast off to da moon for the silver rocket of halcyon days, in other words 2010-2011?

 

Various gold bars. Coin and bar premiums have been shrinking steadily (as have coin sales of the US Mint by the way), a sign that retail investors have lost interest in gold. There are even more signs of this actually, and this loss of interest stands in stark contrast to the firm gold price. Of course, retail investors have generally very little influence on the gold price anyway – they only serve as a contrary indicator. [PT]

 

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Credit has a wicked way

of magnifying a person’s defects.  Even the most cautious man, with unlimited credit, can make mistakes that in retrospect seem absurd.  But an average man, with unlimited credit, is preeminently disposed to going full imbecile.

 

Let us not forget about this important skill…  [PT]

 

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Junk Bond Spread Breakout

The famous dead parrot is coming back to life… in an unexpected place. With its QE operations, which included inter alia corporate bonds, the ECB has managed to suppress credit spreads in Europe to truly ludicrous levels. From there, the effect propagated through arbitrage to other developed markets. And yes, this does “support the economy” – mainly by triggering an avalanche of capital malinvestment and creating the associated boom conditions, while “investors” (we use the term loosely) pile into ridiculously overvalued bonds that will eventually saddle them with eye-watering losses.

 

The famous dead parrot

 

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Oil is Different

Last week, we showed a graph of rising open interest in crude oil futures. From this, we inferred — incorrectly as it turns out — that the basis must be rising. Why else, we asked, would market makers carry more and more oil?

 

Crude oil acts differently from gold – and so do all other industrial commodities. What makes them different is that the supply of industrial commodities held in storage as a rule suffices to satisfy industrial demand only for a few months at most. By contrast, gold inventories are in theory large enough to satisfy fabrication and industrial demand for 70 years (“in theory” because this is under the assumption that there is no monetary or investment demand for gold). This is in fact one of the reasons why gold is the money commodity. [PT]

Photo credit: Getty Images

 

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Friends and Enemies

Do citizens of the United States trust their government will do what’s right?  It depends who you ask. By and large, the esteem the American populace holds its government in is likely a small fraction of what it was roughly 65 years ago.  That was when Lieutenant General William Kelly Harrison Jr. signed the Korean Armistice Agreement.  Certainly, in days gone by representatives of other nations held the U.S. government in higher regard.

 

The most austere signing ceremony ever: Lieut. Gen. William K. Harrison, Jr. (seated left), and Korean People’s Army and Chinese People’s Volunteers delegate Gen. Nam Il (seated right) sign the Korean War armistice agreement at P’anmunjŏm, Korea, July 27, 1953. No-one seems really happy – presumably, no-one was. [PT]

 

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The Details Plotted

In the last issue of Seasonal Insights I showed you the statistics associated with the popular truism “sell in May and go away” in the countries with the eleven largest stock markets. The comparison divided the calendar year into a summer half-year from May to October and a winter half-year from November to April. In all eleven countries, the winter half-year outperformed the summer half-year. As announced on that occasion, here are the details for all countries that were reviewed.

 

October meeting after not selling in May

 

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