The following is part of Pivotal Events that was published for
our subscribers November 13, 2014.
Signs of The Times
"U.S. Companies are turning more to the bond market to fund expansion
than at any time since 2008."
- Bloomberg, November 4.
"Crashing Oil Prices Won't Kill The US Economy"
- Business Insider, November 4.
"Mr. Kuroda promised to 'drastically convert the deflationary mindset'."
- Financial Times, November 5.
"If the ECB tries to press ahead with QE, Germany's central bank chief
will resign."
- Telegraph, November 5.
"The Republican wave that swept over the state left Democrats at their
weakest point since the 1920s."
- National Conference of State Legislatures, November
5.
"Global Warming Community in Panic Over Republican Takeover of Senate"
- Examiner, November 7.
One can't help but wonder how all of the apparatchiks, functionaries, intelligentsia
and central planners who were dining at the public trough in Soviet Russia
felt when the Berlin Wall came down in November 9, 1989.
Perspective
The US election indicates a profound change in political direction and we
have frequently described Obama's policy moves as being the regulatory equivalent
of building the Berlin Wall. This was being accomplished through a mainstream
media that abandoned its critical faculties and started cheerleading massive
intrusions upon basic freedoms.
The towering intellects of Nancy Pelosi, Harry Reid and Obama's teleprompter
have been bypassed by the commonsense of many voters. What's left of Obama's
term is being described as a "Lame Duck Presidency". Yeah, a duck with the
teeth and tenacity of a piranha.
Political dissatisfaction during periods of rampant inflation can turn into
murderous revolutions. The two greatest examples are the French Revolution
that in the 1790s turned into the Reign of Terror. And then there was the Russian
Revolution and another reign of terror that began in 1917. The fall of the
Berlin Wall can be described as a great reformation. Putin's attempts to restore
the Soviet can be described as a counterreformation.
Obama has no specific ideology other than the lust for power and control with
the Rules For Radials being equivalent to Mao's Little Red Book.
In just the last one hundred years there has been some dramatic setbacks to
the long experiment in authoritarian government. These have turned with the
end of a boom. One of the most outstanding commodity booms blew out in 1920
and collapsed. Soviet Russia turned from pure communism to sort of a socialism.
In the US, John Moody explained the wonders of the 1929 boom as due to America's
turn from socialism and nationalized railroads.
The boom radiating out of Tokyo in the late 1980s fostered outstanding speculation
in commodities and global real estate (remember "Trophy" items such as Pebble
Beach Golf Course). As recorded by the Nikkei, the peak was at the end of December
1989 and the Wall came down in November.
The "Glorious Revolution" of 1688 occurred during a deflationary period as
did the American Revolution. Both were essentially conducted by the middle
classes who avoided neurotic intellectuals that prevailed during the nasty
revolutions.
The White House has been overrun by anxious intellectuals and it is time for
another reformation conducted by the middle classes.
Stock Markets
As we have been noting, the "oversold" of mid-October determined that the
setback was a
"correction". With huge amounts of central bank promises (Japan's was remarkable)
and a very refreshing election the rebound set new highs for the senior indexes.
Last week, we listed a number of the key "plusses" that were in the market.
Forgot to include that over the past few weeks financial news programs have
been talking up the favourable October to May seasonal tendency.
We will stay with our list of accomplished stages:
Exuberance, Divergence and Volatility got us to the big swings into and out
of October.
Resolution to excessive speculation has yet to be discovered.
We thought that Small Caps (RUT) and the STOXX were leading on the way to
the
"correction". RUT set its high at 1213 in July with the Daily RSI at 70. The
October low was 1040 and down to 30 on the RSI. The rebound has made it to
1186. This is at a resistance level and has reached an RSI of 70.
Recording the action in Europe, the STOXX set its high at 3325 in June with
a Daily RSI at 72. The October low was 2789 with the Daily RSI down to 26.
The rebound high was 3142 last week and is not overbought.
The NY Composite (NYA) set its momentum high at 11106 in July and declined
to 10557 in August. The September high was 11108 and the October low was 9886
and oversold at the RSI of 28. So far the high has been 10911 and at the RSI
that ended the September rally.
As noted above, inspired by a number of really good stories the stock market
has enjoyed a vigorous rebound. Our work in mid-October had Springboard Buys
on the S&P and JNK. It is uncertain how long this rally may last.
It is worth checking commodities and credit markets for some guidance.
Credit Markets
Lower-grade bonds have been volatile. JNK slumped into a Springboard Buy on
October 14th and the rebound was sufficient to register the opposite on the
following week. JNK (without the interest payment) reached the 50-Day ma and
has been following it down. At 40 now, taking out the October low of 38.93
would extend the downtrend.
Out of the October hit, spreads briefly narrowed and the widening trend has
resumed. The chart showing new "wides" follows.
It is worth keeping in mind that as commodities decline so does the ability
to maintain prices at the retail level. This reduces general earnings power
and the ability to service debt (chart follows). Then credit-rating agencies
get busy with downgrades and eventually junk issues live up to the worst descriptions
in their prospectuses.
Last week we thought that on the next slide in the stock market the bond future
would rally. The loss of liquidity in the world's most liquid market on October
15 was without precedent. That drove the future up five points at the opening
to a price of almost 148.
The low was 140.5 on Friday and it has firmed to 141.25. The high needs to
be tested and that becomes our target.
The Russian note needed to rise above 10.22% to exend the trend. It did it
at 10.24% today.
Central bank recklessness reminds of hanging out with a Martini-drinking crowd
some years ago. The cocktail was referred to as "Martins" or "Electric Waters".
There were certain levels of intoxication, but I can only remember the last
one. You had become invisible. The reasoning was that you were doing such stupid
things that it would be best to be invisible.
They called for transparency in central banking, but invisibility is too much.
Currencies
In 1980 we recall that as Reagan won some important primaries the dollar would
firm up the next day. Upon taking office the DX rallied from 97 to 164. It
was helped by commodities blowing out in the grandest fashion since 1920. Paul
Volker had nothing to do with either event.
Reagan was one of the leaders that inspired the reform of excessive government
that swept the world in the 1980s. Margaret Thatcher had a parliamentary majority
and made huge advances. The equivalent by Reagan was denied by a Democratic
Congress.
This time around, political change will be led by a reform-minded Congress
and opposed by the Obama faction. Republicans will likely win the White House
in 2016, when a massive reform can really get underway.
The dollar was expected to rally as the financial boom ran out of momentum.
The DX broke out at 81 in July. After 85 was reached in September the jump
to 88 was largely driven by offshore buying of US stocks and bonds. The DX
has yet to have a strong rally based upon financial asset deflation.
On the near term, the DX rally reached a lofty 85 on the Weekly RSI and the
index reached 88 last week. Perhaps this is the best on foreigners buying US
paper.
Perhaps DX could correct some more. The next rally would likely be due to
weakening asset prices and a minor start to political reform.
Precious Metals
In early September we thought that a buying opportunity would appear in the
latter part of October. In the middle of that month we decided to wait for
the "buy". Our November 4th Special (Caveat Venditor) outlined how gold and
silver really work during a credit cycle.
The key was that gold's real price has been rising since what seems to be
a cyclical low in June. This could be the early stages of a cyclical bull market
for the real price. Improving profit margins will follow.
The November 7th ChartWorks noted that silver's plunge had become severe enough
to register a Downside Capitulation. A significant rally is pending.
The November 4th Chartworks "Gold Miners Bounce" called for that.
This and last week's Pivot have been looking for gold stocks to begin outperforming
the bullion price.
The HUI/GOLD ratio plunged from .44 in 2011 to .13 on November 4th. It has
recovered a little and we would like to see some stability over a few weeks.
The bear since 2011 has
been brutal and stability would provide the base for the start of a new bull
market for the Precious Metals sector.
On the bigger picture, the recent collapse of HUI/GOLD seems similar to when
the ratio plunged to .13 in late-November 2001. That cyclical bottom drove
the Weekly RSI down to the low 20s, similar to now.
In the last two weeks of October, the HUI dropped from 185 to 146 on November
4th.
The bounce made it to 164 yesterday and the low needs a test.
Crude Oil and Recessions: Ten Years
- Note the "Peak Oil" peak in 2008.
- The current failure is becoming serious.
- Is it indicating technological revolution?
- Is it indicating global recession?
- Perhaps both.
Crude Oil and Recessions: 1970 to 2010
- Crude's plot is rate of change.
- From 1970 until the mid-1990s there was great belief in the powers of OPEC,
the erstwhile oil cartel.
- When OPEC was headed by Sheikh Yamani, it was said that he commanded all
of the attention that is focused upon a cross-eyed javelin thrower at the
Olympics.
Producer Price Index and Recessions: 1913 to Date
- The cyclical low was 168 in March 2009.
- The high for the move was set in April at 208.3.
- A double top was set at 208.3 in June.
- The latest posting is September's at 206.5.
S&P Earnings and Commodities
- This year's high for the CRB was set in June at 313.
- The low for the year was set last week at 266.
- According to the chart, earnings should follow.
Credit Spreads: Now Worse Than On October 17th
- On the near-term, rising above 171 bps set on October 17th would extend
the trend.
- This was accomplished on November 7th.
- It is now at 173 bps and stair-stepping up.
- Widening has taken out resistance at the March "high".
Link to November 14 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/11/geopoli...-price-collapse
