The following is part of Pivotal Events that was published for
our subscribers July 4, 2014.
Signs Of The Times
"Central banks around the world, including China's, have shifted decisively
into investing in equities as low interest rates have hit their revenues."
- Financial Times, June 16
"Deal frenzy, animal spirits, merger mania - call it what you like,
it is back.
At the highest pace since 2007. "
- Financial Times, June 29
"China's fraud scandal continues to widen, with more companies reporting
losses in bogus aluminum and copper financing deals, while Chinese authorities
now say gold contracts have also been faked to secure more than$15 billion
in loans."
- New York Times, June 27
"Investors Trawl for Yield in Unexpected Waters"
"Countries previously off many investors' radar - including Zambia,
Kenya, Ecuador, Cyprus and Greece - issued debt in the second quarter.
Many of the offerings drew strong investment support."
"Ecuador sold $2 billion of 10-year bonds, marking a return to international
debt markets after defaulting six years ago. They were priced at 7.98%."
- Wall Street Journal, June 30
Perspective
We might have headed this section with "Modern Portfolio Theory meets Modern
Central Banking". With desperate bankers buying equities, the latter does not
deserve the distinction of a theory.
Early in June, Stephen Hawking, the theoretical physicist, mused:
"Artificial intelligence could be a real danger in the not too distant
future."
Now let's see how this works in policyland. Get a PhD in currency depreciation
and interest rate manipulation and you can get a job in Wall Street or with
a trade union. If your career path goes well you can become the head of the
Fed and the financial media will worship you. Granting some kind of super intelligence,
artificially as it were.
It is reported that Alan Greenspan's record as a private economist was not
outstanding, but his insight as Fed chairman was celebrated.
Essentially, central bankers meet ancient tribal needs for someone or some
agency with supernatural powers. And when the US was between experiments in
central banking the financial community celebrated the genius of the secretary
of the treasury. Indeed if one was the secretary during a financial mania such
as in the 1920s and 1990s you earned glorious ratings. In the Roaring Twenties
Secretary Andrew Mellon was described as the greatest since the first one,
Alexander Hamilton. Robert Rubin who had the shift during the Dot.Com Bubble
was the next to become so praiseworthy.
Could this be called "Treasury Cachet"?
To be serious, the central banking cartel ran into severe trouble in 1998
with the LTCM blow up. Senior central banks were lending directly to the big
hedge fund. The wager was that government bond yields would "converge" as the
EU came together. The collapse was magnificent. Fortunately, only the Bank
of Italy bought equity in the fund.
Now they are all buying equities.
Stephen Hawking please meet central banking - a very dangerous example of
artificial intelligence.
Stock Markets
Our theme has been that stock action and business reports would be positive
until adverse credit markets ended the party. Signs of a reversal in credit
markets would likely become evident in the season for change - typically in
May or June.
Stock and credit markets remain very enthusiastic and are becoming precarious
- again.
Early in the week it seemed worthwhile to look for some long opportunities.
Well, what seems a reasonable idea is difficult to realize.
Two weeks ago wheat and corn became very oversold and the action is basing.
Also two weeks ago we noted that base metals (GYX) were oversold enough to
take another run at the 360 level. It has and more so. The index is at 367
and in four trading days base metal miners (SPTMN) have jumped from 823 to
904.
The ChartWorks covered some sector opportunities and will update.
These seem to be replicating our call in November for a big "Rotation".
Also as when going into March, the NDX is the focus of another buying frenzy.
Using the Daily RSI it is now up to the most overbought readings since the
excesses clocked in early 2000.
So what we see is a remarkable amount of froth and as this mounts so does
our skepticism. This goes beyond that due to the technical measures of speculation
and gets into the abilities of policymakers to "manage" yet another financial
mania. We also question the establishment's endless discussions about what
the Fed has been doing and should be doing.
This has been the most forced-fed (no pun intended) bull market in financial
history.
Even more so than in 1929 when New York Fed head Benjamin Strong deliberately
boosted the stock market. He infamously boasted the policy step as a "coup
de whiskey".
A few years ago we had some fun with "Coups" and it is attached.
In engineering terms we have been discussing that policymaking has become
a "positive feedback mechanism", applied relentlessly. In less technical words,
the Fed thinks it has invented a perpetual motion machine. But then this is
in keeping with the intentions of the original promoters of the Fed. They earnestly
believed that a committee of experienced bankers would be able to prevent the
financial setbacks that caused recessions.
How naïve and now how ancient!
More lately, the belief has been that a "Dream Team" of economists can manage
a financial mania.
More immediately, the NDX rally is now generating Daily Upside Exhaustion
readings.
This is the most powerful zoom since the blow-off in March 2000 and we are
taking it as ending action.
Credit Markets
Typically, ending action in a stock market buying mania pushes the credit
markets. We have been watching for change in the yield curve and credit spreads.
Nothing significant yet, but the curve has been flattening since earlier in
the year. The last key reversal was accomplished in May 2007.
Junk has been rallying as if there was absolutely no risk. This has driven
JNK to a Weekly RSI of 80.7, which is the highest on a chart back to 2008.
Earlier in June, emerging debt (EMB) reached the highest Weekly RSI since
the peak at 115.86 in late 2012. Of interest is that this rally made it to
115.51 in early June and 115.26 last week. It looks like a current double top
at the high of two years ago.
Recently the Ted Spread, which represents the shorter maturities, has been
becoming interesting. Last week we noted that rising through the .227 level
would get our attention.
It has made it to .229 and if the trend becomes more apparent it won't be
anyone's friend.
Why are we going on about such small moves in credit instruments when the
economy is finally generating some numbers that the establishment is getting
excited about?
Thursday's unemployment number prompted "Kaboom! This report is one hot firecracker.....".
This is what is setting up the change in the credit markets.
The bond future made it to 138.25 at the end of May and that was against our
target of 136 to 138. It became overbought enough on the Daily to recommend
shortening term. It is down to 134 and is not oversold. There is support at
132 and that is the next target.
Precious Metals
As noted last week, gold ran into "congestion" at the 1330 level. With enthusiastic
bidding, the silver/gold ratio soared to a Daily RSI of 84. Anything above
78 indicates mounting speculation. Readings of 92 in 2011 and 82 in 2012 were
considered as
"dangerous".
We've been considering the recent surge in speculation, while part of volatile
conditions, as within the bottoming action in a cyclical bear for the gold
sector. This is against the topping of the cyclical bull market in orthodox
investments.
As concluded last week, we are looking for the next buying opportunity.
Excerpt from PIVOTAL EVENTS published November 1, 2007
Today the next crisis seems to have started.
In the meantime the October 17 Financial Times made some interesting points:
"A decade ago, when Asia was facing a financial crisis, American bankers
and government officials regularly traveled to the region delivering homilies
about the best way to exit a banking mess. After all - or so the lectures
went - America had suffered bank crises, such as the Savings and Loan debacle
of the late 1980s. This experience had shown that the best route to recovery
was to establish realistic prices for distressed assets, by conducting
fire sales if necessary, and then write the losses off. However, it seems
that some US financiers seem to need to take a hefty swig of the medicine
they used to wave at Asia."
Well, that problem is not just in America, but global financiers and central
bankers combined to juice the markets, prompting impressive short covering.
It reminds of 1927 when faltering spirits with the collapsing Florida real
estate bubble needed reviving. Ben Strong, then head of the New York Fed, told
a French central banker that he was going to give the markets a "coup de whiskey".
The rally was terrific but as it turned out, yet another story in the house
of cards. It might just as well have been called a "coup de bourse", and it
was celebrated as a "coup d'eclat", prompting a "coup de chapeau". For realists
it was eventually seen as a failure ("coup de manque") as was all the preceding
nonsense about managing "price stability". As for us, we would have been content
with a "coup de beer".
Link to July 4 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/07/market-...ng-to-the-exits
