Stock Markets
Life in the past lane seems to have helped in the equity department. The old
Dow Theory gave a general "Sell" as the DJIA slipped below the previous low
in early July. In May, our "Friends of the bull market" suggested the senior
indexes could continue up for a few months.
Within the banks and financials, leadership was provided by an outstanding
rally for Wells Fargo. Technical excess and the likelihood of widening credit
spreads prompted our "Widows and Orphans" short memo of July 7th. As with a
similar call in 1998 we thought it would take a while to become effective.
The high for WFC was 58.38 on July 24th and the low on "Black Monday" was
47.75. The BKX reached 80.87 on the same day in July and has dropped to 68
this week. Broker-Dealers (BKX) topped at 203 on July 20th and is now at 166.
It is uncertain how long this week's rebound will last.
However, the most critical event has been the Shanghai blow-out (on schedule)
in June. It has been following the path set by the equivalent blow-outs by
gold in 1980, Nikkei in 1989 and the Nasdaq in 2000. It has also been following
the completion of the great bubbles in history, such as the South Sea Bubble
of 1720.
This "old" history suggests forced liquidation in the fall.
More recent history of the reversal to credit-spread widening also suggests
dislocations in the fall. As noted above, widening is becoming somewhat dramatic.
The damage has been serious.
The NYSE Comp has taken out the low of last October, which is equivalent to
the initial drop in January 2008. Global equities (VEU) have accomplished the
same decline.
Does this mean that the initial and intermediate drop in the post-2015 bear
market is over?
It is worth noting that while those plunges started in October, the action
can be considered as a fall crash. Equity markets have been hit hard, but have
still to face the hardships of the fall.
"Black Monday" was a mini crash that hit markets from stocks to junk bonds
to commodities. Some relief has been earned. Let's call it the JH Rally,
which could be brief.
Commodities
ENSO is back!
By ENSO we are not talking about an ETF. It is the El Nino Southern Oscillation
and it is now coming on rather strongly. The last one was the big one in 1997
to 1998, which fired the imagination of "global warmers". Forever it seems.
They are ranked as follows:
1997-98 2.4
1982-83 2.2
1972-73 2.1
1964-65 1.9
1952-53 1.8
Of course, the extent of this one can't be known until it is over. This writer
recalls the markets discovering El Nino in 1972. The CRB had a low of 98 in
November 1971 and the ocean temperature off of the coast of Peru began to increase
in February. The bountiful fishery depends upon up welling of nutrient-rich
cold water.
The fishery collapsed, including the anchovies used in fish meal for cattle
feed. Moving quickly, the Soviet Union put in buy orders on many commodities.
Each different big broker was told that they had the exclusive order and the
game was on to bid up commodities. One goal was to obtain the commodities,
the second to dislocate Western markets.
Dislocation indeed, as the CRB soared from 98 to 237 in February 1974. The
action prompted OPEC's presumption of monopolistic powers, initiating the first
energy crisis. Providing much relief, neither the monopoly nor the Soviet Union
survived. As an aside the only big monopoly left is the one that protects nationalized
currencies.
Naturally, wholesale prices soared and as calculated by the Bureau of Labor
Statistics the doubling of the index was too easy to see. So the WPI was changed
to the PPI and the index rigged to disguise the double. Notwithstanding this,
the public knew that CPI inflation was painful.
1971 was early in what became an unprecedented inflation in tangible assets
and wages. This completed in 1981, liberating another era of inflation in financial
assets that continues to this year.
Some researchers have been anxious for a return of inflation in tangible assets.
Will it at last happen?
There were two outstanding highs for the CRB. In 2008 it was 474 from which
the cyclical low was 200 in 2009. The next cyclical bull market completed in
2011 at 370. The latest drop was to 185 this week, which is a new low. It compares
to the low of 181 set in the 2001 financial crash.
The Weekly RSI is down to 18, which is quite oversold.
A brief rebound seems likely. Some researchers could use the ENSO story.
However, agricultural production has much greater geographic diversity now
and is less vulnerable to weather dislocations.
In 1972, the era of inflation in tangible assets was just beginning. Now,
the subsequent era of inflation in financial assets could maximized. If the
latter ends, it may not set up a new bull market in commodities.
On the bigger picture, it is uncertain how much this El Nino will raise the
satellite record of global temperature. It will definitely raise the political
temperature of global warmers. A comment on such "political science" follows.
In the meantime, crude oil prices are still likely to find seasonal lows in
December-January. Copper could pop into September and then find seasonal lows
in December. Wheat usually records seasonal firming into late August with weakness
into November.
Precious Metals
Obviously, the transition from the old paradigm for gold to the new paradigm
is not easy.
The old one has been on since the 1960s and initially the story was refreshing.
At the time, Wall Street was explaining that inflation was caused by both "wage
pull" and "cost push". That the Fed was depreciating the dollar and that would
eventually cause increasing CPI inflation was heresy. After all, Keyenes had
redefined "inflation" from the classic "inordinate expansion of credit" to "rising
prices" caused by "inflation expectations".
It must help to have a PhD in Tautology.
At any rate, the paradigm was that the Fed's evil habit would drive gold to
thousands of dollars. The higher you made the forecast - like $10,000 - the
more famous you became.
Nether the gold bugs nor central bankers really understood the condition of
inflation in financial assets. It always follows inflation in tangible assets
and once exhausted just plain deflation in most assets follows.
As we have described it, hoarding of hard things is followed by hoarding of
paper things, which has been followed by hoarding of cash.
By October, the latter should be back in vogue, as the investment demand for
gold continues to increase.
Investors should hold some gold as insurance, without dreams of making money
out of it in senior currency terms. It is too early to get aggressive about
gold stocks.
Fortunately, the gold/silver ratio is providing some instruction.
It goes down during a financial party. The low for this year was 67.5 in May
as junk bonds and commodities reached their best. Shanghai peaked in June.
The ratio turned up and has been staying above the 50-Week ma, which is constructive.
Our view has been that breaking above 77 would anticipate or occur with the
discovery of financial troubles.
It is now somewhat overbought at 80 and could correct. But the warning should
not be overlooked.
The new paradigm will be gold's real price rising enough to launch a cyclical
bull market for gold stocks.
Climate Change: Examined
In January 2008, I published our first article on Global Warming as
it was then called. Having a degree in geophysics, I thought that with warming
on since the end of the last ice age some 12,000 years ago that there no foundation
to the promotion. The corruption of science had become concerning and a few
essays where published pointing out the errors and misconceptions.
In the last few years research outside of government demanded and funded distortions
has expanded considerably. As have responsible websites disseminating "alternative" papers.
The following link is to a comprehensive review of the "science" that government
selects to increase its power and wealth.
http://www.notrickszone.com/2015/08/26/suppre...i.A8ykWBVz.dpbs
A swing chart of the daily price action of the S&P 500 from July 15 to
November 21, 2008.
