Back in January, I discussed the likelihood that global equity markets
were approaching simultaneous tipping points beyond which legions upon
legions of GenX-ers and Millennials would be thrown to the wolves by failing
to recognize the financial mania engulfing them. I alluded to it being
"Time for the Beast to Exhale," and within a few days, my
volatility trade (UVXY) exploded to the upside as the "beast,"
better known as the global stock market ascent, finally exhaled and fell
3,300 Dow Jones points in a week.
I took a double-and-a-half profit on the UVXY and am now comfortably to
the sidelines holding only a modest position in the JNUG, most of which I
exited over a month ago when RSI readings exceeded 70. I am now long a very
modest 20% position in JNUG from $13.35 and looking to add, while I am
avoiding volatility and/or S&P shorts like the bubonic plague for one
very simple reason—shenanigans.
The term "shenanigans" is allegedly from the mid-nineteenth
century, and while the Irish are generally credited with its origin, most web
searches result in "origin unknown." However, two definitions that
most tickle my fancy are as follows: "secret or dishonest activity or maneuvering,"
as in "the bullion banks control gold prices with sophisticated
shenanigans"; and "silly or high-spirited behavior; mischief,"
as in "the shenanigans carried out by the Plunge Protection Team is a
violation of the entire concept of free markets." Whatever the
definition, there is absolutely no other rational explanation for the
absurdity we just witnessed in the past couple of weeks. Total, unabashed,
shameless shenanigans.
Shortly after New Year, I postulated that for a whole pile of reasons, stocks
were ripe for a drop and quite possibly a big drop. Well, with fixed
income yields soaring and the USD crashing, I had a sense that a granddaddy
"bear" was about to arrive and devour everyone and everything in
its path, leaving ravaged financial carcasses on the both sides of all roads
leading to "financial freedom." And arrive he did, hungrier than
ever from a long hibernation, and did indeed strike with unimaginable
ferocity, until the park rangers of Wall Street showed up with a "tranquilizer
bazooka" and subdued the gorging beast precisely at the 200-daily moving
average (dma) for the S&P 500, around 2,539. And on that Friday, a
cleverly orchestrated intervention by the price managers saved the markets
from the dreaded "weekly breakdown." The sighs of relief from the
CNBC anchors could be heard in Nome, Alaska, as plans for winter vacations
were taken off hold and Maserati purchases were resumed, with nary a bead of
sweat nor blink of an eye. While we have all seen this movie before, it was
shenanigans, pure and simple.
At the same time that bitcoin and weed and lithium and zinc stocks were
all finding their "buy the dip!" footings, gold and silver were
doing everything in their power to behave in their rightful manner as safe
havens. That is, until the same day the 200-dma for the S&P was
protected. After trading north of $1,360 resistance on numerous occasions,
the interventionalists finally forced gold to buckle on Tuesday, Feb. 20,
with a $23 smash that ironically coincided with a 250-point drop in the
Dow—proving once again that the inverse correlation of gold to stocks is
quite easily negated through a liberal dose of shenanigans. "Secret or
dishonest activity or maneuvering" . . . if it weren't so melodious it
might be deemed humorous. But it's not funny.
So now that the stock roaches are back in control of the asylum, the
S&P has clawed back approximately 57% of the 333 points it surrendered
during the bear's brief foray from its cave. But I have the totally ad hoc
sense that all Grampa Bear did two weeks ago was enjoy a shrimp cocktail and
a few paté foie gras canapes, and that he remains in full anticipation of an
Edwardian feast of the highest and most consumptive fashion. I see entire
sectors of stocks being vaporized in the upcoming months, for all of the same
reasons I suggested in mid-January that the "beast" had been
holding its breath for too long.
We are now in a reflex rally off the sharp panic of two weeks ago. These
of retest-of-the-highs rallies always set up the longer-term top, one where
Grampa Bear arrives in ill humor but with renewed energy taken from the hors
d'oeuvres of early February and ready to feast, in earnest.
You might wonder why I believe that the oncoming bear will shrug aside the
shenanigans brought about by the interventionalists. Here is why:
If I were to recount the multitude of market corrections, crashes and
bears that I have endured over forty some years of toil, I can safely say
that there has never been a period when I have seen weakness in the
U.S. dollar during a period of credit tightening or market turmoil. As the
chart above depicts, the 10-year yield has advanced over 30% since last June,
while the dollar has given up nearly 7.5%. The theory behind this is that
money is drawn to where it is treated "the best," be it by way of
conservative fiscal policies or by implied rate of return or both.
In countries where fiscal conservatism is a way of life (like the
"old" Switzerland or the U.S. post-WWII), wealthy individuals
salted their savings away in Swiss banks or U.S. Treasuries, knowing their
money was safe from dramatic currency fiascos such as those that occurred in
Weimar Germany, or Zimbabwe, or more recently, Venezuela. Raw demand for safe
haven currency positions exerted upward pressure, and therein lies the thesis
for historical favoritism toward the USD.
However, beginning in June 2017, a glaring divergence began, wherein the
Fed's jawboning about higher interest rates actually manifested itself into
actual reactions in the form of rising yields. Instead of capital flowing toward
the USD, it actually began to flee it. What could be different today
than in other eras and with other regimes? The answer is debt. The
U.S. now has a sitting president that cares not about fiscal responsibility
nor economic sanity; he will build the Wall, create jobs, fortify the
military, solve poverty and unify the nation, all while balancing his budget
by way of renewed growth. And all in the face of cuts in government revenue
through passage of the recent tax bill.
The well-documented legacy issues surrounding debt ceiling, Social
Security and Medicare have been well covered by the financial media, but are
now real concerns, as those issues can no longer be talked over or
explained away. The term "fiat" finds, at its core definition, the
term "decree," meaning that the only reason a currency can be
considered a unit of monetary exchange is that its issuer (government) deems
it so as an edict or order. It would seem that when markets diverge from
historical behaviors, a significant change is probably underway and therein
lies my rationale for extreme caution. When the masses reject a
"decree," there is trouble a-brewing. That, I believe, is where we
are today.
I have been asked a great many times what event would need to transpire in
order for gold to move through $5,000/ounce. I have long held that it is only
when the USS Nimitz pulls into Gibraltar for a refit and they refuse
the credit card. Think about it. The British pound was the world's dominant
reserve currency as long as Britannia Ruled the Waves. But once the British
were bailed out by the Allies (led by the massive American industrial war
machine during WWII), the American currency took the throne of "reserve
currency status," because the world currency owners finally recognized
that the cost of maintaining the empire had bankrupted Britain.
Here we are a mere seventy-three years later, and the American Empire is
now on the verge of that same insolvency-bred disintegration that arrives
without notice but with swift precision. The great author Ernest Hemingway
best described it when asked how he went bankrupt with the brilliant and very
accurate retort: "Gradually, then suddenly."
So, as I try desperately to ascertain whether the volatility trade (UVXY)
or the Gold Miners (JNUG/NUGT) could be reestablished with a reasonable
prospect of renewed windfalls, I must confess that I currently possess a hard-to-describe
sense of foreboding that we might be entering a period where liquidity
demands circumvent the investment merits of any and all asset classes. I
could liken it to opening a hatch in a space capsule while deep in outer
space. The vacuum of space sucks everything from the capsule regardless of
its weight or how it is attached. The vacuum of debt in today's world carries
that same potential—to suck any and all liquidity from everywhere as demands
for added collateral are issued to governments, corporations and private
(leveraged) investors.
With the Fed minutes just out, stocks are screaming higher because the
language sounded "dovish," with only 2.83 rates hikes being
factored in versus the 4.0 hikes discussed last week. Nevertheless,
litmus-test-reaction to this central bank mumbo-jumbo remains the USD index,
which proceeded to drop like a rock, from 89.91 to 89.49 within seconds of
the release. USD weakness is going to be a recurring theme in this
publication because with imported goods more expensive, the deflationary
effect of the "strong dollar policy" has been reversed.
Additionally, if higher rates cannot throw a bid into the USD, imagine
what happens to King Dollar when the Fed panics because the S&P 500
finally breaks support. Just as we learned last week how gold stocks are more
stocks than gold during a crisis, ownership of the physical metal is a far
safer place to be than trying to avoid margin calls with your favorite gold
producer in a careening stock market collapse. No matter how well run or how
much gold they produce, they are getting thrown overboard along with Netflix,
Google and Amazon.
Late on Wednesday, the Dow gave back over 465 points from the daily highs
in what was a breathtaking reversal of fortune. Just as it appeared the Fed
was going to ease up on the quantitative tightening campaign, bond yields
suddenly spiked back to 2.95% from 2.88%, and the USD Index to 90.05 from
89.49, taking stocks, bonds and gold to session lows. This is the type of
action that gives me that ad hoc premonition of impending doom, and why I am
keeping my investment powder extremely dry and the urgency to trade very much
in check.
Charts and images courtesy of Michael Ballanger.
Michael Ballanger Disclaimer:
This letter makes no guarantee or warranty on the accuracy or completeness of
the data provided. Nothing contained herein is intended or shall be deemed to
be investment advice, implied or otherwise. This letter represents my views
and replicates trades that I am making but nothing more than that. Always
consult your registered advisor to assist you with your investments. I accept
no liability for any loss arising from the use of the data contained on this
letter. Options and junior mining stocks contain a high level of risk that
may result in the loss of part or all invested capital and therefore are
suitable for experienced and professional investors and traders only. One
should be familiar with the risks involved in junior mining and options
trading and we recommend consulting a financial adviser if you feel you do
not understand the risks involved.
