The Market’s Gamblers Are Pumping Air

The Fed pricked the financial bubble yesterday as expected. Janet Yellen’s press conference couldn’t have been more perfect for our investment thesis at my new research publication, Stockman’s Bubble Finance Trader. It confirmed that the money printers have come to a stark dead end.

The fact is, the global economy is deflating rapidly and the U.S. is sliding into recession. But our Fed chairman is clueless about what’s happening. She and her posse of money printers are going to get bushwhacked by reality in the year ahead.

She insisted repeatedly that the “economic fundamentals” are sound yesterday. Even though practically everything that matters is going south. This includes business investment, exports, retail sales, industrial production, inventory ratios, commodity prices, freight volumes and much more.

Our Keynesian school marm hangs all of her groundless optimism on the completely misleading and heavily medicated jobs numbers put out by the Bureau of Labor Statistics.

But here’s the thing: You can’t keep saying that the US labor market is in the pink of health when there are 102 million adult Americans without jobs. Or when there are still 3% fewer full-time, full-pay breadwinner jobs than there were 16 years ago when Bill Clinton was still in the White House.

So here’s where we stand after yesterday’s watershed moment…

Yellen officially admitted that, after the lunacy of free money for 84 months running, the Fed is out of excuses. And that it will start draining up to $1 trillion per day from the Wall Street swamp of liquidity.

If the Fed doesn’t follow through on this huge draining action, interest rates won’t go up, even by its trivial 25 basis points target. Its credibility would be shattered.

But if it does start heavily draining liquidity, it will catalyze the current sell off in the massive $2.6 trillion high yield market. That in turn will pull the props out from under the stock market. Here’s why: massive debt financed stock buybacks and mergers and acquisition (M&A) deals have inflated equities to their current nosebleed heights. Continue reading

Ten Investor Warning Signs for 2016:

Submitted by Michael Pento – Pento Portfolio Strategies

Wall Street’s proclivity to create serial equity bubbles off the back of cheap credit has once again set up the middle class for disaster. The warning signs of this next correction have now clearly manifested, but are being skillfully obfuscated and trivialized by financial institutions. Nevertheless, here are ten salient warning signs that astute investors should heed as we roll into 2016.

  1. The Baltic Dry Index, a measure of shipping rates and a barometer for worldwide commodity demand, recently fell to its lowest level since 1985. This index clearly portrays the dramatic decrease in global trade and forebodes a worldwide recession.

http://www.otterwoodcapital.com/wp-content/uploads/2015/11/BDI.png

  1. Further validating this significant slowdown in global growth is the CRB index, which measures nineteen commodities. After a modest recovery in 2011, it has now dropped below the 2009 level—which was the nadir of the Great Recession.

http://www.timera-energy.com/content/uploads/2015/08/CRB.jpg

  1. Nominal GDP growth for the third quarter of 2015 was just 2.7%. The problem is Ms. Yellen wants to begin raising rates at a time when nominal GDP is signaling deflation and recession. The last time the Fed began a rate hike cycle was in the second quarter of 2004. Back then nominal GDP was a robust 6.6%.  Furthermore, the last several times the Fed began to raise interest rates nominal GDP ranged between 5%-7%. 
  1. The Total Business Inventories to Sales Ratio shows an ominous overhang:  sales are declining as inventories are increasing. This has been the hallmark of every previous recession.

Continue reading

Gold and the Federal Funds Rate

Submitted by Pater Tenebrarum  –  The Acting Man Blog

Wrong Assumptions

It is widely assumed that the gold price must decline when the Federal Reserve is hiking interest rates. An example is given by this recent article on Bloomberg, which informs us that SocGen believes “gold will be a casualty of Federal Reserve policy”. Never mind that the assumption that the Fed will now be able to simply embark on a “normal” rate hike cycle is in our opinion utterly absurd. It will only do that if the inflation genie unexpectedly gets out of the bottle, and is guaranteed to remain “behind the curve” if that happens (more on this further below).

 

gold-and-dollarImage via gainesvillecoins.com

 

It seems logical enough: gold has no yield, so if competing investment assets such as bonds or savings deposits do offer a yield, gold will presumably be exchanged for those. There is only a slight problem with this idea. The simple assumption “Fed rate hikes equal a falling gold price” is not supported by even a shred of empirical evidence. On the contrary, all that is revealed by the empirical record in this context is that there seems to beabsolutely no discernible correlation between gold and FF rate. If anything, gold and the FF rate exhibit a positive correlation rather more frequently than a negative one!

Let us look at exhibit one – the 1970s:

 

1-1970sSo the gold price is falling when the Fed hikes rates? Not in the 10 years depicted above, when it did the exact opposite. It rose by 2,350% over the decade, and the vast bulk of the increase happened while the FF rate rose sharply. Gold did however plunge by almost 50% in a mid cycle correction from late 1974 to mid 1976 – while the FF rate actually went down – click to enlarge.

 

So the guessers at SocGen might actually have improved their statistical odds a bit if they had said “now that the Fed is hiking rates, gold prices should rise”. The reality is though that even if they knew perfectly well what the Fed was going to do next year – which they don’t, as not even the Fed itself knows – they could not possiblymake a correct gold price forecast based on that information. Continue reading

Physical Crude Demand Backs Fed’s IP Estimates, Not Fed’s Economic Outlook

Submitted by Jeffrey Snider  –  Alhambra Investment Partners

Like industrial production, the condition of oil inventory in the US was updated today in contradiction of the expectations driving Federal Reserve models expecting “transitory” weakness to simply pass into history. Unlike the virtual conditions for the FOMC, crude oil markets are obliged to respect both the eurodollar and the physical realities of physical commodities. Last week, the US EIA reported a significant drawdown of inventories (about 3.5 million barrels) only to find a greater build this week (4.8 million barrels). That leaves the amount of crude oil currently sitting in US storage as basically same as the all-time high registered in April – back when this sort of physical imbalance was last declared so temporary.

ABOOK Dec 2015 WTI Weekly Inventory

While we hear constantly the drumbeat of supply, the trend in oil production has been entirely predictable; even since summer there is little variability in the trend now at a lower production rate. That leaves but oil demand and usage as the primary variable to have so shifted since last year. While, again, that is being classified as unimportant or “transitory”, somehow it conforms quite well with the disaster in industrial production (energy being a primary input in those segments) now indicating full, economy-wide recession.

ABOOK Dec 2015 WTI Production

More concerning, and placing a great deal more pessimism into the economic mix, is that no matter how low oil prices have collapsed it doesn’t seem to have generated the expected inventory reversal; quite the opposite, the amount of crude in storage appears quite inelastic, as economists reference it, to price. That would seem to violate the basic laws of supply and demand in at least the ceteris paribus manner in which they are analyzed and totaled up as “transitory.” In other words, if the economy was continuing robustly despite the oil slump, those low prices should be quite enough for economic demand to start using much, much more of it. Instead, again, inventories appear inelastic to price which more than suggests that “demand” is weak and weakeningunrelated to the price of oil. Continue reading

5 Key Charts Show Rising Interest Rates Good For Gold Bullion

Submitted by Mark O’Byrne  –  GoldCore

Gold fell to the lowest level in dollar terms since 2009 yesterday after the Fed’s “historic” 25 basis point interest rate rise on Wednesday. The rate hike has been heralded as the “end of cheap money.” This may or may not be the case but what is more important for precious metal buyers is the impact of potential rising rates on gold prices.

18-12-2015_1

Most pundits on Wall Street are nearly universal in seeing the rate increase as negative for gold. Especially vocal in this regard has been Goldman Sachs. One headline this week, screamed ‘Gold sags as higher U.S. rates are ‘very negative’ for bullion’. However, the consensus is likely once again wrong and it is important to examine the widely held belief that rising rates are bad for gold, by looking at the data and the historical record.

18-12-2015_2
Source: New York Federal Reserve for Fed Funds Rate, LBMA.org.uk for Gold (PM fix)

Firstly, let’s look at the basis for the simplistic “rising rates will lead to lower gold prices” narrative. It comes about due to the belief that rising rates will lead to higher yields and thus investors allocating more funds to bonds and deposits. As gold is a non yielding asset, this therefore is negative for gold or so the narrative goes.

Goldman Sachs is the leading propagator of the narrative and is unquestioningly quoted in the media as seen in this article from Bloomberg in October:

“The Federal Reserve will probably raise interest rates in December and follow that with a further 100 basis points of increases over 2016, according to Goldman Sachs Group Inc., which said the shift in U.S. monetary policy will hurt gold”

Continue reading

The Daily Debt Rattle

Submitted by Raúl Ilargi Meijer  –  The Automatic Earth

 

• Sell The Bonds, Sell The Stocks, Sell The House – Dread The Fed! (Stockman)
• Oil Below $35, Set For Third Weekly Loss As Supply Glut Seen Relentless (BBG)
• Natural Gas Falls to All-Time Inflation-Adjusted Low (WSJ)
• This Year’s Worst Commodity Is One You Probably Can’t Pronounce (BBG)
• Slowing Boats From China Provide Clue to Health of World Trade (BBG)
• Fed Will Have To Reverse Gears Fast If Anything Goes Wrong (AEP)
• The ‘Rate Hike’ Means More Looting By The 1% (Paul Craig Roberts)
• Japan To Craft $27 Billion Extra Stimulus Budget To Spur Growth (Reuters)
• Beijing Probes Architects of Stock-Market Rescue (WSJ)
• China Beige Book Shows ‘Disturbing’ Economic Deterioration (BBG)
• IMF’s Lagarde to Face Trial for ‘Negligence’ in Tapie Case (BBG)
• IMF Admits Mistakes Over Greece’s Bailout Program (GR)
• Beijing Grinds To Halt As Second Ever ‘Red Smog Alert’ Issued (Reuters)
• EU Puts Blame On Greece, Turkey At Refugee Summit (Kath.)
• EU To Fast-Track Border Control Plans (RTE)
• Greece Risks Becoming A ‘Black Box’ For Stranded Migrants (FT)