This is too Funny…
We have nothing against hedge fund manager John Paulson…after all, we don’t know the man. In fact, he is inter alia known for his philanthropy, having gifted $400 million of his not inconsiderable fortune to Harvard’s School of Engineering and Applied Sciences. But ever since hitting the big time by shorting assorted MBS prior to the 2008 crisis, he has frequently served as an excellent contrary indicator.
John Paulson looking at a recent chart of gold …
Photo credit: Bloomberg
First he bought bank stocks in 2010, announcing that he was betting on a rebound in growth that would ignite the sector. Not long thereafter, bank stocks began to decline sharply, as the euro area debt crisis went into overdrive. Paulson finally admitted that his strategy was a failure and sold the bulk of his exposure to banks in the fall of 2011 – literally within days of the sector taking off sharply.
Bank stocks and John Paulson – click to enlarge.
Gold investors should have realized that this represented a warning sign. Paulson had decided to jinx them in 2010 – 2011 as well. He announced his thesis on investing in gold and gold stocks in 2010 and eventually launched a dedicated fund for the purpose. He even offered a version of it that was denominated in gold, which we thought was actually a great feature. Continue reading
Experts Agree: It Is Not 2008
If someone were to ask us what year it was, we would probably politely answer that it was 2016, curious to find out whether the inquirer was a) very confused, b) had only recently awoken from a coma and was still unsure of his when-abouts, or c) was a time traveler who got temporarily lost.
In the unlikely case that we should find ourselves unable to remember the year with sufficient precision to ensure a reliable answer, we’d probably consult a calendar. We recently found out that a great many people actually seem to be uncertain about what year it is. Or at least many mainstream media appear to think so, as they have launched an intense awareness campaign.
Specifically, numerous people seem to think it is still 2008. Wish that it were so – we’d be eight years younger. It all started on 24 August 2015, when two publications apparently discovered independently of each other that is was no longer 2008 and decided that this information should be urgently imparted to the rest of humanity. It all started with marketplace.org admonishing its readers to engage in mnemonic exercises so as not to forget:
If you repeat it often enough, remembering it will eventually become second nature…
Photo via marketplace.org Continue reading
Has a Bull Market Begun?
Gold stocks have risen so much and so fast recently that a pullback, resp. consolidation either has begun already or is likely to begin soon. We have therefore decided to post a brief update on the situation in order to discuss what might happen next. Back in late November, we made a few remarks in order to clarify why we have focused so much on the gold sector again since last summer.
Processing plant of the Driefontein mine in South Africa – Photo via goldfields.co.za
Here are a few excerpts:
“When a market is down 83% like the HUI gold mining index is, we are generally more interested in trying to find out when it might turn around, since it is a good bet that it is “oversold”. Of course, if it makes it to 90% down, it will still be a harrowing experience in the short term.
We like these catastrophes because they usually mean “the stuff is cheap and there is probably something people don’t see”. That is definitely the case here, since one of the things that has been routinely ignored is the improvement in costs and cash flows that is slowly but surely progressing at many gold producers.”
Something evidently did get overlooked.
The HUI has rallied by about 57% in a mere three weeks – right after setting a trap for bears by briefly breaking below multi-month support. It has now reached an area of lateral resistance and is quite overbought, so some sort of consolidation is highly likely over coming weeks – click to enlarge. Continue reading
A Curious Collapse
Ever since the ECB has begun to implement its assorted money printing programs in recent years – lately culminating in an outright QE program involving government bonds, agency bonds, ABS and covered bonds – bank reserves and the euro area money supply have soared. Bank reserves deposited with the central bank can be seen as equivalent to the cash assets of banks. The greater the proportion of such reserves (plus vault cash) relative to their outstanding deposit liabilities, the more of the outstanding deposit money is in fact represented by “covered” money substitutes as opposed to fiduciary media.
Euro area true money supply (excl. deposits held by non-residents) – the action since 2007-2008 largely reflects the ECB’s money printing efforts, as private banks have barely expanded credit on a euro area-wide basis since then- click to enlarge.
Many funny tricks have been employed to keep euro area banks and governments afloat during the sovereign debt crisis. Essentially these consisted of a version of Worldcom propping up Enron, with the central bank’s printing press as a go-between.
As an example here is how Italian banks and the Italian government are helping each other in pretending that they are more solvent than they really are: the banks buy government properties (everything from office buildings to military barracks) from the government, and pay for them with government bonds. The government then leases the buildings back from the banks, and the banks turn the properties into asset backed securities. The Italian government then slaps a “guarantee” on these securities, which makes them eligible for repo with the ECB. The banks then repo these ABS with the ECB and take the proceeds to buy more Italian government bonds – and back to step one. Simply put, this is a Ponzi scheme of gargantuan proportions.
Still, in view of these concerted efforts to reliquefy the banking system, one would expect that European banks should be at least temporarily solvent, more or less. Since they have barely expanded credit to the private sector, preferring instead to invest in government bonds, the markets should in theory have little to worry about. Continue reading
A Harrowing Friday – Momentum Stocks Continue to Break Down
The release of Friday’s payrolls report was the worst of all worlds for the US stock market. This typically happens in bear markets: suddenly fundamental data that wouldn’t have bothered anyone a few months ago are seen as a huge problem. Why was it seen as problematic?
The report somehow managed to be weak and strong at the same time – it showed weakness in payrolls growth, but the entirely artificial U3 unemployment rate, which is distorted by the fact that a huge number of unemployed are no longer counted as unemployed, but rather as simply having “left the labor force”, fell below 5% at the same time.
Photo credit: Mike Kemp / Getty Images
This fact should keep the labor market-focused Keynesian leadership of the Fed (primarily Ms. Yellen herself) from moving very swiftly toward a loosening stance – although everybody knows this is what will eventually happen anyway. Does it actually matter? Not in reality, but it certainly matters to an already frayed market psychology.
If there is one chart that describes best that the US stock market has a really big problem now, it is probably this one:
The ratio of the Nasdaq 100 Index to the S&P 500 Index. The Nasdaq, which is primarily driven by big cap tech stocks was the one leading sector that still managed to hold things together while market internals deteriorated throughout 2015. Now its relative strength is beginning to break down as well – click to enlarge. Continue reading
A Comprehensive Discussion of the Economy and Financial Markets
The Incrementum Fund’s advisory board has held its quarterly meeting on January 10, and the transcript has just become available. Readers can download the transcript via the link below this post.
Unfortunately two board members (Dr. Frank Shostak and Rahim Taghizadegan) were unable to attend this time. We hope that you will nevertheless find the board’s discussion of a wide range of topics relevant to today’s financial markets interesting.
Gold rises to an all time high against commodities – a strong sign that economic confidence is waning – click to enlarge.
We would especially point to the debate surrounding central bank credibility (or the “confidence bubble” as Mark Valek refers to it), which we believe is probably the most important subject investors need to confront these days. As we have recently mentioned, Jim Rickards has as always made a number of very interesting remarks on the finer points of Fed policy.
He inter alia pointed out that the Fed’s flexibility tends to be hampered in election years, as it doesn’t want to be seen as influencing the election outcome. This could be especially relevant this year (a similarity to the years 2000 and 2007/8, we might add), as it happens just as the economy and the markets appear to be at a crossroads.
US dollar index, daily – the board’s consensus was that the dollar would no longer make much headway against major currencies, as the Fed was likely to soften its stance. So far this seems to be the case – not even the ECB and the BoJ were able to put pressure on their currencies beyond a single trading day – click to enlarge. Continue reading
Not Getting Better
In late July last year, not long before the stock market delivered a major “warning shot” with its sharp decline in August, we wrote about the transportation sector in Transportation Sector in Trouble – What are the Implications?. As we noted at the time, the sector seemed to send a potential “economic red alert”.
The famous ghost fleet near Singapore
Photo credit: Richard Jones / Sinopix
What was at the time a long-lasting divergence between the Dow Jones Industrial and Transportation Averages, has in the meantime turned into a complete rout of transportation stocks. At the moment the Transportation Average is rebounding from severe oversold conditions, but the fact remains that this former upside leader has become a downside leader.
After topping in late 2014, the Dow Transportation Average has suffered a sharp decline – click to enlarge.
In recent days we have come across a few other data points and charts in this context, some of which we show below. Yesterday Zerohedge reported on a sharp decline in orders for trucks, which jibes with what we are seeing elsewhere.
The charts below are a bit of an eclectic collection, but they are all making the same point: global trade continues to be in trouble. First two charts from China, the first one of which we have already shown in a recent Bill Bonner missive, namely the Shanghai containerized freight index (a price index).
China containerized freight index has been in a relentless downtrend last year. Lately it has been moving sideways at a low level – click to enlarge.
The next chart shows the China railway freight index. Apparently China’s national railway company is set to reports its first ever operating loss this year, as railway cargo volumes have collapsed 11.9% year-on-year in 2015 to a new five year low. In Q4 2015 the decline accelerated to 13.4% y/y. Continue reading
More Anti-Cash Propaganda by Bloomberg
Former NYC mayor Bloomberg is probably one of the worst nannycrats who ever strode upon the US political scene. No-one has done more to take the fun out of New York than this man (we have chronicled the efforts of people of his ilk in “America’s Killjoys”). It always amazes us to no end when successful businessmen – once they have made enough money to last them a thousand lifetimes – suddenly discover their penchant for socialism and State control of every nook and cranny of people’s lives.
Ex-NYC mayor Michael Bloomberg, owner of the famous financial data service and professional nannycrat.
Photo via politistick.com
If not for the huge amount of capital our forebears wisely accumulated while the market economy was still relatively unhampered, Bloomberg wouldn’t have been able to amass his fortune – and yet, we strongly suspect that he has never really been a big fan of free market capitalism. His willingness to join the political class is by itself a major “crony indicator”. There is after all a big difference between wishing to serve consumers and wishing to rule over them.
The financial services offered by his company are nevertheless quite valuable – an unrivaled wealth of data is available via Bloomberg terminals and the financial commentary on the Bloomberg web site is often quite informative as well – as long as it is confined to the neutral reporting of facts that is. It is quite different with the magazine’s editorial line, which is steeped in the statism of the service’s founder.
For instance, central banking and central planning of the economy in general remain routinely unquestioned; Keynesian shibboleths are woven into the narratives as if they represented incontestable truth. It is therefore not a big surprise that the magazine is also editorializing in favor of banning cash. Here is the latest example, with Bloomberg’s editors urging to “Bring on the Cashless Future”. Continue reading
A Negated Breakdown
There have been remarkable gyrations in the gold sector lately. The typical rebound out of a November/December low (typical in recent years after the end of the tax loss selling period) was initially cut short in January in the course of the global stock market decline. This was a bit surprising, because it was widely held that the recovery in the gold price was a result of said stock market decline.
Photo via genius.com
We suspect that in it was initially still widely expected that stock market weakness was just a fluke and that the downtrend in the gold price would therefore soon resume. Moreover, base metal mining stocks were pounded mercilessly and as we have previously discussed, there is a completely illogical short term correlation between this sector and gold mining stocks, likely due to various tracking products and the mindless automatic buying and selling associated with them. From a technical perspective the action has created quite an interesting situation though:
XAU and HUI daily. After initially beginning to recover from November, resp. December lows, both indexes sold off sharply after the first trading week in January, and in the process broke below a previous support level that has been tested many times and has up to that point always held. It looked like yet another breakdown in the long-lasting bear market was underway – but the indexes quickly reversed back above the broken support line – click to enlarge.
As the chart annotation indicates, the recent reversal is definitely positive. Both false breakouts and false breakdowns often turn out to be reliable trend change signals. An additional bonus in this case was that the initial breakdown has induced widespread capitulation (judging from anecdotal evidence). Continue reading
Let’s Do More of What Doesn’t Work
It is the Keynesian mantra: the fact that the policies recommended by Keynesians and monetarists, i.e., deficit spending and money printing, routinely fail to bring about the desired results is not seen as proof that they simply don’t work. It is regarded as evidence that there hasn’t been enough spending and printing yet.
BoJ governor Haruhiko “Fly” Kuroda: is that a windshield I’m seeing?
Photo credit: Yuya Shino / Reuters
At the Bank of Japan this mantra has been gospel for as long as we can remember. Japan has always exhibited an especially strong penchant for central planning. We still recall that many Western observers were beginning to wonder in the late 1980s whether the Japanese form of state capitalism administered by the powerful Ministry of Trade and Industry and the BoJ wasn’t a superior economic system after all. Then this happened:
The Nikkei Index from 1989 to 2003. Japan’s seemingly never-ending boom coupled with forever rising stock prices, carefully administered by Tokyo’s powerful bureaucrats, suddenly became an intractable bust – click to enlarge.
This sudden change in fortunes should perhaps have been taken as a hint that central planning of the economy wasn’t such a good idea after all. That was not the conclusion of Japan’s movers and shakers though (or anyone else’s, for that matter). Instead it was decided that what was required were better planners, or at least a better plan.
For decades Japanese policymakers have been inundated with well-meaning advice by prominent Western economists. Even Ben Bernanke famously admonished them to just print more. According to Bernanke, holding interest rates at zero and implementing several iterations of QE were indicative of “policy paralysis” – after all, these efforts were obviously just not big and bold enough! Continue reading
An Imaginary Bogeyman
What’s a Keynesian monetary quack to do when the economy and markets fail to remain “on message” within a few weeks of grandiose declarations that this time, printing truckloads of money has somehow “worked”, in defiance of centuries of experience, and in blatant violation of sound theory?
In the weeks since the largely meaningless December rate hike, numerous armchair central planners, many of whom seem to be pining for even more monetary insanity than the actual planners, have begun to berate the Fed for inadvertently summoning that great bugaboo of modern-day money cranks, the “ghost of 1937”.
The bugaboo of Keynesian money cranks – the ghost of 1937.
As the story goes, the fact that the FDR administration’s run-away deficit declined a bit, combined with a small hike in reserve requirements by the Fed “caused” the “depression-within-the-depression” of 1937-1938, which saw the stock market plunging by more than 50% and unemployment soaring back to levels close to the peaks seen in 1932-33.
This is of course balderdash. If anything, it demonstrates that the data of economic history are by themselves useless in determining cause and effect in economics. It is fairly easy to find historical periods in which deficit spending declined a great deal more than in 1937 and a much tighter monetary policy was implemented, to no ill effect whatsoever. If one believes the widely accepted account of the reasons for the 1937 bust, how does one explain these seeming “aberrations”?
The DJIA in 1937 (eventually, an even lower low was made in 1938, see also next chart) – click to enlarge. Continue reading
The Stock Market and Economic Data
In previous articles we have occasionally discussed the interaction between economic indicators and the stock market. Among the topics we have touched upon: for one thing, the capitalization-weighted indexes can hardly be called “leading indicators” of the economy anymore. In fact, if one studies specific major turning points over the past two decades or so, it is clear that the market seems to “know” very little (at least not in advance).
The impression one gets is actually that the major indexes are acting like coincident rather than leading indicators of the economy. However, the market is not completely bereft of leading indicator qualities. What seems to be leading the economy are not the cap-weighted indexes, but market internals.
Even while the SPX still rose, resp. went sideways in 2015, market internals began to deteriorate (here shown: S&P hi/low percent, NYSE a/d line, SPX stocks above 200 & 50 day ma) – click to enlarge. Continue reading