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Blow-Off Pattern Recognition

As noted in Part 1, historically, blow-patterns in stock markets share many characteristics. One of them is a shifting monetary backdrop, which becomes more hostile just as prices begin to rise at an accelerated pace, the other is the psychological backdrop to the move, which entails growing pressure on the remaining skeptics and helps investors to rationalize their exposure to overvalued markets. In addition to this, the chart patterns of stock indexes before and after blow-off moves are displaying noteworthy similarities as well.

“On Margin” – a late 1929 cartoon illustrating the widespread obsession with the stock market at the time. There was just a 10% margin requirement, i.e., investors could leverage their capital at a ratio of 10:1. The demand for margin credit was so strong, that it pushed call money lending rates in New York up quite noticeably. This in turn made it increasingly difficult to maintain extremely leveraged positions.

Why do we assume the current move is a speculative blow-off and not just another “normal” up-leg? The main reasons are the speed and size of the move, the fact that it happens at the tail end of a very sizable advance that has already lasted a full eight years, the chart pattern, and above all, valuations.

The chart below was recently posted by John Hussman – it shows the evolution of five different valuation parameters over the entire post WW2 era. As an aside to this: he estimates that another 12% advance would push SPX valuations to the extremes recorded in 2000. We already seem to have passed the 1929 threshold recently, so this is the only record that remains to be aimed for (that does not mean one should expect it to be reached).

…click on the above link to read the rest of the article…

US True Money Supply Growth Jumps, Part 1: A Shift in Liabilities

December 10, 2016

US True Money Supply Growth Jumps, Part 1: A Shift in Liabilities

A Very Odd Growth Spurt in the True Money Supply

The growth rates of various “Austrian” measures of the US money supply (such as TMS-2 and money AMS) have accelerated significantly in recent months. That is quite surprising, as the Fed hasn’t been engaged in QE for quite some time and year-on-year growth in commercial bank credit has actually slowed down rather than accelerating of late. The only exception to this is mortgage lending growth – at least until recently. Growth in mortgage loans is still very slow though, especially compared to historical growth rates. It cannot really account for the recent surge in money supply growth either.

Year-on-year growth rates of TMS-2 (11.19%, black line) and total loans and leases at commercial banks (7.7%, red line) as of October. In absolute terms money TMS-2 has soared by a staggering $840 billion since the beginning of the year – click to enlarge.

Usually lending by commercial banks will tend to lead growth in the broad true money supply, but this lead-lag relationship has become a lot less straightforward after the 2008 financial crisis (in fact, it actually reversed for a while). As a result of the Fed’s heavy debt monetization activities, the pace of money supply growth is nowadays influenced directly by two major sources.

Prior to the crisis, the Fed would mainly affect commercial bank lending growth by setting overnight interbank lending rates (i.e., the federal funds rate) and maintaining its rate target by supplying or occasionally draining reserves. QE by contrast creates new deposit money directly (as well as bank reserves to the same extent), which adds to the fiduciary media commercial banks conjure into being by means of fractionally reserved lending. QE has fundamentally altered the way the system functions – this remains the case even now, with the Fed’s QE type activities reduced to reinvesting the proceeds from maturing bonds.

…click on the above link to read the rest of the article…

Doomed to Failure

October 8, 2016

Doomed to Failure

Larded Up and Larded Over

We’ve been waiting for the U.S. economy to reach escape velocity for the last six years. What we mean is we’ve been waiting for the economy to finally become self-stimulating and no longer require monetary or fiscal stimulus to keep it from stalling out. Unfortunately, this may not be possible the way things are going.

fischers As Milton Jones once revealed: “A month before he died, my grandfather covered his back in lard. After that, he went downhill quickly” (his other grandfather drowned in a bowl of cheerios). A similar fate may await the larded up US economy.

In short, the U.S. economy may never reach “escape velocity” unless it is first allowed to crash. It has been too larded up and larded over with debt for any real sustainable growth to take root. More evidence, to this effect, was revealed this week.

For example, the International Monetary Fund (IMF) anticipates the U.S. economy will expand by just 1.6 percent this year. That’s about one percent less than last year’s estimated growth. In other words, the rate of economic growth in the United States isn’t increasing; rather, it’s decreasing.

According to the IMF, “the slower-than-expected activity comes out of the ongoing oil industry slump, depressed business investment and a persistent surplus in business inventories.” Could this be the twilight of the weakest economic recovery in the post-World War II era? Only time will tell, for sure.

But anyone with an ear to the ground and a nose to the grindstone knows the answer to that question. Business ain’t booming. Moreover, it has become near impossible for corporations to grow their earnings.

…click on the above link to read the rest of the article…

A Convocation of Interventionists – Part 1

September 10, 2016

A Convocation of Interventionists – Part 1

Modern Economics – It’s All About Central Planning

We are hereby delivering a somewhat belated comment on the meeting of monetary central planners and their courtier economists at Jackson Hole. Luckily timing is not really an issue in this context.
central bank HQs 2 Central bank headquarters: the Fed’s Eccles building, the ECB’s hideously expensive new tower in Frankfurt, and the BOJ’s Tokyo HQ (judging from the people in the foreground, it may be a source of noxious fumes).

When discussing papers and speeches delivered at the annual Jackson Hole meeting, it is important to consider the wider socio-economic context. As this article suggests (still the most recent reference available on the topic), the Federal Reserve has essentially bought off the economics profession.

A great many US economists list “monetary policy” in some shape or form as a specialty, or more generally, “macroeconomic policy formation and aspects of public finance”. More than half of the editors of the top seven academic economic journals are on the Fed’s payroll and serve as gatekeepers. The Fed employs hundreds of economists directly, and provides 100ds of millions of dollars in grants to outside economists.

We are quite certain that the situation in other countries is very similar. It is easy to see why practically no fundamental criticism of the monetary system is forthcoming from the economics profession. The basic assumption that money and credit should be centrally planned is rarely challenged (or almost never). Economists naturally won’t bite the hand that feeds them.

Instead, debate as a rule revolves around various “plans”. Their authors are mainly suggesting what they think are improvements on existing plans. Obviously, not all of these plans can be correct; but how can one possibly know which ones might be?

…click on the above link to read the rest of the article…

Gold Sector Correction – What Happens Next?

September 2, 2016

Gold Sector Correction – What Happens Next?

The Long Awaited Correction is Underway

The gathering of central planners at Jackson Hole was widely expected to bring some clarity regarding the Fed’s policy intentions. This is of course a ridiculous assumption, since these people have not the foggiest idea what they are doing or what they are going to do next. Like all central planners, they are forever groping in the dark.

U.S. Federal Reserve Chair Janet Yellen (L) congratulates Stanley Fischer as he is sworn in a vice chairman at the U.S. central bank in WashingtonHi there! Stanley Fischer finds chief central planner Janet Yellen deep in the bowels of the Eccles building. In Jackson Hole, they played “good cop, bad cop”.

Nevertheless, financial markets keep reacting to their words as if they actually meant something – and of course we have to deal with that reaction, regardless of how irrational it is.

As we have mentioned many times during the gold bear market from 2011 to 2015, it was primarily the threat of a rate hike that put pressure on gold and supported the US dollar. We argued that once the Fed finally dared to implement a baby step rate hike, gold would very likely rally in a “buy the news” type response – which indeed happened.

Ms. Yellen’s speech at Jackson Hole (we will post a little post mortem on that gathering of interventionists soon) was still deemed non-committal enough by the markets. Her deputy Stanley Fischer attended the event as well though, and he started mumbling something about rate hikes.

Pure fantasy this may well turn out to be, but rate hike odds as reflected in the Federal Funds futures market shifted anyway. The gold market in turn still seems to care a lot about these shifts, in spite of the fact that trading in the underlying federal funds market is essentially dead as a doornail (with trillions in excess reserves, banks have no need for interbank borrowing). The threat of a rate hike was deemed to have returned.

…click on the above link to read the rest of the article…

Going… Going… Gone! The EU Begins to Splinter

June 25, 2016

Going… Going… Gone! The EU Begins to Splinter

Dark Social Mood Tsunami Washes Ashore

Early this morning one might have been forgiven for thinking that Japan had probably just been hit by another tsunami. The Nikkei was down 1,300 points, the yen briefly soared above par. Gold had intermittently gained 100 smackers – if memory serves, the biggest nominal intra-day gain ever recorded (with the possible exception of one or two days in early 1980). Here is a picture of Haruhiko Kuroda in front of his Bloomberg monitor this morning:

kuroda head This can’t be happening… please… let me wake up and realize that it was all just a bad dream…

Photo credit: Reuters

The War Street Journal immediately exhorted the poor man to “go big or go home” – in an article brimming with the usual Keynesian central planning clap-trap (we need more inflation, a strong currency is “bad”, rev up the printing presses, yada-yada…)

Touching less than 99 yen to the dollar, this brings Japan’s currency back to where it started just as Abenomics was ramping up in 2013. With interest rates already negative, a weak currency is one of the few tools Japan has at its disposal. A strong currency will be devastating for efforts to engineer inflation. Japan will need to prepare a response.

[…]

Bank of Japan Gov. Haruhiko Kuroda will be under pressure to go deeper on negative rates, even though doing so in the first place, in January, has seen the yen strengthen, not weaken.

[ed. note: yes, do more of what hasn’t worked! This is also straight from the Keynesian playbook…]

[…]

If negative rates aren’t the answer, what is? Increasing asset purchases of bonds and exchange-traded funds are an option, but there is limited room to expand those programs and the effect, only marginal at this point. Mr. Kuroda has been dismissive of more aggressive helicopter money-like moves that toe into fiscal policy.

…click on the above link to read the rest of the article…

Turning Stones Into Bread – The Japanese Miracle

June 4, 2016

Turning Stones Into Bread – The Japanese Miracle

Stuffing the Futon

Our friend Ramsey Su just asked what Haruhiko Kuroda and Shinzo Abe are going to do now in light of the strong yen (aside from perhaps doing the honorable thing). Isn’t it time to just “wipe out some debt with the stroke of a pen”?

Samuarai Futon The modern Samurai futon!

We will return to that question further below, but first a few words on the new Samurai futon. Apparently the Japanese are becoming more than a little antsy about Kuroda-san’s negative interest rate policy (and the threats of more of the same coming down the pike). Bloomberg informs us of the latest developments in this saga: “Manga Worker Stuffs Cash in Futon to Flee Japan’s Negative Rates”:

When the Bank of Japan unexpectedly announced negative interest-rate policies in January, the first thing Tomomi Sato did was withdraw a 10th of the money in her bank account and stash it at home.

“It made me think of bank runs and shutdowns like I’ve heard there were in the past,” said the 30-something assistant to manga comic artists, who commutes for two hours from a small apartment in Tokyo’s suburbs. “Eventually, I feel like they’ll start charging me to keep my money there. When I think about that, I begin to worry.”

Sato is emblematic of a challenge facing the central bank that rates below zero only deepened: average Japanese aren’t feeling the benefits of more than three years of extraordinary monetary stimulus, and cash withdrawals suggest they are losing faith. About 40 trillion yen ($360 billion) has piled up in homes across Japan, according to a Dai-ichi Life Research Institute estimate — equivalent to about 8 percent of gross domestic product. That’s money banks could be lending on or using to buy bonds.

(emphasis added)

…click on the above link to read the rest of the article…

China’s Rolling Boom-Bust Cycle

May 18, 2016

China’s Rolling Boom-Bust Cycle

Sweet Authoritative Nothings

There is a mysterious figure making regular appearances in China’s government mouthpiece “People’s Daily”, which simply goes by the name “authoritative person” (AP). This unnamed entity always tends to show up with bad news for assorted speculators, by suggesting that various scenarios associated with monetary and/ or fiscal stimulus are actually not in China’s immediate future (the details of AP’s latest pronouncements can be found here and here).

people's daily The People’s Daily. “Authoritative Person” may be hiding somewhere in the picture to the left.

Some observers seem to believe that this represents a “renewed shift in policy” – Bloomberg e.g. quotes an economist with Mizuho Securities as follows:

“It is very significant and may signal a shift in China’s policies,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “Each time they publish this, it is normally a warning.”

Others are more careful – after all, this seems to be a case of “we’re saying one thing and doing another”, given a credit expansion of 4.6 trillion yuan in just the first quarter, which has sent narrow money supply growth soaring to more than 22% annualized.

The more measured argument is that it could be a sign that the debate about future economic policy is ongoing, resp. has been revived. No-one really knows – it is basically the Chinese version of Kremlinology.

At the end of March, China’s narrow money supply measure M1 was growing at more than 22% y/y – click to enlarge.

Although the extension of new yuan loans has slowed significantly in April from January’s heady pace (555 bn. vs. 2.5 trn.), there has still been enough pumping in the system to push M1 up again in March-April from a brief dip in February – in other words, if there is indeed a change in policy, it is not really visible yet.

…click on the above link to read the rest of the article…

Fresh Mainstream Nonsense on Gold Demand

May 16, 2016

Fresh Mainstream Nonsense on Gold Demand

They Will Never Get It…

We and many others have made a valiant effort over the years to explain what actually moves the gold market (as examples see e.g. our article “Misconceptions About Gold”, or Robert Blumen’s excellent essay “Misunderstanding Gold Demand”). Sometimes it is a bit frustrating when we realize it has probably all been for naught.

Gold bars are displayed at a gold jewellery shop in the northern Indian city of Chandigarh Gold wants to know what it has done now… Photo credit: Ajay Verma / Reuters

This was brought home to us again in a recent missive posted at Kitco, which discusses an RBC research note on gold. In a way, it is actually quite funny. The post at Kitco is titled “Gold’s ‘One-legged’ Rally Is Cause of Concern”.

We can assure you it is not of “concern” to us. But we did wonder why the rally was supposedly “one-legged”, so we decided to read on.

Here is what RBC has decided was worth sharing in its new research report:

Despite gold’s impressive run up so far this year, analysts at RBC Capital Markets are concerned by the “one-legged” nature of its rally. In a research report Friday, commodity strategists for the bank noted that gold’s 2016 upswing has been mainly driven by investors, while other sources of demand haven’t followed through.

“In fact, investment demand seems to be the only leg driving this one-legged rally. For us to turn positive, we would need to see this strength replicated elsewhere,” they said. “Investor sentiment has turned amid a flight to safety, but that seems to be the only sentiment that has in fact shifted.”

(emphasis added)

Color us completely flabbergasted. What “others sources of demand” apart from investment demand are supposedly needed to produce a rally in gold and make it two-legged or maybe even three-legged?

June gold, daily. You poor one-legged thing! – click to enlarge.

…click on the above link to read the rest of the article…

Kuroda-San in the Mouth of Madness

May 14, 2016

Kuroda-San in the Mouth of Madness

Deluded Central Planners

Zerohedge recently reported on an interview given by Lithuanian ECB council member Vitas Vasiliauskas, which demonstrates how utterly deluded the central planners in the so-called “capitalist” economies of the West have become. His statements are nothing short of bizarre (“we are magic guys!”) – although he is of course correct when he states that a central bank can never “run out of ammunition”.

Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a news conference at the BOJ headquarters in Tokyo, Japan, December 18, 2015. BoJ governor Haruhiko Kuroda Photo credit: Toru Hanai / Reuters

The mental state of BoJ governor Haruhiko Kuroda may be even more precarious though. As Marketwatch reports, he recently gave an interview to German financial newspaper Börsen-Zeitung, in which he inter alia threatened even more BoJ intervention:

Bank of Japan Gov. Haruhiko Kuroda said the central bank “can still ease [its] monetary policy substantially” if necessary, in an interview with German financial newspaper Börsen-Zeitung published Wednesday.

This is per se not surprising, although one wonders what Kuroda thinks can possibly be achieved by upping the ante on this:

Assets held by the BoJ vs. the Nikkei index – April 1999 = 100 – click to enlarge.

We have added the Nikkei Index to the chart of BoJ assets above because inflating stock prices is one of the central bank’s declared goals – its stake in ETFs listed on the Tokyo Stock Exchange has in the meantime exploded to more than 50% (which we believe is eventually going to create a socialist calculation-type problem).

The results of this mad-cap buying spree are decidedly underwhelming so far. Although the pockets of central banks are of unlimited depth, this is also no big surprise, as central bankers are probably the worst traders in the world. One also wonders how further monetary easing is supposed to “improve” on this situation:

…click on the above link to read the rest of the article…

May Day Mayhem – Discontent on the Continent

May 4, 2016

May Day Mayhem – Discontent on the Continent

Europe’s Political Class Under Fire

All over Europe not only religious and national holidays are observed, but also a socialist holiday, which we always thought was a bit strange – and in a way quite telling (as far as we know, there is no holiday celebrating the free market). Traditionally the rank and file comrades tend to gather around their leaders on May Day, waving their party-approved banners and dutifully applauding at the appropriate moments. Not anymeure, as Clouseau would say.

einig-in-der-ablehnung-auf The sign says: “Lying press, system of lies, scandal” – in Germany these demonstrators are somewhat condescendingly referred to as “Wutbürger” in the mainstream press (i.e., “angry citizens”). The term essentially implies that while they’re momentarily irate, they have no plan anyway, and can be expected to calm down again soon enough. This seems to have succeeded in making them even more angry. Photo credit: IMAGO

In several European countries the political situation is deteriorating at warp speed lately. We say “deteriorating” not because we commiserate with the establishment figures that have come under pressure, but because the alternatives are usually not exactly appealing either (more on developments on this front in a follow-up post).

Here is a scene from May Day celebrations in Austria, that must surely have shocked the country’s political elite. Socialist chancellor Werner Faymann and the bigwigs of his fast-shrinking party found themselves confronted with a rather unusual May Day crowd. This was actually the second shock for the establishment in a very short time – the first was delivered on occasion of the recent presidential election.

The video shows Faymann delivering his traditional May Day address, which is essentially a sequence of socialist platitudes like every year – only garnished with occasional references to “difficult times” this time around.

…click on the above link to read the rest of the article…

Bank of Japan: The Limits of Monetary Tinkering

May 2, 2016

Bank of Japan: The Limits of Monetary Tinkering

Damned If You Do…

After waking up on Thursday, we quickly glanced at the overnight market action in Asia and noticed that the Nikkei had tanked rather noticeably. Our first thought upon seeing this was “must be the yen” – and so it was:

June yen futures, daily – taking off again – click to enlarge.

Given the BoJ’s bizarre plan to push consumer price inflation to a 2% annualized rate within [enter movable goal post here] years, Mr. Kuroda cannot be overly happy about that. In fact, lately it seemingly doesn’t matter what he decides to do or not to do – the yen is going up anyway.

Last Thursday he reportedly “disappointed” markets by not expanding the BoJ’s madcap asset purchase program even further. We are not quite sure what people believe could possibly be achieved by making the parabola shown below even more parabolic.

Assets held by the BoJ – Mr. Kuroda’s “QQE” (“quantitative and qualitative easing”) was started in April of 2012. The program has certainly impoverished Japan’s citizens, who have seen their real incomes plummet. Lately it has however abjectly failed to achieve its stated goal, which is actually a blessing in disguise… – click to enlarge.

As far as the yen is concerned, we should point out that the trade-weighted real exchange rate of the yen at one point last year had declined to levels last seen in 1973. Combined with the recent strengthening of its technical condition, there is thus actually a good reason for the market to bid the yen up.

…click on the above link to read the rest of the article…

Affairs of State

April 25, 2016

Affairs of State

Insulting Mr. Erdoğan Can Be Dangerous

Most of our readers are probably aware by now that the German government finds itself in a rather awkward situation over its relations with Turkey’s government again – with which the EU has just struck a widely criticized and very expensive deal to help it stem the flood of refugees.

One thing is absolutely certain about Turkey’s president Recep Tayyip Erdoğan: He has no sense of humor whatsoever. As of early March 2016, 1,845 lawsuits were pending in Turkey for “insulting the president”. To see how extremely ridiculous most of these cases are, consider the one involving the pictures below:

golloerd22a Bilgin Çiftçi was fired from his job at Turkey’s public health service last October and detained after comparing Erdoğan to Gollum. He could face up to two years in prison. His lawyer Hicran Danisman said she was forced to argue in court that “Gollum is not a bad character” because she “got nowhere with a defense case based on freedom of expression”. The trial has now been adjourned to give the court time to “consult with a group of experts on whether Gollum is a good or a bad character”.

Two prominent Turkish journalists are even facing possible life sentences over what appear to be trumped-up treason charges after they reported on Turkey’s shady dealings with ISIS. A great many other journalists have lost their jobs and/ or are at risk of getting jail sentences. Not surprisingly, Turkey currently finds itself on place 149 of 180 on the global press freedom list. In short, it is quite dangerous to criticize or make fun of Mr. Erdoğan. This is a great pity, considering what an extremely inviting target he is.

…click on the above link to read the rest of the article…

Russian Aggression Unmasked (Sort Of)

April 24, 2016

Russian Aggression Unmasked (Sort Of)

Provocative Fighter Jocks

Back in 2014, a Russian jet made headlines when it passed several times close to the USS Donald Cook in the Black Sea. As CBS reported at the time:

“A Pentagon spokesperson told CBS Radio that a Russian SU-24 fighter jet made several low altitude, close passes in the vicinity of the USS Donald Cook in international waters of the western Black Sea on April 12. While the jet did not overfly the deck, Col. Steve Warren called the action “provocative and unprofessional.”

The jet was one of two Russian aircraft in the vicinity — the other flew at a higher altitude. The close-flying jet came within a few thousand feet of the USS Donald Cook, a guided missile destroyer which was conducting a “routine mission” at the time. The U.S. ship tried to contact the plane’s cockpit, but received no response. The Russian plane, which the U.S. says was unarmed, made at least 12 passes. This continued for about 90 minutes. The event ended without incident.”

An unarmed plane making passes! Very provocative. Let’s briefly look at a map of the Black Sea:

The Black Sea, with the USS Donald Cook in it – click to enlarge.

Recently the same thing happened again, this time in the Baltic Sea. The Guardian reports:

“The US navy released photos and videos showing Russian SU-24 fighter jets flying low over the sea and “buzzing” the USS Donald Cook – a destroyer of the Arleigh Burke class – which carries guided missiles and which had just made a call at the Polish port of Gdynia.

…click on the above link to read the rest of the article…

State of Fear – Corruption in High Places

April 13, 2016

State of Fear – Corruption in High Places

Mr. X and his Mysterious Benefactors

As the Australian Broadcasting Corporation (ABC) reports, a money-laundering alarm was triggered at AmBank in Malaysia, a bank part-owned by one of Australia’s “big four” banks, ANZ. What had triggered the alarm? Money had poured into the personal account of one of the bank’s customers, a certain Mr. X, in truly staggering amounts.

najib A recent photograph of Mr. X. Photo credit; Peter Foley / Bloomberg via Getty Images

Hundreds of millions of dollars were paid into the account of Mr. X by a Saudi prince described as “mysterious”, and two British Virgin Island companies characterized as “shadowy”.

Overall, more than $1.05 billion landed in Mr. X’s private account in a little over two years. This was bound to raise eyebrows, considering Mr. X’s official salary only amounts to approx. $100,000 per year. Not a bad salary to be sure, but even if he were to save half of it every year, it would take him 210,000 years to save up $1.05 billion, not just two.

Then the head of a government-owned Malaysian company put millions of ringgit into Mr. X’s credit card accounts, which had been a tad overdrawn (by slightly over $ 1m.), due to Mr. X’s wife splurging a bit on jewelry in 2014.

ringgit A nice little pile of ringgit suddenly found its way into Mr. X’s credit card accounts, taking care of a slight overdraft.

Apparently Mr. X was not shy about spending some of his new-found wealth either. Apart from his wife’s predilection for expensive jewelry and other luxury items, he himself occasionally displayed a yen for fancy cars and reportedly also favored swanky accommodation. Friends and partners of Mr. X also enjoyed a windfall.

…click on the above link to read the rest of the article…

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