Topping Stocks, Falling Gold, Rising Dollar Adds upto Deflation
Stock-Markets / Financial Markets 2013 May 26, 2013 - 11:23 PM GMT
The big news this week revolved around all the comments coming from different Fed personalities. On Tuesday St. Louis Fed President James Bullard and New York Fed President William Dudley set the table nicely for Federal Reserve Chairman Ben Bernanke’s appearance on Wednesday at the congressional Joint Economic Committee. They clearly stated that the Fed wasn’t yet ready to tighten. What they say matters because one of the main transmission methods for this whole quantitative-easing thing is trickle-down economics — build up the stock market, and let people who own those stocks spend money, and this will supposedly feed the rest of the economy. Aside from that you keep rates as low as possible thereby maximizing the proceeds from mortgage refinancing and providing support for housing and car sales.
Then out came Mr. Bernanke on Wednesday in an apparently coordinated message contained within his prepared text — saying that a premature exit risks not just hurting the stock market, it even risks the entire recovery! “A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” he said. That is, the U.S. economy, growing around 2%, could entirely grind to a halt depending on what the Fed does. In Fed Chairman Ben Bernanke's opening comments on Capitol Hill Wednesday, he says that despite recent advances, the job market remains weak. So far, so good!
He should have stopped right there as the Dow was up more than one hundred and fifty points when he finished with the prepared text. Then came the clinker! It came in response to the following question from Rep. Kevin Brady, the Texas Republican who heads the Joint Economics Committee, “So, are you going to tighten by Labor Day?” After a few hems and haws, Bernanke replied, that depending on the data, the rate of bond purchases could slow “in the next few meetings.” So much for towing the party line, and the Dow fell right back down to earth in a heart beat. What’s the point? The point is that even the mere thought of easing off on QE at some point down the road is enough to unravel markets, so what happens when they actually do pull back? Better yet what happens if the Fed is forced to stop altogether?
So Bernanke spoke and then the market spoke. Bernanke said maybe he’ll cut back on QE, and the market said don’t you even think about it! I can’t remember the last time all three major markets staged reversals on the same day, and it’s a clear warning for anyone invested. These markets are completely dependent on QE and the current rise in stock prices has little or nothing to do with valuations or earnings. That’s why I told my clients of exit their stocks on Wednesday morning even before Bernanke began to talk. What happened on Wednesday may have been a game changer, and even if it wasn’t it’s still a coming attraction.
A lot of people labor under the false belief that the Fed will be able to ease its way out of QE without suffering consequences. In order to see the fallacy in that logic all you have to do is look at how the markets behaved in the hours that followed Bernanke’s off-the-cuff remarks. The Dow, Transports, S & P 500, NASDAQ and the bond market all staged downside reversals while the US dollar staged an upside reversal. I can’t recall a time when all three of the paper markets (stocks, bonds and the US dollar) all staged reversals on the same day. That’s the market’s way of saying, “Not on your life.”
I was particularly interested in the behavior of the US dollar since it is the world’s reserve currency and most of the debt in the world is dollar denominated. Aside from the upside reversal we can see the previous breakout above the top band of the trend line. Additionally, we see a new higher high and it broke out above the 83.31 Fibonacci resistance. Finally, you have to go all the way back to July 2010 to find a close above the 84.35 close posted on Wednesday.
The talking heads will cheer the rise in the dollar, claiming its proof the US is a safe haven and it’s all part of a strong dollar policy, but the Fed does not want to see a stronger dollar. Also, most of our industrial base in now located overseas, earning in a foreign currency, and it takes more of that currency to buy dollars when repatriated and that cuts into corporate profits. Then you have commodities priced in US dollars and they’re now more expensive for the rest of the world. Finally, Bernanke knows that the only way the US can ever pay off its debt is to inflate the debt away, and that means the dollar must depreciate over time. All in all, a rising dollar spells trouble for Bernanke and the money crowd.
In the US we have three paper markets, stocks, bonds and the dollar, and I believe that all three are headed for trouble. In fact I’ll go so far as to say that the bond market has already topped and is now heading lower. I believe the bond topped back in July 2011 and then turned lower. Below you’ll see the first leg down that took it to the March 2013 low of 141.41:
The March low was followed by a rebound that retraced almost exactly 61.8% and then turned down for the second leg that will produce a lower low.
The more the bond price falls, the higher the interest rate goes. Now think about the trillion dollars of new debt coming out every year, and the half a trillion or so of debt that has to be rolled over, all at higher rates. The US has US $100 trillion in debt if you include unfunded obligations, so imagine what just a 1% increase in interest rates would cost the US per year. Right now the interest rate is at historical lows and it would have to jump 4% just to get back to the historical average. Such a jump would cost the US several trillion more a year just to service existing debt. Finally, it’s worth remembering that we have over US $700 trillion in derivatives floating around and more than 50% is tied to the interest rate! Can you see a problem?
Finally, for those of you looking for ‘confirmation’ there is another outside indicator that demonstrates interest rates are on the rise. As you can see in the previous chart, the Dow Jones Utility Index has broken down. This is important because the Utilities Index is extremely interest sensitive and you generally see a break down in the Index once the bonds have topped.
Stocks have better luck than bonds, but they still suffered a
downside reversal on Wednesday on a big jump on volume. The Dow, Transports, S & P 500 and even the NASDAQ all posted downside reversals on Wednesday and all but the Dow continued that decline on Thursday and Friday. The Transports weakened more than the others as you can see and it came close to testing good support at 6,305. What’s more the Transports appear to be faltering as you can see a break below the original trend occurring back in early April, and RSI failed to confirm any of the new all-time closing highs.
If you look at individual stocks you’ll see there is something to worry about as companies like Caterpillar:and Apple:
have experienced significant breakdowns. It’s common at a top to see that the market leaders have turned down several months before the general indexes finally exhaust themselves. Aside from the two above I could have posted charts of FedEx, Facebook, IBM and Intel since they’re all in the same boat.
On the positive side of the ledger we still had the Dow posting a new all-time closing high as recently as Tuesday although it was not confirmed by the Transports. Also, as you can see below, the number of companies trading above
their respective 50-dma is holding at a high percentage. Personally I don’t like what I see and that’s why I advised my clients to exit all their stock positions Wednesday morning as Bernanke was preparing to speak. I just don’t see the value in this market and I see no reason to play a game of financial musical chairs.
Right now we have a shortage of safe havens and based on what I see in the market place gold still offers some short term difficulties;
Below you can see the decline that began from the October 2012 lower high, leading to the break of critical support at 1,522.10 and a collapse all the way down to 1,321.50 on April 16th.
Once the low was established, temporary or otherwise, the price of gold rallied up to the 1,468.60 area, recouping 50% of the decline and stalled. This was followed by a drop down to what some say is a higher low at 1,336.30. From there again gold rallied up to the 1,404.07 resistance, another 50% retracement of the previous decline, and seems to have stalled. The spot gold closed out the week at 1,386.00 and that is just above the 38.1% retracement at 1,384.50. Right now I look at gold and I see more questions than answers. Was the Monday print of 1,336.30 a higher low? Better yet, was 1,321.50 the low, or is there more downside to go? I have to admit that I have real concerns as to whether or not the 1,321.50 low was the low or not.
What bothers me so much is the fact that once gold began to move up from the April 2009 low of 861.00 to the September 2011 all-time high of 1,923.70, gold hardly experienced as much as a hiccup along the way. The only reaction of note was a 5-month 14% retracement that occurred in early 2010. Other than that nothing! That’s feels great on the way up but the lack of reactions also means there is little or nothing to break that fall once a major support is broken. In this case the major support was at 1,522.20 and we all saw what happened in mid April when that gave way.
If the low is in then the sideways movement seen in the following chart is accumulation:
What makes that hard to swallow is the fact that the initial rally stopped at a 50% retracement and now this most recent rally also stopped at a 50%. So I look at the sideways movement over the last six days and I have to ask myself if this is distribution or accumulation. A prudent man would look at this chart and say this is distribution, and if that’s the case there is nothing to stop the price of gold from falling down to 1,089.00.
There are reasons for believing (hoping) that gold holds here and then begins a march higher. If you look at RSI you’ll see that is sits at 39.02 on the daily chart and that is still somewhat oversold (but well off the 15.00 low). Then we have the question of the massive short position that have accumulated in gold:
Source: Bloomberg
As of Thursday’s release of the latest CFTC Commitment of Traders data we see that the Comex gold short position grew once again to a new all time high of 79,416 shorts. Furthermore, short positions in gold have risen 25% over the last three weeks. Another argument in favor of gold holding above the low has to do with the average cost of mining an ounce of gold estimated to be at $1,350. Then again back in the 1990’s the price of gold spent close to a decade below the cost of mining an ounce. All in all, the arguments sound great but they don’t fill that gap between 1,089.00 and 1,522.20.
For those of you who do not own paper gold and silver or precious metals stocks, and are holders of physical gold and silver, none of what I’ve said so far should matter. If you own the real deal then you’re probably smart enough to know that you bought a store of wealth and it will stand the test of time. I have no doubt the price of gold will be higher two years from now, and probably a lot higher. I also have no doubt that Japan, China, the EU and the US will continue to print fiat currency excessively while creating staggering amounts of debt. I do know that will not end well, and the only thing I don’t know is the expiration date. So if you own physical gold and silver you only concern is when to add on. My answer is to either buy down at 1,150.00 or better, or if the current low holds buy above 1,470.00. Either way you’ll come out a winner.
CONCLUSION
Sometimes we spend so much time focusing on details that we miss the big picture, although it can be both interesting and profitable to know if the price of commodities, gold or bonds is going lower, or the US dollar is going higher. Perhaps it would be much more useful to know why the prices of commodities, gold and bonds are all headed lower and at the same time the greenback heads higher. I would like to remind you that two years ago you couldn’t have found a dollar bull to save your life. Now here we are with a new two-year high! When I pull out my abacus and add it all up, I come up with deflation.
It is all very confusing when you look at the data, no doubt correct. But besides taking the temperature of the patient and monitoring his heart and other vital signs, we want a diagnosis: what's wrong with the patient? What causes are at work? Again, if we really knew what the Fed is up to, it would be helpful. Unfortunately, it seems to me that experience has shown that the Fed is adept at either not informing or deliberately misinforming the public. Is the threat of "tapering off" on QE for real, or just a ploy? Hard enough to decide what to do, even with the correct information, but next to impossible when one has to deal with a powerful institution that does not refrain from misguiding the public, for its purposes. I view QE as I view breathing, so try "tapering off " of your next breath.
Never forget the Fed’s real mission. It has nothing to do with inflation or unemployment. The Fed’s mission is to make debt disappear and it has two alternatives. There is simply too much debt and it has to be cancelled by massive defaults, or by inflation, or by both at the same time. So take you pick of ingredients for the recipe: massive defaults, and/or massive inflation; add higher taxes to taste, sprinkle in a “bail-in” or two and the confiscation of IRA’s, all in an attempt to pay down debt (which won't happen).
The Fed is coming to the realization that inflation isn’t happening so that would lead me to believe that QE will cease sooner rather than later, and will be followed by more draconian measures. Instead of the FDIC bailing out banks, it will be left up to the depositors to carry that end of the log. Also, government debt will be subsidized with your IRA’s. Perhaps more importantly the Fed will simply print and give money to the Department of the Treasury, dispensing entirely with the formality of creating debt that the government has no intention what so ever of paying. Trial balloons are being floated now as you saw in Cyprus and laws are being passed while rights are being eliminated, and its going on all over the world.
Never forget that the Fed is an instrument and its real purpose is to transfer wealth from the many to the few. The Fed was created in 1913 at a time when the US was the largest creditor nation in the world, and it possessed a large and growing middle class. Of course you had the super rich, but you also had an upwardly mobile lower middle class and middle class that were savers and creators of businesses. The Fed’s job was to get the money from the middle class and give it to a select few. Debt was the tool to do that and it’s no accident that the US is now the largest debtor nation on earth. The Fed is the new version of the “company store,” dispensing debt in the guise of wealth, with the purpose of enslaving a nation. The average American is now caught in a web of involuntary servitude, along with diminishing rights under the law. In my opinion this can only end one way, with violence, so prepare yourself.
Robert M. Williams
St. Andrews Investments, LLC
Nevada, USA
Copyright © 2013 Robert M. Williams - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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