In response to Janet Yellen’s everything is OK speech following today’s balance sheet reduction notice by the FOMC committee, I received an interesting set of comments from Pater Tenebrarum at the Acting Man Blog regarding rate hike cycles, gold, and stock market peaks.
“Rule of Total Morons”
A new bull market in gold started in late 2015 concurrently with the Fed’s first rate hike. That is no coincidence. The gold market is highly sensitive to future changes in liquidity. The more tightening moves the Fed undertakes (which it does in the face of collapsing money supply growth, because its decisions are based on lagging economic indicators), the more gold bullish and the more stock market bearish the fundamental backdrop becomes. Anyone long stocks should actually ask himself how it is possible that gold is up nearly 30% from its low, despite an ostensibly “gold bearish” rate hike cycle.
But they never do ask the right questions, which is why stocks peak with a big lag, particularly in major bubbles. Economic historians found out that the economy was technically very likely already in recession when the stock market peaked in 1929. In the 2007 to 2009 bust, NBER backdated the beginning of the recession to December 2007, but in May of 2008 Bernanke was still talking about how well the economy was doing and how the high oil price was “creating inflation” (thereafter he began to shut up about all that, but not before demonstrating for everyone to see how utterly clueless he was). And of course, stocks peaked in October of 2007, practically two seconds before the economy fell into recession.
In bubble regimes, the final stage is always characterized by the “rule of total morons”. That’s just how it is.
Central banks cannot see inflation because they are totally clueless how to measure it: Central Banks Puzzled as Global Inflation Hits Lowest Level Since 2009: Solving the Puzzle
How Much Gold Should the Common Man Own?
If you wish to understand the nature of the bubbles we are in, a few recent articles of mine will help.
- Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble
- Median Price-to-Revenue Ratio Higher in All Deciles vs 2007, 90% vs Dot-Com Bubble: THE Choice
- Debunking MMT, Keynesianism, Monetarism: Reader asks “What theories do you believe?” Mish Reading List
Gold vs. Faith in Central Banks
The above chart also shows the bottom in gold right as the Fed started hiking, in agreement with the analysis of Tenebrarum.
For additional images, please see my 38 slide powerpoint Venture Alliance Presentation on trends in sentiment, asset bubbles, and gold from June 24, 2017.
Mike “Mish” Shedlock
What is the difference between being early and wrong? … No difference. The market can remain irrational for longer than you can remain solvent.
If you don’t play the game – you can remain solvent longer than an irrational market.
Is being early the same in all venues? If gold is the inverse of the dollar could that be different than, say, apple stock or real estate. If either of those skyrockets in price there are always holders willing to trade you their apple stock for dollars. But if gold skyrockets then it’s inherently a statement of no confidence in the dollar. Will the holders of gold be willing to trade it to you for your dollars as that graph of price is shooting upward? Perhaps, but not so obviously so as with trading shares of Apple for dollars. So, perhaps being “early” will not be the same in all venues.
Peak faith in the Central Banks in DEC 2015?
What is coming is going to be horrific.
What frustrates me so, is that I have been trying to understand markets since I was eleven and yet I never developed the confidence in my ability to see the future like so many other people seem to have.
Don’t feel bad.
NO ONE can predict the markets.
Unless you are a Buffet with insider deals and insider info.
About the best you can do is to spot trends – especially ones that go against the “herd”
And that is no guarantee of success either.
The best trends to spot are those that mathematically goes against “conventional wisdom” and so no one wants to believe it.
Negative interest rate?
Health care costs rising 7% a year?
Pension costs rising 8% a year?
Housing costs going up 15% a year?
Autos with 120 days of inventory using subprime loans to sell what they got?
Miners selling at below cost levels?
That a government could ever run any industry without bankrupting it?
Dot com companies that have never made a dime but are worth billions?
It is kinda of a game sometimes…
“About the best you can do is to spot trends”
OR create them. This documentary about HFT is outstanding and is free for Amazon Prime members:
Ghost Exchange (2012)
SEC Admits US Public Filing System Was Hacked, “May Have Resulted” In Countless Illegal Profits
Also, if the Fed doesn’t carry out EVERYTHING it does with MILITARY SCIF levels of security which I HIGHLY doubt that they do, I’ll bet the Fed info is also hacked allowing the likely results of their meetings to be surmised well in advance of the announced results or, if the meeting itself is bugged, something that is easily possible if they don’t use a SCIF and SCIF procedures, at least in advance of everyone else.
Tony Bennett said:
“Unless you are a Buffet with insider deals and insider info.”
Buffet’s most galling move. September 2008 when he invested $5 billion into Goldman Sachs preferred shares. The Bush Administration desperate for a private investor to step up to the plate and show confidence in Wall Street. The deal announced on a tuesday (september 23rd) … the sunday prior (september 21st) GS (and MS) converted into a bank holding company … mean getting access to the Federal Reserve discount window (bailed out, if necessary).
Buffet made $billions on the insider quid pro quo.
Ambrose Bierce said:
its one huge monetary experiment, and to improve the efficacy of the drug you have to control the test group, so millions of people were pushed outside the reach of Fed policy (ergo the Fed is irrelevant to them, their CPI is not your CPI, which is why they talk about it, and do nothing) they can run any economic policy they want they merely have to tailor the test group to suit the policy. occasionally they have a problem when matters of common use which overlap both economies get out of balance and the group outside their economy starts an economic recovery for instance and it screws up the data inside their economy. then they typically crash the system, reset and exert new financial repression. 2008 is an example, when private debt creation started putting pressure on the monetary base, the Fed only prints money after a debt obligation is created.
Most people have beliefs and agenda’s, not confidence, as confidence comes from actual experience and data. A theory or relationship that only holds water for a certain period of time cannot instill confidence, which explains why so many people have missed the rise in stocks and thought gold would rise indefinately with QE.
The smart money has confidence because they know a few important facts that those with beliefs and agenda’s ignore:
(1) what matters is confidence in govt, not the Fed (no, the Fed is not the 4th branch of govt.), as the Fed always follows the Invisible Hand.
(2) global investment flows swamp trade flows, and certainly the actions of the Fed. Countries can try to bypass the dollar for trade, but where do they park their proceeds?
(3) for the moment, the US dollar provides the only market with the depth, breadth, and liquidity to absorb the flows, period. This will certainly remain the case through the collapse of Japan and yen next year, and the EU and euro afterwards. Our turn comes in 2020-2022, as the rising dollar and rates force a change in the dollar status.
Thank you Martin Armstrong.
1) $SPX & $GOLD collapsed in 1982, together.
2) The FED % rate decline since the early 1980 all the way to late 2016, but look at $GOLD
from 1982 until 2002. It was in a trading range for 20 years.
3) $USD peaked in 1985, what is BOLD doing before and after. It’s true that $GOLD
have peaked in 2011, while the $USD was pumping muscles at the bottom, before
start climbing in 2014, but each chart have life & dominating forces of their own.
$GOLD bubbles don’t build correlation +1 /(-)1.
The reason is simple : $USD was NOT the currency that finance the Chinese buildup, from
the 1990’s until 2011 – with the commodities consumption (DBC).
It was the big banks “pipeline of wholesale credit” that made the world go around.
Did you ask yourself what BOLD was doing in Oct 2014, when the global stock markets
collapsed, but only one stock market in the world was rising ==> Chines $SSEC, well
BOLD was collapsing too.
The relative strength of BOLD vs Chines stock market was trending down until June 2015. The same story for $USD.
$GOLD:$SSEC // $USD:$SSEC.
Despite yesterday wonderful performance of the energy sector and oil co, – it will cont
for a while – the downtrend of commodities, gold & oil is, unfortunately not over yet !!
The FED is going to reduce by 10 billion USD a month. Because of their confidence in the economy. During QE they were buying 60 billion a month. This is deleveraging in name only. I wonder if they’ll report any gains or losses from their sales.
I suspect the main reason they want to reduce their inventory is because they fear they may run out of things to buy if they ever have to do QE again.
actually at the height, they were buying 85B a month
Gold is shiny, gold can support paper currencies, but there are also other “REAL”
The currency that was used to ship “workers” to the sugar islands in the 1700’s and
the 1800’s was:
1) in the trading post, near Africa coast ==> Liege guns for slaves.
2) inland, inside Africa ==> either you become a Muslim or a slave.
It was a win win trade. Demand from gun powder was on the rise.
In a short time half of Africa became Muslim.
To counter the expansion of Islam, and block it as much as possible, the tiny European
nations did the following steps.
1) build up colonies inside Africa and extracted commodities and “workers” to the sugar
islands and other plantation.
2) under the cause of morality the slave trade was prohibited.
A new bubble was formed. “Assets” owners in the sugar & other plantations became
rich. They had incentive to increase wealth ==> the natural way.
After the civil war slavery was defeated.
Half of US assets have collapsed overnight.
Deflation took over and lasted for 40 years, between 1865 to 1897.
That chart clearly shows a bubble, the last time the bubble burst in the 80’s gold traded sideways to down for 15-20 years.
Interest rates were 15% in the 1980s…
Now they are basically 0%
Could make a difference.
Yeah, maybe it’s different this time, who can be sure?
Also, another big difference between real estate and stock bubbles bursting versus gold bubbles bursting: the federal reserve doesn’t give a shit about re-inflating the price of gold.
Quite the contrary. The BIS is the club of central banks and has been shown to “lease” hundreds of tons of central bank gold into the gold “market” when price is rising.
Could it also make a difference that Japan, and much of Europe are on the verge of popping their debt bubbles, not to mention the sad state of pensions?
Ron J said:
“But they never do ask the right questions, which is why stocks peak with a big lag, particularly in major bubbles.”
The myth is that the market leads the economy by 6 to 9 months.
In 2007, the market peaked in October, the recession officially began in December.
The 2001 recession officially ended 6 months after it began, but the stock market continued to decline until October 2002, a year later. Big fail on the market leading the economy by 6 to 9 months.
They also say don’t fight the FED, but the FED had an emergency rate cut on the first business day of January 2001, in addition to another at the regular meeting, then continued to cut rates. The stock market continued to fall for another year and 9 months. Not fighting the FED would have been a poor decision during that time.
Ted Fiolek said:
The 6 to 9 month market indicator stopped working 20 years. As did the rule of thumb that markets have a 10% correction every 2 years and a 20% correction every 5 years. Now, they just go up every day for 8 years and then drop 50% and start all over again.
Ron J said:
“Central banks cannot see inflation because they are totally clueless how to measure it”
It is measured selectively, therefore not honestly. Say beef goes up $2 a poound, while chicken goes up 30 cents. The FED says everyone switched to chicken, so there was less inflation in meat prices.
When oil prices quadrupled in the 1970’s, they created core inflation index, so as to exclude oil prices. Then food prices rapidly rose, so they excluded food from core index. By 1975, Greenspan had created the WIN lapel button, whip inflation now. Of coarse, lapel buttons did nothing to stop the inflation rate from climbing. It took Volker raising the FED rate to 20%, to reverse the phase of the rate cycle, which eventually hit ZIRP.
The BLS is under enormous pressure to report low inflation since a lot of government transfer payments are tied to the inflation rate and it make GDP growth look better than it actually is.
Tony Bennett said:
“In bubble regimes, the final stage is always characterized by the “rule of total morons”. That’s just how it is.”
But, hey, it might be different THIS time …
Nah. Watch Yellen or Bill Dudley speak. Our morons today are more completely morons than ever before.
If you did not watch the video that Mish included in this article, go back now and view it at least once. It is EXCELLENT!
Now for a few comments on Gold and the markets.
What is different this time?
1. There are more ETFs, Mutual Funds, Closed-End Funds, and Derivative Instruments than individual stocks. That is the number of ‘Funds’ vastly exceeds the number of equity issues and potential IPOs. Hedge Funds alone have more dollars than the total value of all existing equities.
2. This is true for both U.S. and foreign equity markets. Thus there exists ‘counter-party risk’ so that many non-equity issues will go to zero while most equities even have some residual value after bankruptcy.
3. Most Gold is owned by Central Banks and used as part of the SDR basket and that total is still too small for most big players cannot park money in physical gold. Thus gold is just a trade and not money. It can be a very profitable trade, but it is a trade.
Those who believe in Gold should switch to silver since it is a precious metal that is consumed at a greater rate than current production. Governments universally want to make it so that individuals (that is you and me) cannot profit from holding Gold.