Friday, November 27, 2015

Buy Gold!

Gold Plunges Below "Crucial Level", Lowest Since Oct 2009 On $2 Billion Notional Flush

Tyler Durden's picture

Submitted by Tyler Durden on 11/27/2015 08:28 -0500

With the world closest to World War 3 since the cold war era and Russia about to unleash escalating sanctions of Turkey, it makes perfect sense that 'investors' would want to purge themselves of precious metals. Someone decided that Friday after Thanksgiving would be the perfect time to dump over 18,000 contracts (around $1.9 billion notional) sending the price of gold futures to their lowest since Oct 2009, below what Goldman called a "crucial level."

Over 18000 contracts dumped...

Sending gold futures prices to Oct 2009 lows...

As Goldman notes, in Gold, the critical level is 1,068-1,066. In Silver, support spans 13.98-13.83.
Gold Daily/Weekly – The level to watch in Gold is 1,068-1,066. This includes an ABC equality target off the January high and the trend across the lows since Dec. ’13.

The fact that oscillators are diverging positively suggests that price may be attempting to stabilize. Failure to break this support area confirms that the setup is still corrective; that a 5-wave sequence from ’11 highs ended in July. Alternatively, a break lower would warn that the market hasn’t yet completed its impulsive decline.

This would open potential to extend towards 966 (a 1.618 extension target from the January high).

Silver Daily/Monthly – The level to watch here is 13.98-13.83. This includes the previous low from Aug. 26th and the trend across the lows since Jun. ’03.

Although the wave count on Silver is a lot less evident than the one for Gold, it is apparent that rallies have all met ABC targets insinuating that rallies lack impulse. On a more positive note, daily oscillators are crossing higher from the bottom of its range.

Put another way, the balance of signals seems mixed; 13.98-13.83 does however look significant.

Flying into the Coffin Corner

Fabius Maximus website

Recession Watch: the economic indicators to watch to see what’s coming

Summary: As the expansion ages and growth slows, we should begin to watch for signs that the next recession approaches. Here are some tips for doing so without spending much time at it.



What should we watch among the blizzard of economic data? Journalists tend to focus on the numbers most frequently reported, usually about manufacturing and housing. Such as this week’s existing home sales volume (oddly, we don’t similarly obsess over NYSE volume). It’s important for people in that biz, but tells us little about the US economy.

Also big in the news are new home sales, building permits, mortgage applications, and many other housing datapoints. For a simple measure of this industry see total residential construction spending. It shows a continued strong expansion. Tune in next month to see if anything has changed.

Residential Construction Spending

What are the most important economic numbers?

But the often dramatic graphs don’t tell us the importance of those numbers. Here’s one perspective on the big picture…

  • Construction value added: 4% of GDP (housing is 1/3 of this).
  • Goods-producing value added: 19% of GDP (manufacturing is 12% of this).
  • Services value added: 68% of GDP.

Another way to see this relationship: manufacturing new orders were 15% of GDP in 1995; now they’re only 10%. Manufacturers employed 30% of all non-farm workers in 1955; they employ only 9% today. Manufacturing was once the key swing sector of the economy; now we are a services economy. Unfortunately there are few good leading indicators for the service sector. Creating Purchasing Managers Indexes for Services was a creative idea, but untested — and doesn’t make much sense to me: what do they PM’s of service corps do that gives them special insight about the economy?

Another perspective

Watch labor, one of the — or perhaps the — major engine of the economy. New claims for unemployment are a sensitive indicator of labor markets, a powerful leading indicator, and hard numbers reported in real time — but they’re noisy. Claims have given a tentative warning, as their rate of improvement slows.

A lesser-known indicator should also be near the top of your watchlist: the Fed’s Labor Markets Conditions Index. Like GDP, it is a mind-bendingly complex indicator — a useful single number providing one aspect of the broad economy. Unlike GDP they report it monthly. It’s flat-lined after five years of slow improvement. Not in decline, but giving a clear warning.

Labor Markets Conditions Index

The bottom line

If you want to follow just one indicator, watch the Atlanta Fed’s GDPnow model. It’s roughly as accurate as economists’ forecasts, but It is updated 5 or 6 times per month.

Atlanta Fed's GDPnow


The US economy has flown into what pilots call the “coffin corner” — unable to accelerate, but much slowing probably would cause a crash. But economists remain confident, as they were before the 2001 and 2007-09 recessions. With their eyes firmly on the rear view mirror, they see that the usual causes of recessions are absent.

We are in a new era. Don’t assume history will repeat. Watch the economic data to see the unexpected turbulence that will end this already old expansion.

Thursday, November 26, 2015

Letting Facts Speak for Themselves

‘Silk Road’ Countries’ Gold Reserves and Demand Accumulation Has Grown 450% Since 2008, The Greatest Increase Has Been Since The Global Financial Crisis

Submitted by IWB, on November 26th, 2015

by Jesse

Silk road total demand, including the growth of official reserves and commercial imports, has risen from 1,493 tonnes in the year 2000 to over 27,087 tonnes in 2015.

The greatest increase has been since the global financial crisis in 2008 with an astonishing increase of 450% over the total amounts accumulated until then.

As you may recall, gold was ending its long bear market with a price bottom and a long climb higher shortly after the currency crises of Asia and Russia in the 1990’s.

Silk Road demand has easily exceeded total global mine production for the last two years. And quite  Therefore, in addition to mining, other sources of gold have had to be found.  This may include scrap, and gold held by other entities.

Has this surge in gold demand been an uniquely Chinese government phenomenon?  Hardly.

In the second chart I show all the gold reserve increases for China AND Russia from the year 2000. They account for only about 11.4% of the growth in gold demand from the ‘Silk Road’ countries.

It is interesting to match this with the steady declines in Western gold vaults and the increased leverage in gold trading, what some call ‘synthetic gold,’ that became apparent in 2013.

I show that in the third chart vis a vis the Comex, and the fourth chart for the London Vaults.

The fifth chart compares the relative physical deliveries on the Shanghai Exchange and the NY Comex.

I am not trying to persuade or convince anyone, or argue with anyone, and certainly not sell anything.
Here are the facts as I have been able to discover them, and I cannot control what people may choose to think or not to think about them.

The data suggests that the volume of gold increased dramatically in 2013, when measures seem to have been taken to dampen the large increase in price up to the $1900 level, through rather clumsily determined selling programs in quiet hours.

This increased flow of bullion may be the result of Gresham’s Law, which states that ‘when a government overvalues one type of money and undervalues another, the undervalued money will leave the country or disappear from circulation into hoards, while the overvalued money will flood into circulation.’

The data suggests that gold is very underpriced in US dollars because of an effort to make the dollar appear to be strong and gold to be disreputable as an alternative store of wealth.  Why should gold be more favored than cash money in their own currencies, which central bankers would also like to eliminate to smooth the way for further policy blundering and experimentation.

They are hardly without better alternatives to this.  Except of course for their pride, and insular group thinking, and of course the credibility trap that does not allow for frank discussions of what the problems really are and how we might move along.  But alas, that is not favored by The Banks and the moneyed interests.  And so the very serious people are loathe to even raise the subject of genuine reform in a serious conversation, except in some mockery of a charade.

And the Congress is no better.  The Congress may not know when it is talking nonsense about the economic situation, but the financiers, the Banks, and their hired hands do, but don’t care.

Whatever else someone may say about this, it is apparent by any examination of the figures that gold bullion is flowing from West to East, and in some fairly consequential and increasing volumes.

The Silk Road has added over 25,000 tonnes of gold in the last fifteen years.  The gold miners are hardly in a position to increase production and search for new supply.  A gold mine takes four or more years to bring into production.

According to Nick Laird’s figures, monthly global mining production is about 260 tonnes, and monthly demand is about 357 tonnes.  I have included a list of the top gold producing countries  in chart six.

Where will the supply for the Silk Road demand come from over the next five years, as it continues to grow faster than mining and even scrap production?

These two charts are from Nick Laird at, with my annotations.

Wednesday, November 25, 2015

The tide (liquidity) goes out on Corporate Bonds

To Junk Bond Traders "It Almost Feels Like 2008"

Tyler Durden's picture

Submitted by Tyler Durden on 11/25/2015 21:00 -0500

Despite distressed-debt funds suffering their worst losses since 2008, mainstream apologists continue to largely ignore the carnage in the credit market (even though veteran bond managers have urged "it's not just energy, it's everything.") With the number of loan deals pricing below 80 (distressed) at cycle peaks, and "a less diverse group of investors holding a lot more bonds," price swings continue to be wild but as DB's Melentyev warns, initially "all of this looks random when there is no underlying news to support the big moves. But eventually a narrative emerges -- maybe we have turned the corner on the credit cycle."

Investors are shunning the lowest-rated junk bonds.

That is underscored by the extra yield that investors are demanding to hold CCC rated credits relative to those rated BB. This has jumped to the most in six years.

As Bloomberg reports,

With confidence slipping in the strength of the global economy, there are fewer investors to take the opposite side of a trade in the riskiest parts of the market, according to Oleg Melentyev, the head of U.S. credit strategy at Deutsche Bank.

"These are all small dominoes in one corner of the market," Melentyev said. "In the early stage, all of this looks random when there is no underlying news to support the big moves. But eventually a narrative emerges -- maybe we have turned the corner on the credit cycle.

One sometimes-overlooked element that’s contributing to the big price swings is the increasing concentration among investors, according to Stephen Antczak, head of credit strategy at Citigroup Inc.

Mutual funds, insurance companies and foreign investors make up 68 percent of corporate bondholders compared with 52 percent at the end of 2007.

That means that if one mutual fund investor wants to sell some holdings, there isn’t another one that’s ready to step in. That’s because they typically have similar mandates from investors and often need to sell for the same reasons.

"A less diverse group of investors hold a lot more bonds," Antczak said. "The difference between incremental buyer is more now than it used to be. It takes a bigger move to get people interested."

Bonds of smaller companies that carry a high amount of debt relative to earnings are most susceptible to falling quickly after earnings are reported, said Michael Carley, a co-founder of hedge-fund firm Lutetium Capital.

Money managers looking at the bonds of those types of companies aren’t spending time examining the issues in those businesses before selling because they’ve got their “own wounds to lick,” said Carley, the former co-head of distressed debt at UBS AG. “And the dealers are saying, ‘I don’t own it; I don’t care.’ So it just plunges.”

As we noted previously, for the first time ever, primary dealers' corporate bond inventories have turned unprecedentedly negative. While in the short-term Goldman believes this inventory drawdown is probably a by-product of strong customer demand, they are far more cautious longer-term, warning that the "usual suspects" are not sufficient to account for the striking magnitude of inventory declines... and are increasingly of the view that "the tide is going out" on corporate bond market liquidity implying wider spreads and thus higher costs of funding to compensate for the reduction is risk-taking capacity.

*  *  *

One wonders when stock investors will wake up again?

Happy Thanksgiving, FED

Wall Street Remains Clueless—–Even As The Brown Stuff Heads Straight Into The Fan

by David Stockman • November 24, 2015

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The Dow should have been down 500 points Tuesday. And that’s to say nothing of the fact that the market’s current lofty valuation makes no sense in the first place.

The fact is, the brown stuff is now heading straight for the fan.

Didn’t the odds of a major geo-political calamity just take a huge turn for the worse in the airspace over the Syria-Turkey border?

At the same time, wasn’t today’s GDP update just one more reminder that the global economy is sinking into a deflationary contraction? And that our so-called domestic recovery cycle is getting very long in the tooth and is essentially running on the fumes of inventory accumulation?

Yet the Wall Street gamblers and robo-traders seem to think that pricing this global accident waiting to happen at 22X reported S&P 500 earnings is no big deal. And that comes on top of the fact that the long-running corporate earnings expansion cycle is over, as attested to by both the GDP report and the Q3 SEC filings.

At $94 per share, S&P reported earnings came in 11% below last year’s $106 per share. And that was before the most recent headwinds became evident.

To wit, Syria is rapidly taking on the complexion of the Balkans in June 1914. The resulting backwash of Islamic State terrorism and millions of refugees streaming deep into the interior of Europe threatens to elicit a political and economic lockdown and a potential Thermidorian Reaction.

The rise of rightwing nationalism, in fact, would end the European Union as we know it.

And this is occurring even as Asian exports to Europe plunge, dragging Japan into its 5th recession in seven years and China ever closer to a thumping hard landing.

So the market at 22X amounts to a bubble floating toward a pin.

And folks, there are sharp objects cropping up everywhere on the planet——starting with Tuesday’s incident on the Syrian border.

This wasn’t a minor stray pitch. It was evidence that a half-dozen lethally-armed outside combatants are lined-up in a circle firing capriciously into the hodge-podge of sectarian tribes, political factions and marauding militias that have metastasized within the boundaries of a shattered former state.

The idea that Russian planes threatened Turkey and deliberately violated its airspace is ludicrous. By the attestation of US officials themselves, the incursion was hardly measureable, if it happened at all:

US officials told NBC “They were in Turkish airspace only 2 to 3 seconds, a matter of seconds” before the Turkish F-16s attacked.

Two to three seconds?

Why in the world would Washington’s Turkish “ally” in the fight against the Islamic State, and the NATO member located closest to the front line and with the largest military in Europe, put a near act of war on a such a hair trigger rule of engagement?

Alas, its because Turkey is not at war with ISIS. Instead, its megalomaniac President is in the midst of a monumental power grab designed to transform Turkey into a Gaullist dictatorship with himself at the helm.

To that end, his incendiary shootdown of a Russian Su-24 warplane was designed to pander to domestic constituencies sympathetic to the Turkmen villages in northwest Syria now being bombed by the Russians.

This egregious provocation, in fact, is out of the same playbook from which Erdogan bombed Kurdish forces on the Syrian border——even though the latter by all accounts have mounted heroic campaigns that ousted ISIS from Kobani last summer and from Sinjar more recently.

Moreover, it did not take long for the rest of the gong show to materialize. It seems that Alwiya al-Ashar, an anti-Assad rebel group consisting of or aligned with the Turkmen villages, attacked the parachuting pilots and a Russian rescue helicopter.

According to reports at least one of the pilots was killed and the Russian helicopter was destroyed by a TOW missile supplied to the so-called Free Syrian Army (FSA) either by Saudi Arabia and Qatar—–or more recently via direct US “paradrops” into Latakia province in the Syrian northwest.

The operative theory of the latter seems to be the hope that during this insane game of jump ball on the rubble of Latakia that the good guys will get the TOWs before the butchers in black robes do.

Yet it is not even clear where Alwiya al-Ashar’s allegiances actually lie. Some of these so-called “Turkmen brigades” appear to be aligned with FSA, but others operate in close cooperation with al-Nusra front. For those without a war games roster, the latter is the al-Qaeda affiliate in Syria.

But here’s the thing. There appear to be only about 200,000 Turkmen in the northwest corner of Syria or maybe double that number at the outside. They are non-Arab Sunnis who came as conquerors in the 11th century and whose communities have waxed and waned with the rise and fall of various empires and despots ever since.

But in more recent times, the Turkmen have apparently not been thrilled to be part of an Arab state confected by white Europeans, that is, Messrs. Sykes and Picot in 1916. So they have looked to Turkey for solace, especially in the face of the brand of secular Arab nationalism promoted by the Assad regime in Damascus during the last 40 years.

Indeed, since the so-called Arab spring in 2011, they have spawned numerous fighting brigades which seem to be all over the lot when it comes to Washington’s fictional claim that there is a difference between “moderate” and “radical” anti-Assad rebels.

That’s right. The fools in Washington are paradropping deadly TOW missiles into a no-man’s land of so many different tribes, sects and brigades that we don’t even know whether it was “our” Turkmen or the “jihadist” aligned Turkmen who destroyed a Russian rescue helicopter; and did so with “made in the USA” weapons that have been showcased on social media videos almost from the moment the incident happened.

The fact that friend or foe identification is impossible in this geopolitically fraught incident even among one of Turkey’s smallest minority populations is telling. It means that the effort of Washington and its allies to destroy what was always the tenuous state of Syria has unleashed religious and ethnic demons rooted in the ages.

And that’s just for starters. The duplicity and treachery of the Three Crooked Amigos who pretend to be allies in the battle against ISIS—–Turkey, Saudi Arabia and Qatar—–seemingly knows no bounds.

As we have repeatedly pointed out, the so-called Islamic State is a rickety patchwork of dusty towns and dilapidated economies which narrowly hugs the Upper Euphrates valley in Syria and the wreckage of war-savaged Anbar province, Mosul and the empty desert expanses of western Iraq.

If the Three Amigos and Washington really wanted it gone, it would be gone because the Islamic State is entirely dependent upon them for weapons, money and survival.

Indeed, the butchers would become the butchered at the hands of their several million subjects were Washington and its allies to give up their regime change campaign against Assad, and give a greenlight to the Syrian state and its Shiite friends to finish the job.

The fact is, the only meaningful revenue being obtained by the Islamic State is from oil that is being sold to middle men in Turkey, and winked at by the government in Ankara. If Turkey were to close off its border to the oil trade, the financial wherewithal of the Raqqa government would dry up in a matter of months.

Likewise, virtually all of the Islamic State’s weapons, aside from the massive trove of US weapons captured as Mosul and elsewhere in Iraq, have come across the Turkish border from the north; or they have been delivered to the various anti-Assad factions by the CIA and the Gulf States—–only to fall into the hands of the barbarians in black.

And the same thing is true of the 5,000 or so alleged European jihadists who have joined the fight in Syria. They got there from London, Brussels and Paris on Turkish Air.

Needless to say, cutting off the money and weapons would not require a single additional bomber run by either the US or French Air Force. And in the absence of western bombs falling on Sunni villages, the Islamic State’s best recruitment arm would be disabled. Throw in a scarcity of money, and the Islamic State fighters would not get their $300 per month pay packet, either.

This rational scenario, of course, is not likely to happen any time soon, and for one overwhelming reason. The Washington War party has gone just plain stark raving mad when its comes to Russia and Mr. Putin.

It is not barrel bombs and the brutalities committed by Bashar Assad and his father that explains Washington’s perverse efforts to destroy a secular state based on a coalition of religious minorities——Alawites, Christians, Druse, Kurds, Yazidis etc. The latter is infinitely preferable to the murderous Sharia-based theocracy of the Sunni jihadist who established the Islamic State.

Yet Washington is on the wrong side of that obvious choice owing to the historic alignment of Damascus with Russia, and due to Obama’s shrieking nest of R2P zealots led  by UN Ambassadors Samantha Power.

So we end up with yesterday’s farce from the White House. French President Hollande came to Washington hat in hand looking for allies in what he now describes as his all out war on terrorism.

That is, a war that only a few weeks ago consisted of France’s military assault on the Assad regime—–a campaign of infinite stupidity that helped create the vacuum in which ISIS has thrived and which fostered the bloody-minded revenge motivations behind the Paris attack. Those barbarians did not pick Paris for their evil deeds by throwing a dart at the map of Europe.

No, the Assads, Russians, Iranians, Hezbollah and Shiite government in Bagdad have not mounted terrorist attacks on Europe or threatened them. That’s the dastardly work of their enemies——the Islamic State and its enablers in Turkey, Saudi Arabia and Qatar.

Accordingly, the first order of the day yesterday at the White House should have been a public bitch-slapping of Erdogan by the leader of the free world and his French supplicant.

It was Erogan’s treachery that facilitated the rise of ISIS; and it is now his petty political ambitions that threaten the Russian-led campaign to restore the Syrian state, and which also could precipitate a hot military confrontation between NATO and Russia.

The butchers of Raqqa must have been tickled pink by the sight of what actually transpired in Washington. Namely, Obama’s defense of Turkey’s right to start a war over a two second infraction of its air space, and the joint statement by the two alleged “leaders” that Russia was welcome to join the war on ISIS as soon as it throws its historic ally, and the constitutionally elected President of the sovereign state of Syria, under the bus.

What that means in practical terms is that world is heading down a path to the wrong war—–a NATO/Russian confrontation that is utterly unnecessary.

Meanwhile, the soft underbelly of Europe will remain exposed to new terrorist attacks mounted from a barbaric proto-state that survives only due the flow of money and weapons from Washington and the Three Amigos, and due to the War Party’s demonization of the very forces—– Assad, Putin and their Iranian allies—-that could extinguish it militarily.

Nor was that the only lunacy on this matter coming from the White House. Nearly every week there is an announcement of new Washington arms sales to Saudi Arabia. Over the past two decades, in fact, the Saudis have purchased up to $200 billion of weapons and armaments from the US.

Not only has this enabled the Saudi’s to function as the arms merchants of the middle east and to foment anti-Shiite insurrection in Yemen, Iraq, Iran, Syria, and elsewhere in the middle east, it also permits Riyadh to continue to export Wahhabi religious extremism throughout the region.

Stated bluntly, were Washington to threaten the Saudi princes with an arms embargo, the supply of money, weapons and religious zealotry emanating from Saudi Arabia and fueling the Sunni jihadist movement would dry up in short order. The unspeakably corrupt and decadent House of Saud literally depends on the steady replenishment of spare parts for the F-16s on which their rule depends.

At the end of the day, you do not have to get very far down the rabbit hole of the War Party’s middle eastern policy fiasco to recognize that this madness is going to end in something fairly horrific.

And in that context, buying the dip at 22X amounts to madness itself.

More from Hussman

John Hussman, Hussman Funds

Dispersion Dynamics

Nov. 25, 2015 8:10 AM ET 

Two types of dispersion are increasingly apparent in market dynamics here. The first type of dispersion is between leading measures of economic activity and lagging ones. The second is dispersion in market internals, particularly observable in a continued narrowing of leadership to a handful of “winner-take-all” stocks, while broader measures of market action across individual stocks, industries, sectors, and credit spreads show persistent divergence that suggests increasing risk-aversion among investors.

As I’ve frequently noted, if one examines the correlation profiles of various economic indicators with subsequent economic activity, there is a clear sequence. The earliest indications of an oncoming economic shift are observable in the financial markets, particularly in changes in the uniformity or divergence of broad market internals, and widening or narrowing of credit spreads between debt securities of varying creditworthiness. The next indication comes from measures of what I’ve called “order surplus”: new orders, plus backlogs, minus inventories. When orders and backlogs are falling while inventories are rising, a slowdown in production typically follows. If an economic downturn is broad, “coincident” measures of supply and demand, such as industrial production and real retail sales, then slow at about the same time. Real income slows shortly thereafter. The last to move are employment indicators — starting with initial claims for unemployment, next payroll job growth, and finally, the duration of unemployment.

What we observe at present is something of a race. The most lagging and backward-looking measures of the economy continue to show the most strength; precisely because they indicate what is in the past rather than what is in the future. Unemployment duration continues to fall, payroll growth has enjoyed a recent upward surprise, and initial claims for unemployment — though flattening out — remain near multi-year lows. Largely on the basis of improvements on the employment front, the Fed is quite eager to move away from zero interest rate policy by hiking the Federal funds rate in December (by paying banks a fraction of a percent more on idle excess reserves) — a move that is now broadly anticipated on Wall Street.

Meanwhile, the most leading and forward looking measures of the economy continue to deteriorate. The race, in this context, is whether the economic weakness that’s already evident in the leading measures actually becomes reflected in the employment numbers soon enough to derail a rate hike. The chart below updates our measure of “order surplus” based on standardized values of regional Fed and purchasing managers surveys. My impression is that this chart presents a good representation of the actual state of the economy here — deteriorating enough to create a clear risk of recession, but not profoundly enough to establish a confident expectation of recession.

(click to enlarge)

It’s tempting to make predictions about whether incoming economic data will weaken enough to derail a December rate hike, or whether lagging employment figures will remain strong enough to encourage “liftoff” by the Fed. But from an investment standpoint, the actions of the Fed, either way, are not nearly as important to monitor as the behavior of market internals. The impact of Fed actions is strongly dependent on the prevailing condition of market internals (see When An Easy Fed Doesn’t Help Stocks, and When it Does). If we observe improvement in broad internals and credit spreads, it will suggest a shift back toward risk-seeking by investors, and virtually whatever the Fed does will be favorable for stocks. If internals remain unfavorable, virtually anything the Fed does will be unfavorable as well.

Historically, the worst market outcomes have unfolded when the Fed has eased in an overvalued market where internals have become unfavorable (suggesting growing risk-aversion among investors). Investors should remember that the Fed cut rates in late-2007 and early-2001, just as deep market collapses were beginning, and additional persistent and aggressive Fed easing did nothing to prevent stocks from collapsing for nearly two years both instances. A Fed easing in an overvalued market with poor internals is almost always a response to weakening economic fundamentals. Fed easing emphatically does not support stocks in that kind of risk-averse environment because risk-free liquidity is viewed as a desirable asset rather than an inferior one. The upshot is that unless market internals improve, a decision by the Fed not to hike interest rates would likely be a very negative signal for investors.

Even from an economic standpoint, there’s little evidence in the historical record that activist Fed policy has a significant or reliable impact on subsequent economic activity. Economic downturns tend to be mean-reverting and self-correcting, so a large economic shortfall tends to be followed by subsequent economic strength. There's clear economic evidence that fiscal policies targeting productive investment can be quite effective (particularly investment tax credits, accelerated depreciation, and certain infrastructure expenditures), but even without those initiatives, we observe substantial mean-reversion in output. On the inflation front, the level of inflation remains positively correlated with previous levels of inflation for about 6 years (with zero correlation after about 9 years), but changes in inflation are negatively correlated with the preceding level of inflation right off the bat, meaning that very high inflation tends to be followed by falling inflation, and very low inflation tends to be followed by rising inflation.

Systematic monetary policy approaches such as the Taylor Rule suggest linking monetary policy targets to observable variables, such as output shortfalls and the prevailing rate of inflation. These have historically described Fed policy fairly well, with notable exceptions in recent years. As Stanford economist John Taylor observed last week, Janet Yellen’s objection to calls for more systematic Fed policy “ignores the harm that came from deviating from rules-based policy in the period leading up to the crisis.” Since Fed policy changes have historically tracked observable economic variables in a fairly systematic way, it’s difficult to disentangle whether subsequent changes in output and inflation were actually supported by Fed policy or whether they would have naturally occurred anyway. We're inclined to give that systematic component of policy the benefit of the doubt. Still, we do know that activist deviations from systematic monetary policy have no relationship with later economic activity. For example, the difference between the actual Fed Funds rate and the rate prescribed by the Taylor rule has zero correlation with subsequent economic growth. Moreover, Fed activism has been the central cause of financial distortions, yield-seeking speculation, and subsequent collapses that have devastated the U.S. economy in recent cycles.

If there was evidence in the historical data to suggest that a rate hike would materially weaken the economy, we would argue against a rate hike, because the economy is weakening already. Even so, whatever “policy error” the Fed might make here utterly pales in comparison with what has already become the most spectacular episode of monetary policy error we will likely see in our lifetimes. The primary impact of extraordinary monetary policy in recent cycles has been to provoke a series of speculative bubbles and collapses. We are now observing the third speculative financial bubble since 2000. At best, Fed actions will modestly affect the timing of the inevitable fallout. In recent years, Federal Reserve policy has been little but an engine of yield-seeking speculation, hypervaluation, expansion of low-grade debt, and global malinvestment of exactly the sort that produced the worst financial crisis since the Great Depression.

If the Fed is to do anything, we strongly believe that the Fed should immediately stop reinvesting the proceeds of maturing assets on its balance sheet, as the Fed could run off about $1.4 trillion without placing any upward pressure at all on interest rates. Absent any reduction in the size of the Fed’s balance sheet (which would lower the ratio of the monetary base to nominal GDP), the only way to raise interest rates here is by literally paying banks on their idle excess reserves. The only impact from that operation will be to draw a significant amount of zero-interest currency out of circulation and into the banking system, thus creating an even larger pile of idle bank reserves.

Weak market internals persist

The second type of dispersion we observe here is in market internals. Credit spreads remain in an uptrend, suggesting increasing concerns among investors about the potential for credit defaults among highly leveraged borrowers. The chart below shows the S&P 500 (black) compared with the persistent weakness of low-grade bonds, as tracked by the high-yield exchange-traded fund (NYSEARCA:HYG).

(click to enlarge)

Even with the capitalization-weighted S&P 500 just short of its record May high, only about 40% of individual stocks remain among their respective 200-day moving averages. Even for the S&P 500 itself, the entire year-to-date gain in the index has been driven by a handful of companies that enjoy “winner-take-all” network effects. These stocks still benefit from the same sort of can’t lose mentality that we observed during the top-formations of previous speculative bubbles — for example, the ‘onics and ‘tronics stocks of the late-60’s Go-Go market, the Nifty Fifty of the 1973 peak, the dot-com stars and later the Four Horsemen of the tech bubble, and the financials that came to dominate market capitalization during the housing bubble.

The chart below shows the relative performance of the capitalization-weighted S&P 500 Index (black) and the Value Line Index (blue), an equal-weighted arithmetic index of 1700 of the best-known companies in the stock market. The performance gap between these two indices since mid-2014 has been about 9%, which is the primary reason that many hedged-equity strategies have had difficulty during this period. If one is long a diversified portfolio of stocks and hedged using capitalization-weighted indices such as the S&P 500, one of the only ways for a hedged strategy to gain traction lately has been to over-weight the most speculative stocks in the market, even beyond their lopsided weights in the S&P 500 itself. There’s some rationale for hedged strategies to hold something greater than a zero position in these stocks, if only to lower their “tracking risk” versus the cap-weighted indices. But whether one is hedged or not, we view the strategy of overweighting the most speculative stocks to be a sure path to short-term acclaim and longer-term loss. That’s a lesson that should have been learned from other bubbles.

(click to enlarge)

Historically, this sort of internal divergence, emerging after an extended period of extreme overvalued, overbought, overbullish conditions, has been a precursor to severe market weakness. If market internals improve, this divergence will narrow, and there will be a reduced need to hedge as aggressively against probable market losses in the first place. In either case, we view the situation as transitory.

One observes a similar picture examining the S&P 500 Index (black) versus the percentage of stocks above their respective 200-day moving averages (blue). The average stock has been much less resilient in recent months than the capitalization-weighted indices, primarily because a handful of extraordinarily large “winner take all” stocks have been responsible for the lion’s share of the market gain.

(click to enlarge) In short, the central feature of market dynamics here is dispersion; not only in the form of dispersion between leading measures of the economy and lagging ones, but also dispersion within market internals, which continues to suggest increasing risk-aversion among investors. The underlying signal within the data here is one of a deteriorating economy that appears strong only by appealing to the most backward-looking indicators, and an extremely overvalued market in an extended top-formation — where investors are becoming skittish, and where speculation has narrowed to an almost absurdly selective handful of stocks. Our expectation is that all of this will end badly, but again, a material improvement in market internals would likely defer these outcomes and substantially reduce our immediate concerns — though probably at the price of making the inevitable unwinding of this speculative bubble that much worse.

The foregoing comments represent the general investment analysis and economic views of the Advisor, and are provided solely for the purpose of information, instruction and discourse. Please see periodic remarks on the Fund Notes and Commentary page for discussion relating specifically to the Hussman Funds and the investment positions of the Funds.

The Market Soars as Breadth Collapses

Even The Rally In Large Caps Is Narrowing

Submitted by IWB, on November 25th, 2015

by Dana Lyons

The bull market in U.S. equities has narrowed over the past 6 months as strength has become concentrated in large cap stocks. Recently, strength has narrowed even among those large caps.

One common theme in these pages (and others) over the past 6 months has been the narrowing of participation in the equity bull market. That is, the rally has persisted among the major averages, but fewer and fewer stocks are rallying alongside. This dynamic is possible, of course, due to the uneven weighting of most stock indexes. The largest stocks, either by market cap or by price, have the greatest impact on the performance of the indexes. And those big-cap stocks have shown little propensity thus far to slow down. However, just recently, we are seeing the narrowing of the rally even among these large cap stocks.

We touched on this trend earlier this month, pointing out that the “Equal-Weight” version of the Russell 1000 Large-Cap Index had been lagging behind the “market cap-weighted” version since this past May. That is evidence that even the average large-cap stock has failed to keep up with biggest of those stocks. Further, we illustrated in a chart that while the Russell 1000 cap-weighted Index was back near its May levels, the Equal-Weight Index, i.e., the average stock, had not only lagged, but was down some 6% over that time.

Today’s Chart Of The Day takes that contrast even further by looking at the relative ratio between the Russell 1000 Equal-Weight Index and the cap-weighted version. As of Friday, that ratio had dropped to its lowest level since the inception of the Russell 1000 Equal-Weight Index


Granted, the Equal-Weight Index has only  been around for 5 years. It would have been interesting to note its relative behavior around the top in 2007, and especially during the “great divergence” between 1998 and 2000. Nevertheless, we must read the recent developments in a negative light as the fewer number of stocks that are rallying, the less robust and resilient the rally is likely to be. Sure, it may have little to no impact on those areas that are still working right now. However, when those areas do begin to succumb to selling pressure, there will be precious little left to support the broader market.

There is no telling when the ultimate top in the major stock averages will be. However, participation in the rally is getting narrower and narrower – even among the bull market’s former leaders.

Gold Prices Skewed to the Upside

Boris Mikanikrezai, Mikz Economics

Gold Weekly: A Rally Is Imminent

Nov. 25, 2015 2:00 AM ET 

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)


Money managers are now net short gold, reflecting an extremely bearish sentiment.

ETF investors continued to sell the precious metal for a third straight week, albeit at a slower pace.

Although the macro environment is negative for gold, sentiment is so weak that a reversal is likely.

I remain on the sidelines. But I could implement a long position as soon as this week.

Every week, I closely monitor net speculative positions on the COMEX as well as ETF holdings in so far as the historical economic behavior of gold prices suggests that over a short-term horizon (<3 months), gold prices are largely influenced by changes in the forward fundamentals, reflected in changes in net spec length and ETF holdings.

Speculative positioning

(click to enlarge)Source: CFTC.

Gold. According to the latest Commitment of Traders provided by the CFTC, money managers, viewed as a relevant proxy for speculators, became net short gold in the week ending November 17, while spot gold prices fell by almost 2 percent over the period covered by the data.

The net speculative length fell from a net long position of 16,869 contracts as of November 10 to a net short position of 13,923 contracts as of November 17. In other words, the net spec length dropped 30,792 contracts from last week, the fourth consecutive weekly decrease. Taking a closer look, the fall in the net spec length was largely driven by a build-up of shorts (+29,422 contracts, the largest weekly increase since August 11) and was reinforced by a tepid liquidation of longs (-1,370 contracts, the fourth weekly decline in a row).

The net spec length is now in a negative territory for the first time since August 11 and is at its lowest level since July 28. It is important to note, in our view, that the net spec length is at a very low level by historical standards. Indeed, except during the summer of 2015 when money managers were net short gold for about three weeks, money managers have always been net long gold since the CFTC started to publish its statistics back in 2006.

With the net spec length down 116 percent on the year and below its 2015 average (49,430 contracts) and long-term average (109,492 contracts), we argue that the spec positioning in the gold market has become overstretched to the short-side, and as such, a bout of short-covering could emerge in the very short-term.

Last week in my weekly report, Bulls Will Come Back With A Vengeance, I mentioned that money managers reached an extremely bearish positioning so the sell-off in gold prices could run out of steam. Although gold prices continued to reach new 2015 lows last week, we note that the market has been struggling to push sustainably lower, suggesting a waning conviction in the short side. This confirms that gold prices are close to enter a bottoming-out process.

Looking ahead, I will closely monitor the current week's market action and if gold prices should manage to remain above their last week's low, this would suggest, in my view, that gold prices have already bottomed out, and I would jump in the long side accordingly although the stop loss would need to be carefully chosen due to a possible spike in volatility when prices are near a trough (or a peak).

Investment positioning

(click to enlarge)Source: FastMarkets.

Gold. ETF investors sold gold for third week in a row as of November 20, albeit at a slower pace than the prior two weeks.

Gold ETF holdings fell about 5 tonnes between November 13 and November 20, which we attribute to some selling from short-term investors ahead of the December FOMC meeting where the Fed is set to raise the federal funds rate for the first time in almost a decade. Indeed, although US macro data were not particularly encouraging such as industrial production for October (down 0.2 percent from September) or housing starts (at 1.06 million in October, down from 1.19 million in September), the release of the October FOMC minutes on November 18 proved to me more hawkish than market participants had previously envisaged. According to the minutes, most FOMC market participants anticipated that the conditions for starting the policy normalisation process could be met 'by the time of the next meeting". Against this backdrop, market participants revised upwards their expectations for the timing of the liftoff. The 30-day fed-funds futures are currently pricing in a 74-percent probability for a December liftoff, compared with 70 percent before the release of the minutes. ETF investors sold gold accordingly the following day, about 3.38 tonnes or 68 percent of the weekly amount sold.

However, we believe it is worth mentioning that the pace of the decline in gold ETF holdings has slowed, which suggests that those holdings are increasingly held by stronger hands. As I outlined in a previous report, in spite a downward trend in ETF holdings since late 2012, the pace of outflows has gradually declined, which leads me to consider that 1,500 tonnes represents a solid floor for total gold ETF holdings.

Amounting to 1,518 tonnes as of November 20, total gold ETF holdings (tracked by FastMarkets) were down 5 tonnes from last week and 33 tonnes from the start of November. They are therefore on track to record the first monthly outflow in 4 months as investors were net buyers of 12 tonnes of gold in October, 2 tonnes in September and 10 tonnes in August. ETF investors are currently net sellers of 77 tonnes of gold on the year, due to strong outflows between March and July.

Looking ahead, we believe that the current commodity-unfriendly macro environment could push gold ETF holdings below their year-to-date low of 1,517 tonnes seen early in August. However, we do not expect the pace of ETF selling to accelerate nor these holdings to fall sharply below the 1,500-tonne level in so far as those physical holdings are held by "strong hands" investors with a long-term philosophy.

Spec positioning vs. investment positioning

(click to enlarge)Source: MikzEconomics.

My GLD positioning - A Rally Is Imminent - weekly chart

(click to enlarge)

Source: TradingView.

As I indicated last week, I remain on the sidelines concerning GLD. While two weeks ago, I was deeply convinced in the short side, I am now deeply convinced in the long side.

From a technical perspective, it is clear to me that the market is deeply oversold in the near-term and as such, a rally is necessary to alleviate deeply oversold conditions. Further, GLD is sitting near a solid support, the $100 level, which could thereby induce some short-covering from this price level.

From a fundamental perspective, although I contend that the macro environment is likely to exert downward pressure on the metal in the medium-term, sentiment is currently so weak that a reversal in gold prices appear to me very likely at this crucial juncture.

To sum up, I would like to play the metal from the long side but I need to await further confirmation before initiating my long position. From a price perspective, if the last's week low ($101.94) holds this week, I would consider that the sell-off has lost its steam and I would therefore implement a long position in GLD with a one-month horizon. If last week's low fails to hold, this would suggest that further decline is likely in the near-term and I would closely watch the $100 level. From a spec positioning perspective, I will closely monitor the upcoming Commitment of Traders released at the end of the week to adjust the parameters of my trade. I would view an improvement in spec positioning as an early signal that gold prices are close to a reversal. To sum up again, I currently view the short-term (< 1 month) risks to gold prices as skewed to the upside.


US Money Supply: No Growth

Malinvestment Lunacy Exposed As US Money Supply Growth Finally Begins To Crack

In our recent missive on junk bonds, we inter alia discussed the fact that the growth rate of the narrow money supply aggregate M1 had declined rather noticeably from its peak in 2011. Here is a link to the chart.

As we wrote:

“We also have confirmation of a tightening monetary backdrop from the narrow money supply aggregate M1, the annualized growth rate of which has been immersed in a relentless downtrend since peaking at nearly 25% in 2011. We expect that this trend will turn out to be a a leading indicator for the recently stagnant (but still high at around 8.3% y/y) growth rate in the broad true money supply TMS-2.”

In the meantime the data for TMS-2 have been updated to the end of October, and low and behold, its year-on-year growth rate has declined to the lowest level since November of 2008. At the time Bernankenstein had just begun to print like crazy, via all sorts of acronym-decorated programs (they could have just as well called them “print 1, print 2, print 3”, etc.). So we’re now back to the broad true money supply growth rate recorded at “echo bubble take-off time”.

1-TMS-2, annual rate of growth

Annual growth rate of US money TMS-2, breaking below the lower end of the range it has inhabited since late 2013 – click to enlarge.

Tuesday, November 24, 2015

Dollar Going Higher

The U.S. Dollar Has Already Caused A Global Recession And Now The Fed Is Going To Make It Worse

By Michael Snyder, on November 22nd, 2015

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Dollar Hands - Public DomainThe 7th largest economy on the entire planet, Brazil, has been gripped by a horrifying recession, as has much of the rest of South America.  But it isn’t just South America that is experiencing a very serious economic downturn.  We have just learned that Japan (the third largest economy in the world) has lapsed into recession.  So has Canada.  So has Russia.  The dominoes are starting to fall, and it looks like the global economic crisis that has already started is going to accelerate as we head into the end of the year.  At this point, global trade is already down about 8.4 percent for the year, and last week the Baltic Dry Shipping Index plummeted to a brand new all-time record low.  Unfortunately for all of us, the Federal Reserve is about to do something that will make this global economic slowdown even worse.

Throughout 2015, the U.S. dollar has been getting stronger.  That sounds like good news, but the truth is that it is not.  When the last financial crisis ended, emerging markets went on a debt binge unlike anything we have ever seen before.  But much of that debt was denominated in U.S. dollars, and now this is creating a massive problem.  As the U.S. dollar has risen, the prices that many of these emerging markets are getting for the commodities that they export have been declining.  Meanwhile, it is taking much more of their own local currencies to pay back and service all of the debts that they have accumulated.  Similar conditions contributed to the Latin American debt crisis of the 1980s, the Asian currency crisis of the 1990s and the global financial crisis of 2008 and 2009.

Many Americans may be wondering when “the next economic crisis” will arrive, but nobody in Brazil is asking that question.  Thanks to the rising U.S. dollar, Brazil has already plunged into a very deep recession

As Brazilian president Dilma Rousseff combats a slumping economy and corruption accusations, the country’s inflation surged above 10 percent while unemployment jumped to 7.9 percent, according to the latest official data. The dour state of affairs has Barclays forecasting a 4 percent economic contraction this year, followed by 3.3 percent shrinkage next year, the investment bank said in a research note last week.

The political and economic turmoil has recently driven the real, Brazil’s currency, to multiyear lows, a factor helping to stoke price pressures.

And as I mentioned above, Brazil is far from alone.  This is something that is happening all over the planet, and the process appears to be accelerating.  One of the places where this often first shows up is in the trade numbers.  The following comes from an article that was just posted by Zero Hedge

This market is looking like a disaster and the rates are a reflection of that,” warns one of the world’s largest shipbrokers, but while The Baltic Dry Freight Index gets all the headlines – having collapsed to all-time record lows this week – it is the spefics below that headline that are truly terrifying. At a time of typical seasonal strength for freight and thus global trade around the world, Reuters reports that spot rates for transporting containers from Asia to Northern Europe have crashed a stunning 70% in the last 3 weeks alone. This almost unprecedented divergence from seasonality has only occurred at this scale once before… 2008! “It is looking scary for the market and it doesn’t look like there is going to be any life in the market in the near term.”

Many “experts” seem mystified by all of this, but the explanation is very simple.

For years, global economic growth was fueled by cheap U.S. dollars.  But since the end of QE, the U.S. dollar has been surging, and according to Bloomberg it just hit a 12 year high…

The dollar traded near a seven-month high against the euro before the release of minutes of the Federal Reserve’s October meeting, when policy makers signaled the potential for an interest-rate increase this year.

A trade-weighted gauge of the greenback is at the highest in 12 years as Fed Chair Janet Yellen and other policy makers have made numerous pronouncements in the past month that it may be appropriate to boost rates from near zero at its Dec. 15-16 gathering. The probability the central bank will act next month has risen to 66 percent from 50 percent odds at the end of October.

But even though the wonks at the Federal Reserve supposedly know the damage that a strong dollar is already doing to the global economy, they seem poised to make things even worse by raising interest rates in December

Most Federal Reserve policymakers agreed last month that the economy “could well” be strong enough in December to withstand the Fed’s first Interest rate hike in nearly a decade, according to minutes of its meeting Oct. 27-28.

The officials said global troubles had eased and a delay could increase market uncertainty and undermine confidence in the economy.

The meeting summary provides the clearest evidence yet that a majority of Fed policymakers are leaning toward raising the central bank’s benchmark rate next month, assuming the economy continues to progress.

Considering the tremendous amount of damage that has already been done to the global economy, this is one of the stupidest things that they could possibly do.

But it looks like they are going to do it anyway.

It has been said that those that refuse to learn from history are doomed to repeat it.

And right now so many of the exact same patterns that we saw just before the great financial crisis of 2008 are playing out once again right in front of our eyes.

A lot of people out there seem to assume that once we got past the September/October time frame that we were officially out of “the danger zone”.

But that is not true at all.

The truth is that we have already entered a new global economic downturn that is rapidly accelerating, and the financial shaking that we witnessed in August was just a foreshock of what is coming next.

Let us hope that common sense prevails and the Fed chooses not to raise interest rates at their next meeting.

Because if they do, it will just make the global crisis that is now emerging much, much worse.