I’m back. Here’s an updated look at the main pillars of my work.

First, demographics. The key overarching macro issue going forward, in my view, is whether the combined price-deflationary and asset-deflationary demographic trends now in place between US, Europe and China will tip the world into recession and deflation despite the best efforts of central banks. Someone else has picked up on the theme and produced this:

Source: Nakedcapitalism

I continue to look at leading indicators for evidence. There is no doubt central banks have some impact on behaviour in the economy and financial markets by deploying policies to discourage savings, cash and fixed income, and to encourage lending, risk-assets investment and spending. But is it enough to offset the demographics?

The latest data shows Europe strengthening (PMIs, economic surprises), USA possibly having peaked (ECRI, economic surprises), and the overall global economy potentially weakening towards late 2013 but not until then (narrow real money). This week’s US GDP release surprised to the upside for last quarter, however the upside surprise matched the retrospective reduction in the previous quarter’s data. Nonetheless, the overall global picture is still fairly ‘safe’. Europe’s relative strength ahead should bode well for the Euro v USD, and a relatively weakening USD should bode well for commodities, and if we are to see the normal late cyclical outperformance in commodities (once stocks peak) then we need leading indicators to at least hold up a little longer.

If the unprecedented coming together of demographic downtrends in US, China and Europe mean the global economy is heading for recession no matter what (given China has now peaked demographically), then I believe this will mean a severe nominal decline in equities, as central banks will be revealed as impotent, and panic will ensue. If we slip into global recession without the ‘agent’ of commodity price acceleration then I would expect the SP500 to complete an overall megaphone formation since 2000 with a potentially lower low than 2009.

Next, solar cycles. Experts still don’t know if a solar peak is ahead or behind. Here’s the latest sunspot chart:

It’s clearly a weak sunspot cycle, and fairly messy. Some scientists believe there is a second peak ahead this year, which may exceed the existing smoothed max (Feb 2012). On the other hand, an overlay of SC5 suggests that existing peak may have been it:

Source: WattsUpWithThat

If the peak was Feb 2012, then I would point to 2011’s commodities speculation including a silver parabolic together with extensive Arab revolutions as normal behaviour patterns associated with solar maxima. It should mean that we have passed the speculative peak in commodities, that global temperature may have already peaked, and that we should expect the geomagnetic disturbance peak that follows a solar max normally 1-3 years later and is associated with recession. In this scenario I would expect commodities to continue overall weakness and deflationary recession to occur.

If the peak is still ahead later this year then we may see global temperature hitting extremes and more geopolitical trouble, together with a speculative peak. All three could push up commodities in a late cyclical outperformance into 2014 with bonds already having topped and stocks topping this mid-year. In this scenario I would expect an inflationary spike to help tip the global economy into subsequent recession.

Next, geomagnetism. All models have been updated for this week, and drawing in the next 3 weeks geomagnetism forecast, we see this (mapped against the commodities index):

A flattening out in cumulative geomagnetism in August following a downtrend May-July. By normal seasonality, geomagnetism should be troubling again by September and October. August-September would therefore be a suitable time for US equities to make a final peak in a topping process, if one began in May. Did one?

Well, so far the process is developing like a typical top. A marginally higher high is currently being played out with some weakening in breadth versus the May peak (% stocks above 50MA, Mclellan summation index). Margin debt still looks like it peaked in April, and in 2000 and 2007 this peaked 3-6 months before the stock market finally rolled over. However, this would all be invalidated if stocks push on again here and away from the topping range, with breadth strengthening again. US earnings may play a role in this and so far have made an impressive earnings beat, but a poor revenue beat rate. This means companies are making profits by cutting costs. This could be a warning if the economy shows signs of weakening, which brings us back to the importance of leading indicator readings as they come out. If central banks have been able to juice the economy just enough to offset demographics, through rate cuts, QE and verbal support (do what ever it takes) then it is feasible that this already long cyclical bull (by historical comparisons) continues. But I side with the multi-month topping process currently playing out until counter-evidence increases.

Next, lunar phasing. I have updated The Lunar Edge page and this is how the two of the most ‘sensitive’ indices to lunar phasing have performed so far this year:

The German Dax has delivered all of its annual gains so far within the lunar positive fortnights (4 days after full moon through to 4 days after new moon), whereas the Singapore Straits has really delivered no lunar edge of any note so far this year. Nonetheless, a strategy playing the lunar edge equally across both would still have returned well overall. I continue to look to the start of lunar negative periods for adding short and to the start of lunar positive periods for adding long, in order to time my longer term trades. On that note, the current lunar positive period ends by Friday next week. If equities have been able to rise further by then, I will look at taking profits where in profit, and adding short at that point if evidence continues to support a topping process.

Because we are in a lunar positive period currently, and Japanese equities fulfilled what I last suggested look liked occurring (the arching-over turning into falls) I have entered long Nikkei again, but just a starter position. My main exposure currently remains long commodities, with greatest weighting precious metals. I have various significant loss-making positions in commodities. I continue to believe that because of demographic trends precious metals will come again as the anti-demographic. I suggest central banks in US, China and Europe will continue to have to support the economy for some time to come and that renewed dovish talk will benefit gold. For other commodities, I return to the solar maximum unknown. If the solar maximum is ahead still, then I believe temperature and geopolitical disturbance and speculative mania can inspire a historically normal commodities peak following a peak in equities. Crude oil’s breakout in June gave this more credibility. Crude has now pulled back a little, and it will be important to see if this is consolidation before further gains.

If commodities as a whole have peaked and deflation continues to press them downwards, then I will be holding increasing loss-making positions. What to do? I will be looking to average down and time mean reversion. Nothing goes down in a straight line and I will be looking to convert them into winning trades in a ‘trade your way out’ style by leveraging up. Not easy, and no doubt some would view that as too risky, but that’s what I will be doing. Don’t follow me, etc, I’m just sharing with you what I’m doing, as the money management is as important as the analysis, right? But first, let’s see if commodities can outperform in the rest of 2013, as the previously detailed evidence suggests is possible. I want to give them a little more time to gather momentum, before using aggression.

Some key assets. Gold reached important resistance around 1344. Can it break through? If not then the basing process in precious metals will need some time longer. It is confidence restoration versus short squeeze, but if the latter is to occur then we will need triggers in the news. The US dollar has been in decline since the Fed backtracked on QE-tapering-hastiness, turned away at key long term resistance. However, it could yet be consolidation before another charge. I believe it will weaken as the Eurozone relatively improves, but the Fed’s actions will play a key role. Since I sold out of short-treasuries they tracked overall sideways. This could be consolidation before further rises in yields, but as there has been no pullback I don’t wish to yet rejoin.

I am writing this post US GDP release and pre FOMC output. Both market movers, and it will take until tomorrow for the dust to settle and we see where different assets want to go. But I wanted to get the post out as my trip gave me no opportunity. Thanks for your comments and emails whilst I have been away.