Problems in China

1. China tipped over the demographic cliff circa 2007-2010. Here are middle to young, middle to old, net investors and dependency ratio (inverted) measures:

16se152. China’s stock market enjoyed a parabolic mania at the demographic peak, like the US did in 2000 and Japan in 1989.

Screen Shot 2014-09-16 at 07.39.37

Source: Yahoo

3. China’s stock market correlates closely with commodities:

Screen Shot 2014-09-16 at 07.33.17

Source: Yardeni

4. Demand for commodities is weakening as the economy weakens:

Screen Shot 2014-09-16 at 07.25.48Source: Yardeni

5. Chinese official GDP stats are questionable, so proxies are used for greater reliability. Here, steel, cement and electricity output show a wilting in 2014, flirting with the zero level:

16se9

Source: Bloomberg

6. Imports and exports are at much weaker growth levels since the demographic peak, and both have seen lurches below zero in 2014:

Screen Shot 2014-09-16 at 07.26.24

Source: Yardeni

7. Government spending has shrunk:

16se7Source: AlphaNow

8. Producer prices are mired in deflation:

Screen Shot 2014-09-16 at 07.26.59

Source: Yardeni

9. And certain indicators have suddenly become more acute in 2014, starting with foreign direct investment:

16se3

Source: ZeroHedge

10. Then the housing market:

16se6Source: AlphaNow

11. The shadow banking market:

16se2Source: Investment Watch

12. And lending:

16se18History shows that economies which expand at breakneck speed typically derail at some point. A potential hard landing for China has been discussed in the media for a long time, but analysts don’t largely understand that it is only in the last 3-4 years that this has become more realistic, since China fell over the demographic cliff. Their one child policy has a nasty sting in its tail. The key is whether the Chinese government can roll out measures that nip the sharp 2014 declines in the bud (which would postpone rather than prevent the devastation), before the negative feedback looping becomes too acute.

In my view, it is the unprecedented collective demographic downtrends in USA, Europe, Japan and China that are tipping the global economy into an unstoppable negative spiral here (only currently propped up by the wealth effect of the stock markets) and central banks will not be able to prevent it. Japan, USA, Europe and China all took turns to be the engine of the world economy between 1980 and 2010 but now we are engineless until circa 2020/2025. By demographics that means a global deflationary recession, or a depression. Passing through the solar maximum here in 2014 should produce dwindling speculation and economic activity and nudge the stock markets and world economy over the edge, feeding off each other.

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166 thoughts on “Problems in China

  1. As usual, John, your analysis is impressive. The problem here, though, is that the current financial system utilizes unbacked paper currency, whose units can be replicated at will (and that is exactly what is occurring). What SHOULD be a deflationary depression is being met with an extraordinarily powerful inflationary policy response. Right now, the opposing forces of deflation and inflation are locked in a tug of war, but I strongly believe that inflation will ultimately win. As Voltaire wrote in 1729, “Paper money always reaches its intrinsic value — zero.” He will again be proven right.

    As for China, the thing most investors don’t understand is the degree to which China has been hedging for exactly the demographic problem you’re describing (by securing very long-term natural resource deals at low prices using unbacked, ultimately worthless U.S. dollars). While China’s road to global economic supremacy will no doubt be a rocky one, this WILL be the century of China, make no mistake. I’m not sure if the Chinese will be benevolent masters, but masters they will be.

    “China is a slumbering giant. It is best to let her sleep, for when she awakens, the world will tremble.” –Napoleon

    1. Voltaire may be proven right. However, today’s global economy has one major difference from the economy of Voltaire’s time: Today the world’s currencies are all paper money that float in value relative to each other. So if Voltaire gets to be proven right again, how will this happen? Will they all go to zero together? We wake up one day and all the world’s currencies are worthless? Or will just one currency go to zero, leaving the rest of the fiat currencies with “value”? And last but not least, what’s the time frame here? Will the world’s currencies go to zero this year? Next year? In 10 years or 50?

      1. These are not rhetorical questions. I’m just wondering if it’s true that fiat currencies will eventually go to zero, how will it play out in today’s global economic system where all currencies are now fiat.

      2. Thought provoking questions!

        Currencies will definately continue to become WORTH LESS, but they cannot become WORTHLESS in a definate timeframe because that would mean everything would have to be repriced at infinity!

        I believe that people generally are losing faith in western style government, and so when those governments eventually achieve their goal of creating inflation it will rapidly get out of hand. So the current tentative moves to get out of holding cash will then become a rush to buy material things with some intrinsic value (or possibly into some other backed currency which cannot be hyperinflated).

        We are facing this situation now.

      3. I think you need to look at both side of the equation. Obviously assets (stocks, commodities, housing bonds) will all rise in relative value to the currency units. However, the demand for currency until will fall in relation to how “productive” the economy is at growing leading to consumption and investment.

        Those are the two force in opposition – monetary inflation vs economic growth that are in an interplay to set the “value” of the currency.

  2. Thought provoking as always John.

    D.J. I think China is headed for a major speed bump,
    longer your view may be accurate.

    Markets off slightly again at the time of this post,
    can bears build some traction today?.

  3. Thanks both.

    In my view, we will tip over here and see a stock market bear and a deflationary recession erupt (as per stock market indicators, solar cycle, Europe and China on the edge economically). The question is what central banks then do, as no question they will fight, and they have to move from policies that encourage to policies that force (e.g. ban on short selling, preventing capital from leaving the country, penalising saving etc). It’s going to get unpleasant. Eventually, when demographic relief comes in the next decade, I see inflation winning out. That’s when all the inflationary policies of now will become problematic. I see a real risk of both deflation for several years followed by runaway inflation.

    Not sure about China dominating this century, because of their demographic problems. India, Brazil, Indonesia: these are the countries with big enough economies and positive demographics that can become more dominant in the world, IF they can get it right at government level (policies, reforms etc).

    1. Hi John thanks for the update again, great analysis. Just trying to get your current take …. If we don’t tip over today which doesnt appear will happen, are you planning on staying short until ECB QE is launched in a few weeks when seasonality also becomes a bulls best friend? Is there a target on the S&P that you’re getting out if bulls take over and start running again? I’m not interested in the daytrading comments from others only the major trend changes that you provide. It does seem the S&P is a coiled spring with dips continuously bought and lots of bullish events for the week.

      Thanks in advance

      1. Staying short. Supportive action in RUT, JNK, neg divergences, extremes in sentiment and allocations, so don’t believe the bulls will be able to break upwards again. Sep-Oct most likely period for the falls to erupt.

  4. John, amazing buddy. You must be reading my mind as I have been doing my own research into the China anomally and you have summarised the impending difficulties facing China extremely well.
    Thank you!

    1. Just aside from that. I have begun liquidating property in Australia, i believe that relative to income Sydney property prices are the biggest real estate bubble in world and will soon come crashing back to earth on the back of a faltering Chinese economy.

      Keep up the goid work 😉

  5. RUT is the short: http://scharts.co/1qF8wBA

    Mixed day yesterday across the U.S. indices – the broader sold off, whereas the narrowest, with the largest companies had a mildly positive day.

    The theory I have heard advanced is that stock prices are being supported by ZIRP-debt-fuelled buy-backs – and only the largest balance sheets are still in that game at this point…

  6. I know this is completely off-track but the article below has some thought provoking comments re Sydney/Australian property prices..
    I am frankly terrified of the prospects for not only ordinary Australians but for the major banks, particularly the CBA which is so over exposed to Australian residential real estate.
    I have been telling friends and relatives for 12 months to get their money out of the CBA, it scares the hell out of me.

    http://www.smh.com.au/business/the-economy/australias-housing-bubble-is-real-and-banks-are-to-blame-says-author-20140828-109ahx.html

    1. Allan, I agree with your views on the Australian housing bubble. The Aus housing market is similar to the current US stock market boom in that it’s arguably been in a bubble for a number of years and is similarly “hated” for its refusal to correct to any great extent.

      Of course the state of the Australian economy largely reflects that of the Chinese economy given they’re our largest trading partner: http://dfat.gov.au/publications/tgs/index.html

      If the economic outlook for China continues to deteriorate we’ll finally see the bubble correct but probably not before it’s further inflated by speculative capital leaving China.

    1. I think John, myself and others have been saying it for months. It’s all smoke and mirrors, designed to make late comers think the party is continuing unabated as they off-load as much as they can.
      The real bull ended EXACTLY when John told us it was ending.

      1. Nice article John. China could very well be the canary in the coal mine.

        My personal views is for the bull to end Mar next year. However, im expecting volatility to increase between now and then. No one can be certain about timing but my own views are more a 50% decline rather than the 30% i was looking for before. There is a need to wash out the indicators you have talked about over the months and in terms of timing i would look for just over a year long timeframe into Oct 2016. That would fit with the 17 year cycle.

  7. Arrival City by Doug Saunders is an interesting read. In China (and worldwide) workers prefer to live in so called slums where they have a kind of ownership and can keep a foot in the country and the city. They don’t want to pay for apartments or they will have no money to send home. In a slum they can even get rent from new arrivals, who is going to live in these new cities they keep building? It seems the Chinese Elite are as out of touch as our bunch.

  8. John, do you have any views on softs such as corn, grains and sugar? They are at oversold levels not seen in over a decade. I just sold my place in Sydney to move back to HK. I agree with Allan that the Australian prop bull market is waaaay overextended.

      1. Thanks John. Corn and grains are getting some record yields with good weather in the US but I personally just can’t see much more downside given how oversold they are.

    1. was busy today so missed out on my usual trick of going long on any negative Dow open. Would have bagged 50 points again! Maybe tomorrow…it always works lol!

  9. Allan, I agree with your view on junior miners…… been accumulating JNUG myself and now making money on those! Hope you are positioned well too!

    1. Yes mate buying everything atm. NUGT, GDXJ, physical, Aussie miners and thanks for the tip on JNUG.
      I frankly see no value whatsoever anywhere else amd that includes real estate, stocks, bonds etc etc, bubbles everywhere.

  10. So..the blast off in all things stocks…emerging markets, US, China, gold, EVERYTHING….cuz of the Fed’s mouth piece, Hilsenrath, saying in the WSJ, that he thinks the Fed will leave the language ‘considerable time” in the commentary.

    The all clear signal. Back into the pool. At least for today. Total BS manipulation.

  11. 1999 is key – wont trust any buy signal here with the FED and Hilsolth at WSJ pushing the narrative…

    need to see what XRT and TYX do tomorrow

      1. Another master piece of analysis by John. It will surely play out the way you are anticipating John.

        As expected, the market is being brought up during the Fed meeting and Alibaba IPO. imho great opportunities this week to go short as much as we can. The reversal next week will be quite spectacular.

  12. Liquidity is not economic stimulus when there are no employed human buyers of goods and services (demographics, wealth gap). This feels like the final pump before fed loses control.

  13. Global revolutions are obviously not priced in to market. (ISIS/entire mid. east, Ukraine, Latin America, Scotland, Missouri, ………………..). Nor is global climate change and dwindling natural resources (drought, flood, oil peak, gas flaring, polar vortex……..). There is only a slim chance of things going perfectly (economic boom), and a multitude of looming crises (economic collapse). The peak is here.

  14. Thanks, John

    My view, referring exclusively to the long term Cycles, first DJI must finish the current 17-years-cycle till 2017-18, in a similar structure to S&P1980-82 or 1919-23 Dow Jones.

    This implies at least 1 more recession, even 2.

    I Can not evaluate Demographics.

    I only know that Japan finishes the 90´s Bubble, Europe (in general) in 2007. Ibex or Eurostoxx are similar, even Cac 40 to Nikkei from 90´s.

    But the matter is US.

    I think this Bubble will end with the 90-100 and 300 years cycle circa 2023, +- 300 years from 1720.

    1835-1929-2023

    These are my figures.

    Thus, I think this will imply the end of Capitalism, not in one day nor in 30.

    But not yet.

    Prior this occurs, the 17-years cycle must finish, with the known pattern and after that, my thesis is a huge spike to nowhere, well a mega-bullish end of this pattern with gigantic Dow Jones revaluation, similar prior 1720 and 1929 Eiffiel model.

    In my opinion, is not still the case.

    Obviously, I can be wrong, but these are my studies for the Industrials secular Cycle.

    John, the engine could be moved by Asia, Latin America, Emerging mkts and finally US last stage before the crash.

    @apanalis

  15. You beat me to it Duncan.

    Elvis, SPX trading above 2,000 atm and DOW
    hits an intra-day record, surely that qualifies
    as a trend change.

    1. I see this ripping higher Phil. Bears will be running for cover as they have likely been layering in shorts over the past week on a “double top”. But imo we are approaching an important top … just a bit more to go.

      1. I have this evening taken my first long position on the Dow after price broke out against the previous mother candlestick. Now we have the Chinese injecting the market and I simply believe we are going to see this across the board.

        I expect gold and silver to continue falling in US Dollars and I really do expect to see $950 gold sometime in the next 6-9 months. Maybe sooner. The monthly chart is saying it all. I don’t expect the Dollar to top and pull back…. instead we are in the early stages of a Dollar bull market. The Euro and Pound Sterling make up almost 65% of the Dollar Index and I expect both of these currencies to devalue strongly against the Dollar over the coming months or year. You may think I’m mad but I see the Euro going to parity against the Dollar and the Pound testing 1.35. But more than likely, the Pound will go lower. We could see a 50% devaluation in the Pound during 2015, from the recent 1.72 highs. I do not believe this is out of the question. Therefore, gold or silver, bought in Sterling or Euros will likely be a decent buy from around these levels. I would think…. at least, the metals would be a decent hedge against the falling currencies if you didn’t have the same confidence in the Dollar as I do. But I would not be touching gold in Dollar terms whatsoever. Spread bet longs, or anything leveraged based on the futures market would be financial suicide at this stage. Gold is quite simply going lower. The charts are telling us this. Why fight the trend?

        All of this will therefore fuel US stocks. And I believe we are in the early stages of breaking out of this consolidation zone around 17,000. The dips keep getting bought, despite all the terrible news around the world. The stock market simply cannot be a bubble as far as I’m concerned. When retail participation is so low – I believe no larger than 6-7% in the UK and US – who is there to panic and sell? Funny money everywhere hence rising prices for food, fuel, transport etc in the UK, Europe, and the US. And this funny money is seeking a home.

        This is a paradigm shift… something we’ve never experienced before. Everyone’s printing, even if some is at the back door. So there is a general Dow or S&P500 bubble coming before a huge collapse. Long all the way now.

      2. Nicely put Jonathan.

        The only thing I’d add is that buying physical precious metal (rather than betting on the dollar price) will mean at some point, rather than cash it in for dollars, you’ll be able to swap it for a currency of your choice, or a bushel of wheat, or a house, or a goat, or a Lamborghini…

      3. Exactly mark. I should have made that more clear. I’ve been buying silver bullion for 12 months now and I could have timed it so much better to be honest, but hey ho. Not only is it a hedge, but it’s out if the banking system which is something I’m becoming more and more concerned about as every week passes. But yes, silver and gold are sensible choices here for Pound Sterling or Euro denominated buyers. The dollar is better still but it’s sensible to diversify a little.

    2. use the system! not a guess. I cant post much as Stockcharts deleted ALL MY CHARTS and refuses to respond to my service request emails.

      what greedy incompetent asses.

      Does anyone have an alternative to stockcharts that will allow annotations and ratio charting – I HATE STOCKCHARTS!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

      anyway – the buy signal IS NOT CONFIRMED

      why is everyone in a hurry – if a trend IS a trend…hmmm?

  16. Rally from hell ? Nope. This was not hell, yet… Very far from that.
    Today S&P may close above 2K but my favorable scenario is that S&P will revisit August low, of preferably, MA200 at 1890.
    If Scotland votes “yes” then it will substantially accelerate things..

    1. Scotland will vote no. This is a political game. The consequences of leaving the union are unthinkable. Plus the US wont be impacted if in the unlikely event that they do.

      1. Agreed. Nice rally but more can always come.
        Chance of voting no are slim — at least they will fail once, regroup and vote again. The union has been for 300 years…won’t disappear in one vote.

      2. Even if Scotland, Fed and other wildcards fail to disappoint I still see market in topping formation. Breaking S&P top at 2011 will obviously change things. We’ ll see tomorrow after the Fed.

    1. I agree. A no vote is coming but from what I saw in Glasgow last weekend, I think it will be much closer. My gut instinct is that the no campaign will take it by a percentage point or two.

      This being the case, the damage has still been done. It is inevitable that Scotland will be independent in the medium term future as another referendum will take place. Not looking good for the UK longer term therefore. I think capital will continue to be pulled from the UK from now as fractions between the natives will do us no favours with regards to being a home for international capital. Sterling will be the victim in all of this. A yes vote would bring about Sterling demise a lot sooner but I think we’ll see a gradual drop south against the US Dollar from here.

      1. Hi, Jonathan, long in Dow? My Goodness! Best Regards.

        Always the same in the tops:` this time is different´

        @apanalis

      2. You’re maybe right Antonio. I am bullish US Dollar and this is my focus. But I will also layer into the Dow in the months ahead. I will tolerate a 5% correction and add further down. But I don’t see this as the market top yet. If it crashes next week then I’m wrong. I’m following the Dollar.

  17. Thanks John. Your hard work is appreciated.
    Just wanted to point out the pattern predicted a sell off to about 1979ish SPX to be followed by one more 5 legger up. It appears the SPX correction stopped about 1/2 point below this number and is now in the final 5th wave up. As mentioned before, it is hard to predict where the 5th wave will end, but it “SHOULD” make a new high and if I had to guess I would look at Sept 24th as a potential ending date because of astro and Fib. reasons.
    A 5th wave of 42 to 55 points would not surprise me. When we get closer, I should be able to pin it down much closer…Just like the 1904ish and 1979 SPX targets.

  18. I also wanted to point out, any of the remaining 5th waves up could fail and be followed by massive selling pressure. There comes a point where the risk in “buying” out weights the potential gains…and I think we are approaching that time.

  19. Harry S. Dent, Jr. recently commented about sun spots effect on markets for the first time. He is predicting the imperfect storm of demo and sun spots to bring the dow down to 2000 levels. One of the analysts I follow is Jay Kaeppel of Optionetics (Seasonal Stock Market Trends, Wiley 2009) who’s work indicates seasonal strength beginning Oct 1 until Mar 2016, the sweet spot of the 10 year cycle. While most facts seem bearish, I am mostly bullish thru early 2016.
    I have

  20. S&P did not manage to close above 2K. I am looking for return to the downtrend tomorrow. Gold firmly in its own downtrend, this is really saddening but we need to be prepared for triple digits in gold.

    1. Be optimistic, the Shanghai Gold & Silver Exchange (largely based on physical) is about to go live, and be sure to keep an eye on development like:

      “(Reuters) – CME Group Inc will launch a physically deliverable gold futures contract in Hong Kong later this year to capture growing hedging and investment buying in the Asian region, a senior executive of the exchange said on Thursday.”

      http://www.reuters.com/article/2014/09/11/cme-group-gold-asia-idUSL3N0RC24E20140911

  21. China’s “injection” will do nothing and I remain short AUD ( via AUD/USD since June ) for several “China and Australian reasons” noted in others comments.

    Aside from the daily / weekly ideas ( currently holding several gold and silver miners as well ) I imagine short AUD will be one of the largest and most profitable long term Ideas of the year, as it takes out the previous lows around 86.00

    One has to keep in mind that when trading a currency pair “both currencies can be falling” it’s just a matter of which one is falling harder.

    I don’t believe USD will do anything but go to toilet paper as more and more international trade is settled “outside” the petrodollar, and the only thing the U.S can do about it is go to war.

  22. I have said for a long time, that the consumption of gold, is greater than the net mining and reserve release of gold. & Gold and silver buyers in the us have been seeing lower sale volumes for almost 2 years now. I know what is afoot. Do you?

    & a side note, what a wonderful synopsis, and I must certainly agree. Interesting how the cycles have occurred in the intensity and order of intensity that they did, long after the economic cycles and choices had been decided, some 2 decades ago. They plan decades in advance, only to realize that the sun was following their cycles, or was it that they were anticipating? & that has been the greatest wonder of all. Are we a projection of the sun, and nothing more? Like shadows in front of a flashlight.

  23. Jonathan, interesting to hear your outlook.

    I am unsure if an appreciably stronger $ is supportive
    of higher US equity levels, a considerably weaker £ would
    certainly help some of the UK listed big overseas earners.

  24. This is a very compelling case. But let me ask you a question I have been struggling with. China today just announced a pretty hefty easing package to stimulate credit markets. How does your model (or any model) account for central banks that are actively opposing the natural demographic and deflationary pressures from decreasing investment and decreased lending?

    The US has managed to stave off a downturn (so far). Of course, I expect that the US will eventually fall in a recession but I think it is difficult to model with central banks interfering with the existing close system model system. Comments?

    1. I believe QE is overstated. 80% of QE money is parked in excess reserves because ultimately it can’t significantly influence demand. China’s package amounts to less than 2 months US QE (pre taper) so I have my doubts that it will reverse those recent problems. My take is central banks can help phase devastation but not prevent it. We can look at 30s US and 90s-00s Japan for reference.

  25. Jonathan’s comments are always worth reading. Long American equities and short gold should both be very good bets in the next 12 months. People are in love with the former while mad at the latter. That’s all.

    There’s no mania in the U.S stock market. On the contrary, market participants are extremely cautious, as we can tell from S&P 500’s near term call options. I think those prices are the lowest in the last two decades, while the prices of put options are quite normal. That’s the only reason why CBOE skew index stays at very high level.

    The last two times when skew index were at such high levels, in 1998 and 2006, you know what happened next.

    1. Yes Michael. I am short gold from $1280. I expect to see $1240 resistance hold. Then we are off to $1180. Then $950. I expect this to be the bottom. Worst case scenario $650 but I can’t see it myself.

  26. Here’s another perspective other than my own on the US Dollar. I don’t mean to keep banging on about the Dollar but I cannot stress how much I see the trend emerging in just my day job here in Saudi Arabia. I work for the worlds largest oil producer and supplier. Dollar trading is stronger than ever and rising. We have just seen the strongest rise in the Dollar since 1997 and the supply chain is starting to take notice of this. If I am right about this, then we are going to see some major contrary movements in financial markets over the coming 12 months or so.

    http://www.marketoracle.co.uk/Article47340.html

    By the way, we are very much aware of currency deals being done between Russia, China, Venezuela, the Philippines, etc. but at this stage, they are of no threat whatsoever. Perhaps 12-18 months from now we will start seeing larger shifts and alliances but at the moment, these deals are exaggerated and bear no influence on the global oil industry. The US Dollar is still the lifeblood of this industry, and let me put some things into perspective for you. There are approx $30 trillion Dollars swishing around the world economy in liquid form. The Chinese Yuan’s global contribution – now the worlds 2nd most traded currency – has only 15 % of the Dollar’s market depth. The Euro on the other hand is only 10% of the US market depth! And this is falling.

    These ridiculous scare stories about the Dollar’s imminent demise are nonsense. It is simply the best out of a very bad bunch. It will fall but after everything else has fallen first. The Dollar will be the last Dollar standing. And good luck to any sovereign state wanting to buy any form of energy globally with anything else other than the Dollar, over the coming 24 months 🙂

  27. That was my point, a significantly higher $ does
    not go hand in hand with higher US equity prices surely?.

    A dramatically weaker Euro is what the Eurozone
    desperately needs, if the single currency is to
    continue in it’s current form longer term.

    1. Hi Duncan / Phil

      Was the last Dollar Bull market of 1996-2001 bad for US stocks back then? No.

      Here’s a rationale for why a strong Dollar often boosts US Stocks…..

      http://www.businessinsider.co.id/sp-500-performance-during-dollar-bull-bear-markets-2014-9/

      This time however we have a European crisis. Worse still, it’s a sovereign debt crisis. It doesn’t get much worse! We are seeing money pour out of the UK at the moment (30bn Sterling in two weeks!) and there are huge sums escaping the EuroZone. The EuroZone implosion is what I began to see in my previous role, in Madrid, and I have already written about this. The Ruble is being destroyed, the Ukranian Hryvnia is being systematically decimated and all roads leave to Rome – the Dollar. Cash is no longer safe in many parts of the world. This is why we are seeing many move into gold, perhaps cultural or the norm in some societies, but most are moving into the Dollar. The Dollar means income. Interest rates. Stock market dividends and returns. Gold does not provide this. I just think the gold story is too early and we are going to see people getting out of it, forcing it down further, to buy into the Greenback.

      Look at the US Dollar Index! It’s taking off. This is against a basket of global currencies. I think the masses are programmed into thinking we are facing a stock market crash as we haven’t had one for 7 or 8 years. Gold is meant to make people amazingly rich when it blasts to $2000 then $5000 because the Dollar will be imminent toilet paper. I don’t think so! There is no way Gold will rise to the previous high within the next 18 months. The world is taking sanctuary in the Dollar and it’s plain to see. Corporations in the Oil industry are doing the same. They are forward ordering reserves with a current cheap Dollar as it isn’t going to last. The momentum is building! I think too many of us try to fight the trend. It’s been 15 years since the last Dollar bull ended. It’s simply not inconceivable that the next, and possibly final, one is upon us.

      1. “Gold is meant to make people amazingly rich when it blasts to $2000 then $5000 because the Dollar will be imminent toilet paper.I don’t think so”

        How many people actually believe that?……I would suggest less than .1% of the investing public and even less of professional investors.

      2. Thanks Jonathan. Interesting that the dollar rose in 90s along with equities. What could possibly be different this time is the percentage of earnings that have come from overseas since then.

        I feel that today there is a more intergrated global economy than back then. Particularly with the advent of the internet. If the percentage of overseas earnings is much higher today i do feel equities will struggle.

        Thanks again for your detailed response.

  28. The USD trade is one EXTREMELY lopsided and crowded trade at present.
    On the flip side gold sentiement is back at all-time extreme lows and yet gold is dverging from the dollar and the shares are diverging against gold.

    The Euro, gold and dollar are about to shock and surprise more than a few.

    1. Apologies Allan. I was perhaps being a little facetious with that comment but I make my point. I hold silver bullion and I regret purchasing it when I did. I called it too early 9-12 months ago but I strongly believe we are turning the corner now in terms of Sterling. It is probably a good hedge. But I don’t a see general PM bull market to be upon us for at least 12 months. Perhaps 18 months. I’ve laid out my case for this and I know our timings contrast. I am bullish long term but once the ZeroHedge crew have been flushed out. I cannot understand how it could be possible for any of the commenters on that site to be solvent as most have this ‘stacking’ mentality, no matter what the price. That’s absolute nonsense in my mind. Stackers are nutters. Such a waste of money and misallocation of cash/savings.

      And you’re right about professional investors. They have absolutely no interest in gold right now. They are short selling it. That is my point precisely. Now is not the time.

      1. Mate there is no need to apologise as there was no offence taken and you have as much right as the next person to respecfully express an opinion and I do listen
        😉

      2. The 8 year cycle in gold is not due to bottom until late 2016. Gann’s Master Time Factor (60yr cycle) indicates a low for commodities around 2030. Per gold’s 1980 analog to now a large bear mkt rally should have ocurred. Was 1180 to 1430 it? Big rips up frequently occur on the way down to scare out weak shorts like I think oil did yesterday.

      3. Gold is nothing but a special commodity and natural currency (for other commodities). Its dollar value/price is decided, imho, by three factors: commodities’ dollar value/price as a whole, people’s perception of systematic risks, and real interest/yield of paper money.

        To be short gold, you must believe that commodities’ bear market will continue, that there’s no meaningful systematic risks, and that real interest of paper money will be rising. It’s never easy.

        Market participants, during 2009-2011, once thought the Fed were making all those three factors good to gold. But when people finally realized QE was working, gold price collapsed.

  29. I notice reading various posts that many are expecting
    a sharp reversal next week for equities?.

    Wondered was there any particular reason behind that.

    1. Particular reasons? Are the numerous indicators that John brilliantly displays are not good enough as a reason?

      The markets need a major booster aka Fed meeting plus corporate buybacks in order to stay afloat. The topping process is almost over, so the obvious next step is an imminent decline.

      On a side note, Shmita year starts next Thursday 09/25/14 and runs until 09/13/15. Shmita normally comes and goes with ground breaking events within the financial markets.

  30. I believe we are within 12 months of the top.

    September 3, 2014
    Market bears now scarcer than any time since 1987:
    http://www.cnbc.com/id/101967860#.

    May 21, 1999
    Newsletter Bullishness Runs High, and That’s Troubling Sign for Stocks
    http://articles.latimes.com/1999/may/21/business/fi-39421

    Since discovering John’s site I have assigned the highest probability to 2015 as the top given the current sunspot cycle most resembles the likes of cycle 16. I’ve been in accumulation mode with regard to gold/silver stocks. I’m not sure where that bottom is exactly but we are nearing it. Gold runs about a 6-7 yr cycle. Therefore I anticipate the bottom is within a year for the cycle that began around this time in 2008. I must admit a 3 digit bottom would give the financial media the ability to strike fear into the last of the weak hands.

  31. Hand it to the bulls once again. The trannies are making a huge surge to new all-time highs thus giving confirmation if it holds and other indices follow.
    The DOW on breaking to new highs now has a target of 18k.
    All this while Corporate buy backs and net Corporate debt reach all-time highs and debt levels across every sector of society and the economy reaches truly absurd levels.
    The party continues and there is no way the Fed can end without ushering in a complete collapse……………and thus the market knows it.

    So we go higher until such time as the market decides once and for all that it can take no more.

    http://stockcharts.com/h-sc/ui?s=$TRAN&p=D&b=5&g=0&id=p53511660026

    1. Yes we are off now. 18k Dow will be here soon and then we can reassess the short trade again. Ideally though I prefer for Dow 25k followed by the biggest financial crisis ever taking Dow to 5k. Once a lot of major banks and companies are bankrupted central banks will reassess their policies and we can have a normal market again.

    2. Hi Allan, I’m not long US markets for any fundamental reason as the fundamentals are pointing towards a bear market. John puts this case across in an excellent manner on this site of his. I cannot fault his research. My 12 month investment perspective is rather perverse and irrational. I’m expecting one hell of a bubble. And bubbles as we all know defy logic. There is no rationale. The fundamentals never support the parabolic rises. And they appear to be crazy beyond belief. And everyone can’t get enough, jumps on and gets burned. This latter aspect hasn’t happened yet but it will come I’m sure.

      My case is simply the unfolding geopolitical mess that is worsening in the Eurozone. I’m an international settlements analyst. I’ve performed this role with the Spanish Central Bank and now for the world’s largest oil company. I trade what I see but with some understanding of the fundamentals. I’m an economist by education and what I see in Europe has me a little distressed. The situation for people, businesses and governments is worsening. I honestly believe we are in the calm before the storm. This equity US market won’t rise on company valuations. Or because the US market is necessarily growing. Because actually it isn’t. It’s is slowing down but just much more slowly than everywhere else. I’d go out on a limb to say that the US economy is possibly holding the global economy together right now. But it isn’t going to last much longer. Hence, why I expect the US to vacuum in troubled / distressed capital from elsewhere to act as a safe haven. But possibly more than that. This feels like the end of the 1930s Great Depression to me. It will go on longer than people realise but the eventual crash will be horrendous. But not before a parabolic rise in equities. And I’m not talking just once sector like the Nasdaq. I suspect the entire S&P index could rise enormously from here.

      I’m awaiting the hysteria. We haven’t had anything like the 2000 Nasdaq bubble euphoria yet. This has been subdued but this time next year could be very different. A correction here would be healthy and then I would expect markets to motor on. A crash would rule my scenario out completely. Whenever this crash does happen, this year or next, I’d quite like to be on an island in the middle of the Pacific!!! 😉

      1. Hi, again Jonhatan, yes US$ is bullish from 2007 to the end 2015-beg16. If you see the EURUSD my target is 1:1.

        Is a well known pattern and is on motion:

        http://foros.estrategiasdeinversion.com/foro/foros-de-bolsa/1119492/eurusd/

        You said you don´t see euphoria, but for example Invst. Intell. pool is very clear;I don´t know if sep´14 will be the top as explained in Twitter o in forosdebolsa.com(cocacola), but likely is not so far from here.

        No matter if DJI reaches 17.5 or 18K, don´t know that extreme, but be long here, after +200% revaluation in most US indices and with extreme indicators pointing out, it is risk factor for me.

        If they prolong this top, as they did since oct´12, I bet the plunge would be colossal.

        Best regards

        @apanalis

      2. ¡Antonio! Que tal éstas?

        Yes I am targeting parity (1:1) for EUR/USD, similar to you. I also think Pound Sterling will suffer a similar fate and 1:1 against the US Dollar isn’t out of the question by the end of 2015.

        I am layering into a US equity position but I want to see how September unfolds and see how the first two weeks of October take shape before adding any more. But I simply can’t see central banks removing the underpinning of these markets yet. Central banks are buying these markets and sovereign wealth fund participation is increasing month on month. How else do governments keep control of all these unfunded liabilities…. healthcare, pensions, unemployment benefit etc? Stock markets! Interesting times ahead.

  32. The higher dollar is in response to anticpated higher rates. Oh wait a sec? …..The market is higher because the Fed are going to confirm that rates will stay on hold right through 2015 into 2016……….um wait a sec??

    That is an indication just how schizophrenic this market is.

  33. sorry to be absent –

    STOCKCHARTS DELETEDE ALL MY CHARTS and WILL NOT RESPOND TO MY SERVICE REQUESTS

    ASSH–es!

    Does anyone know of a paid alternative to stockcharts that allows annotations and ratio charting???

    by the way – NO confirm on my systems of a buy or continuation of trend yet…

  34. I wanted to chime in and thank Jonathan for his talented perspective laid out in his posts. JS; you sounds like a transparent Armstrong with a good global overview and w/o having an axe to grind. (:-)

    1. I regard oil the same as precious metals, particularly silver. Soft prices over the next 6-12 months then higher next year and into the end of 2016. Lower prices at the moment are mainly due to the 25% over ramp of the normal capacity here in KSA. This over supply had been for international export, presumably to calm global markets. This will be cut back soon even though KSA can easily accommodate the lower prices. Other oil nations need a substantially higher oil price in order to remain profitable. I don’t need to take this point any further. This current price action will be hurting.

      There is plenty of oil supply for 2014, going into 2015. Demand is also down.

  35. Everyone looks at things via their own “looking glass” – and thats fair enough.

    A strong USD moving forward is 100% out of the question for a myriad of reasons, and the dollar index is hardly “taking off”.

    There has never been a time in history where as many negatives have been stacked against USD, and the worlds reserve currency has changed every 100 years or so regardless.

    The blatant “abuse” of this privilege ( being the worlds reserve ) by The Fed and U.S Gov will not be tolerated much longer, as the move away from USD related trade continues to take shape.

    It will likely “be” the Saudi’s that break the camels back when we see them move closer to the East ( Russia and China ) in the medium term future.

    I am 100% on the opposite side of the trade as Jonathan – currently short USD ( as of last night )

    1. You’re right Forex Kong. The abuse won’t be tolerated much longer and I am in complete agreement with you. The Dollar breakdown just simply won’t be tomorrow, or next week. But not too long in the future. Not long at all.

      And you are right about what you state in your second to last paragraph. I just cannot comment on it at this moment in time as I’m sure you’ll understand. Timing, Forex King. Timing.

      I guess we make a market. You short. Me long. Should be interesting. All the best.

      1. COT data is worthless as it’s “looking backwards” but yes obviously…..USD is as overbought as it’s been in years as it continues to rise along side US Equities.

        When it goes…..they both go.

  36. Love Jonathan’s second perspective, even it is largely contrasted to John Hampson’s views. Very healthy discussion for one of the best discussion boards around. I respectfully disagree with 90% of what Jonathan says. John Hampson and Forest Kong’s scenario is playing out, slowly but surely in my opinion.

    1. Thank you. And I mean no disrespect to anyone either. I’m just trying to bring something else to the table. My professional work centres on currency movements and transactions. I regards precious metals as monetary metals too, therefore a form of currency. Many will disagree but it’s my view. My employer has accepted gold as payment on occasions in the past believe it or not. Arabs won’t be fooled! Therefore I trade PMs accordingly. I don’t trade oil but I regard it as a similar commodity to silver. They tend to be quite correlated from the research I’ve carried out. Again this is a personal opinion.

      As for the stock markets, I’m no expert. This is simply a hunch and I wouldn’t be surprised if markets crash and I’m proven to completely wrong. Im trying to make the linkages here just like anyone else. I’m basing it solely on what I see from a currency perspective. Assets will be safer than cash. So stock markets and US property will rise in value. But why the US?

      I’m a little perturbed from what I witnessed during my time working in Madrid. Much of the FED QE was exported, and intentionally so, into Europe and European debt was being collateralised in US Dollars. I mean, debt was sold in US Dollars, and not Euros. This will end up being catastrophic for the Eurozone as they’ll never be able to pay it back. Not that I feel there is ever any intention to do so anyway. In effect, the US have exported inflation and instability to the periphery and this is the reason the EuroZone will fall. Those Dollars are akin to a poison Boomerang. It will end up back on US soil very soon and really hurt America. But everywhere else will have contracted the ‘cancer’ first, especially Europe. It is the route the Dollar has taken through the global economy over the last six years that will drive its value up. It’s abusive, it’s dangerous, and very reckless. But it’s what I’m seeing unfolding.

      All the best.

      1. Forex King made a good point. Trading currencies is all about the dynamics of the two currencies in each pair. You can have a sick currency but if the other one is sicker, you’ll catch a trend. It’s all relative. Survival of the fittest as it’s likely going to be a race to the bottom. You just need to identify the healthiest horse at the glue factory. I don’t care for example if the Aussie Dollar is stronger than the US Dollar as I have no position. The Euro is a different matter for me. I guess you trade your edge, as John and many of you do.

        But regardless, forex influences the stock markets. We just have to figure out which way they go. And that’s the toughest part. Best of luck to everyone and good fortune! It’s going to be a very interesting 12-18 months I feel.

      2. Jonathan, it appears we share the same view on PMs. Funny how folks argue the point but they are always listed alongside forex quotes. I also share the viewpoint that stocks can run for another year (based on solar cycle analogs mentioned earlier), although not a manic run, def a double top on the nasdaq is within sight. I also think PMs will bottom within the next 12 months as well. What I couldn’t gather exactly from your posts is what is your opinion on the timing? Some posts suggested 1-2 years and some 5 years out.

      3. Hi Joseph,

        As I’m sure you can appreciate, my posts have jumped from a US Dollar perspective being an oil industry-remunerated worker, and Pound Sterling as I’m British therefore have some UK assets. Therefore I have different timeframes based on the currency base.

        Precious metals in US Dollars:
        – I see them bottoming in 6-9 months. By March 2015 possibly.
        – I don’t see the bull market really gathering speed until 2016 as this is when I see the US Dollar becoming really overbought. But I think PMs will rise into the final Dollar ascent together. But prices should at least start rising in the latter part of 2015.

        Precious metals in Sterling / Euros:
        – I think PMs are bottoming now nominally. The bottoming process may continue into the end 2014.
        – PM bull market from March 2015 onwards. This is nominal as I’m targeting large declines for Sterling and Euro. Prices to rise into early 2016.

        *I have purchased silver bullion in Pound Sterling only.*

        I think the US Dollar bull market has started and yes, we may have a small correction before going any higher. But much higher I feel we will go.

        US stocks – the final destination for the rising dollar. It’s my experiment trade. With a dollar that will one day meet it’s demise, tangible assets will become the only game in town. Precious metals, property, equities, bottles of single malt etc 😉
        I think we could possibly have a small equity correction then see the Dow and S&P break out into the end of this year. I expect 2015 to be very bullish as the Dollar is bought up and exchanged for tangibles.

      4. Thanks for sharing.

        Speaking of whiskey, my personal fav Jameson has rocketed in price yoy, $47 to $57 for the 12 year and $90 to $109 for the 18 year.

    1. Markets flying as expected. Let the dreamworld continue. Who knows it might finish negative but a new high finish does the bear scenario quite some harm. Will need to see how the markets finish the rest of the week.

      1. Red is the color of Ms. Yellen’s heart
        in the mornin
        when she lies
        in the mornin
        we’ll all cry

        red is the tape
        as the market makers rape
        all the dippers
        blindly bent
        before Ms. Yellen
        when she lies

  37. Currencies lead – no matter what ( as you can’t buy an asset without it right?)

    In this case….USD from Fed printing has just been sitting in bank reserves while JPY printing has been converted to USD to pump markets.

    The trade is clearly “long JPY” when the fall comes and USD will fall along side U.S Equities…and in my view….along sidew ALL things American, as bonds have already topped.

    1. Thanks buddy, def no velocity in the dollar as of yet. Confirms my thinking that the dollar leads as well, thus my shorting the dollar initially and long gold which is sending some very reliable signals.
      Have hesitated shorting equities but will look for another opportunity once this rally runs out of steam. Hopefully by early Oct.

      Great to have your input in gives me much clearer idea on the set-up in FOREX mkts.

    2. Forex Kong,

      This is only my word but I 100% promise you that USD From FED printing has not solely been sitting in bank reserves. This is the point I’m trying to drive home. The Dollars are abroad and they are wreaking carnage.

      Those Dollars were tunnelled into the EuroZone where they supported a number of ‘distress projects’. US dollars were used to collateralise Greek sovereign debt, Portuguese sovereign debt, the catastrophic Spanish banks and the Bankia merger, stabilise and Serbia and Slovenia, then to underpin French banks more recently.

      Research Belgium and the role it has played for 4 years. Middle man.

      1. I completely disagree as yes Belgium as served as a “surrogate buyer” of U.S bonds sure…but as I understand……something like 80% of Fed toilet paper currently sits in the “partner ponzi players” accounts on Wall St.

        Japan has done the heave lifting in boosting this “illusion of wealth” seen in U.S Equities parabolid rise.

      2. Jonathan, I doubled my USD long position by 1 pm EST. It works well so far. Thanks for your comments.

        Can you please explain why you are so bearish on Sterling? Frankly, I’m bullish on Sterling. I think it’s even better than USD. So I’m very curious to know your reasoning from a British citizen’s perspective. It’s possible that you have a “homeland bias”, because you are too familiar with the country.

  38. Elvis, I’m assuming your system is now indicating a
    directional change in equities, the bulls have it.

    Yesterday’s powerful reversal was a large clue.

    1. the system user Stowell’s bull/bear power and 13 ema with small caps – NO CONFIRM YET

      look at IWM on an elder chart

      read THIS CAREFULLY http://www.docin.com/p-273918909.html page 24
      “The Powertool Strategy”

      many feathers in bull cap but no confirmation of resumption of an UP TREND – possible to be sure but…wait for it, wait for it!

      stop feeling your way around in the dark and trade objectively! lol –

  39. READ MY LIPS!

    no confirm!!!!!

    roflmao!

    bow down to YELLEN

    BOW DOWN TO YELLEN!

    BOW DOWN TO NARRATIVE FICTIONS OF ALL KINDS!

    lol

  40. Add one more point to your analysis John…as they are manufacturing for other countries and exporting, the demand for their manufacturing resources (hence commodity drop) also declines. Even if China had a billion extra youth and demographics were a non issue right now, they face a hard lending to to collective demographic headwinds from Europe, Russia, and North America.

  41. Joseph – just as well you’re not in austerity-crippled Ireland. Jameson 12YO is $83 and 18YO is $171 at today’s exchange rate.

      1. Apologies, I will have to back-pedal on both of those SSes as, having rechecked, the pair of them closed a smidgeon above the mid-point of the daily range.

  42. EURUSD tanking to a new low off the FOMC, even if the USD is very overbought (outside both Bollies on the weekly, heavy warning for a reversal).

    Curiously, given the vote tomorrow, GBPUSD showing strength and has not followed suit so far…

    1. Can’t agree with Bunell more. The setup today was perfect to lure the last wave of buyers in for the minor sell-off before close. Tomorrow is an important swing day, which defines the market direction for the rest of Sep.

  43. Elvis, the price action comment providing a clue
    was not aimed at you, it was a general comment only
    based on yesterday’s sharp reversal.

  44. Brilliant debate tonight …. Thanks Jonathan and Kong for some great points on USD. I havent ventured much into currencies myself so this is great for a novice. Keep up the great posts.

    Jonathan – just a point i would make is that becoming all out bullish would negate the multiple indicators that John has published. Trust me I have been bullish recently on Equities but I dont like what im seeing next year. Not saying it wont be bullish just saying technicals are not supporting it – at least from my perspective.

    1. Duncan,

      I’m not going to post here too often going forward as I don’t want to undermine John’s work. I’m not here to troll or rock the boat. I read this site daily and I agree with John’s work completely and 99% of the time the market would be collapsing. However, I have laid out my case for what I see happening. I am simply following the money – it’s a parasite (the US Dollar) chewing up Europe and getting stronger and more reckless as it travels the rest of the globe. I’m trading against multiple sovereign debt crises that are on the horizon. I feel these will far outweigh market fundamentals, thus I see a bubble emerging. It will all in in tears one day but the Dollar is the only game in town right now. And despite not being a committed stock trader, I feel equities will break out and that we could see something that makes 2000 look like a picnic in the park. I refer to the euphoria during the rise and the devastation of the collapse. But the Dollar bull I am seeing will have to be ‘parked’ somewhere. It will not remain liquid. Tangibles will be the honey poy.

      The Dollar is the main event. And Sterling, Euro and a basket of currencies globally will pay a heavy price. Even those down under. We are seeing gold being decimated down as we write, read, and review these posts on John’s brilliant site. Why fight the trend? Being contrarian is great but trends can be very powerful and rip the shirt off your back. I’ve been a Dollar contrarian for almost two years now and I feel this is my time. Time will tell.

  45. Scotland vote for independence

    China gold futures exchange with actual metal

    Audit the fed

    All happening at once

    Anybody expecting the world to remain the same is going to lose

    We have definitively reached peak central banking

    I love it

  46. The bears HATE this market, keep trying to get the top, but FED keep injecting money, just not so much as they were before. We are still going up. This is one scary chart.

    Check out this scary chart ===> http://bit.ly/1fMcakI

    Basically the way you look at this, it means, we keep going up on the market, every time there is an injection of money by teh fed. Do you love it? can you smell the top? welll…. I dunno, but if you are smelling something, it smell like more verbal diareha about the fed, and how they are ramping this market, before the death crash like 2008 is coming.

    Remember how everyone got tricked into that con job. The market goes andn crashes every 7 years from 2000 so that means things will get very interesting in the next sevearl years.

  47. Bunell and erick, brave call to both expect a big down day today
    given the DJT yesterday, see what happens as the day develops.

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