Velocity, Yields, Inflation, Growth And Commodities

Posted on April 18, 2013April 18, 2013 Posted in Bonds, Commodities, Indicators, Inflation, Macro, Solar Cycles, Stocks39 Comments

I maintain the late 1940s is our closest historical mirror, as per this chart:

Then, as now, they had a problem with money velocity. But it reversed course and took off as of 1946.

Source: Hoisington

Yields also reversed course as of 1946.

Source: Milton Friedman

As per my last post on money velocity, there is a historical relationship between the two. Here we see it clearly:

Source: BNVInsight

Essentially, expectations of rates, inflation and growth determine the path of yields and velocity. In 1945, like now, there were very low expectations in these three areas due to excessive post-war government debt, government controls and growth that would not stick. But then in 1946 yields and velocity began to increase and inflation took off and peaked in 1947. The picture changed.

In my recent post on money velocity I showed a selection of charts that show a current potential bottoming out of both velocity and yields, though only tentative at this stage. If this is the case, then we could also be set to see inflation take off and potentially reach a peak within a year in line with the historical mirror. If the solar peak is ahead later in 2013, this is a very good fit with 1947 which was also a solar maximum.

Here are 5 year treasury yields versus core inflation (excludes food and energy). We can see yields are overdue a catch up. Money is parked in bonds paying a negative real return. The divergence captures a lag in belief and sentiment that is overdue a reversal.

Source: Scott Grannis

Yes the Fed is manipulating this market, but it is not the difference since 2011 – it was doing this before. Rather it is the mired perception of unsustainable growth. However, since mid-2012 we have seen a sustained positive picture in leading indicators that still persists at the time of writing. Unless leading indicators turn down again sharply soon, then I give good odds to a belated change in perception, a belief in growth, that should generate an upturn in yields, velocity and inflation.

What would that mean for commodities and stocks? Using the late 1940s historical mirror, we can see that commodities were the beneficiary, with corn and copper charted here:

Both accelerated as of the turn up in yields and velocity of 1946, and had made the bulk of their parabolic rises within a year. Oats and wheat performed similarly, crude oil escalated in price by 50% from 1946 to 1947, and the CCI index as a whole made its peak by late 1947.

If we turn to the Dow-gold ratio, we can see that by 1947 the ratio was already in an uptrend, because stocks had been on a tear, much like now.

Source: Macrotrends

Here is the Dow Jones chart from the period in question:

Source: Stockcharts

Stocks rose fairly steeply into a 1946 peak. That stocks perform well in an environment of low rates and low growth was in evidence then, as it has been into 2013. In 1946 stocks made a pullback and then traded sideways, before the secular stocks bull momentum ‘go’ point as of 1949. So whilst stocks consolidated around 1947, commodities esclatated.

But let’s not get too carried away with the historical rhyme. Back in 1946 in the US, price controls, that had been implemented during the world war, were lifted, which along with weather-related bad harvests, helped drive up commodity prices. There are no such price controls today. The government also abolished the buying rate it had set for treasury bills, which helped free yields. In short, the government took several measures at the time to reduce its controls over the economy. Clearly there is a chime with today: the US government has supressed yields and taken controls over the economy in terms of ZIRP and QE and other policy actions. What we do not yet see is the relinquishing of such controls. However, if the US government were to announce it was stepping back from QE or eyeing an end to zero interest rates in the future, then this could have the same effect as in 1946 of yields rising, which would be accompanied by velocity, and inflation could then logically follow. Perhaps then an end to QE would not be a nail in the coffin for gold, but the opposite.

What 1946/7 and 2012/13 do have in common is the solar maximum. If you subscribe to the theory that sunspots drive human excitement and this manifests itself as speculation, buying and inflation, then we have another angle. This alone should encourage money velocity, bullish policy actions, and drive money into pro-risk.

Now if you don’t buy into the solar idea, or maybe the solar maximum passed already in Feb 2012, and you don’t buy into the historical correlation with the late 1940s either, the we nonetheless still have an unsustainable situation of negative real rates and yields, and money supply and velocity at opposite historical extremes. Unless the system is broken, then at some point growth is going to stick and accelerate, and these extremes will mean revert. Is it broken? Is the US the new Japan? Unable going forward to get growth and inflation to entrench? As it is by far the largest contributor to world GDP, this would be felt globally for some time. Well, the US was keen to avoid Japan’s errors, i.e. being slow to react to deflation until it was set in. It was aggressive in response to the 2008 crisis. We also have an exponential trend in technological evolution, which at an even faster rate of paradigm shifts going forward, should be the fuel for a new secular stocks bull. The US remains a world leader in technology. Plus, through natural gas disoveries and shale oil the US has its own ample energy resources again to power growth, which Japan lacked. So time will tell, but there are reasons to believe that the US can make a normal transition into a new K-spring, and so likewise the global economy.

I suggest the natural cleansing cycle, a regular secular bear, a K-winter, has worked through within normal parameters, and we are in the realm of a secular transition. Unless you do believe the system / the US is broken, then a new cycle of growth should be emerging, and yields and velocity should be undergoing a reversal. As that occurs, it would be normal to see the fresh circulating of the parked money bring about inflation, and for commodities to enjoy another leg up. If you draw in solar cycles (assuming the solar max is ahead not behind) and the 1946/7 historical mirror to this, then the prediction is refined further: we should see stocks pull back and give way to commodities outperforming, for yields and velocity and inflaton to rise up, all around now. The Dow-gold ratio having bottomed should not be the death knell for gold, but instead reflects the environment being positive for equities as it was into 1946, and such a pullback on equities (as occurred then) would be a buying opportunity for a forthcoming momentum ‘go’ point in stocks.

In the worst case scenario, the current status quo would persist for some years longer. Yields and rates and velocity would remain trapped at ultra low levels as sustained, entrenched growth remains elusive. Therefore, I continue to watch leading indicators closely. I believe that if they can remain positive and healthy into mid-2013 then we would have a long enough run behind us to change perception, and this should inspire the moves I am imagining.

State Of The Markets

Posted on April 17, 2013April 17, 2013 Posted in Bonds, Commodities, Currencies, Indicators, Macro, Solar Cycles, Stocks50 Comments

Starting with leading indicators, the latest Conference Board table is a sea of green:

Source: Conference Board

Global money supply suggests a flattening out of industrial output in mid-year, but at good growth levels:

Source: Moneymovesmarkets

US leading indicators remain positive:

Source: Dshort/ECRI

In short, the global picture looking out on the horizon is good.

However, with coincident data, things look different. Economic surprises have tumbled of late:

Source: Brokenmarkets

If we look at relations between the CCI commodities index, the MSCI World stock index and major economy economic surprises, then we see they generally move together, but typically economic surprises lead the turn:

Underlying source: Brokenmarkets

What is notable is that equities have diverged over the last 6 months, whilst relative weakness in commodities has been more in line with the trend in economic surprises. It suggests equities may be overdue a correction.

If we aggregate 10 year treasury yields, Euro-USD, the CCI Commodities and MSCI World Equities indices, then the collective trend changes over the last 12 months appear like this:

Source: Bloomberg

We see a notable downtrend in pro-risk since the start of February but with equities diverging. To be specific, it is the US and Japanese stock indices that have diverged, as we see corrections more clearly over the last couple of months in the Hang Seng, STI, Dax, FTSE. And a result of outperformance in US and Japanese stocks is more expensive valuations, with both now having p/es of around 17 (compared to the other country indices listed which are between 11 and 14 p/e). So are US and Japanese stocks due a period of underperformance, a belated correction? Or do the two biggest QE programmes in the world make for a difference that will endure until those policies are reigned in?

There is a potential topping pattern in the Dow Jones currently, as shown by the historical mirror below:

Source: HubertMoolman

The overthrow out of the wedge could be reversed. Monday’s action – when gold toppled 10% – added to the likelihood of this topping pattern. However, yesterday we saw a partial retrace. The trend in economic surprises suggests they are overdue a proper pullback, however on the flip side the geomagnetism trend has resumed upwards. If I remove lunar phasing and show the short term geomagnetic trend only versus the SP500 it looks like this:

A correction has given way to a new uptrend which currently extends out to mid-May. This could imply that the pro-risk chart aggregate above is due a turn into a new uptrend, in line.

If equities were to make a proper pullback, then the question is whether commodities would outperform, as they historically tend to as late cyclicals. Below we see this occurring in both 2000 and 2008.

There is a distinct gap between stocks and commodities formed over the last 12 months. If there remains a secular bull in commodities, then we should see that close again and commodities to perform well despite a pullback in equities. On the other hand, if the secular bull in commodities is over, then we should see that divergence continue. The CCI commodities index remains tantalisingly in a triangle, as shown:

Source MRCI

The breakdown in precious metals has pulled it to the support line, which makes the next move in commodities the key.

So imagine commodities made their secular peak in 2011 and the sharp breakdown in gold is to be followed by general steep commodity falls that take the CCI into a breakdown. Resource stocks would get hit hard, and we would see a pullback in equities accordingly. Equities would fall, commodities would fall harder, treasuries would be a likely beneficiary. However, I can’t square this scenario with the positive picture in leading indicators. Unless we see a rapid deterioration in the general picture of growth ahead then I see it as more likely that commodities will hold up, and at worse continue to build out the triangle sideways. To add to this, from my recent post on money velocity, we see a potential bottoming out in progress in money velocity and treasury yields, that I suggest could have begun in 2012. We similarly see a potential bottoming out in UK gilt and Geman bund yields below, as of mid-2012:

Source: Fxthoughts

If the wall of parked money begins to circulate a little in the economy, based on a more entrenched picture of growth, then we ought to see a pick up in pro-risk asset inflation and a pick up in price inflation. So I continue to watch leading indicators for evidence that growth is becoming entrenched or for evidence that we are cycling down into danger again, to be met by another central bank response. Right now the evidence is for the former, and so I have my doubts that the commodities secular bull is quite over. Below we see the secular bull progression in commodities since around 2000, in terms of relative expensiveness versus other assets:

Source: Nowandfutures

It is clear that there has been a large relative repricing of commodities in that period, but it is also clear by the various measures that we have not seen levels reached in the 10s, 40s or 70s. That said, we saw a much more extended repricing of equities into 2000. So my question would be: has the exponential rate of technological evolution brought about a change whereby we see future Dow-gold ratio tops and bottoms at ever higher levels (as human progress is captured in equities)? Or is this offset by increasing scarcity of commodities and increasing demand (more humans chasing fewer resources), which means the secular commodities bull still has work to be done to drag those ratios to normal historic levels?

Below we see the Dow-gold ratio and the author (not me) questions whether what we just saw in gold was the equivalent of a 1987 event for stocks, namely a crash that appeared to spell the end of the bull market in stocks and a breakout for gold, but was swiftly reversed.

Source: Goldversuspaper

If that is so, then we should see buyers step back in on precious metals and retake the breakdown level of 1550 in due course.

A look at gold monthly in log scale shows the crash so far like this:

As things stand this is a correction that does not violate the secular bull market. UBS echo Chris Puplava’s view that the correction in gold will turn out the start of a new up phase:

Source: UBS

And a reminder of real yields globally is still a positive environment for gold:

However, I maintain the picture for gold – and commodities – is very much in the balance. As you know I can write a broad-based case for commodities having peaked in 2011, aligned with a sunspot maximum in 2012, as well as a broad-based case for the secular commodities peak being ahead, in line with a sunspot maximum in late 2013. The breakdown in gold adds weight to the former. Piece by piece we will see the clear winner, and right now I look to see if buyers step in on gold to reveal a weak-hand shake-out whilst retaining its log support and whether commodities attract interest here to prevent a CCI breakdown. Sunspots have picked up, but not to new highs, and so it remains in the balance as to whether the solar maximum was in Feb 2012 or is ahead.

If gold did make its secular peak in 2011, then we could point to similar technical shaping at the end of the last secular bull:

Since that chart was produced, gold dropped to a low of 1320, which would be equivalent to around 350 in 1981. Looking at what happened next in the 1980s, gold was then not far off a bounce, which retraced half the falls before failing again.

In summary, I still think it remains in the balance as to whether the secular bull market in commodities and gold is still in play and has one final (biggest) leg up still to come. Since selling my stock indices longs, my positions consist of short treasuries, long multiple commodities, and long gold, silver and gold miners. I doubled up on these last three into the sharp falls. My exposure is significant, and it is going to get expensive if the secular bull market is over and more falls are ahead. However, if this was the last correction before a bull market finale, then those positions would conversely turn out highly profitable. It’s a risky business, but I am leaning towards staying put and watching developments for further clues, rather than lightening up.

Money Velocity

Posted on April 8, 2013April 8, 2013 Posted in Bonds, Commodities, Indicators, Macro, Solar Cycles14 Comments

The Fed, BOE and BOJ have all been busy creating money out of thin air to make purchases in the bond market. The institutions selling the bonds then have new money in their accounts and so this produces an increase in the money supply. The intention is to stimulate the economy by increasing the money supply, once interest rate cuts have been exhausted. The ECB has this kind of direct action on standby. The BOJ has just doubled its purchases. The result of these policies is that we have seen a large and unprecedented increase in the world’s money supply over the last few years:

Source: Maomoney-maoproblems

As more money chases the same amount of goods and services, this clearly has the potential for massive inflation. Yet, so far, the banks and institutions have largely sat on their increased reserves. The new money is parked, rather than circulating in the economy. This shows the lack of confidence in growth and a persistence of fear. So the increase in the money supply has been offset by a lack of money velocity. Here are money velocity charts for Japan, the Eurozone and the US, in order:

Source: Nowandfutures

On the US chart, which is longer term, we see the same long term cycling in money velocity as in treasury yields: This perhaps makes sense as money velocity would tend to be lower when money is being parked into treasury bonds in an enduring trend, and vice versa. So, are we going to see money velocity about to turn upwards, at the same time as treasuries starting a new long term bear market? Certainly, with treasury bonds up to 20 years in duration paying negative real returns (using official CPI), the potential is there. Purchasers of treasuries are buying something offering a guaranteed loss, and the main reason for that is capital preservation: they expect equities, real estate and commodities to do worse. If confidence is restored in growth and pro-risk assets then we could expect a significant reversal in money flows, out of bonds. Aggregating the US money velocity measures and zooming in on the last few years we see have seen a gradual flattening out, which raises the potential this could begin to rise in 2013: By my solar cycles work, this is indeed what should occur. Growthflation, money bidding up the secular pro-risk asset into a peak, money reversing out of treasury bonds. But we need to see velocity start to pick up, rather than flatline. If we look back at our closest historical mirror, 1947, then in the US longer term velocity chart further up we can see that velocity just reversed out of its downtrend with about a year to go before the solar/secular commodities peak. Treasury bonds also topped around a year before the solar peak, which confirms the correlation between the bonds and velocity. So, with the solar peak expected around Fall / Autumn 2013, did treasury bonds top out and yields bottom some time last year? They potentially did, subject to where they go from here:

Source: stockcharts

And using the money multiplier measure of velocity, we also see potential this bottomed too:

Source: St Louis Fed

Now let’s say I’m wrong about the solar maximum correlation. Unless you believe the system is broken and/or not cleansed in the cleansing cycle since 2000, then a natural cycle of growth should still take hold at some point – only the timing would differ. Once the entrenched growth becomes clear then the wall of money will be rapidly tempted out of cash reserves and bonds as it remains that they are paying negative real returns. Unless central banks then very swiftly neutralise all the new money and the easy conditions – and with history as our guide this is unlikely – then there is a high risk of major inflation in the prices of goods and in pro-risk assets. If we get such an inflationary episode, we should see the feedback looping with commodities (as hard asset inflation hedges) to deliver the secular parabolic finale that I anticipate. The alternative scenarios would be these. One, we continue to only muster low and spotty growth, nothing entrenched or sustained, which keeps the wall of money largely parked, central banks on the accelerator, and stocks gently rising. Two, all the central bank interference has prevented the cleansing cycle from doing its work, and we need a big deflationary episode before any genuine growth can be mustered. I don’t rate either of these scenarios as likely. I believe we have seen a normal cleansing cycle, with equities and real estate valuation sufficiently washed out, and private sector balance sheets significantly repaired (public sector clearly not – but it is the private sector that is the engine of growth – and public debt should not reach crunch point in the major economies until later this century on current trends). Plus the cleansing cycle has been of normal duration and characteristics. The central bank action did not succeed in restoring natural growth in this period – the cycle was king – but rather their actions are likely to supercharge what happens next. With history as our guide, it is likely that central banks will be behind the curve as inflation and speculation rapidly escalate, and with little appetite to reverse or neutralise all the new money supply. Bring back in my solar cycling theory, and we are primed for that to occur 2013 into 2014, before excessive commodity prices and belated central bank tightening tip us into a global recession again. If leading economic indicators start to turn down again, then central banks are likely to respond again, with yet more stimulus. Perhaps the ECB would join the QEers. But another cycle of indicators and asset prices falling over the next few months would start to stretch the solar timing. So I’m keen to see if the current growth is the one that sticks, and that leading indicators stay in the positive. The next chart suggests that this may be so:

Source: Moneymovesmarkets

The leading indicator of leading indicator has just lately strengthened again instead of tumbling. If the growth can stick here, then I expect the rest to fall into place: money flows out of treasury bonds, money velocity to pick up, commodity price escalation and inflation, and all to the timing of the solar maximum. Here’s a final chart that may be predicting this:

Source: Nowandfutures

In The Balance

Posted on April 4, 2013 Posted in Bonds, Commodities, Currencies, Indicators, Inflation, Macro, Real Estate, Solar Cycles, Stocks51 Comments

Time for an updated look at the big picture: is a secular commodities peak ahead or behind us?

Here is the equally weighted commodities index. It remains in the nose of a large triangle. A decisive break down through the twin supports will add weight to a secular commodities peak having already occurred in 2011, whereas an upwards break beyond down sloping resistance will add weight to a secular bull still in tact.

Source: MCRI

By solar/secular history, a secular commodities peak normally occurs around or closely following a solar maximum. However, that too remains in the balance as shown by the alternate predictions in the SIDC chart below – either a solar peak occurred at the turn of 2012 or a solar peak is ahead later this year.

Source: SIDC

The most common consensus remains that the solar peak is rather ahead than behind us, with the median forecast for Autumn/Fall 2013. Planetary models predict a spike in sunspot action around Sept/Oct 2013 and some physicists also predict a burst in activity later this year, which would fulfil the NOAA red line prediction below:

However, until such a flurry is seen, it remains unresolved.

Danny challenged the 33 year secular commodities peak and solar peak correlation with this chart:

It is an ultra long term modelling of commodity prices, to which I have added the markers to show when the industrial revolution began and when the gold standard was abolished. It can be seen that the correlation in solar peaks and commodities peaks largely failed prior to the industrial revolution. Understand that prior to this time there were only localised markets for commodities, little storage, and almost nothing in the way of demand and supply matching. Farmers tended to grow their usual crop, bring it to market, get the best price they could for it, and anything unsold went to waste. For a natural cycle that influences collective human behaviour to manifest itself, I suggest optimum conditions are instant, globalised, free markets, like we have in the current day and age. In pre-revolution conditions, it would have been impossible to draw out real cycles from slow, localised, restricted and fragmented markets. I don’t see that part of the chart as valid therefore. See also below how the solar/secular oscillation in the Dow-gold ratio became pronounced after the freeing of gold and paper:

Source: Sharelynx

So, returning to the ultra long term commodities price chart above, we see an broken success rate (as shown by the circles) in the fiat era and between the industrial revolution and fiat era two successes and a potential inversion or double failure. However we classify that anomaly, such a failure could potentially reoccur in the future – unless it was the result of a non-free, slow, localised era. But a failure amongst a majority of successes would be in line with all other ‘real’ trading disciplines, i.e. there is no holy grail, nothing that works all the time, just things that work most of the time. To sum up, the solar peak is probably ahead, and the secular commodities peak is probably ahead in line with that.

Turning to climate and agricultural commodities, are we going to see another year of extreme temperatures and natural disasters, which would drive up commodity prices? The next chart reveals that the last two years have not been as severe as a cluster before that. However, they were both La Nina years, which has a cooling effect.

Source: NOAA

This year, a largely neutral year is expected (no dominance of La Nina – or El Nino either) so there is the potential for a bigger bar – unless the long term trend is now reversing.

Global warming is one factor, global wierding (rate of natural disasters) another, and in the US, drought conditions at the start of 2013 are displaying patterns that could unfold into the equivalent of the worst drought years in history. Grains took a big hit in price this last week due to higher than expected plantings and stockpiles, but there remains the potential that climate developments could drive agricultural commodities higher again in the remainder of the year.

Rising commodity prices and inflation together make a mutually reinforcing feedback loop. Escalating commodity prices drive up inflation and escalating inflation attracts money into commodities as an inflation hedge. So how do inflation expectations look, aside any climate developments? The next chart shows expectations have been on the rise since Q3 2012, with a divergence in gold that we might expect will be rectified:

Source: M Boesler

If gold is not to make up that ground, then we might expect inflation expectations to fall instead – i.e. a period of deflation would be ahead.

Turning to valuations, gold is historically expensive here versus stocks and real estate, but could yet become more extreme expensive before reversing.

Source: Fred

Source: Approximity

All 3 charts reveal gold’s meteoric relative rise in price to stocks and real estate since 2000. The question is, does it have a parabolic finale yet to come in which it reaches the obvious zones, or is going to stop short and is already in relative decline?

If gold has already made its secular top (in 2011), then we would expect stocks to be now in a new secular bull. So did stocks wash out sufficiently, in terms of price/earnings and price/book valuations, to make it likely the secular bear is over? So far in the secular bear, the FTSE reached a p/e of 7, the Dax 9, the Hang Seng 8, the SP500 and Dow 9. The Nikkei only reached 13, but it made a p/b ratio of under 1. Broadly speaking, they are all low enough to satisfy secular bear cleansing, and we can add to that the extreme low p/es reached in the PIIGS at the height of the Eurozone crisis. If we look at other valuation measures in relation to the SP500 then we get a different picture:

Source: Dshort

These four valuations combined suggest the secular bear has not washed through sufficiently, and that current valuations are closer to a top than a bottom. However, we ought to note the much higher top in 2000 and question whether central bank policies of unprecedented easing and stimulus have dragged all these measures permanently higher.

US indices aside, we have reasonable evidence from around the world that secular cleansing could be largely complete in terms of valuations reached at the bottom of the falls in 2011. Plus this year we have what appears to be a new secular bull break out in the Japanese indices.

What about treasuries? This secular transition should also be accompanied by a secular transition in treasuries from a long term bull market to a new long term bear. Did treauries top – and yields bottom – in 2012? It remains to be seen as it is currently too technically ambiguous to say with confidence.

Source: Stockcharts

Using history as our guide, if a secular commodities peak is ahead later this year (and potentially into H1 2014), then we should see a topping process in equities by around mid-year whilst commodities take over as the outperforming class. A feedback looping between inflation and commodities should occur, until too expensive commodity prices and tightening yields help push the economy into recession. That recession should be fairly mild, with stocks making a shallow bear market, whilst commodities plunge harder, in the mirror of their preceding parabolic escalation. The bottom of that shallow stocks bear would be the momentum ‘go’ point for the new secular stocks bull.

Alternatively, if a secular commodities peak already occurred in 2011, then secular bull momentum in stocks should already be underway, and we might point to action in the Nikkei or SP500 in 2013 as supporting evidence. The recession that should follow the secular commodities peak occurred then in 2011-12, with the Eurozone and the UK two notable areas that experienced this. It was not a world recession however, and we did not see typical cyclical stocks bull topping bells ringing preceding it. If we look at an overlay of the CCI commodities index on the MSCI World stock index, we can see that they topped together in April/May 2011:

Source: Bloomberg

We did see outperformance in commodities, but not to the degree of 2008, or the last secular commodities bull peak of 1980. But silver did make a suitable parabolic blow-off in price.

To sum up, a case can be made for both competing scenarios: a secular commodities peak ahead or behind us in 2011. It remains in the balance, but not indefinitely. The CCI commodities index will break one way or the other. Gold will catch up to inflation expectations, or inflation expectations will fall. Sunspot evidence will come in more definitely in favour of a solar peak ahead or behind. Climate evidence as 2013 unfolds will drive agricultural commodities to escalating or plummeting prices. Equities will maintain secular bull momentum and outperformance of equities, or they will begin to make a topping process whilst commodities outperform.

What about a third scenario: both equities and commodities drop here into a bear market, with treasuries the beneficiary? For that to occur, we should still need to see a topping process in stocks whilst leading indicators and internals deteriorate. Currently, we do not see major warning flags in either, with leading indicators and breadth supportive. However, we have lately seen changes in trend in economic surprises, both in the US and Europe:

This coincides with the change in geomagnetism trend, and perhaps provides fuel for a pullback. I do not believe, however, that we have evidence for more than a swing pullback at this point, but it could become part of a more significant topping process that lasts several months.

If we pull back and look at the wider environment for assets, we largely/generally have ultra low rates, central bank support, money supply growth, cash and bonds paying negligible or negative real returns, stock yields exceeding bond yields, low/spotty economic growth and not excessive inflation, and historically below average valuations for stocks and real estate. This is a fairly positive environment in which equities and housing can attract money flows, and that is what we are seeing. It would take another sharp slowdown in the world or another debt-related crisis coming to the fore somewhere, for this to change. The question is whether we have seen a sufficient cycle of cleansing since 2000 and sufficient foot-on-the-accelerator central bank action to now sustain growth. If growth can stick and even accelerate, then we have better chances of reaching growthlationary froth and the commodities/inflation feedback loop, as all the inflationary stimulus and easing could quickly become problematic, with faster money flows out of bonds.

Finally, a few more potential clues as to the likely winner in the scenarios. Crude oil inventories are approaching a record, which has the potential to pull the rug from under crude prices if growth stumbles. Inflation should make a bigger peak 5 years after 2008, which would be this year, based on secular/solar history. Emerging markets manufacturing surveys (a leading indicator) picked up to 52.6 in March (over 50 is growth), of which China is the biggest commodity consumer. Commodities generally move opposite to the US dollar, as they are priced in US dollars, and the US dollar could be ripe for a sustained decline as speculator positions hit a record and this has previously led a swing top.

In conclusion, there remains no clear winner, with good evidence supporting a secular commodities peak ahead, or that it occurred already in 2011 and a new secular stocks bull is in progress. I maintain that the balance of probability lies with the secular commodities peak being ahead in H2 2013 – H1 2014, which should mean a cyclical stocks bull top occurring by mid-year 2013. However, if that is the case, then it should only give rise to a shallow stocks bear before new secular bull momentum. I am positioned for a secular commodities bull finale ahead, with significant exposure to precious metals, energy and agricultural commodities. I have only a position in Russia by way of equities exposure. So there is my concern: if the alternative scenario is the correct one, then my current portfolio will perform badly. However, if commodities did top in 2011, there should be an ‘echo’ bounce around 3-4 years later in line with history (as the commodities supply-demand story is not resolved overnight), which would be a belated opportunity to make some profits on those positions, with correct timing. In the meantime, evidence would increase in favour of a new secular stocks bull being underway and I would add trades there.

I will continue to weigh this up as developments come to light. Your views and any additional evidence very welcome. I have personally found that we have reached a period of time in the markets, and perhaps in my progress, where I don’t really feel there are any ‘experts’ out there I can rely on. I believe this is the difficulty of trying to navigate a secular transition, which in effect takes several years.

Markets, Trades And Solar Update

Posted on March 7, 2013March 7, 2013 Posted in Bonds, Commodities, Currencies, Indicators, Macro, Solar Cycles, Stocks47 Comments

Got internet this morning so time for a post.

The chart below reveals that pro-risk (proxied by MSCI World Equities, Euro-USD, CCI equally weighted commodities index and 30 year treasury yields) made a correction throughout the month of March. Today Euro-USD and commodities have popped up – not captured yet in that chart – so I suggest the correction in pro-risk may now be over. Equities remain the leading class, and various indicies have broken out to new highs in the last two days, which cements the idea of the correction is done.

Source: Bloomberg

If you recall the 5 models in alignment, they projected a January swing top and a March swing bottom. If this is playing out, then the next and final top should be around June. With history as our guide, the stocks cyclical bull should end with a frothy overthrow, so the kind of sentiment and buying levels we are reading about should be expected. However, I am not sure whether stocks can keep pushing on from here until June. I originally targeted around 1600 for the SP500 to top out, and this was echoed in work by Laslo Birinyi and Barry Bannister. We are currently less than 4% away from that.

Again with history as our guide, we should see a topping process with weakening internals and negative divergences in leading indicators. In terms of leading indicators we don’t yet see this. The latest global PMI reading for combined services and manufacturing looks like this, still in expansion:

Source: Markit / JP Morgan

Citigroup economic surprises are back in the positive for the US. ECRI US leading indicators have weakend a little but remain in a strong positive uptrend. The last missing update in CB leading indicators was for Euroland which came in a positive and improved +1.0. So, right now, we have a backdrop for pro-risk to advance, but I am watching for evidence of trend changes in these indicators.

In terms of market internals, stock market breadth has overall been good and confirming. We need to see those internals weaken for greater likelihood of a top. It does not mean we cannot see a deeper pullback before a renewed attempt at a high – which then displays the weaker internals – in fact that would be the historic norm. So, I am not sure about the push on until June from here, without another correction. Supporting this we see a spike in the bullish percent over call/put indicator, which has been missing, which suggests US stocks should top out soon (Tom Demark predicts at 1567). We also see daily sentiment for the Nikkei index over 90 (out of 100) and it stands on that one precarious steep leg. Plus, Monday is the new moon, which has the potential to be a swing top. So, with this in mind, I have taken profits on my Nikkei positions this morning (NZ time) and left my other stock indices positions in tact. Back in October 2012 I wrote about how cheap the Nikkei was and bought for an average of around 8700 (see here). That trade has returned 40%:

I believe the Nikkei has entered a new secular bull, after a 19 year cycle from nominal top to nominal low, but that this steep single leg up needs to become a more stable ‘W’ with a retracement, a higher low and then a push on again.

Commodities, as a whole, are in a different place, with sugar, coffee, precious metals, wheat, orange juice and others suffering bearish sentiment and low buying interest. However, most of those are now back to important support levels, which combined with the contrarian sentiment readings, provide a good base to rally. And so we return to the guide of solar/secular history, which suggests commodities should now take over as the outperforming class, and while equities process a top, commodities go make their secular finale. This, as you know, is subject to the solar peak timing being correct, and we still do not have decisive evidence on this, so I continue to watch sunspots.

Danny pointed out the change in IPA solar peak forecast. I now understand they are using the SIDC methodology, so it doesn’t amount to a different forecast. Here is a summary then of the solar peak projections:

NASA: Fall/Autmun 2013

NOAA: May 2013

SIBET: Sept/Oct 2013

SIDC: Either Fall/Autumn 2013 or it occurred already in Jan/Feb 2012

Polar reversal method: Q1 2013

The consensus therefore remains that it should be taking place ahead this year – and so it remains that a daily sunspot count over 200 would help sure up that likelihood. Therefore, that scenario remains my favoured and I am positioned for it, but until the alternative secnario is weakened, I am not taking on further commodities positions, despite some very attractive current plays.

TheDarkLord referred to the possibility of a twin peak, based on the similarity to solar cycle 14. I covered this last year, when the parallel was already being floated – see here. You can see in the charts on that link that SC14 was essentially a flat top as well as a twin peak, but note that the smoothed solar peak and the secular asset peak both occurred at the front peak – in fact they happened both dead on Feb 1906. So, it is the smoothed peak forecasts, as compiled above, that are key. That said, I have previously shown that there should be an echo commodities peak (a lower peak) a couple of years later, which could tie in with a second solar peak. However, I have also previously shown that by that point, being in equities is the place to be, returning better than commodities. Therefore, it does not change my strategy: assuming the consensus solar peak is correct and ahead, commodities should make their secular peak in the months following it, then I wish to exit commodities and target equities.

I have not been able to update the models this week, but will do so next week. The key points are that the new moon takes place on Monday, the geomagnetism model has weakened slightly (geomagnetism should start to seasonally worsen here) and sunspots are back up around the 100 zone.

The Next 10 Days

Posted on February 25, 2013 Posted in Bonds, Commodities, Currencies, Indicators, Lunar Cycles, Macro, Solar Cycles, Stocks21 Comments

…I will be in a motorhome, touring NZ North Island, so internet access is going to be occasional and fleeting. So an update and roundup on the markets below, and I will post in the comments beneath it anything important in that period. After New Zealand it’s Abu Dhabi for a week, the last stop on the trip, before returning to Europe.

Let’s start with gold. Major extreme readings were reached last week in oversold and overbearish measures, in both gold and gold miners, many more extreme than in the 2008 sharp falls. I won’t reproduce them here, as many blogs and sites have shown them, but it was sufficiently extreme for me to add to both gold and miners last week as declared. Gold has since rallied away from those extremes and therefore in price, and whilst I don’t know how it will shape technically from here, the key question is whether its secular bull is over and ended in 2011 with silver’s parabolic rise and fall. So here is gold since the start of its secular bull in 2000, measured in all the major currencies. It should be clear that gold has tracked sideways since 2011 and has consolidated up high, whichever currency it is measured in.

Source: Gold.org

As a parabolic excessive-greed finale is the norm as a conclusion to an asset secular bull, and as gold is the leading asset in a Kondratieff winter (which we are concluding), I would give good odds to gold finishing with a blow-off parabolic. A comparison with gold’s last secular bull, below, shows that blow-off parabolic clearly and how gold’s secular bull this time has been fairly measured to date.

Source: Nowandfutures

I am not suggesting that gold has to shoot as high as the comparison suggests – only rather that some kind of excessive exuberance would be a normal end. So, the lack of parabolic ending move in gold yet, together with the high sideways consolidation when the whole secular bull from 2000 is viewed, give me a couple of reasons why I believe we have been seeing a final washout of weak hands before gold breaks higher. However, I await supporting evidence such as from sunspots breaking higher (to confirm the solar peak is ahead), commodities starting to outperform equities, and inflation picking up. This is how sunspots look:

There is a mess, rather than a trend. If the solar peak is ahead this year, which remains the most common forecast, then we need to see daily sunspots register over 200 to make the uptrend clearer. So I am looking out for that.

Since my last post on the markets it has become clearer that pro-risk did begin a correction at the turn of January into February. The chart below combines proxies for stocks, commodities, risk-safehaven FX and treasury bond yields.

I suggest there are two paths forward, both of which eventually will see equities return to their highs, in order to deliver a negative divergence top (price advances but internals weaken). The first is the five-models-in-alignment path, which suggests pro-risk may pull back into March before advancing again. The second is that pro-risk is only making a normal lunar pullback, into yesterday’s full moon, and will continue upwards over the next few weeks, for a Spring swing top. This option is supported by cyclicals as a leading indicator, and my geomagnetism model shown:

The tail on the model stretches out into the end of March and remains in an uptrend due to unseasonally tame geomagnetism (actual and forecast). The oscillations within that are the lunar phase pressures.

There also remains a fairly benign macro-economic environment, which should support pro-risk, although we should always be alert for early warning signs of a change, and we could potentially have this in the latest PMIs.

China PMI, US PMI and Europe PMI in order below:

Source: Markit

A droop in the latest data, but still positive in China and the US.

Meanwhile, economic surprises show unclear developments in both Europe and the US, but using oil prices as a leading indicator for the latter, a topping out in this measure may occur in Spring.

Source: BrokenMarkets / Citigroup

US earnings season is pretty much over, and the final results in both earnings and revenues were good, and supportive for equities.

Source: Bespoke

The latest Conference Board leading indicator data table looks like this:

Source: Conference Board

Since my last market post, readings for China, Germany, US and Mexico all came in positive. The table is healthy, for now.

In summary, the picture between leading indicators and economic/earnings data is fairly supportive for pro-risk for now, unless that droop in PMI readings becomes wider weakness ahead.

There is bearish sentiment towards sugar, coffee, wheat, corn and cattle currently, as well as the precious metals, and I would add to commodity positions if we saw improved evidence of a secular commodities peak ahead, namely those developments listed above. Until that becomes clearer however, I am playing it safe and sticking largely with what I have, as both the primary (secular commodities and solar peak ahead) and alternative (secular and solar peak passed) scenarios remain in play.

As Things Stand

Posted on February 20, 2013February 20, 2013 Posted in Bonds, Commodities, Indicators, Macro, Stocks24 Comments

Gold, silver and gold miners are at extremes of oversold and overbearish readings, with possible high volume capitulation candles on the last day of last week. Mean reversion should now follow in the form or either a relief rally to work off these conditions or the start of a new upleg, but first we need to see a turnaround and some buying interest.

The majority of other stock sectors, aside gold miners, are overly bullish, and warning flags persist in equities, but without any technical break yet. Is the narrowing number of global stock indices making new highs a sign of a gradual top taking place since the end of January, or was that meagre correction only a blip in a continued advance into March? It’s not clear at this point, but here are two reasons why equities could potentially advance into March: cyclicals as a leading indicator and actual/forecast geomagnetism. So far this year actual geomagnetism has been tame and it is forecast to remain so into early March at this point – here is the latest model with the tail three weeks into the future:

Only in June-September last year did US stocks diverge particularly from the cumulative geomagnetism model and whilst that divergence gap has not been repaired, the market direction has since been following the model direction again.

If equities are instead in a correction that began in late January, with a couple of laggards about to turn and join (e.g. US indices), then I can refer you back to five models in alignment, and would also point to the current narrowing wedge in treasury yields which could suggest a switch to safety and away from pro-risk is coming, if yields break down:

Source: Stockcharts

The latest leading indicator releases from CB came in flat for Korea, +1.0 for Spain (improvement on last month) and -0.1 for Australia (also). Commercial loan data for China showed quite a jump in January. US earnings beat rate for this quarter came in at an impressive 64% beat rate both in earnings and revenues. Citigroup economic surprises have turned up again in the US:

All in all, a continued positive environment persists for pro-risk assets and any pullback at this point should be as a result of excessive bullishness rather than a deterioration in the macro picture – at least until that changes.

I have no further evidence at this point to validate or invalidate the primary scenario (secular commodities peak and solar peak ahead) or the alternative scenario (secular commodities peak and solar peak in the past), but I expect we will see decisive evidence one way or the other within the next couple of months.

I am leaving Australia on Saturday and coming to Auckland NZ for 3 nights, before motorhoming around the rest of the North Island for 10 days.

Current State Of Play

Posted on December 14, 2012December 14, 2012 Posted in Bonds, Commodities, Indicators, Macro, Stocks12 Comments

Hi all, in a cafe with Wifi, due to storm-damaged internet access at our second hotel (neat Ubud, Bali), so will get down to it.

My trading boils down to this. I am long commodities, attempting to time the secular bull market top. I am long stocks, attempting to gauge the cyclical bull market top. And I am to a smaller extent short treasuries, believing us to have made a secular bull market top in treasuries this mid-year. Currently I believe all these still look good.

Treasuries are still ‘potentially’ making a W-bottom. By Gann they should have bottomed mid-year, and ditto by solar/secular history, which predicts yields should now rise into a stocks cyclical bull top. Still very tentative, more time is required to judge this one.

Source: Stockcharts

Regarding the cyclical bull market in stocks (within a secular bear market), there are several ways to assess its likelihood of continuation:

1. A topping process lasting months with reversals of reversals of reversals – as the Hang Seng, Dax and now the FTSE have broken out of their long term triangles I don’t think this is happening yet, though US stocks show the most potential.

2. Overbought and overbullish extremes – we see largely neutral sentiment readings and only short term overbought readings (which I believe has produced the pullback of the last two days).

3. Breadth divergence – NYSE breadth has just made an all-time high, which is bullish.

4. New lows confluence prior to top – we haven’t seen this leading into the US Q3 highs.

5. Defensives outperforming cyclicals – again not seen, cyclicals have been strong.

6. Major distribution days near the highs – we did see these near the US Q3 highs, but since we have seen major accumulation days, which are bullish.

7. Rising inflation, tightening yields, yield curve flat or negative – we don’t yet see these macro developments

8. Rolling over of leading indicators and recession model alerts – we see evidence for growth into Q1 2013 – more below.

The latest CB global leading indicators revealed positive strong for Spain and Korea, but slightly weak for UK and Japan. The latest OECD leading indicators show weak growth but overall above long term trend for the OECD nations:

Source: OECD

Note the horizontal lines are the long term growth trendlines, rather than expansion/contraction divide. Drawing out the narrow money supply leading indicator, the forecast is for global industrial output to increase into Jan/Feb 2013:

Source: Moneymovesmarkets

HSBC’s flash PMI for China today came in at 50.9 for December, a 14-month high, adding weight to an upturn in China, and Chinese stocks continue to attempt to make a bottom, with a further 3% jump today at the time of writing.

Economic Surprises have recently weakened for both the US and Asia, but both remain positive. One to watch, as a trend change in this indicator has previously led a trend change in equities.

Commodities have been weaker than equities this last couple of weeks, but I believe they will catch up, with support from an improving China, an improving Euro-USD, depressed sentiment in certain commodities and gold miners. We just passed through the new moon, but with very tame geomagnetism there is support for commodities to rise into year end, as shown by the new model uptrend here:

Finally, a look back at history reveals that the closest mirror for US equities from history is 1967, with a 90% correlation. I find this interesting, because 1968 was the secular equities top and the solar peak – around November/December 1968. In other words, equities are behaving very similarly, as we head into next year’s solar peak, which I anticipate to be a cyclical stocks peak and then secular commodities peak.

Source: MCRI

In short, I see no current reason to change my outlook that the secular commodities bull and cyclical stocks bull will continue into the start of 2013. I continue to watch all the measures and indicators outlined above, and believe my first move will be to close of out of the bulk of equities longs, but as yet we do not see typical topping indicators nor compelling divergence in leading indicators.

Currently we are planning to spend a further week and a half in Bali. The rest of our trip is looking like this (subject to change of course, as we are booking and ‘feeling it’ as we go): Thailand, Philippines, Hong Kong, New Zealand, Fiji, Australia, Sri Lanka and maybe Maldives. There are other countries and continents we would dearly like to visit, but we have to draw the line somewhere as time is limited.

Have a great weekend all.

In Charts

Posted on November 23, 2012November 23, 2012 Posted in Bonds, Commodities, Macro, Stocks11 Comments

The CB leading indicators for Germany came in at +0.1 (previous month flat), and for USA +0.2 (previous month +0.5). The summary table is below and shows the overall positive global picture.

Source: Conference Board

Next are the Markit PMIs released this week for the Eurozone, USA and China. The Eurozone remains weak in this leading indicator, but USA and China both show pick up and positive readings.

Source all: Markit

I maintain the opinion that leading indicators globally are overall showing renewed positivity, and that should bode well for risk assets into year end. Presidential seasonality and Gann are also supportive.

Source: Bespoke / Moneygame / my update

To counter that, we have down pressure into next week’s full moon. Today, the Friday after Thanksgiving, has a positive historical seasonality, but not Monday. Given the v-bounce in US stocks, I believe there are several reasons why the market may pull back next week, and the question is whether this produces a dynamic ‘W’ base from which to then rally into year end, or whether the market drops lower than the mid-November low and makes a positive divergence (or even lack of positive divergence).

Below is the SP500. The overall wedge shape is bearish, but the market met twin support (shown) at the mid-November lows, together with bottoming indicators such as Nymo and capitulative breadth. A drop back to the lower support or just below, before advancing, or a move up to the top of the wedge for a slightly higher high (with potential negative divergences, if this were a topping process), would both be possible outcomes here. However, the swift reclaim of the 200MA this week could provide additional support for the market holding up here rather than dropping down to the lower boundary again.

Next is the Nasdaq, which has been the neatest index technically since the cyclical bull began. Here again we can see the market reached rising support at the mid-November low. A lower low would therefore spell trouble, and, given the improving global picture ahead, and the normal topping process (push back up to the highs with negative divergences) if this index is already topping, then a higher low or continued uptrend seems more likely, in my opinion.

Looking wider, I noted a few days ago that the Hang Seng was backtesting the breakout of its long term triangle, and it has since advanced again, suggesting a successful backtest. It’s still tentative at this stage, but looks promising.

The Morgan Stanley China A shares ETF shows a tentative breakout from a declining wedge on positive RSI divergence.

The UK FTSE is still within its long term triangle, but is again pushing back up towards the declining resistance. By solar secular history, a breakout would be normal, followed by a pullback towards the triangle nose, before secular bull momentum begins – all taking place over the next 18 months or so.

The German Dax remains technically bullish. Various supports and resistances are shown, with the Dax flirting with breakout of the longer term resistance also.

Looking at other assets, gold is looking technically positive to eventually make new secular highs. A breakout upwards out of the 11 month consolidation (shown), and a bounce above the 200MA again, which has largely supported the secular bull to date, are evidence for this. We are in a positive seasonal period of the year for precious metals also.

10 year treasury yields are still toying with a potential bottom. A positive RSI divergence on the longer term view:

Source: Yahoo

And a similar scenario in the nearer term view, as well as a potential higher low in November than in July. That the mid-year low will hold here is unproven, but I have previously outlined reasons why I believe it will do so, and that it could mark the secular low for bond yields.

Source: Stockcharts

Next I show coffee and sugar, both at extreme low levels of sentiment/oversold. I suggest both are ripe for a bounce here, but whether they can muster new uptrends at this point is unclear. The parabolic moves in both are recent, and therefore more time may be needed. However, if my predictions for secular finales in commodities and inflation come good, then I would expect most commodities to be dragged upwards again.

Source: TradingCharts

The following chart is an ETF for grains, which were the best performing commodities of mid-2012, due to adverse weather conditions. They have now made a 50% retrace of that upmove and on positive RSI divergence. By Gann, commodities should begin a large upmove as of now, so this could be a suitable point at which to resume an uptrend.

In short, in the near term next week, I predict some degree of correction or consolidation in stocks, which could imply pro-risk in general. Thereafter I expect a push upwards into year end, supported by improving leading indicators, positive technical setups, and Gann and seasonals. What would change my mind? Other leading indicators foretelling contrasting global weakness, greater evidence of cyclical stocks topping indicators, or a technical breakdown in key assets, such as a breakdown from the Nasdaq channel.

S O L A R C Y C L E S

Category: Bonds

Velocity, Yields, Inflation, Growth And Commodities

State Of The Markets

Money Velocity

In The Balance

Markets, Trades And Solar Update

The Next 10 Days

As Things Stand

Current State Of Play

In Charts