Sunspots, Equities, Treasuries, Commodities, Inflation, Money Velocity, Interest Rates And Demographics

Posted on May 10, 2013May 10, 2013 Posted in Bonds, Commodities, Demographics, Indicators, Inflation, Solar Cycles, Stocks42 Comments

Time to draw them all together and see the full correlations. This is US-based analysis due to data availability.

The first chart (click to view larger) reveals historic spikes in US interest rates, 10 year treasury yields, MZM money velocity and US inflation (averaging official CPI and Shadowstats data) all within a 2 year period around the solar maximum (note the 1968 solar max was November and the 1979 solar maximum December, hence the 2 year boxes following; also note some of the measures have been scaled to share the same chart).

Stepping back further in time, the 1947 solar maximum was accompanied by a 1947 inflationary peak, followed by spikes in corporate bond yields by 1948 and treasury bond yields by 1950.

If the next solar maximum is ahead in Autumn 2013, then by history we should see spikes in rates, yields, velocity and inflation within around 2 years of each other and of the solar maximum. Is it different this time because the government has acted to surpress both interest rates and bond yields? With velocity correlating closely with bond yields, is an inflationary peak not going to happen this time? I believe it will happen, as the same surpression occurred in the 1940s and yet the spikes took place.

The second chart (click to view larger) adds in real commodities using the CRB index adjusted for inflation (and again scaled). Interestingly, real commodities behave very similarly to rates, yields, inflation and velocity – all moving together into peaks (orange boxes) and troughs (red boxes), over periods lasting around 3 years.

There is a general pattern of collective peaks around each sunspot peak, and additional collective peaks before solar mimima. I don’t yet understand why we see rallies leading into solar mimina, however they have historically set up the panics and crashes that occur at the solar minimum. Nonetheless, yields, commodities, velocity and inflation all acting together is suggestive of waves of ‘human exctitement’ that brings about speculating, buying and circulating money in the economy, or the opposite.

The third chart adds the real inflation-adjusted S&P500 and US demographics trends (middle to old and middle to young ratios combined) into the picture. Here we again see evidence of ‘human excitement’ correlating with sunspot peaks as some combination of real stocks, real commodities and inflation spike up around the solar maximum.

Demographic trends appear to be important for real stocks to peak, whilst commodities appear to behave opposite to demographics.

In summary, there appears to be a 4-way correlation between equities, sunspots, demographics and inflation, whilst there appears to be a 5-way correlation between rates, yields, velocity, inflation and real commodities. My solar-theory take on it is that the same phenomenon of human excitement (driven up and down by the solar cycle) translates into trends in buying, asset speculation and circulating money, hence the united correlations, whilst demographics (which also have a solar input: solar maximum peaks (and occasionally troughs) in births) additionally feed into equities due to investment/disinvestment in equities, relating to retirement.

I’d be interested in your thoughts on any of the correlations in the charts. I suspect there is more to be teased out.

State Of The Markets

Posted on May 8, 2013 Posted in Bonds, Commodities, Currencies, Indicators, Stocks14 Comments

Here is the latest picture for pro-risk proxies. A new uptrend appears to have begun in late April, following an overall downtrend since the turn of February (equities traded overall sideways).

Source: Bloomberg

Developments are still very much in keeping with 5-models-in-alignment (this post), and if their collective forecast holds good then the next and final top should be June/July for equities. As it happens, the last two cyclical bulls in equities ended with a steep wave up lasting around 12 months:

Source: MSCI

The current wave up began June 2012 and so its termination around June 2013 would fit with the last two cyclical bulls and also the 5-models prediction.

A top right here in equities appears unlikely as divergences in breadth have been largely rectified over the past couple of weeks, which combined with breakouts in US and German stock indices, looks good for further near term gains. Plus the overall geomagnetic trend remains upward, looking out to the end of May.

Note on the Bloomberg chart the sharp upturn in treasury bond yields over the past week, and this is also reflected in action in German bunds, UK gilts and even Japanese bonds, despite the government’s doubling of QE:

Source: Bloomberg

An interesting development. Recall the close relationship with money velocity, and the potential basing that has been occurring in both over the last 12 months. We need to see follow through on this if it is to be meaningful.

Another interesting development is in crude oil:

Crude failed at an upwards breakout attempt in mid-April, but then failed at a breakdown attempt, and has now completed a reversal of a reversal back to the top of the large triangle. Can it break out this time?

Meanwhile gold has partially retraced its falls and we see how it shapes from here. Some kind of W-base would be normal, i.e. a second low. If that is a higher low, then that would be bullish for gold.

Central banks are acting supportively for gold. Their combined gold purchases came in at record levels in 2012, and they continue to ease, devaluing currencies and cash, with both the Australian and Eurozone central banks cutting again in the last couple of weeks:

Source: Action Forex

This is in response to a weakening that we have seen in economic surprises and leading indicators. Here is the latest global PMI reading, still positive (i.e. growth) but weaker than last month:

Source: Markit

However, there are reasons to be optimistic for a renewed strengthening ahead in the global economy. Falling commodity prices over the last 6 months should have pulled down input costs giving the economy a boost. Plus, narrow money is still positive as a leading indicator of industrial production (normally by 6 months):

Source: Moneymovesmarkets

Furthermore, breaking down narrow money trends, emerging markets look set to outperform developed markets from here, which should produce a strengthening in emerging market industrial production:

Source: Moneymovesmarkets

And there is historically a correlation between commodity prices and emering markets industrial production:

Source: TheFaintOfHeart

Agricultural commodities could also benefit from continued global wierding extremes. In the US, 60% of the country is in drought or dangerously dry, it is the second coldest Spring start on record, but then there is record breaking heat in the Southwest and record high river levels in the Midwest. Drought, flood, freeze and bake – really an ideal mix to decimate crops. And returning to crude, geopolitics have the potential to push oil higher if hostilities in the MiddleEast continue to escalate.

The other potential driver for commodities is the normal rotation into cyclicals at the end of a bull run. Money should switch out of defensives into oil and industrial commodities, amongst others.

One step at a time as always, but I see improving chances of my primary scenario coming good, namely that a solar-maximum inspired inflationary peak and secular commodities peak lies ahead. Sunspots have been in a solid uptrend of late, and if there is a correlation between rising sunspots into a solar maximum and speculation in the markets then speculative behaviour has certainly been in evidence. The primary scenario likelihood would be much further enhanced if treasury yields can continue to rise and with them money velocity, plus if oil can break upwards out of its triangle, and the outperformance in emerging markets and commodities takes hold. We need to see a renewed strengthening in economic data, particularly leading indicators, to provide the backdrop for speculation into risk assets. Inflation will follow if yields, velocity and commodities all rise.

In the near term I see good chances that pro-risk can rise together into June/July, so I am holding all positions for now. However, the lunar positive period ends on Monday so there is higher risk of a correction or consolidation in the subsequent fortnight.

Solar Cycles, Demographics and Equities

Posted on April 23, 2013April 23, 2013 Posted in Commodities, Indicators, Inflation, Macro, Real Estate, Solar Cycles, Stocks77 Comments

A long post coming up, but I found this to be outlook-changing research.

Firstly, the Japanese stock index long term chart, with solar cycle maximums marked as black lines (C for commodity secular peaks):

Underlying source: Wikipedia

A fairly simple 100 year history: a long secular bear followed by a long secular bull followed by a long secular bear that potentially just ended at the turn of 2012 into 2013. The secular turns fell very close to solar maxima.

Secondly, the US Dow stock index long term, with solar maximums again marked in black.

Underlying source: Stockcharts

Alternating secular bulls and bears. I argue the mid 20s to mid 30s episode was outsized greed and fear events that cancelled each other out on the way to the true secular peak in 1937. The secular turns fell very close to solar maxima.

Thirdly, the commodities index long term, with solar maxima marked. Again, alternating secular bulls and bears, and again secular turns falling very close to solar maxima.

Source: Nowandfutures

Fourthly, 10 year treasury yields long term chart, with every third solar maximum marked.

Underlying source: Multpl

A longer term cycling of secular bulls and bears, but again the secular turns falling close to solar maxima.

Here is real estate, but only half as much history available as a global index (hat tip Rob):

Underlying Source: P Loungani

There is a tentative cycle here, with the peaks alternating on solar maxima and solar minima. Furthermore, there is the main (circadecadal) solar cycle averaging 10.66 years, and a lesser (circahemidecadal) solar cycle averaging 5.75 years. They fit rather well with the two cycle parts noted above. But a little more history going forward is required to judge this model’s validity.

Moving on, the next chart is US unemployment versus solar cycling.

Source: Gorbanev / Ktwop

Rises in unemployment just after the solar peaks. The chart fits well with my own chart, showing recessions occurring after each solar peak (which correlates with geomagnetism peaks lagging sunspot peaks).

And also this chart, which shows inflation spikes occurring at each solar peak.

Below we see money velocity rising into solar maxima and peaking before or at the subsequent recessions:

And the next chart shows the treasury spread (10 year treasury yields minus 3 month treasury yields) widens to a peak leading into a recession:

Source: New York Fed

Let me draw all that together. At each solar maximum, we see a particular risk asset or assets making a secular peak, whether this be equities, commodities, real estate or bond yields. I argue this is sunspot-driven biological human excitement that translates as a speculative mania in the popular asset class of the time. We also see inflation and money velocity spikes at each solar maximum, which I argue is also behavioural effects in the economy of the same excitement phenomenon. After each solar maximum we see peaks in the yield spread and unemployment and recessions. Market history dictates that bull market cycles end with inflation rising, yields rising and overtightening, so this fits with the picture being revealed. Excessive and unsustainable speculation and buying in the markets leads to excessive inflation and tightening and tips the world into recession – economists would relate to that phenomenon as a regular cycle of greed and fear, boom and bust. But add in solar theory, and sunspot maxima biologically help inspire the greed/boom part, whilst geomagnetism maxima (lagging sunspot peaks) depress sentiment to assist in delivering the fear/bust part.

So by this modelling, we should be seeing a secular peak in commodities and a secular bottom in treasury yields around the current solar maximum, which should fall either Feb 2012 (past) or ahead in Fall 2013. Both commodities and treasuries have fulfilled secular bulls through to 2012/13, regardless of what happens next. The difficult part is in timing the turns when you are close in on the action, as we are as traders here in 2013. What is clear is that money velocity has not yet picked up and inflation has not peaked (making its high thus far in 2008). US jobs and yields spreads do not indicate a recession, and geomagnetism is currently benign. Jobs are in fact predicted to grow ino the Fall:

Source: PFS Group

Historically, recessions have begun an average 14 months after solar peaks, so we might expect to see leading indicators for jobs falling by now if the solar peak passed in feb 2012.

Collectively, these suggest the solar peak is more likely ahead in Fall 2013 than behind us in February 2012. I previously showed that world bond yield and money velocity charts could be bottoming out based on technical action thus far in 2012-2013, and in which case an escalation from here through the solar peak (assuming Fall 2013) would fit well with history. That would also suggest an inflation peak, and a secular commodities peak, lies ahead.

We can now cross-reference this solar picture with demographic models.

The next chart is a 100 year chart of the US Dow p/e ratio together with the trend in US demographics as measured by the middle-aged to young-aged ratio:

Source: CXOAdvisory

This chart is the same demographics trend shown against the inflation-adjusted Dow.

Source: CMG Wealth

Both the p/e and ‘real’ Dow do the same job of removing inflation from the picture. There is a clear correlation between equities and demographics.

Chart 14 shows the SP500 netted of inflation versus the same demographic trend, and I have added in the solar maxima (black lines) again.

Underlying source: Chris Puplava

Now things get interesting, because there appears to be a three-way relationship between solar maxima, demographics and equities, with peaks and troughs in all three lining up. In my Trading The Sun PDF I noted there was some research identifying solar cycling as influential in population and demographics in other species, as well as research attempting to correlate solar cycles with longevity and mortality in humans. But I have now additionally found a research paper by Walter Randall (1991) that identifies an 11-year cycle in human births, and here is the chart showing that dominant cycle in the US:

Source: W Randall

Randall also found variation in human conceptions relate to sunshine levels and geomagnetism.

I have added the solar maxima to the US births per year chart below. We see births have typically spiked up a little at the solar peaks.

Underlying Source: CalculatedRisk

And here are UK births, with solar maxima overlaid:

Some clear peaks and troughs aligning with solar maxima.

So, we have solar-inspired waves in demographics which provides a reasoning for a correlation between the two.

We can also explain the demographics correlation to the stock market. There are young borrowers/spenders, middle-aged investors (partially investing for retirement) and old-ages disinvestors. If the middle group is growing relative to the others, then we have a growing demand for the stock market. Similarly, the old and the young don’t typically buy houses, so a swelling middle-aged group relative to the others is an environment for a housing boom, and vice versa.

So there we have our three way correlation between sunspots, demographics and equities (and housing too). Because of the solar cycle related births swells, we will find certain demographic groups peaking in numbers and relative numbers around solar peaks. That provides peak demand or supply (e.g. a peak in retirees disinvesting), and together with the sun-driven biological changes in human excitement at the peaks, we have a recipe for asset invesment and speculation peaks at solar maxima.

In the US demographic chart above we can see that the steepness of the secular bull from 1980 to 2000 appears related to the steep demographic uptrend of that period. Now here is the same demographic model for Japan:

Underlying source: Chris Puplava

Again, peaks and troughs in stocks, solar and demographics line up. The steep secular bull up until 1989 again appears related to the steep demographic uptrend of that period. The reversal in demographic trend as of 1989 appears to explain why Japanese equities topped out at that solar maximum and did not keep going until the 2000 solar maximum, whereas US demographics did.

Looking forward, we can see that the US demographic model reveals a new uptrend from this solar maximum (circa 2013) to the next (estimated mid 2020s), which is supportive of a secular bull, albeit a relatively shallow one in real terms. Meanwhile, the Japanese model is already in an uptrend and is good until around 2020. Japanese stocks are currently in a sharp upswing, belatedly catching up the demographics and suggestive of a new secular bull.

We have looked at middle-young demographics, so let’s now draw in middle-old demographics. The chart below shows the picture for the US:

Source: BusinessSpectator

The US faces a demographic headwind looking out to 2020 in this regard, unlike its middle-young asset. Using the m/o ratio only we see a prediction for the p/e ratio to drop to just 2-3 by 2020. This should be offset to some degree by the improvement in the m/y ratio. Nonetheless, there is something notable here, which is that p/e ratios for country stock indices appear to largely reflect demographics. In other words, a country stock index with a cheap p/e is only a good buy if the demographic trend forecast reveals an uptrend ahead. Some of the most ‘expensive’ stock indices around the world right now by p/e valuation are Indonesia, Mexico and Philippines, all of which have very favourable demographic trends looking forward compard to most of the world. Rather than shying away from these indices because they appear overvalued compared to historical averages, it might instead pay to invest there, as they should get more ‘expensive’ going forward. This also explains why the Nikkei around 1982 maintained a p/e of around 20 whilst other stock indices were making single digit secular bottoms, because it was in the midst of a positive demographic trend looking out to 1989. Note this relationship is longer term and does not preclude shorter term p/e oscillations. P/e valuations will overshoot and undershoot the demographic trend but mean revert to it over time.

The next chart shows the middle/old trend for Japan, which is a tailwind out to 2020, like the middle/young for this country.

Source: Zerohedge

Two more demographic measures for the US. The first chart points to a bottoming out by around 2020, followed by an upswing into 2036, which is supportive for a secular bull market.

Source: HS Dent

And this chart shows an enduring trend in nominal labour force expansion in the US into mid-century, standing out from the other developed countries shown.

Source: SeekingAlpha

So combining all four demographic measures for the US, we have strong odds of a secular bull from around 2020 to 2030. Prior to 2020 it may struggle to gain traction, and need a deeper washout in p/e. Let’s not forget that we are dealing with ‘real’ Dow/SP500 and p/es, so inflation matters. A sharp rise in inflation could drive down p/es whilst the index goes sideways. A lack of inflation could mean the index falls nominally before embarking on a momentum secular bull run from 2020-2030. Either way, because this demographic uptrend from 2020-2030 is ahead, we might not expect a major washout in p/e in the US. The SP500 and Dow are amongst the more expensive indices by p/e around the world but this could reflect the positive demographics ahead.

Let’s now look at dependency ratios (proportion of retired and young to the working population) demographics globally. Trends in the developed world contrast starkly with trends in emerging countries, as shown here:

Chart 23 reveals the bad situation kicking in as of now in developed countries:

Whilst the next chart shows a particularly positive outlook for Philippines, Malaysia and India:

And the next chart provides another comparison:

Brazil looks good. The USA improves looking out to mid-century. And the worst: Japan. So let’s return to Japan, which we can also model using the dependency ratio as below:

Japan is understood to have battled with asset deflation for 2 decades. However, we see that demographics were responsible for a p/e or real downtrend in Japanese equities from 1989 to around 2000. Then the m/o and m/y demographic trends picked up again, and we can see in the chart below that the Nikkei effectively tracked sideways since then.

We might therefore take a fresh look at it and consider the Nikkei was in a downtrend for a decade (or one solar cycle) and then turned sideways as the demographic trends in m/o and m/y changed upwards. The massive spurt since October 2012 therefore looks reasonable, as a belated catch up to trend. However, not all is well for Japan. The dependency demographic trend is the worst around the world in that it is likely to become devastating by mid-century. It also has the largest debt-to-GDP ratio in the world, over 230%. Interest rates are effectively zero, and cannot be allowed to rise much because of the servicing of the debt. There is little hope of major GDP growth in the years ahead because of the dependency trends and the debt. Despite this, Japan is going hell for leather in a bid to restart the economy and ignite inflation, now doubling money supply from 29pc of GDP to 56pc of GDP by 2014. The first result of this ultra-aggressive policy has been a swift 20% drop in the yen. As Japan is an energy importer, this has immediately produced a big uplift in energy price inflation. If I am correct in predicting a pick up in money velocity here, and also correct in a commodities/inflation peak ahead relating to the solar maximum, then I suggest there is the potential for Japanese inflation to quickly become problematic. As the government cannot combat with rate rises because of the debt servicing, the risk then would be hyperinflation. I know hyperinflation is overhyped, but I just wonder whether it is worth an outside bet here.

Hyperinflation has historically been initiated by either rapid increases in either money supply or money velocity, then the other one has joined in to complete the feedback looping. Japan is obviously at full acceleration on the former. Under hyperinflation, stock markets have historically gone wild in nominal terms, but the cost of living has gone even wilder. In Zimbabwe, the stock market went up 47,000% in a year, but the cost of living rose even faster. So a Japan hyperinflation trade could be achieved either by a spreadbet on the nominal index or a long Japan fund whilst short the yen. This is how I see it: Japanese stocks should rise on the belated catch up to m/o and m/y demographic trends, regardless of the Japanese government’s policy actions, but those actions have the potential to produce wild inflation which would then take Japanese stocks in nominal terms much higher.

Back to demographics. The headwinds facing many developed countries in dependency trends are problematic. Here is real estate modelled against dependency for six developed nations:

Source: Business Insider

If we refer back to the global house index chart further up the page, that cyclical model projected no real take-off in global house prices until 2019. These dependency charts suggest headwinds that further cement the likelihood that housing won’t offer a great return for the next few years in the developed world, applying equally to most other European countries, New Zealand and Canada. China and Korea also faces the same dependency trend issues starting around now.

The countries with the best demographic trends looking forward include India, Brazil, Mexico, Indonesia and Philippines. South Asia, ASEAN and South America look particularly fruitful regions going forward, and Sub-Saharan Africa too. If this is a global transition into a K-Spring, then investments in equities and real estate (K-Spring’s champions) might do best in these countries and areas. The USA should perform well too, from 2020 to 2030, but the period before 2020 is less certain.

Brazil and Mexico have good prospects until around 2025 but India and Philippines extend until 2040. Contrast this with China, which is just hitting trend reversal point into a negative trend, and we can see the likelihood of China stepping back from being the world’s leading growth engine, and in doing so maybe provide a backdrop to a secular commodities bear (as it is the world’s largest commodity consumer).

Source: DarwinsMoney

Dependency ratio trends and projections for select nations:

Source: John Eyers

Maybe the investment star of the next two decades will be India, which could feasibly rise for multiple solar cycles in a powerful secular bull that resembles the Nikkei into 1989 or the Nasdaq into 2000. With its 1.2 billion inhabitants it has the potential to mobilise something significant. But India, just like Brazil or Philippines or Mexico or Indonesia is an emerging country, with emerging risks. Let’s say the demographic outlook provides potential for great returns in these countries, but the structure to achieve it is less reliable than in the developed nations. The developed nations conversely have the track record but now the demographic headwinds.

To draw back together demographic trends, solar cycling and equities, we might expect that the positive demographic trends that have been in place in some of these emerging countries to have provided a secular bull over the last solar cycle, much like the Nikkei powered its way through 4 solar cycles in a secular bull set against a positive demographic backdrop. This is indeed what we see:

Source: Yahoo Finance

Over the last solar cycle, from 2000 until now, all the four country indices shown have made secular bull markets, not secular bears, in line with the demographic trends. They are all also amongst the most ‘expensive’ countries in the current p/e spectrum in the world, again in line with the demographic trend. I suggest that the ‘expensiveness’ of a country’s p/e rather has to be measured in terms of its relativity to its demographic trends. I also suggest that due to the demographic trends in all four remaining positive for another solar cycle, they should go on to continue their secular bull over the next solar cycle. I suggest that may be at a steeper rate, because it will be against the backdrop of a global K-spring, an up-cycle. As a reference point, see how the Nikkei secular bull (first chart in the article) that lasted for 4 solar cycles was at its steepest in the solar cycles of 1947-1958 and 1980-1989, both of which were global upcycles, a K-spring and a K-Autumn.

To conclude, these are the opportunities that I see (for myself of course… I am not an advisor).

1. Long Japan, due to m/y and m/o demographic uptrends until 2020, and an outside bet for hyperinflation. Averaging into any falls. We can see Japan’s little window of positivity here, in the upturn in the green line between 2005 and 2020:

2. Long USA, but more compelling as of 2020. At risk of a p/e washout before then. These two charts show head and tail winds respectively for the US market from now until 2020:

Source: Informed Broker

3. Long a basket of emerging markets with the best demographic outlooks: choosing from India, Philippines, Indonesia, Brazil, Mexico and potentially sub-Saharan Africa. Averaging into any falls.

Here is the very long term look at dependency ratios to end:

Source: Appliedmythology

If these projections hold true, then the four lowest listed regions should offer the best opportunities over the next solar cycle. The following solar cycle the USA stands to fare well (where the blue line flattens). And later his century Russia and Eastern Europe may get their shot at being investment gold.

Additional chart: prospects for specific sub-Saharan African countries: positive demographic trends for the next solar cycle for Algeria, Ghana, Nigeria, Cameroon, Ivory Coast and South Africa:

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.

More On Gold

Posted on April 16, 2013April 16, 2013 Posted in Commodities, Indicators36 Comments

A potential low was formed overnight in precious metals. I suggest a snapback has good odds, as yesterday’s action produced yet more extreme oversold and overbearish flags, such as this:

Source: Bespoke

Daily Sentiment Index for gold and silver was down to 7 out of 100 at the start of the day, so I expect finished close to zero. Bullish percent for gold miners ended a second day at zero.

It’s akin to a stretched elastic band. Doesn’t mean it can’t go lower yet, but if so the relief rally would likely be bigger and faster. An obvious target for a relief rally would be the scene of the breakdown, which in gold would be around 1550. However, it would take a fairy powerful snapback to get us there and I doubt such a strong relief rally would occur if this is a new secular bear. So is it?

Many times I have documented reasons why gold is around the end of its secular bull: expensive value ratios versus stocks and real estate, solar cycle timings, bottoming out of real estate and (potentially) treasury yields, stock index p/es and p/bs having in various countries reached secular extreme lows. But this overall secular transition takes time and working out the timeline of developments is difficult.

We now see a potential bottoming in the stocks/gold ratio:

Source: Joe Weisenthal

We also have the CCI equally weighted commodities index now at the bottom of its large triangle. Further falls in commodities here would ensure a break down and pass another piece of evidence to the secular-bull-already-peaked camp. I believe the action for the remainder of this week is going to be telling. Either buyers step in significantly in gold (central banks or large investment funds buy it up) and drag precious metals back up, to eventually reveal it was a last shake-out of weak hands before a parabolic finale – or – buying interest is weak and by the end of the week precious metals have tumbled further to levels whereby the secular bull cannot be recaptured any time soon. Ironically that would be a parabolic finale, only the wrong way up.

So no time to delay, in my opinion. If you were in gold, like me, prior to the falls, then you either attack for a snapback or defend and close out or sit aside and do nothing until the dust settles. I’m sure you already made your choice, but for me if this is a new secular bear then I don’t want positions stranded further up and nor do I want to take a loss. I attack on weakness and sell into strength, and that works for me. Interestingly, yesterday was the biggest one day traffic for my site since I launched it. I imagine many were scrambling for info and ideas as they were holding precious metals and surprised by the action.

If it turns out gold did make a secular peak in 2011, then it did not make a typical parabolic secular top, but silver did. Gold instead rather made a topping range from then until last week, which is the other typical market top, if internals or indicators negatively diverge. Perhaps there were such divergences in that ‘fear’ susbided over this period, as the Eurozone finally got to grips with its debt issues, the US dollar potentially bottomed out, inflation did not materialise as expected – all reasons for/against gold.

If it didn’t make its secular top yet, then can we find other reasons for it to now do so? Gold performs well in an evironment of negative real interest rates, so if rates and yields are maintained negigible but inflation picks up it could reassert itself. For inflation to pick up it needs commodities as a whole to recapture money flows, which could occur if growth can be maintained and money velocity picks up. Leading indicators currently suggest this could occur, but there is some demand-supply slack to overcome. Another support for gold is central bank balance sheets and money supply, which can dilute currency in relation to gold. Below we see global money supply growth correlating with gold’s performance:

And here we see recent growth in the money supply around the world. Only the US has weakened, but collectively the global trend is still up. It would take a reversal in policy to change this. Could such a policy change be about to happen? Potentially, if growth and jobs pick up and become more entrenched. However, right now, we are seeing doubling up in efforts in Japan, and no change elsewhere.

Source: Moneymovesmarkets

Central bank balance sheets show a similar apparent correlation with gold’s trend, and again, it would take a reversal in policies, an reduction in or end to QE to change the balance sheet trend. Once again, maybe gold’s decline is telegraphing this, but right now we are seeing more QE in Japan rather than less.

Of course it is not set in stone that gold should rise in line with balance sheets and money supply. Measured against other commodities, gold is overpriced and has advanced too far too fast. In short, there are multiple ways to value gold, and some argue for a (protracted) decline, some argue for further upside, but the bottom line is this. As things stand right now, gold is perceived as unattractive, because central bank policies have not (this far) brought about raging inflation, weak growth low rates and low fear is the general global situation, which persuades investors into stocks and real estate, particularly as both are historically cheap relative to gold, and there has been a build up in inventories in most commodities. So it depends on what happens next, or what is perceived to happen next. Will commodities outperform as late cyclicals if stocks make a top here? Is there to be a solar max later this year which inspires speculation and inflation? Is money velocity about to pick up in a meaningful way as growth becomes entrenched, leading to inflationary froth? Or is growth to weaken again leading central banks to even greater stimulus, which inspires money into gold again? Or is moderate growth and low inflation to be the norm ahead, with central banks gradually easing off and a new K-spring already underway with momentum in stocks and real estate?

If gold still has unfinished business in any of these areas, then I suggest we should see swift repairs and solid buying interest, to reveal it was a last shake out of weak hands. If not we should see a weak response to the precious metals rout and the CCI commodities index breaking from its large triangle. An important few days.

Gold

Posted on April 15, 2013April 15, 2013 Posted in Commodities, Indicators, Solar Cycles50 Comments

As per comments I have attacked this morning into further selling. Added to gold and silver, and will add to miners later. Chart at end of Friday shows gold miners bullish percent hit zero and high volume day which previously correlated with bottoms:

Source: Stockcharts / CobraMV

I am playing for the mean reversion rally, the snapback, pending resolution of whether gold remains in a secular bull or topped out in 2011. See the last secular bull for possible echoes – both green circle triangle breakdowns could apply here, with the higher the termination of the secular bull:

Source: ActingMan / Fred

However, regarding the lower green circle, I maintain that we are not in 1975 by mirror, but 1979 or 1981, depending on whether we remain in the secular bull or not. There is a history of assets shaking out weak hands in a final flush before going on to make a parabolic peak. Gold also did this in late 1978, just over 12 months before making its secular parabolic peak:

Source: SeekingAlpha

Gold has now dropped just over 20% from its 2011 peak.

So three possible scenarios for you:

1. Are we in 1975, at the start of a mid-bull cyclical bear? I don’t believe so, as it does not fit with solar cycle timing. That mid-70s correction was the half-way point for the gold secular bull, but by gold-stocks and gold-real estate ratios we are close to the end, and the gold secular bull is a good 5 years older in duration at this point.

2. Are we at the turn of 1978 into 1979, just over a year from the secular top? I still rate this as the most likely, but it is very much in the balance. If this is so, then we should quickly see a recovery in gold, now that the weak hands have been shaken out and the key technical levels broken. A large and final move up to a peak in 2014 would fit very well with my solar cycling.

3. Lastly, are we in 1981, breaking down from a secular bull that in this case ended in 2011? I rate this as higher probabilty than 1. and less than 2. There is the possibility that the smoothed solar max already occurred, plus most stock indices hit secular low valutations. Stocks-commodities and real estate-commodities ratios hit low enough by secular history, if not absolute extremes.

If the third scenario is correct, then the danger is that gold falls long and hard before recovering. Although I previously showed the CCI to have already corrected a large amount from its 2011 peak versus its likely secular bottom, gold has been the commodity that has held up the best, and thus has potentially the furthest to fall. Nonetheless, nothing goes down in a straight line, and with overbearish/oversold extremes already in play, I am attacking for a bounce and will attack lower from here.

Friday Update

Posted on April 12, 2013April 12, 2013 Posted in Commodities, Currencies, Indicators, Macro, Stocks26 Comments

The SP500 has pushed up to the 1600 zone, which fits with the Birinyi/Bannister target, in a potential overthrow move. Plus this weekend marks the shift from the lunar positive to the lunar negative period, and a geomagnetic storm is predicted to be on its way. Lastly, economic surprises for the main regions have been in collapse and a change in trend in this indicator has previously led tops in the market. So collectively reasons for a top here.

However an opposing case can be made too. We don’t see particular degradation in stocks breadth and the SP500 has broken out into clear air. We see a strong/stable position in leading indicators. Here is the latest OECD collection:

Source: OECD

Plus CB reported Japan leading indicators at +1.0, in the first of this month’s updates. Using narrow money the updated picture is one of potentially moderating growth ahead, but as yet no significant downturn.

Source: Moneymovesmarkets

In terms of overbought and overbullish, some measures for equities are elevated, but there is a lack of major warning signs. Conversely we do see extremes in sentiment versus some commodities and commodity related sectors but the other way: bearish.

If you are following the SP500 or Nikkei then things look to be overwhelmingly bullish, but it should be noted that these are the two countries with the most aggressive central bank stimulus/easing programmes. A wider look at pro-risk is captured through combining the world stock index, equally weighted commodities index, euro-usd and 10 year treasury yields:

Source: Bloomberg

We see collective behaviour in pro-risk, but with under- and out-performers. So, up from June to Sept 2012, down to mid-November, up then to the turn of January into February, down into the end of last week. Could we now be the start of a new collective uptrend for pro-risk? Again, followers of the SP500 or Nikkei might find that hard to believe, but the wider look at pro-risk suggests it could be possible, and a rotation in leadership if of course feasible. The collective picture for pro-risk fits with 5-models-in-alignment:

https://solarcycles.net/2013/01/09/tools-for-2013/

Namely, a pullback from the end of Jan to Mar/April, then a final rally into around June time, to either end the cyclical bull (in my primary scenario) or produce a significant swing top (in my alternative scenario).

With US earnings season just getting under way, there is another potential mover in the markets. Let’s see.

More In The Balance

Posted on April 9, 2013 Posted in Commodities, Indicators, Inflation, Macro, Solar Cycles, Stocks19 Comments

Secular commodities peak behind or ahead? Here we go again.

The last secular bear in commodities, circa 1980-2000, lost 50% in nominal value from top to bottom. The previous secular bear, circa 1948-1968 lost a third of its value top to bottom. Assume a secular bear in commodities began following the peak in 2011, then drawing on those past events we could estimate a secular bear bottom in the zone shown:

Source: MCRI

We could go further back in time to average in more secular commodity bears, but I suggest the evironment was different, pre fiat capital era, pre free globalised markets, and pre inflationary government policies. The 1980-2000 secular commodities bear has a sideways bias, that is also shared by the 1948-1968 secular bear, and we see overall sideways action in secular equities bears too – and these are all because of modern government policies of inflation. In real inflation-adjusted terms, we see more of a downward bias, compared to the nominal.

The 1980-2000 commodities bear proceeded in waves, i.e. cyclical bulls and bears within an overall secular bear, and this too is similar to progress in secular stocks bears. If the secular bull peak for commodities is already in, back in 2011, then the chart above shows that we would already be getting towards around half way between secular bear top and bottom. Given that the secular bear progresses in waves, then a wave up ought to be soon due, perhaps like the 1982-1984 cyclical bull, post 1980 peak. As it happens, multiple commodities are currently at levels of extreme bearish sentiment, including corn, silver, copper, soybean meal and sugar, which would provide the fuel for such a potential rally. That said, overbearish or oversold increases the likelihood of a mean reversion or relief rally, but on occasion these extremes can persist and test patience, until the evironment becomes more supportive. So how does demand and supply look currently in some key commodities?

Natural gas shows a recent tightening of demand and supply, as inventories are dipping beneath the historic average. Nothing extreme though:

Crude oil inventories are plentiful, which is a depressant on price:

Source: Bespoke

Both zinc and copper show increasing inventories. Both in notably different positions to 2008 when commodities made a big interim peak.

Cereals, i.e. wheat, rice, maize, show a fairly steady position, with inventories largely tracking sideways over the last 5 years:

Source: FAO

And lastly to gold. Demand decreased last year on the year before, but remains high, with central bank and investor demand the main areas of growth the last few years:

Source: Moneygame

Whilst supply has been growing since a bottom in 2008, to a now all time high:

Source: ZealLLC

In summary, the overall demand-supply situation in these key commodities is no backdrop to a major rally, at least not as things currently stand. But to return to the opening question of whether a secular commodities peak is behind or ahead of us, the clues may still be in gold. If the period since 2000 is a K-winter then gold should be the leading asset. If demand slack in other commodities reflects recent weak economic growth, then the picture for gold is more complicated, as it is less a commodity and more a hard currency. Gold can thrive in conditions of negative real interest rates and money printing (or currency dilution). That said, it is also an inflation hedge and depressed commodity prices are doing nothing to convey troubling inflation expectations. As gold is sensitive to investor interest, were there to be a shift in stance from central bank away from negligible rates and currency diluting policy action, we might have conditions in place for an enduring secular bear. Indeed, this is what I predict will happen, the question is when? Does gold have a parabolic rise left in it yet, to end its secular bull, or did that occur in 2011 with silver making such a blow-off move?

This next chart shows how we are into the region of a secular transition in stocks and real estate versus gold. Gold is relatively expensive versus both and a rounded bottoming in the ratios could be in progress:

Source: Sharelynx

The ratios are low enough to justify a secular reversal, or they could yet break lower to around 1980’s levels to complete the secular extreme relative valuation. The curiosity is the Q ratio, which together with CAPE for US stocks, leads some analysts to expect steep falls in US equities from here, such as to 450 on the SP500 ( Russell Napier) to rectify it. I doubt it because of secular low valuations reached already on other stock indices around the world in this secular bear: such as Japan sub p/b 1, PIIGS p/es between 2 and 7, Germany, UK and Hong Kong all reaching below 10. In the last secular stocks bear, Japan only reached a low of p/e 20, so not all indices necessarily have to wash out, as long as most do.

Add in treasury bonds, due a reversal out of a 3 decade secular bull market and potentially bottoming around now along with money velocity, and consider the rounded bottoming in progress in many real estate markets around the world, and we have a window, and evidence, here for a broad secular transition, out of a K-winter and into a K-spring, switching from a secular commodities bull to a secular stocks bull, to a new secular treasuries bear and a new bull market in real estate.

The US dollar also appears primed for a new bull market, following a decade long bear. Interestingly, although the perception is that commodities generally advance when the US dollar is declining, in fact the last secular commodities bull peak took place against a sideways dollar, and the previous two commodities peaks against a rising dollar. In the secular commodities bull since 2000 we have seen more periods of commodities rising whilst the dollar has been falling, but we have also seen periods of them moving together. In summary, it does not appear that the fortunes of the USD particularly correlate to the fortunes of commodities. So what other clues can we use to assess if commodities made a secular peak in 2011 instead of biding time before a secular peak erupts ahead?

Well, I’ve left out solar cycles until now so time to bring them in. My analysis shows commodities making secular tops close to solar maximums. Danny suggested that food and metal peaks tend to occur at different times. It is true that historically individual commodities have peaked at different times. Here is a brief summary of previous secular commodities bull peaks:

1917 solar peak: copper peaked 5 months before, wheat 4 months before, corn dead on the solar peak, silver not until 27 months after.

1947 solar peak: oats peaked 6 months after, wheat 6 months after, corn 7 months after, copper 15 months after.

1979/80 solar peak: copper peaked dead on, gold peaked 1 month after, oil 4 months after, sugar 9 months after.

There is the possibility that the tighter packing to the solar peak in 1979/80 could be related to the free-est, fast-est, most globalised conditions to enable solar-related speculation to be at its most potent, but if we exclude that then we are left between the historic examples to expect commodities to make individual peaks at various times around the solar peak window. That peak is currently anticipated for Autumn/Fall 2013. Could the peaks in copper, silver, and cotton in 2011 be near enough to be within range for solar validation? Possibly, but a little stretched, and when we consider the likes of oil and wheat made their peaks back in 2008, that becomes then too far away.

What I have previously explained is that secular asset peaks around solar maximums are speculative. The solar activity brings about buying and speculation behaviours in humans through biological changes. Spikes in inflation occur at each solar maximum as shown, within a range of about a year either side:

Therefore I suggest it is possible through a feedback looping of commodity speculation and inflation to bring about a secular commodities peak ahead, even with looser inventories. Once demand increases and the perception is of a change in trend in inventories (rather than accute inventories) then the status quo can quickly change. However, there is no doubt that the looser inventories and weaker Chinese / global growth are a headwind. After all, there is nothing magical about the solar influence, it is just one influence in sentiment. I have also argued that the secular asset of the time becomes the target of the solar-influenced speculation, and if the perception is currently that commodities and equities have already switched secular position, then could stocks become the target of the speculative frenzy? I can’t rule it out. However, it remains that oil and other commodities tend to be late cyclicals, making a peak after stocks, so when stocks make their swing or cyclical peak, we could then see a move into commodities. As gold has built out a sideways range near its secular highs, it could then potentially break out, giving the technical break into clear air to inspire a speculative frenzy.

In conclusion, the call as to whether a secular commodities peak is ahead or behind us remains a tough one, very much in the balance. But it comes down to how to trade this, until evidence aligns more decisively one way or the other (gold breaks up or down, CCI breaks up or down, sunspots make a new high, commodities take over as the outperforming class or equities roar away). I am already positioned long a basket of commodities. Because of the uncertainty I do not wish to add here, despite the overbearish extremes. However, if commodities did peak in 2011 then as per the first chart the CCI is reaching towards a price level and time point where it is due a cyclical bull rally soon. I therefore believe that I can likely make a profitable trade out of commodities regardless of their secular position, with a little patience.

S O L A R C Y C L E S

Category: Indicators

Sunspots, Equities, Treasuries, Commodities, Inflation, Money Velocity, Interest Rates And Demographics

State Of The Markets

Solar Cycles, Demographics and Equities

Velocity, Yields, Inflation, Growth And Commodities

State Of The Markets

More On Gold

Gold

Friday Update

More In The Balance