State Of The Markets

Posted on July 7, 2013July 8, 2013 Posted in Commodities, Currencies, Deflation, Demographics, Geomagnetism, Indicators, Inflation, Lunar Cycles, Macro, Real Estate, Solar Cycles, Stocks33 Comments

No collapse in the stock market, which makes the case stronger for a more regular multi-month topping process. It would be historically normal for equities to retest their May highs and even make a marginally new high, then complete a volatile trading range by around September time before falling in earnest.

Also historically normal would be if commodities outperform from here, with bonds having topped first, then stocks topping, and eventually commodities topping out, likely in 2014. The continued falls in bonds – and rise in yields – adds weight to bonds having topped – and yields bottomed – in 2012. Now are world equities in the process of making their top?:

Source: Bloomberg

The strong advance in crude oil of late has added more weight to commodities going on to outperform here, rather than the historically abnormal but deflationary case of commodities sinking. The combination of protest and unrest in Egypt together with speculation in crude oil are both historically normal for a solar maximum, so I am encouraged. Nonetheless, crude oil has yet to truly break out and some geopolitical dampening could pull it back:

Source: Stockcharts

If crude does continue to rise, then commodities as a whole should catch a bid, due to high historic correlation, with oil a a key input in the agri process and a key inflationary force, which brings us to gold. Gold has dropped around 30% from its 2011 high, which is similar to the percentage drop made in 2008. It has the potential to be making a bottom here with a higher low than in late June, and the longstanding overdue bounce based on extreme bearishness, but only if it can rise this coming week, which brings back to oil’s performance, plus also the US dollar.

The recent strength in the USD has taken the currency to back up to a key level. Below is the long term view and the potential for an important breakout:

Source: Rambus / Stockcharts

However, as per my demographic work, I believe leading indicators will weaken and gold will re-assert itself, and US stocks will top out here reducing demand for the dollar. Here is some evidence to support that view.

The latest global PMI combined services and manufacturing dropped to 51.4 from 52.9 and continues the overall weakening trend over the last few years. This is as I would expect under the combined deflationary demographics of USA, China and Europe since around 2010.

Source: Markit

The performance in corporate bonds suggests US housing may be about to turn down again also:

Source: Martin Pring

And margin debt continues to look an important pointer for the stock market. See below how a sharp run up in margin debt, a final parabolic rise, precedes the 2000 and 2007 tops in the SP500 by several months. We have seen a similar parabolic rise since mid-2012 to now and there is the possibility that margin debt peaked out in April which would suggest stocks should indeed be in a topping process now and over the next couple of months:

Source: Dshort

If stocks are topping out then normal clues would be found in negative divergences in stock market internals and leading indicators. For the former, we should look for breadth divergence once we see a retest of the highs. For the latter, we have the potential in the global PMI above, but also in this leading indicator of leading indicators, by RecessionAlert:

Source: RecessionAlert

I have enquired with them what this MBS indicator is, but have no reply. If anyone knows, please share. But it would fit with my demographic-deflationary expectations.

We also see a potential divergence in geomagnetism, if equities can now rally again to a retest of the highs:

The ideal combination by my work and research is for commodities to outperform again now into next year, and make a speculative peak near to the solar peak (the timing of the solar peak remains unknown, with the experts still diverging. Sunspots are currently back up over 100, which adds to the muddy trend), then deflationary demographics to mean the global economy fairly quickly tips into recession under that commodity price pressure, and then we should see the steep falls in nominal stocks. My alternative scenario is that the deflationary forces are too great and commodities in general sink with just gold, as the anti-demographic, eventually coming again alone.

In support of my primary scenario, the action in live cattle has been very much aligned with solar history, with what looks like a peak earlier this year:

Source: Tarassov

Source: TradingCharts

Now we need to see other commodities make a fresh rally to new highs, assuming a solar peak is still ahead.

This week we have the new moon on Monday and the end of the lunar positive period by Thursday. So I am ideally looking for equities to rise further in the next couple of days and make that retest of the highs or marginally higher high, then retracing again in the negative lunar period ahead, to further the technical look of a topping process. If we get that retest of the highs then I will be looking to sell equities longs and add short. But for further support I would like to see oil break out, commodities to rise en masse and the US dollar to be turned down with gold catching a bid at last. Let’s see how the action unfolds.

Deflationary Demographics

Posted on June 27, 2013 Posted in Deflation, Demographics, Indicators, Inflation, Macro39 Comments

If the combined demographics of the major nations are exerting an overall deflationary pull on the global economy, then we ought to see clues in the data. Broadly-speaking, USA demographics began a downtrend around 2000, Europe around 2005 and China around 2010. Therefore, the biggest pull has been in place since 2010 or so.

G7 and E7 countries combined industrial output has been weakening over this period. The question is whether this measure is going to continue downwards and break beneath zero or pull upwards again from here:

Source: Moneymovesmarkets

Retail sales in some of the key advanced economies have also shown a declining trend over this period, and are also at the point whereby they either pull up or drop into the negative:

Source: Capital Economics / IBtimes

The global PMI composite for services and manufacturing shows something similar: a weakening trend over the last several years and the same predicament going forward:

Source: Markit

Combined leading indicators for the OECD nations have also shown weakness the last couple of years but are trying to pull up again:

Furthermore, we have seen a renewed round of easing recently, with rate cuts across the globe in the last couple of months, as shown below, which should have a positive effect several months hence:

Source: Business Insider / Moneygame

Lastly a look at specific USA data on its own does appear to show trends being pulled down over time:

Source: Streettalklive

Source Dshort

Now let me outline two scenarios going forward. The first is that the world economy picks up in the second half of 2013. Positive effects from the round of further rate cuts, plus the drop in input prices through recent softer commodities push most of the above indicators upwards and away from danger. Demographics continue to exert their influence in keeping global growth weak and unimpressive, but growth is nonetheless maintained and improves, at least temporarily. Asset markets would be the primary beneficiary, with stocks most likely winners again, under low growth low rates. Commodities should also get a boost, in a mean reversion away from oversold and overbearish, and on improved global demand. If commodities then gained too much traction, the risk would be of oil and other key inputs tipping the world into recession given global growth is fragile due to demographics.

The second scenario is that the combined demographic trends of USA, China and Europe, that are now collectively at their most potent, drag those indicators above negative and the world economy tips into recession under deflationary momentum. So no spike in commodities, no excessive inflation or subsequent tightening, but rather like a global version of Japan in the 1990s, whereby no central bank action could prevent the demographic waves from cutting spending and investing. Such a deflationary shock is the scenario Russell Napier is predicting. QE has failed to produce either strong or self-sustaining growth, and growth in emerging market reserves has reversed, limiting their ability to deal with another deflationary shock. Inflation is the only real solution for the indebted developed country governments, to inflate the debt away, yet they cannot induce the necessary inflation, due to the combined demographic downtrends. If the world was to tip into a deflationary recession, then I expect a panic would ensue and stocks would sell off hard. The perception would be that despite the billions spent on propping up the economy, it had all failed and central banks were powerless. The massive debt that had been racked up in trying to stimulate and support was also now growing even bigger under deflation – a double failure. Of course, demographics would be the culprit, and eventually by around 2020 the trends would have improved in USA and China and others sufficiently to give the global economy traction again, but not before a massive sell-off in assets.

Stocks look to be rising again since the new lunar positive period, so I am hopeful my preferred scenario of a re-test of the highs will ensue. If this is a topping process in equities then we may then see the historically normal switch to outperformance in commodities. Certain indicators, such as Martin Pring’s, suggest commodities are about to gain traction again, and given they have been oversold and overbearish for some time now, a mean reversion would make sense. If commodities were to truly rally and then top out after stocks in the normal sequence, the whole momentum move for commodities would have to happen fairly quickly. This could happen through solar maximum inspired speculation, but until and unless commodities become the money target then this scenario remains theory for now.

If commodities do not take off, but rather leading indicators weaken and provide a negative divergence to the equities high retest, then the deflationary scenario could be unfolding. I would expect bonds and cash to be beneficiaries to some degree, whilst equities fall hard, and I believe gold would rally again, as the anti-demographic go-to. Once again I could see a solar maximum inspired speculative peak, this time in gold.

I have to end on the scenario not mentioned. Central banks continue to tease enough growth in the economy to keep stocks in favour. Not too much to inspire inflation and commodities momentum. Not too little to slip into deflation. Sustained weak growth in the economy and sustained easy money conditions, with the latter inspiring continued flows into equities, and perhaps a solar maximum inspired speculative peak happens in stocks. Under this scenario I would expect Japanese equities to outperform, under their belated demographic catch up, full-on central bank push, and as an energy importer benefiting from the subdued commodity prices. If this scenario were to be the theme of H2 2013 then I would expect renewed economic weakness in 2014 as the recent round of easing wears off again, and demographic forces continue to pull. Would we then slip into deflation at that point, or could yet another round of central bank interference once more have the required effects?

It comes down to whether central banks are really in control here. Are they successful in their ZIRP and QE efforts? The evidence suggests not, as they cannot induce inflation nor sustained growth. Japan’s central bank could do nothing to overcome their demographic downtrend in the 1990s. Central banks can only encourage or discourage through their tools, they cannot force. With US, Chinese and European demographics united down in this decade, I think that’s too potent a combination for central banks to overcome. It’s just whether they can keep it at bay for now. So let’s see how leading indicators develop, and whether commodities can attract a rally or not. Timing the solar peak remains troublesome as the experts cannot agree, but assuming it remains ahead, then I expect it still has a key role to play here. I expect a sunspot-associated speculative peak, and maintain the most likely asset to benefit is gold, as demographics are anti-equities, anti-t-bonds and deflationary. If it isn’t gold, then the combination of easy-bubble-making monetary conditions and solar inspired speculation should inspire a moon-shoot in another asset.

Demographics, Disinflation and Deflation

Posted on June 23, 2013June 23, 2013 Posted in Bonds, Commodities, Demographics, Indicators, Inflation, Macro, Stocks53 Comments

I have enlightened myself again this weekend, and I feel just in time. More outlook changing research. These last 4 months or so have been a real leap forward in understanding, personally. So yes, some of my views have changed, parts of the site need updating, but let’s get to the important. Demographics not only dictate ‘secular’ bull and bear markets in stocks and real estate, but also play a major role in inflation, disinflation and deflation.

It is labour force growth or shrinkage playing a key role in price inflation. A swell of people aged 15-20 entering the workforce works up price inflation through spending, whereas more people entering old age relative to the work force is disinflationary through saving and disinvestment. There are correlations with inflation in labour force growth (15-60), young labour force percentage (15-40) and dependency ratios (inverted – old and young versus the working population), all of which are approximations of the same idea. It’s another simple but powerful mechanism, in the same way swells in the ‘investment’ age group produces equity bull markets.

Countries with ageing populations have generally experienced low inflation in recent years, whereas younger countries have experienced higher inflation, due to the resultant spending boom:

Source: Andrew Cates

Japan’s proportion of 15-40 year olds has historically correlated with inflation levels:

Source: James Bullard

Japan’s working force growth projection suggests Japan will not successfully reinstate inflation this decade, but will at least manage to change the trend as of around this year:

Source: Andrew Cates

Here is the 15-40 year old ratio history versus inflation for the USA, also showing the correlation with inflation:

Source: James Bullard

And two projections forward:

Source: James Goulding

The charts suggest the USA should be tipping from disinflation into deflation. That is, if we assume the Fed is powerless to stop it.

Now look at dependency ratios for some of the main countries, we first see that collective trends historically matched broad global inflation history (nb: dependency ratios are not inverted in this chart):

Dependency ratios collectively fell (i.e workforce proportions grew) between 1965 and 1980, which was a period of rampant inflation. Since then we have seen overall disinflation, and this is confirmed below:

Looking forward, we see collective deflationary dependency ratio trends in the major nations, with the exception of India and Brazil (nb: dependency ratios are inverted in this chart):

The alternative 15-40 ratio measure paints a similar picture of price deflation ahead for five of the most important economies:

This explains why ZIRP and QE have failed to bring about inflation in Japan and now the USA. These countries want to inflate, but the demographic trends mean the public just won’t spend sufficiently in the economy for it to happen. For the majority of the major nations, this is a problem going forward, as the demographic trends persist and worsen. For the global economy, this is a problem, because the combined GDP of Brazil and India and other smaller positive-demographic countries is much smaller than the combined influence of the USA, China and Europe.

So what’s likely to happen? The central banks of these countries are largely pushing on a string. They can’t force spending and investment, they can just use ‘carrot and stick’ tools to encourage spending and investment and discourage saving and cash. The evidence suggests that disinflation should continue. The risk is that disinflation turns into deflation, as the demographic trends suggest. The global economy is at risk of falling into a new recession, or even depression. It explains why the recovery since 2009 has been spotty and weak. The central banks will likely have to persist with ZIRP and QE and perhaps also deploy other unorthodox tools, but which would likely have the same lack of potency. If deflation takes hold, then debts would grow, savers and currency holders would be beneficiaries, and investment would become unattractive because future prices would be lower. Risk asset markets would fall.

So why are equity markets so strong currently? We have disinflation and low growth, together with the ZIRP and QE easy money conditions. Whilst the former two conditions hold, then speculation is encouraged by the latter two. It would take a plunge into recession and deflation to generate the exodus out of stocks, and it is such a development that a couple of analysts that I respect are touting (e.g. Russel Napier, using the Q ratio, predicts the SP500 to bottom at 400 in 2014). With this new research, I now understand why.

But could this benign status quo continue, with low growth and pro-speculation conditions, with the central banks acting together to maintain such conditions? Well, I would repeat that all they can do is encourage and discourage through their limited toolkit. They can’t force. The demographic trends are now united negative in USA, China and Europe, which provides a powerful downward pressure. There are less new investors coming to market, and more leaving. So how can stocks keep rising? I suggest the answer lies in the current margin debt situation:

Source: NY Times

Stock market participants have increasingly borrowed and leveraged in the market. So it’s not more investors but the same investors buying more and more on credit, and as the graphic shows, when margin debt reached over 2.5% of GDP previously, the stock market fell into a cyclical bear subsequently.

Here is the correlation between the S&P composite p/e ratio and the middle-old demographic ratio for the USA, with projection:

It suggests a fair p/e of around 10 by next year. As of Friday’s close the p.e was 18.4. A shrinking of p/e can be achieved either by stocks holding up nominally but strong inflation eating away at the valuation, or it can be achieved by stocks tanking under no-inflation or deflationary conditions. By the demographic projections further up the page, the second option appears likely. This would also mean US stocks could be in for severe falls ahead.

Deutsche Bank produced the next chart which shows US market cap as a percentage of GDP versus middle-old demographics. SMC as %GDP is a valuation measure for the stock market and the second chart below shows where we currently stand, which is very much overvalued versus the demographic forecast in the first chart:

Source: Business Insider

Source: Vector Grader

Again this suggests the US stock market should be in for sharp falls, both real and nominally, because the demographics don’t support inflation. I therefore believe US stocks should be a good shorting opportunity ahead, together with Europe and China. However, I still think Japan is set to do well as a long equities bet. The pick up in labour force growth for Japan, shown higher up the page, from this year looks set to change the deflationary trend even though true inflation looks set to remain elusive. So that suggests at least stabilisation in the economy. However, equity prices could grow much stronger, in line with the M/Y ratio:

The next two years is a particularly good demographic period for Japan as middle-old and net investors measures also rise. Plus Japan is playing catch up to demographic trends that turned up as of around 2002. I maintain that Japanese stocks took off then but were pulled back by the global crisis of 2007/8. So, the question is whether they would again be dragged back by a new global recession and a stocks bear in most of the major nations. I don’t think they would be immune, but I would still expect them to outperform and eventually deliver their demographic fulfillment. Plus, there is a chance of a fast speculative boom. Current monetary conditions encourage bubbles, and the new Japanese government has upped the ante by saying it will buy equities as part of its reflationary policy. With speculative behaviour also at peaks around solar maxima, I think there is a chance Japanese equities could go crazy, and so I will maintain long Japanese equities and add on any further retreats.

Now one more demographic correlation, this time with government bonds. This work by Credit Suisse is the same simple idea: the ratio of those who are predisposed to buying government bonds to those who are really not determines the long term path of bond yields:

Source: Credit Suisse

For the US and Europe we see a change in demographic trend has taken place over the last 10 years which should see outflows from bonds going forward, and yields therefore rising. The US changed trends first, which suggests treasuries are belatedly falling to trend now, and that the flows out of treasuries are justified.

If a sharp cyclical bear does occur in equities, then we would have a similar deflationary shock to 2008. In that experience, most assets were sold off as people needed to raise cash to pay for losses elsewhere. Gold did not escape. It was government bonds that were the recipient of the money flows. Would they be this time?

Let’s turn to gold. Historically, gold has performed well when demographics have been in negative trends. I recently showed that the Dow-gold ratio had bottomed and topped very closely with demographic turns in both the USA and UK. Below, the same p/e demographic ratio as shown further up the page but with the gold price added also shows the inverse correlation:

Source: Glenn Morton

You may read that in the 1970s gold rose as an inflation hedge, in the 2000s gold rose under disinflationary conditions, and gold also performed as a deflation hedge in 1933. Gold is touted as a hedge against systemic risk and financial market instability, as hard currency or as a store of value under conditions of negative rates or currency dilution. What I would suggest is that gold is the go-to, the default investment, under certain demographic conditions, i.e. ‘negative’ demographic conditions. When demographic trends are counter equities and real estate and government bonds then gold becomes attractive by default. This ‘last resort’ status is reflected in gold’s real performance over time, namely it goes nowhere in the long term.

When equity p/es are declining under m/o demographics, and stock market interest is in decline due to m/y and net investor demographics, but labour force growth demographics are inflationary, then we have disinvestment in the stock market but price inflation in the economy. This was the 1970s, and reflects the broad collective downtrends in demographics amongst the major nations at the time. Gold and commodities outperformed.

When equity p/es are advancing under m/o demographics, and stock market interest is increasing due to m/y and net investor demographics, and yuppie/nerd demographics are pro bonds, and labour force growth demographics are price disinflationary, then we have investment in the stock market and bond market and price disinflation in the economy. This was 1980-2000 for most of the major nations, although Japan changed demographic trends circa 1990 and went its own way. Equities and bonds outperformed.

From 2000 to current, we saw some divergence in demographics. For the USA, equity p/es were declining under m/o demographics, stock market interest was in decline due to m/y and net investor demographics, and labour force growth demographics were disinflationary, so we had disinvestment in the stock market (secular bear market) and price disinflation in the economy. However, Europe largely retained positive demographic trends until mid-decade and China until around 2010. China’s conditions were price inflationary, and as the biggest consumer of commodities, commodities had a demand story. Some have suggested that gold performed well in the 2000s under disinflationary conditions, i.e. that it is a beneficiary under disinflation, which may be true. However, the picture is muddied because of the price inflationary China demographics which could equally have been the story for gold’s rising, partnering with commodities again.

Which brings us to now and the next few years ahead. We see more united demographic trends again. For the USA, China and Europe, equity p/es should be declining under m/o demographics, real estate interest should be declining under m/o and dependency ratio demographics, stock market interest should be in decline due to m/y and net investor demographics, yuppie/nerd demographics should be counter government bonds, and labour force growth demographics should be price deflationary. So we should see disinvestment in the stock market and bond market and price deflation in the economies of these countries. What would be the winner under such conditions? I believe it has to be gold, as the default, go-to asset again. I suggest this would be the difference to 2008, as government bonds have changed trends and with ZIRP still making cash unattractive, money has to flow somewhere. If the solar maximum is ahead this year and this deflationary shock happens 2013-2014 with gold the recipient, then we would once again produce a secular peak close to the solar maximum.

What about commodities? I am not sure if commodities as a whole would be winners in such a deflationary shock. I have my doubts, because the demand story should be on the wane, and they are a class for inflationary trends. I believe the question is whether they collectively would become a speculative target, rather than an economic demand target. If equities are close to topping then commodities could go outperform here in the historically-usual pattern of topping last as the economy rolls over. However it would be done so most likely on speculative interest, rather than tight inventories. Geopolitical or climate events could play a part, particularly as the solar maximum has historically inspired protest, revolution and temperature peaks. The solar maximum has also historically seen speculative climaxes, so the potential for commodities as a class to rise is possible, particularly if oil took off. However, I am now very much open to the alternative, which is that the price deflationary demographic trends, particularly in China, take down commodity prices from here, and precious metals perform alone. I am therfore going to refrain from adding any more to my long commodity positions for now, and watch developments.

In short, I think calls that gold’s bull market is over are premature, as it is the counter-demographic go-to asset. Equities are on borrowed time due to counter demographic performance and margin debt. Collective demographic trends in USA, China and Europe are not in favour of stocks or real estate, nor pro-government bonds. Price deflationary trends are in place, which means falls are likely to be hard in nominal terms for risk assets. Commodities may not escape this, unless they are initially speculated to a peak and then join the falls. We don’t really have a precedent for such a coming together of trends, but I believe gold should be the winner as bonds, equities and real estate are counter demographic and cash is unattractive under ZIRP. I want to short stock indices from USA, China or Europe, but want to play long Japan, as it is the demographic exception. Brazil and India are also positive-demographic, but are not likely to escape a sell-off. I want to add long there post-falls. I will remain short treasuries and long precious metals.

I stated at the top of the post that I believed this analysis to be just in time. By that I mean I suspect equities could fall hard at any time, and that’s the position I want to add to my portfolio: short stock indices. I can now see more of a case why US equities could be in an eiffel tower formation and about to collapse. So I am going to add short without delay. If China liquidity and emerging market issues don’t escalate this week and set off sharp declines, then I would ideally still like to see a more regular topping process with another attempt at highs before rolling over, over the next couple of months.

Macro And Markets

Posted on June 21, 2013June 21, 2013 Posted in Bonds, Commodities, Currencies, Demographics, Geomagnetism, Indicators, Inflation, Lunar Cycles, Macro, Real Estate, Solar Cycles, Stocks22 Comments

The Fed announced tapering of QE as of 2014, subject to developments of course. It will first need to taper out its QE to zero before rates can rise from ZIRP. Rates will then likely be raised slowly as in the 1950s due to high government debt. Together this means easy monetary conditions will persist until US demographics bottom out 2014-2019. I suggest that is broadly necessary to counter the demographic downtrend and could mean that we see continued low growth with more asset bubbles appearing and then popping.

What would change this course of action? If inflation became problematic and yields rose too far too fast. Currently inflation is benign as global growth remains fairly soft. History reveals that a low growth low inflation low rates environment is good for equities. It took the last 12 months for investors to really gain confidence in economic growth persisting (if soft) and with a gradual bottoming in government bond yields:

Source: Bloomberg

At those record low yields, investors were making a guaranteed real loss, yet money flows were still attracted into government bonds – with the assistance of QE in USA, UK and Japan – due to fear of greater losses in other asset classes. Recently that has changed, and it is because low economic growth has persisted long enough with some of the main worries (e.g. Euro debt, sovereign default) deflated. That does not preclude new crises emerging, but there has been a gradual process of repair since 2008, and I suspect we have seen the bottom in bond yields.

Because we are currently in demographic downtrends for the USA, China and Europe, I suggest it makes sense that only low growth is the current norm and that easy monetary conditions are likely to be maintained until a collective demographic improvement as of around 2020. Gains in real estate and equities should be capped by the demographic downtrends, but supported by the easy money conditions. Commodities have historically performed well during demographic downtrends, but could struggle to make large gains if soft growth holds down demand. Money should continue to flow out of government bonds, with any of those three classes the recipient, unless real yields rise too high for bonds to become attractive again. Yields cannot be allowed to rise too high because of high debt servicing and negative economic impacts. Combined, that makes for a fine balancing act between all four asset classes.

Japan is one economic giant that is in a demographic uptrend and I believe the recent surge in equities there is a belated catch up to that trend.

I believe Japan was ripe to bottom around 2002, along with demographics, but was then pulled back down again with the global crisis in 2007/8. The H1 2013 Nikkei rally was stopped at the long term declining resistance, but I think this time it will burst through it successfully, in due course:

The Japanese government has declared it will do whatever it takes to re-inflate the economy and assets including buying equities. The question is how long it will take to break through. If US equities are beginning a topping process then it would seem unlikely that Japanese equities break out at this point. If emerging markets are heading into a crisis, as Russel Napier believes, then a global sell-off would likely take place again.

There are 3 possibilities here for US equities. One is that they have run up in an eiffel tower parabolic formation and will collapse now down the other side. Two is that they have begun a topping process whereby we should see an overall sideways volatile range over several months whilst negative divergences appear. Three is that they are consolidating before further gains.

Because of the sharp run up and the demographic headwinds, I have my doubts about option three. However, cyclical stocks bulls usually end with commodities and inflation rising to become problematic and helping tip the economy into recession. Inflation rises, yields rise and the higher input costs and higher rates squeeze the economy. Bonds top first, then equities, then commodities. At this point we appear to have seen a top in bonds, but do not yet see commodities or inflation rising. Therefore we don’t see the usual historic pressures to pull down equities. Low growth, low inflation, low rates: good for equities.

For option 1, a harsh collapse, some analysts are referring to a 1987 overlay, predicting a crash. I can’t rule it out, I can just refer to that current environment again – it differs significantly from 1987 where yields and rates were much higher. We know that flash crashes can happen, where automated selling begets automated selling, but I suspect we’d need a swift change of status quo to bring it about. Something like the possible emerging markets crisis.

For option 2, a topping process, we would have time. There is no rush to short until we need more technical evidence of a topping range and negative divergences in breadth and leading indicators begin to appear.

In the short term, I believe we could be reaching a point this weekend whereby equities rally up again. Passing through the full moon together with a possible bottoming out in geomagnetic disturbance – the Singapore STI shown here mapping very closely to the model:

Plus, low Nymo and bullish percent / call put readings in US equities suggest a bounce imminently.

If equities do bounce then crude oil has a chance of holding its breakout, which it is currently backtesting. If crude cannot, and falls back into the triangle, then the textbook action to follow would be a breakdown out of the bottom of the triangle, which would likely spell prolonged doom for the commodities complex.

So will commodities come again? I believe they will. Nothing goes up or down in a straight line. Mean reversions eventually occur, if not something more juicy. What could give them momentum? A top in equities or concerns about the economy functioning without QE could spur money into precious metals as safety again, with a short squeeze possible on record short interest. Geopolitical developments can affect oil prices and in turn wider commodities and protests/wars are common at solar maxima. Global warming and global wierding remain risks to agricultural commodities, with May having come in at the 3rd hottest on record globally and Jan-May the 8th hottest on record. Global temperatures have historically peaked around solar maxima.

The latest on solar peak prediction is that NASA believe a summer peak in 2013 is likely, NOAA a Nov/Dec 2013 peak, and SIDC running with two options as shown:

Source: SIDC

Averaging, we could look to a late 2013 smoothed maximum. Historically, secular asset peaks have been made close to solar maxima, along with inflation peaks. We should allow around 12 months for commodities to rise up and make a ‘secular’ peak and an associated inflationary peak if it is to happen along with this solar maximum, so it should be the theme from here into 2014 if it is to occur. With bonds having likely topped and equities having rallied hard, we are also ripe for outperformance to emerge in commodities. However, economic data out of China, increasing inventories, depressed sentiment in the class, and strength in the USD are some reasons why this is not occurring. Until this collective picture changes in some way, I have to remain open to the possibility that commodities will underperform through the solar maximum, and this could mean a different asset class is bid up to a speculative peak if the solar maximum is still ahead.

From my recent Dow-gold ratio analysis, I suggested two likely bottoms in the ratio: 2014 or 2025 (approx). Either a swift run up to a speculative peak in gold into next year, or a mid-point currently on the way to a bigger gold peak a decade away at the next solar max. From the same analysis, demographics in the main nations no longer offer clear support for either equities or gold going forward, which I suggest means we are likely to see less wild swings between the two, and alternating shorter bulls. So I remain happy to average down in gold and other commodities, particularly with my new cash injection, and await either a mean reversion rally or a possible momentum move into commodities once a trigger emerges. I also would add to long Japan equities on any further drops. I am tempted by the weakness in positive-demographic Brazil and India to build more of a long positive there, but each are currently experiencing their own economic or social problems which could yet worsen so I am going to hold off. I would look to add short equities if a topping process becomes clearer with negative divergences. I remain short treasuries.

I believe the greatest risk currently to my portfolio is some kind of sharp global sell-off, a collapse in US equities infecting all pro-risk. However, I really can’t call a winner from the three options I outlined above for US equities at the moment, so await further flags and developments. If pushed, I still place greatest likelihood by a historically normal unfolding of events, namely that bonds have topped and we will see equities top as commodities outperform, with commodities topping last, helping tip the world into recession and end the equities bull; that the solar maximum will inspire speculative peak and that peak will be in commodities (or precious metals at least) due to the collective demographic downtrends aside Japan. However, I am nowadays ultimately of the view that there is complex interaction between demographics, solar cycles, fundamentals, government intervention and more, that make it a difficult calculation. I believe anomalies can occur if several of these factors conspire together to produce one, which is why there is no holy grail. However, I expect clearer ‘probabilities’ to emerge from here, one step and development at a time.

Topping Sequence

Posted on June 10, 2013 Posted in Bonds, Commodities, Geomagnetism, Macro, Stocks37 Comments

In Martin Pring’s work on the business cycle he proposes that bonds top first, then stocks, then commodities. Here is an illustration (click to view better):

I am of the conviction that bonds began to top last year, with momentum having taken hold the last 6 weeks. Here are US, UK, German and Japanese 10 year government bond yields:

Source: Bloomberg

Equities have made a steep rally over the last 12 months which echoes previous cyclical bull terminal runs:

Source: MSCI

The trajectory and the duration suggest stocks should be due to top soon, however it is usual for a topping process to unfold over several months:

Such a process usually unfolds with negative divergence warning signs. We have one current divergence in the geomagnetic model:

Meanwhile, bond yields should continue to rise and commodities should attract momentum. ECRI leading indicators have historically given rise to commodity price action with a lag, and the LEI strength over the last 12 months should now turn commodities upwards:

Source: M Pring

We see crude oil once again making an attempt to break upwards out of its long term coiling or triangle, with the support of an inverted head and shoulders pattern:

And mid-June is a historic take-off point for gold:

Source: Zealllc

By Russell Napier’s work, cyclical bulls in stocks historically end with yields rising and inflation troublesome. I see this as a fit with Pring’s work and my own, namely that we see equities rising, then yields and velocity, commodities become a beneficiary until inflation and yields start to tip leading indicators over and money exits equities, with commodities late cyclicals often rising into a peak once the business cycle has started to turn down. This, collectively, is the historic norm, and I believe we will see a repeat here, but it’s a question of timings.

I believe we are at the start of a multi-month topping process in equities, that commodities are from here going to be the momentum class, and that money should continue to exit bonds. However, we do not yet see rising inflation and we only have 6 weeks momentum out of bonds, which suggests the whole process should take some time yet.

A look at the equally weighted commodities index reveals that commodities prices are still elevated, and a momentum rally of 25% (red line) off a typical W-base would take us close again to record highs:

Source: MRCI

That would ensure the missing inflation, but I suggest we may need one or more triggers to held generate such a move into commodities. I can only guess at such trigggers. One could be if crude oil can break out this time – as crude is an input in agricultural commodities and an important inflation driver, it could inspire price rises in both softs and gold. Another is the June 19 FOMC output, either sticking to or scaling back QE. The latter should create an initial sell-off but then I believe would translate into a faster flow out of treasuries and into commodities.

On a personal note, since moving to Austria we have been living with the in-laws. We will finally move into our new place 1 July, and we are renting there with no plans to buy in the foreseeable future. We just sold our house in the UK at the end of last week which means I now have a large lump sum in the bank account at my speculative disposal, because it is no longer stuck in the housing market. I am going to take my time to work with it and work out how best to deploy it, but it clearly alters the status quo. It means I am flush with cash, but as a trader I see this as a golden opportunity to turn it in to something much bigger. In the short term it means I can and will want to be more aggressive with opportunities, in building up my exposure, so I wanted to share it with you to set the context when announcing future trades.

Roundup

Posted on June 4, 2013 Posted in Commodities, Geomagnetism, Indicators, Macro, Solar Cycles, Stocks10 Comments

NASA now estimates the solar peak to be ‘summer 2013’, which is line with Jan’s latest. As forecasts are still being amended by both SIDC and NASA, we will just have to see how sunspots develop, but the key for me remains whether February 2012’s peak-to-date can be beaten.

My suggested mirror from history is 1946-7, into the solar peak, treasury yields reverse course from ultra-low. Here is the Bradley model for 1946 courtesy of WX Guru.

Source: Llewellyn Publications

A similar model to this year’s Bradley, with a peak in June.

Gann Global maintain the closest mirror is the 1950s and draw out this map for commodities (using the BLS commodities index):

Source: Consensus / Gann Global

I still foresee commodities rising and outperforming as stocks lose momentum and the USD weakens. Leading indicators suggest emerging markets and Europe should outperform going forward, which should bolster commodities and the Euro.

Here we see PMIs for various European countries turning up:

Source: Moneymovesmarkets

I have added to long sugar today. It has been languishing on oversold and overbearish readings for some time now. That does not mean a turnaround has to happen. But it has pulled back sufficiently for me to want to add.

Source: Indexmundi

I have also added to long Natural Gas today. It has pulled back from having reached over 4.5 dollars to just under 4. It is still at historic cheapness and relative pricing to oil. Plus it is in a better position in terms of inventories compared to crude.

Source: IEA

And lastly today I have opened a long position in the Poland WIG stock index. Here is is modelled against the latest geomagnetism update.

Geomagnetism has changed significantly over the last month, from benign to troublesome. I believe this has been a factor in stocks pulling back. As can be seen, the geomagnetism forecast for the next 3 weeks is not good, but I wanted to open a position in the WIG and it is just a starter position. With a current reasonable p/e of 12 and a likely improvement ahead in Europe, I decided to start that position today.

Secular = Demographic

Posted on May 27, 2013May 27, 2013 Posted in Commodities, Demographics, Indicators, Inflation, Macro, Solar Cycles, Stocks22 Comments

Secular bull or bear markets in both equities and real estate are in essence demographic bull or bear markets, with equities and real estate correlating fairly well with each other over time, and in turn with demographics. In other words, slow moving trends in demographics make for the longer term ‘secular’ bull or bear markets in stocks and housing, within which there are cyclical bulls and bears. To enable this relationship in any particular country, certain fundamental conditions are required: sufficient levels of sanitation and education, social discipline and peace, a sufficiently diversified economy and good infrastructure, i.e. what we would generally find in developed countries but may be lacking in positive-demographic but raw frontier nations.

The first chart shows US demographics, using middle-old, middle-young and net investor ratios, modelled against a composite of real stock prices and real house prices. The composite topped along with demographics circa 1965, then bottomed together around 1980, then topped again around 2000.

All three demographic measures swung fairly closely over that 50 year period, which perhaps explains why the composite tracked so well. We might note that the composite peak in 2000 was fairly extreme, suggesting an episode of excess greed that subsequently required wash-out, and also that the secondary peak circa 2005-7 was counter new demographic trends, and thus liable to the steep crash that then followed in the composite.

Looking forward, net investors stops falling as of around this year, the middle-young ratio bottoms circa 2015 and the middle-old ratio after 2020. This suggests there is scope for new ‘secular’ bull markets in stocks and housing, but it is unclear when they might kick off. Note though that the composite has again made a counter rally to the demographics from 2009 to 2013, which suggests another leg down in real terms would be appropriate before any new secular bull. Note also that we don’t see strong uptrends or all three measures united again, like from 1980-2000, which suggests future secular bulls in the USA may not be as powerful.

Next up is the same chart for Japan, but not stretching back as far in time. Again the equities and real estate composite peaked with the demographic measures in the late 80s, and again with a fairly excessive greed peak and subsequent harsh wash out.

The composite has belatedly taken off again only in the last 6 months, with net investors and middle-young having turned positive again around 2002, continuing until around 2020. There has thus been a 10 year delay in Japanese stocks and housing in turning back up with demographics. However, this period coincides with the wash-out negative-demographic period in the USA, the largest economy in the world, which suggests Japanese risk asset markets were infected by situation in the USA.

The third chart shows the same modelling for the UK. The demographics for the UK topped out in the late 1960s and the stocks/housing composite made a top around then but went on to eek out a slight higher peak circa 1972. So again we saw belated adjustment as this was then rectified to a combined low in the late 1970s. Demographics and the composite then made a strong secular bull until the 2000s.

The peak in the composite for the UK was around 2007, in line with the demographic peak. For the UK this peak was higher than in 2000 and justified by the demographics. The US peak circa 2005-7 was a lower peak than in 2000 and fittingly its demographics were already on the decline. The later demographic peak in the UK was reflected in other major nations and thus possibly ‘infected’ the USA in pulling the US composite up into a decent 2005-7 peak despite the falling demographics. Looking forward, the UK faces demographic downtrends until around 2020-2025 which suggests a secular bear could be in play until then. However, we need to look at the demographic positions of the other major economies of the world so see the overall picture as evidence of cross-infection and lags are at work. To that end, here are the three demographic measures as used above for China, Germany, France and India.

China made an excess-greed peak in equities and real estate circa 2007, tying in with the topping of demographic trends. It now faces difficulties until circa 2020.

Germany faces similar headwinds until around 2020, or potentially even around 2035.

France is in a united downtrend until circa 2035.

India is in an ongoing uptrend in two measures, and the middle-old ratio is a little deceptive as India is starting from a very small older population which is growing. For that reason there is a downtrend in the ratio, but it is still fairly benign compared to the more developed countries above.

The chart for Brazil looks very similar to India, ongoing positive, and if we round out the top 10 major economies of the world, Italy is similar to the other European countries with unfavourable demographic trends, whilst Russia has a positive period from now until circa 2025. The caveat for Russia would be that is may not score as highly on the criteria for the relationship to fulfill, for example the stock market quite closely tracks the prices of energy commodities due to the economy not being as diversified.

So with a view of the next 10 years, the largest economy in the world, the US, has fairly flat demographics and is unclear. The second economy, China, is at risk of a secular bear until circa 2020 but then improves. The third economy, Japan, is in a positive period until around 2020, and is in fact playing catch up to demographics. The fourth largest economy, Germany, is negative until around 2020 but has better potential after that. The UK, France and Italy are part of an unfavourably-demographed Europe, whilst Brazil and India are ripe for long bull markets.

In short, from now until around 2020 Japan, India and Brazil are in positions to rally but China and most of Europe are pulling down, with the USA unclear. From circa 2020 to 2025, Germany, USA and China are in better positions for secular bulls, whilst Japan’s window closes. On balance, that suggests a global secular bull with many participants has better odds in the second part of the decade, so the question is what is going to happen between now and then, i.e. select secular bulls in those countries with favourable demographics only, or ‘infection’ from the larger economies to the others.

Most of the major economies of the world, listed above, enjoyed positive demographic trends from circa 1980 until circa 2000 or 2005. That made it easy for the world to embrace a collective strong secular bull on the whole. Looking forward, there is a large pool of countries with strong demographics for the next 20 years, but they are largely ’emerging’ countries, including Brazil, India, Turkey and Malaysia. That suggests there will be a global shift in performance over time away from the old developed world to these countries and others. However, currently, USA, China, Japan and Germany make up almost half the global GDP, which means their fortunes affect the world. It will take a long time for the emerging countries to alter this in a significant way.

This is my suggestion. If US stocks and real estate (and in turn global stocks and real estate) can make another cyclical bear leg down to bring the composite down to the demographics, and put them at better relative cheapness to other assets, by circa 2015, then there will be better odds of a global secular bull beginning 2015 and strengthening from around 2020-2025.

Now I need to bring in solar cycles at this point, because something is going on with them, which further shapes the picture.

Here is the UK real equities chart versus sunspot cycles. The three major peaks in equities coincided with every third solar peaks. Inbetween interim peaks were made, also at 3-cycle intervals. And commodities also made secular peaks every third solar cycle, which were the buy points for equities.

We know the performance in equities largely correlates with demographic trends, and from research in my recent posts, we know that there is a solar cycle influence on demographics. However, is that ‘every third’ solar cycle rhythm just an accident, or is it a ‘natural’ sine wave? The long term real Nikkei chart reveals links with solar peaks but no such repeating rhythm. However, commodities have made a secular bull once again over the last decade, in alignment with the pattern.

We know that over time, real commodities have gone nowhere, and have been no long term investment. They just enjoy bursts of interest.

We know that they do not correlate with demographics, but rather tend to make secular peaks and troughs that are fairly opposite to equities. So do they just come into favour when stocks and real estate are out of favour? There must be more to it than that. Real negative interest rates unite the periods in which commodities soared, however, commodities are closely correlated with inflation, so their rises cause the negative real interest rates. In the 1970s interest rates were high, but real interest rates were still negative due to very high inflation.

The period into 1917 was similar to 1980: high yields rates and velocity, high commodities and inflation. 1947 similar to today: low yields rates and velocity, high commodities and inflation. Right now we have only mild inflation, but there have been bursts of problematic inflation, particularly in 2008 and 2011. This chart shows those sets of relationships in the US, and the UK experienced very similar.

So the four commodities secular bull periods are only all united by two things: high commodities and high inflation (with the inflation being notably higher than rates, to create negative real rates). As commodities are the key driver of inflation, we are left with one uniting feature: escalating commodity prices. So what causes these periods of escalating commodity prices?

I believe it’s a multi-part answer. Supply lags is one known. It can take 10 years for a new mine or energy field to come into production. That can create a decade-long demand and supply inbalance, as periods of lower commodities demand can close down projects and therefore create problems of inelastic supply further along in time. Commodities come into favour when their relative pricing to other assets is historically low, and this occurs at the end of secular bull runs in stocks / housing (as evidenced in dow-gold or real estate-gold ratios). Demand for commodities can also increase as more countries develop and urbanise,which can occur from economic boom periods. In today’s environment of ultra low rates and yields – similar to 1947 – investors look beyond cash and bonds for returns, putting commodities in favour. Conversely in the 1970s and 1910s, investors looked to hard assets (commodities) as hedges against supply-side inflation. Common to all, stocks and housing were in down trends due to demographic trend changes so commodities then became the go-to investment.

Following a decade long commodities bull market we have reached the point today whereby commodities are relatively historically expensive to stocks and real estate, peaking in this regard so far in 2011, and whereby new supply has been catching up and coming on stream in the last few years. However, real interest rates and yields remain negative and so maintain commodities interest, whilst demographics for the major nations largely remain in downtrends which should keep equities and real estate under pressure to the benefit of commodities. It’s therefore a balanced picture, but recall that commodities have been a terrible long term investment, so if the balance tipped further towards stocks and real estate then we should expect an end to the commodities bull.

With all that in mind, this is my view on what is most likely to happen. Commodities ought to make one last bull rally, in keeping with solar cycle history: excitement and inflation into and around the peak. Both equities and commodities have a history of making major peaks near to the solar maximums, regardless of cyclical patterns. That should tip the world into a recession and equities into a bear, to take off again from yet lower relative value levels circa 2015 once demographics are bottoming out more in the US. For stocks and real estate to be already in secular bull trends at this point – say, from 2011 – is rather counter the collective demographics. This fundamental downward pressure on stocks and real estate (in certain key countries) ought to reassert itself shortly and money flows ought to move into commodities (for likely one last time) under conditions of negative real interest rates.

If there is another cyclical bear in the US, then as per the cyclical bears of 2001 and 2008, the other major country stock indices are likely to participate – i.e. all moving as one. However it ought to be shallower in those countries with more favourable demographics.

State Of The Markets

Posted on May 24, 2013 Posted in Bonds, Commodities, Currencies, Geomagnetism, Indicators, Lunar Cycles, Macro, Stocks5 Comments

The Fed’s hint of possible scaling back of QE as early as next month provided the break in the US and Japanese stock market bull runs. I suggest that QE-cut is unlikely to happen next month but the markets were ripe for a catalyst to pullback and that provided the puncture in confidence. Below is the updated lunar geomagnetic model and Sp500 chart. We are in the lunar negative period and geomagnetic disturbances have pulled the overall model down, so the market was levitating against these two trends, and therefore vulnerable to a break.

The full moon is tomorrow and the end of the lunar negative period is Tuesday, so there is potential for more downside in the next couple of trading days. However, it is too early to say whether this week’s snap will be swiftly recovered thereafter or whether we have made a more decisive trend change. My thoughts at this point are that the Fed did enough to put uncertainty back into the markets until the next FOMC decision of 19 June. So I could foresee a correction/consolidation until then. I believe they then won’t scale back QE as early as that (though it could come in the following months) and so the markets will rally up again. Combined, that could provide a possible topping process formation.

Linked to this are the fortunes of the US dollar, gold and commodities in general. By my work, money flows should shift into cyclicals and commodities as equities enter a consolidation or topping process. Gold has potentially double bottomed this week and continues to track the Nasdaq’s correction of 1998. However, it’s too early to be sure of a bottom. The US dollar meanwhile made an intraday reversal on the Fed’s comments, which could be telling as it was the reversal of a breakout above the 2012 high:

Source: Ino.com

If US equities lose their momentum then I would expect the USD also to do so, and this could inspire a move into commodities if the global economy and leading indicators remain supportive. Crude oil once again failed to break out of its large triangle, this time to the upside, and so is back in the range lacking direction.

Here are the latest economic surprise readings:

Source: Citigroup

Bar Japan, they are all around historically low levels from which reversions normally occur. I checked the history of Citi economic surprises as a market indicator and they weren’t very meaningful in the bull of 2003-2007. However, as this is a mean reverting indicator, we can broadly expect these indices to rise going forward and thus provide some sentiment support for pro-risk. Plus there is some evidence that cyclicals tend to perform well when they are rising.

Turning to leading indicators, the situation for now is fairly positive as shown by the World LEI and CB LEIs below:

Source: Recession Alert

Source: Conference Board

ECRI leading indicators for the US continue to be positive:

Source: Dshort

China flash PMI was weak in the latest reading, Europe PMIs improved. My overall view is that there is fairly low risk for the global economy over the mid-year given that there were rate cuts and increased stimulus in Q1 in various countries, together with fairly benign commodity price action and inflation. I think it therefore possible that money continues to flow out of government bonds into pro-risk, but the reversal in bonds and yields is a fairly new development so it is too early to be sure it is enduring.

Sunspots, Geomagnetism, Global Temperature And Birth Rate

Posted on May 22, 2013May 22, 2013 Posted in Demographics, Geomagnetism, Indicators, Macro, Solar Cycles36 Comments

Both sunspot and geomagnetism cycles correlate with long term global temperature variation, with geomagnetism having the closest correlation co-efficient:

Source: Landscheidt

Changes in global temperature have been demonstrated to influence fertility and birth rates. A composite of 19 countries below shows the inverse relationship between temperature and birth rate over the last century:

Source: ScienceDirect / Harry Fisch

Sunspot and geomagnetism cycles therefore affect demographics through global temperature variation.

There is also a global temperature oscillation related to solar cycling, shown below. Therefore we have two solar influences on climate: an 11 yearly oscillation and a long term trend following long term changes in solar activity.

Source: C Camp

There is typically a spike in births around solar maxima – an 11-yearly peak – oscillating like the above:

Source: W Randall

Additionally, birth rates have been shown to vary with the economy, typically declining during recessions and rising during boom times.

Source: Pew Social Trends

There is a pattern to recessions following solar peaks, and therefore births declining following solar peaks. The chart below shows all three for the US, with the solar peaks marked in black. There is generally a spike up in births at the solar peak followed by a pullback or flattening in births aligned with a recession.

The major peaks in births occurred close to the solar maximums of 1917, 1958 and 1989.

Typically there is growthflation in the economy into a solar peak – which should encourage more births – and human excitement peaks with the sun. Perhaps human excitement at the solar peak also translates into more births, in terms of human behaviour effects, as snow shoe hare populations have been shown to peak around solar maximums. Then, following the solar peak recession and unemployment peaks typically occur, which would pull back the birth rate.

In asset markets we also see both an 11-yearly oscillation correlated to solar cycles and additionally a mapping of long term trend. This is a busy chart, but it attempts to show both the 11 year solar oscillation and the long term solar variance trend against risk assets, demographics and temperature – click to view larger:

So we have a six-way relationship between sunspots, geomagnetism, climate, demographics, the economy and the financial markets. The sun is the agent, and temperature and human behaviour (which translates into economic, risk asset and birth rate effects) are the subjects. There are two patterns: an 11-yearly oscillation and a long term trend variance. Within this multi-relationship there also appears to be a cause and effect chain from the sun to global temperature to birth rate (which becomes demographics) to long term risk asset performance in stocks and real estate.

If we are moving into a long solar quiet period then global cooling should become the theme and this should have implications for fertility, producing a trend of increasing global births. However, if man-made warming overrides the cycle of cooling then the opposite could occur. Whichever wins out should have implications for the world economy and financial markets later in the century.

S O L A R C Y C L E S

Category: Macro

State Of The Markets

Deflationary Demographics

Demographics, Disinflation and Deflation

Macro And Markets

Topping Sequence

Roundup

Secular = Demographic

State Of The Markets

Sunspots, Geomagnetism, Global Temperature And Birth Rate