Really ... A Real Recovery Redux?

Since 2009 we've put forth a very important idea every time the consensus began to believe a real US economic recovery would take hold.

Actually, two ideas ...

First, we figured there was always too much deflationary pressure for a real, sustainable recovery to take hold.

Second, assuming we were wrong about the first idea, we feared what a recovery would mean for the US stock market. 

We cannot stress enough that market prices are driven by sentiment, human nature. Improving sentiment for the real economy has the potential to undermine the market.

Let me explain ...

I met a friend at a coffee shop on Friday. (In case you were wondering, I'm one of the few remaining hold outs in this cultural piece de resistance -- I do not drink coffee. So I drank some fancy chai thing. I think it's some kind of tea.) He's in the market to buy a house. And I also know some guys who are in the market to sell a house.

So we discussed how new home-buyers may be coming into the market now. There are two reasons for this (besides the typical "buy low" mentality):

1) Many past short-sellers are now eligible to get a mortgage again.

2) Buyers may be looking to seize the opportunity to lock in low interest rates.

The latter point is critical. Keep it in mind ...

Also on Friday I was passed along an article by David Malpass writing in the Wall Street Journal:

The Fed's Tapering is Already Paying Off

Malpass argues the Fed's tapering is already making room for lending to be made to individuals and small businesses. He also argues this trend will actually, finally, create jobs and drive real economic growth. 

There was one very brief mention of how Fed policy has effectively driven capital to the "Haves" at the expense of the "Have-nots." In other words: the rich get richer. (I'll say no more about income gap dynamics so I can avoid contracting a case of the Mondays.)

But let me take Malpass's article to its logical conclusion for the stock market ...

If the Fed is believed to continue tapering and completely end its bond-buying program in a few quarters, then soon thereafter they'll probably be inclined to remove their very visible hand from atop the Fed Funds Rate.

Any signal to that effect will allow interest rates to rise. That's not to say they will, but the odds are greater that they will rise once the Fed assumes a lesser role in manipulating the cost of money.

Yet well before the Fed changes its low interest rate policy, investors are likely to react. 

Along with hints of economic recovery, the expectations for rising interest rates will drive the demand for lending. Small business and individuals looking to pump money into real economy investments will be looking to grab loans at near-historically low interest rates.

So ... kinda sounds like gravy on a biscuit -- it's all good, right?

Not so fast.

Part of the "rich get richer" dynamic that's been emboldened by the Fed's extraordinary monetary policy has been the rise in asset prices. Considering that in said monetary environment the money was flowing into banks and financial institutions while much of the rest of the country remained mired in mediocrity, the eventual destination for most Fed liquidity was not the real economy but, rather, the stock market.

Now consider the levels at which major US averages are now trading -- historic highs, more or less.

Indeed, there are a lot of bears out there who can't justify these levels. (That, from a contrarian's point of view, however, does suggest the market can still press a bit higher in the near-term.) As the opportunity for out-sized gains in the stock market diminishes, capital will seek other sources of return.

A source of return that has long been absent is investment in the real economy.

It may seem like improving economic fundamentals are a plus for the stock market too. But for now we've got to look at it in the context of capital flows, I think.

The Fed has created an environment where investors are addicted to capital flowing between asset markets. The Fed's departure (and consequent expectations for a rising economy and rising interest rates) could open the door for a reversal in these capital flows.

Certainly the Fed is going to do their best balancing act to avert any significant drop in market capitalization lest their "wealth effect" efforts be thwarted.

But I think there will come a point when the market is going to run out of buyers willing to buy high and hope for higher.

Maybe the reaction to Wednesday's FOMC meeting will offer some clues ...

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Get a load of this tidbit out of the IMF ...


It seems like this can shake out one of two ways:

  1. A new effort to air the dirty laundry. As long as global policymakers are being seemingly transparent, then the consensus will believe things will remain relatively under control thanks to these devoted policymakers.
  2. A genuine attempt to pressure the euro lower. The common currency remains a key feature of the Eurozone growth struggles. The periphery certainly won’t welcome a further rise in the euro should it break above nearby levels. As long as the IMF volunteers further action from the ECB, the outlook for the yield dynamic appears to favor the US dollar over the euro.

The former might mean the euro continues to climb higher. The latter, should sentiment sufficiently turn, would mean the euro rolls over and begins a push lower.



December: History versus Taper

It's that jolly time of year again.

The bears are in hibernation and the bulls are getting fat. I've been seeing reminders here and there: Decembers are good for the market, don't you know?

Very well. Without pretending I did the research, let me steer you to Variant Perception for some stats to back up the December-to-remember claims.

The moral of the story: Buy today and come back once your New Year's hangover wears off.

If, however, you're monitoring potential reasons the consensus will get caught in a long-winter's nap, you don't have to look much further than taper talk.

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In every December on record till now, the market has not had to deal with "tapering." To be sure, I am confident the Fed is NOT going to taper in December. And though a lot can happen in three months, I'd be willing to bet they don't taper in March either.

But guess what? What I think generally doesn't matter to the consensus.

What matters is how the crowd wrestles with this idea. Let's assume incoming data remains positive. Belief that the Federal Reserve tapering decision is data dependent will go a long way into feeding tapering expectations. Further, belief the Federal Reserve is dependent on growth and unemployment levels will be the primary catalyst should tapering concerns flare up.

This isn't to say the December exclamation point on this year's rally will be denied. December may turn into another positive data point. After all, though the charts of major US equity averages appear extended, they still look quite strong.

But it is to say be careful not to become complacent. If too many find comfort in the history of December, the market will become vulnerable. Just because there's egg nog to fall back on, doesn't mean the jolly souls won't freak out if they think the punch bowl is going to get taken away.

S&P 500 futures are at record highs, but momentum isn't confirming the move:


Can someone please pass the punch?

And then can someone explain what it would mean for stocks if bond prices are propelled higher here?

-JR Crooks 


Eurozone economy will "turn the corner" ... to a new LTRO?

And the headlines read:

Sharp euro zone inflation drop, record joblessness add to ECB conundrum (Reuters)

EU sees 'hope' but also lower growth (BBC)

Euro zone economy turns corner, but growth, inflation subdued: EU executive (Reuters)

Well, the downward revision of growth from 1.2% to 1.1% is certainly not jaw-dropping. But is it enough to spark a subtle shift in sentiment that generates a more fragile consensus on the eurozone?


The joblessness is no surprise. As it has been in the US, unemployment will be a critical impediment to the eurozone's economic recovery. Spanish utility Gas Natural Fenosa has particularly acknowledged the depressed demand in Spain and the nearby areas. It's due very much to the severe unemployment situation. Gas Natural seeks to make its progress and profit in Latin America in the coming years because the outlook for economic growth in the eurozone remains grim.

But perhaps the most important piece of the headlines to be pulled out is the inflation data. We know what subdued inflation means in this era of monetary accommodation: more accommodation.

Does that mean another LTRO (Long-Term Refinancing Operation) is right around the corner, the same corner around which the eurozone economy will supposedly turn?

Doubtful, at this stage. But don't abandon the idea completely. If things get nasty, the European Central Bank will need to do something to help re-recapitalize a financial system built on crummy collateral. 

Instead, what's more likely in the interim is the strategy du jour for central banks: talk the market to sleep. 

The ECB's rhetoric, perhaps when they meet later this week, in light of subdued inflation, will signal:

  1. Economic activity shows stabilization but still has room for improvement
  2. The central bank has room to provide additional support measures IF needed without fear of generating inflation or asset bubbles

In other words: don't worry about the economy. But if you do, remember we're there to backstop it ... so don't worry about the economy.

Ok. Got it. More accommodation. Woo hoo. So what?

So, barring any real shocks to the financial system, real or perceived, we're left to juxtapose expectations for the European Central Bank and the Federal Reserve.

In the weeks following the agreement reached on the US debt ceiling, market expectations shifted mightily into believing Federal Reserve tapering was to be long-delayed. Decent US economic data is surely to erode that enthusiasm and expectations will then shift back to believing tapering is on its way in.

Assuming I'm right about the inevitable shift in Fed expectations, and the ECB's further-accommodation-if-needed rhetoric, the resulting change in yield differential will be US dollar supportive.

And that seems appropriately timed, since in just the last few weeks predictions for the US dollar's demise have ramped up noticeably. And this story about South Africa diversifying their currency reserves is sure to validate the bears' collective growl.

The euro may recoup some of its recent sharp losses in the coming days. But it could have very likely already made it through a turning point of its own, one that sends the value of the euro much lower in coming months.

-JR Crooks

P.S. We mentioned the open EUR/USD trade last week that was showing open gains of about $1,500. Well, that trade is still open in Jack's Black Swan Forex trading service -- and it's now showing $2,810 of open gains per one standard-sized lot. And Jack's locked in, gauranteed, $2,540 of it.

Click here to see how the rest of Jack's trading advice has panned out this year. I imagine you'll be impressed.


US Nonfarm Payrolls. Gross!

What a weak-handed attempted to recover $7.7 billion in redemptions last month.

That's the amount of money that flowed out of Pimco's $41 billion Total Return Fund in August. And Bill Gross is trying to stem the outflows by promoting the NEED to be in short-term Treasuries and credit.

He and his colleague, Mohamed El-Erian, are campaigning with their predictions for a very unstable investing future, albeit one where the Fed continues to maintain historically low interest rates.

They may be right about the increased instability, the low-interest rate environment, or both. I tend to think they'll at least be right about the Fed sticking to its low interest rates policy ...

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As it concerns the more immediate future -- the taper -- I think the Fed will at most gesture with a small decrease in its monthly bond purchases. But it will need to simultaneously emphasize its continued commitment to low interest rates, monetary accommodation and new bond purchases if needed.

The Fed is nowhere near an exit if you consider the global dependency its policies have created. The global economy is not ready to stand without the Fed's crutch.

What does this mean?

Well, sticking with Bill Gross's area of expertise, I think bonds may find some support here. A colleague of mine this week called shorting bonds "the easiest trade in the world right now." As such, he seemed as reluctant as I am to jump on this easy trade right now. 

On a weekly basis, this drop in bond prices (rise in interest rates) appears to be overextended. In looking at a weekly chart I noticed a similar price pattern between now and late 2010/early 2011.

In the last four months, the 30-year Treasury Bond has fallen nearly 13%. In the four months ending January 2011, the 30-year Treasury Bond fell just over 13%.

What happened after January 2011? It's interesting you ask. The 30-Year Treasury Bond price rallied 40%, low to high, over the following 17 months.

Now, I know this is not a perfect and certainly not a scientific comparison. So many things are different different between now and then. So this pattern may not be an apples-to-apples comparison. And it may not be a trading signal you're comfortable jumping on.

But it may be worth considering nonetheless. It may show we're close to a maximum tolerance level for interest rate increases over said period of time.

The US Nonfarm Payrolls report this morning was not stellar. It wasn't overtly bad either. But it was soft enough that it gets investors thinking more about the anticipated certainty of the Fed taper. 

Minneapolis Federal Reserve Bank President Narayana Kocherlakota recently said the US economy needs more stimulus, continued QE. He says the Fed’s own forecast on inflation and unemployment calls for continued accommodation. If the Fed does decide to taper, this suggests it will be a marginal move -- a gesture -- that keeps its ultimate commitment to accomodation intact.

Interest rates may find at least a temporary top if this idea gains traction.



Schiff. Rosenberg. Looking for inflation in a deflationary world ...

I think Peter Schiff is very good at explaining how political economy should operate. But it seems his market and economic forecasts, in anything but the very long term, tend to be similar one-way bets.  Maybe I notice this because often times my bets are opposite his.  (I mention him because he’s calling a spectacular buying opportunity in gold, again.)

David Rosenberg is also very good on political economy. He seems to me more pragmatic than Peter Schiff in that he seems more open to change his market calls as evidence mounts.

[Note:  Both Peter and David have made some great calls, and I respect their work.  This is not intended to be a bash session.]

Mr. Schiff remains on the inflation train, thinking that Fed policy must eventually generate an unmanageable increase in prices; while Mr. Rosenberg has held on to his outlook that deflation is the order of the day under current policy. David has been more correct than Peter since the credit crunch, but now he’s changing his tune ... Thus, it is an important shift of a powerful voice away from the deflation camp [a camp I frequent].

Mr. Rosenberg believes we may soon begin to see some inflation. He doesn’t expect much, but he notes the potential for inflation to exceed the 2% threshold the Fed likes to posit.


The crux of his change of heart seems to rest on the deleveraging of US households. The fact that they may have finished working off their debt suggests consumption can regain a pace to generate rising prices. Rosenberg’s words now:

“My sense is that once this consumer deleveraging cycle is over, and there are signs that it is coming to an end if it hasn't ended already, you're going to see the velocity of money start to rise, against the backdrop of double-digit growth of the monetary base, and that is going to lead to inflation down the road.”

Here is a chart from the BIS showing debt growth as a percentage of GDP in a range of countries. Notice what I circled: it shows that US household debt as a percentage of GDP has shrunk in the five-year period in question.


That is unquestionably a good thing. But is it sufficient to counter other deflationary forces?

Sure, there is plenty of data you can grab to suggest the US economy has finally stabilized and could resume a steady pace of growth. But I feel like we’ve said that at least once a year for the last, I don’t know, three or four years, maybe?

The chart above shows overall global debt, when measured relative to economic growth, actually increased (and by $33 trillion, no less). I may be reading this wrong, but I would say that means many countries are actually worse off when it comes to their flexibility in managing debt and growth.

So if you want to consider the Fed’s much-talked-about tapering, you have to wonder what it will mean for interest rates. And if it means interest rates will continue to climb, you have to wonder what that will mean for countries still struggling with too much debt and dysfunctional credit markets. And you have to wonder what type of contagion that might have on the US. And you have to wonder if the Fed actually can taper any meaningful amount of its purchases without rattling sentiment.

All said I can understand Mr. Rosenberg’s change of heart. He sees the writing on the wall – we’re stuck with a status quo of QE that will in most cases generate further fuel for financial markets. And, as Mr. Rosenberg believes, I suspect any increase in prices will look more like stagflation than inflation.

In the medium-term, Mr. Rosenberg’s decision may begin to look prescient. Rising interest rates may be taken as a sign the market has overcome the central banks’ low interest rate policy. US economic data may continue to improve. The labor market may even continue to show the faintest signs of improvement.

But how long can the US maintain stability if the rest of the world has dropped anchor and the US labor market still faces substantial hurdles?

I do expect the US will continue to outperform. But that’s all relative. It doesn’t necessitate rising prices. And it perhaps overlooks the battle the Fed will continue to fight in trying to keep the rest of the world from weighing down the US.

A major correction, particularly in US equities, could be materializing now (finally). But ultimately, the outlook for the global economy suggests business as usual. In such an environment, stock markets probably remain buoyed and other asset prices will ebb and flow on fluctuating economic expectations.

Unless the Fed surprises everyone, I’ll be looking for a market downturn soon ... and then a buying opportunity.

-JR Crooks


The great Treasury explosion is coming

Take what you want from that headline!

The point I want to make is this:

We could soon witness a sharp and steep, though perhaps short-lived, rally in Treasury prices.

To be sure, I began to think we were due for a rally in Treasury prices back in June. That's when prices had already taken a big hit and there was a palpable risk-off mood in other asset classes. I thought Treasuries might get a a safe-haven boost in such an environment.

Apparently there were plenty of others who thought the same thing. Because the negative mood came and went with barely a hiccup in Treasury prices' downtrend. In fact, anyone who positioned for a rally in Treasury prices were devoured by the bears on a renewed surge lower.

And that leaves us where we are today. The downside has become quite extended. And it appears the trade is becoming a bit lopsided as the fundamentals are shaping up in such a way to confirm the suspicions driving Treasury prices lower.

But we know the market. And most of us probably respect the buy-the-rumor-sell-the-news dynamic. In this case, however, it'll be a sell-the-rumor-buy-the-news dynamic if Treasuries do rally.

As we near an anciticpated announcement of Federal Reserve tapering, Treasury prices appear ripe for a sharp, corrective rally. The catalyst may be less hawkishness -- less taper -- than expected. At the same time, I looked at the latest CFTC Commitment of Traders (COT) data yesterday morning ...

With regards to positioning in 10-Year Treasury note futures, the speculators are running an extreme net short position (bearish) while the commercials are running an extreme net long position (bullish). At extremes, the commercials tend to have it right and the speculators tend to have it wrong. Check out the following chart for a visual on this idea:


Is this explosion to the upside going to happen today? Maybe. Tomorrow? Maybe. This week? Perhaps.

It may make sense to monitor the COT data for confirmation, i.e. wait till positioning begins to reverse before throwing your bets down. (You can get the newest data as early at 3:30 Eastern on Friday afternoon.)

But needless to say, even if we are in a long-term downtrend for Treasuries (uptrend for yields), it appears a corrective rally is due to commence very soon.


-JR Crooks



Yield Differential Still Seems in Charge of Euro versus US dollar

To show a market correlation is to show a market correlation.  That is about it.  The reason I say that is because we can never really be sure which of the pieces of price data in the correlation is leading and which is following.  And to go further, even if we did know which was leading we then run into the problem of then "forecasting" where the lead piece of price data is going in order to help "forecast" where the follower is going.  Thus, I think correlation analysis is useful, but it must be handled with caution.

In that vein, you have probably heard plenty of people trying to forecast currency prices using a forecast of interest rates. 

Read on ...

Currency Currents 25 July 2013


We don't believe real estate is a good hiding place either

Recently, a newsletter guru (who shall remain nameless) listed several reasons why he believed real estate would be a great place to put cash.  We were surprised because we don’t believe real estate will be a haven after another major washout in global markets if global demand doesn’t materialize soon. 

It just so happens a good friend of ours, his name is Clive, agrees.  We have printed below Clive’s well-reasoned and articulate responses to said newsletter guru’s consensus rationales for buying real estate.  We couldn’t have said it better ... thanks Clive. [Note: read the dialogue by clicking on the link below ...] 

Unless we see a rebound in US demand, coupled with a rise in real income, it seems unlikely to me that real estate will sustain recent gains given what Clive calls “funny money” going into real estate.  A break in financial assets means a fall in collateral as many leveraged funds have to sell collateral to cover stock margin.  There is big “fund” money now invested in real estate, and much of that investment has been subsidized by our government—you and me, in other words ...

Currency Currents 25 June 2013

-Jack Crooks


Timing gold.

A friend called me up a couple weeks ago. He wanted to know when would be a good time to buy some gold coins.

I told him to call someone else.

Actually, I didn't. But I did tell him to consider waiting. I thought gold could go significantly lower.

Gold started that "significantly lower" move this week. So my advice wasn't too bad in the grand scheme of things. 

But Elliott Wave's was better.

Earlier this week -- on Monday, actually -- Elliott Wave International released a short-term update to their subscribers. I'll let them explain:



Gold and Silver: A Great Day to be a Bear 

Elliott wave analysis is the blade-proof glove with which "to catch a falling knife"
By Elliott Wave International

In the wee morning hours before dawn on Thursday, June 20, the precious metals' rooster crowed, "Cock-a-doodle-DOH!" First, gold prices plummeted 4% then 5% then 6% below $1300 per ounce to their lowest level in nearly three years. Soon, silver followed in an even steeper drop below $20. Read more.

Is Elliott Wave International suggesting, with their falling knife subtitle, that it's time to buy gold?

I guess you'll have to read to find out. But I know that other gold watchers are open to an even deeper dip -- into the $1,100 range if gold can't stabilize soon.

Regardless, you have to wonder if we are not nearing the end of gold's downside:

[Click on the image to view a full-size chart of gold futures.]

Clearly, gold needed a real correction after what everyone notes as 12 years in a solid bull market. It would seem that the latest surge lower is in reaction to interest rate expectations. (Remember: gold doesn't offer yield, which makes it less appealing in an environment of rising interest rates.)

But are expectations for rising interest rates -- courtesy of the collapse we've seen in Treasury prices lately -- well founded?

As Elliott Wave touches on, Ben Bernanke gave no obvious indication of a concrete change in policy after this week's FOMC meeting. There has been no change to bond or MBS purchases. And there certainly has been no indication of when an interest rate hike will happen (except for Fed Funds Futures indicating traders now expect the first rate hike will come in January 2014 instead of January 2015.)

So might this latest interest rate chaos wind down soon?

It's possible. 

I don't claim to have blade-proof gloves, but if Treasuries at least stabilize around current levels (or even rally, a scenario Jack discussed recently) and the risk-off mood takes US stocks on a much-overdue and deeper-than-expected correction, and other assets continue to flounder, then maybe gold comes back into favor a bit.

[Click on image to view full-size chart of 30-year US Treasury Bond futures.]

That could mean the yellow metal lays a foundation that provides a rallying point once investors calm down. Because after this sell-off finishes, central bank policy will not have changed in any way that substantially undermines the low-interest rate status quo.

And it won't, if global central banks have anything to say about it. The only real obstacle is if the market generates financial system risks of its own that policy accommodation can't manipulate in the near-term.

-JR Crooks