Forced Liquidation Continues
The following is part of Pivotal Events that was published for our subscribers September 22, 2011.
SIGNS OF THE TIMES:
"Brazil is booming amid a tectonic shift in global investing that has lifted its stock market, strengthened its currency and provided financing for new ports and World Cup stadiums."
~ Wall Street Journal, September 13
"Ferrari SpA predicts record sales as executives said ultra-luxury remains recession proof."
~ Bloomberg, September 15
"As fascinating as record volatility has been, the action remains on the path to a 'classical' fall period of forced liquidation."
~ Last week's Pivot
Politically, the public is seeing through the nonsense of interventionist economics and market forces are - again - closing the window on "stimulus".
The former is fascinating and the latter is ugly.
One indicator of the return of trouble has been the rise in yields for corporate bonds that has continued this week - on the path to disaster. Perhaps this could be behind the decision to invoke the old "Operation Twist". Problem is - the long bond has already been driven up by speculators and more buying from the Fed is adding to instability.
Another indicator has been the rise in the gold/silver ratio. The September edition noted that rising through 47 would be associated with the return of troubles. Overnight it jumped from 44.9 to 46.8 and disruptions have been impressive.
The September 7th Pivot also noted that if the DX rose through 76 it would be on its way to a secular bull market. This was accomplished a couple of days later, but the troubles began yesterday when the 76 level was tested and the rally lifted off late in the trading day.
The last three weeks have been hard on commodities, such that base metals (GYX) and agriculturals (GKX) have plunged.
This morning's comments from London include "Base metals nose-dive as market confidence plummets." In NY, the GYX opened down 4.5%, and the GKX is off by 2.7%.
With crude down more than 5%, the CRB is down almost 3%.
Wall Street economists will be pleased that gasoline has now established a downtrend. The high was 3.53 in early May and at 2.80 it has taken out the August low. Crude should soon follow.
For some reason the establishment thinks that crude is unique amongst commodities as it is a "tax" on the consumer. And on the same reasoning - all other commodities are not considered as having the powers of taxation.
Our view remains that for hundreds (if not thousands) of years commodities go up and down with the business cycle. It is exhaustion of speculative abilities that ends the business cycle - not taxation.
Having taken out the August low, the big CRB index is in a bear market. The high was 371 at the end of May, the August low was 315 and today's level is 310.
Last week we noted that important exchanges in Asia and Europe had taken out their August lows and set the bear.
Brazil, Mexico, New York and Toronto had not suffered the equivalent. As of today this is still the case, but it is worth noting that all set key highs in the speculative surge into April. However, the Dow is testing its August low.
The question is - will the sequence encompass markets in the Western Hemisphere?
Or will the genius of the Fed and the White House stabilize the turmoil?
To answer the above question - the authorities need to drive the dollar down, but it has been rising since the exceptional low as the "surge" completed in April. An intermediate uptrend has been set.
We had thought that the Canadian dollar would settle at around par and in a day and a half it plunged to the 96 level. There is technical support at 95.
To return to the above question about the Fed's genius. This page often notes that the Fed cannot push the yield curve, which the "Twist" is attempting to do. Also it cannot push credit spreads, which the "Twist" may be trying to do for corporate bonds.
Perhaps central bankers have given up on Sovereign Debt and are turning to other things that may be more responsive to manipulation.
To yesterday's posting, corporate spreads continue to widen and have taken out the worst levels of August. There is further pressure today.
At the shorter term, the pattern for the Ted Spread (attached) is following 2008 with interesting fidelity. Note the action in August-September.
In early August the action in the long bond registered an Upside Exhaustion that prompted our "sell" with the headline: "Bye-Bye-Bonds!".
Two previous such "sells" and "buys" had been successful.
From the call, the bond corrected and that got rid of the overbought condition. Obviously the bond has gone on to greater things.
Just how far this can go is uncertain, but the story about the Fed drastically lowering long rates could be in the market.
More on bonds over the weekend.
Answer To The Question
It is becoming increasingly doubtful that the "genius" of the Fed and the White House will prevail in the ambition to materially alter financial history.
The first business cycle out of the post-bubble crash was likely to end around May. Recent action in stocks, commodities, credit spreads and the dollar confirm this melancholy prospect.
In so many words, "genius" is under impartial adjudication.
CREDIT SPREADS AND THE STOCK MARKET 2008 and 2011
Link to September 23rd 'Bob and Phil Show' on Howestreet.com: http://talkdigitalnetwork.com/2011/09/goldsilver-ratio-ballistic/