Universally Pathetic

By: Bob Hoye | Mon, Apr 22, 2013
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The following is part of Pivotal Events that was published for our subscribers April 11, 2013.

Signs Of The Times

"Corn, silver and rubber tumbled into bear markets, joining slumps in commodities such as sugar and wheat, on signs of expanding supplies."

- Bloomberg, April 2

"Russian's economy grew at the weakest pace in the fourth quarter since 2009."

- Bloomberg, April 2

"German New Car Sales Fell 17% Last Month"

- Bloomberg, April 3

"Ultra-easy Federal Reserve policy...is causing distortions and posing risks to financial instability."

- Kansas City Fed President, Reuters, April 5

"Ferraris registrations in Japan surged to the highest in 12 years."

- Bloomberg, April 4

Ferrari sales were up 46% year/year on the "push to weaken the yen".


Japan's central bank has announced that it intends to double the money stock over the next two years. As widely reported this is to be done by buying bonds. The trading floor cynic thinks it would be a whole lot easier to just do a "two for one" split.

To be serious, this is another example of "Do Whatever It Takes" to get CPI inflation up to 2 percent. This will be done by boosting the money supply, but the "inflation" desired in the consumer price index has been going elsewhere. Mainly in driving financial assets to precarious levels.

No matter how fancy the theories or "new" policies get, the main purpose is to fund the experiment in unlimited government. In which case, the not-so-hidden agenda is "Doing Whatever it Takes" to get their hands on your money. Taking whatever they can get.

This has always been the reason for central banking. That they are now pushing so relentlessly is a desperate attempt to prove their theories.

Can they prove that throwing credit at a contraction that is the feature of the post-bubble world?

In economic terms the salient feature is the severe recession starting with the collapse of speculation (✓). Then recoveries are weak and the first one starts soon after the initial and severe liquidity crisis ends (✓).

In North America the recovery is in its fourth year and so is the stock market.

The stock market is working on a big rounding top and over the last few weeks some key economic numbers have turned down. In Monday's BondWorks, Levente described the latest such reports (Canada and US) were "universally pathetic".

The US Macro Chart is an objective summary of economic numbers and it shows a "rounding top" focused upon November. The decline into January was followed by a rebound to late March. The decline since is concerning in setting a failed test of the high.

The first recovery in the business cycle after a crash is a natural event. Despite unprecedented "stimulus", policymakers did not prevent the crash and had very little to do with prompting the recovery. However, all of the "lolly" has only exaggerated the public's abilities to speculate, which seems to be peaking. Central bankers will be unable to prevent or defer the next recession which seems to be starting.

Credit Markets

The rally in the June Bond Future carried prices from 140.44 in early March to 148 and change on Friday. Last Thursday's Pivot noted that the rally had been good enough to expect a pause.

Lower-grade stuff has had a couple of good weeks, with the dreadful sub-prime being bid up to 70.12 yesterday. This takes the price above the trading range of 66 to 69.5 that prevailed since early December. The low in 2009 was 38.

With this the party includes the Spanish Ten-Year yield reaching new lows. The high was 7.50% set with last summer's panic about European insolvencies.

No problems now as the yield has plunged from 5.40% in early February to 4.62% earlier today.

Other sectors have done well.

JNK rallied from the low of 32 with last summer's troubles to 40.79 in January. After correcting to 40 in February the price reached 41.21 today. The last four days have been strong.

Emerging Market Debt (EMB) clocked a significant decline from 122 at the beginning of the year to 117 at the end of March. With chart-gaps and all, the price essentially exploded to 120.57 on Monday.

This, the doubtful returns sector, has been hot.

But, sometimes financial markets can record a "Silly Season" in March-April and the Bitcoin has done it. The following chart provides a complete comment. Talk about a "Reversal-to-the Downside"!

Of course, there is no telling how general the damage will be. Let's take it as another speculative eruption, followed by chagrin. If the establishment states that the "Bitcoin Problem" is "isolated" then we will know it is serious.

Since July, lower-grade price action has been outstanding relative to the action in treasuries. Spreads from junk to treasuries narrowed until a couple of weeks ago.

This shows in the JNK/TLT chart, which reversal in March 2012 anticipated the problems of last summer. That reversal pattern is being replicated now. Its completion would end the trend of narrowing credit spreads that has prevailed since July. That trend led to this year's "Spring Party".

What's more, often there is a seasonal change in spreads in May. All it needs is compulsive buying of spread-products at about this time of year.

The last big one was accomplished in May-June 2007, which was followed by the "Greatest train wreck in the history of credit". The next train has been picking up speed since last July.

That was our call in the first part of that fateful June. It was preceded by the yield curve reversing in May, which was also fateful. This time around, Treasury Bill yields are at Depression lows preventing the curve from even thinking about inverting. No signal from the curve.

The next six weeks or so could provide the ideal time to get out of Risk City.

It is worth reviewing another disaster subsequent to a reversal in credit spreads. But, before going there it is worth emphasizing that the credit blow out in 2007 was a huge event with universal participation. That included private and government participation. Today's credit eruption includes an enormous intrusion by central banks. The LTCM disaster in 1998 hinged upon the street's conviction that as the EU came together credit spreads for different European countries would "converge". After all, they had agreed to keep budgets and deficits under defined constraints.

Spread narrowing was central bank policy. The financial establishment "bought" the "sure thing" that spreads would narrow. LTCM was the big hedge fund and was so highly regarded that senior central banks loaned funds directly and the Bank of Italy did that plus took an equity position. That is why there was such a massive bailout when LTCM failed. Unwinding of suddenly unsupportable positions eventually included the Bank of England selling taxpayer gold down to 253.

At the time these pages noted that even under the severe discipline of a gold standard there was considerable difference in yields between England and Germany, or between Germany and Italy. You get the idea. The EU deal did not include the discipline of gold and "Convergence" was suspect. One can Google "European Convergence Criteria" to learn more.

The next step was market forces with spread excitement going into the seasonal reversal in that fateful May of 1998. Spreads did reverse to widening and confirmation (also in May) of developing troubles was provided by the gold/silver ratio setting an uptrend.


Spreads between Junk and Treasuries are replicating the pattern that led to the Euro-bond panic of last summer, as well as LTCM in 1998. One of the features of the gold/silver ratio

is that at critical times it acts like a credit spread. In this case, going up provides a warning and the ratio is in a minor uptrend and reached 58.5 last week. The slump to 56.2 today shows some volatility, which is also an indicator of pending change.

Breaking above last year's high of 60 would enhance the uptrend and signal the beginning of liquidity concerns.

How could there be liquidity concerns in the midst of radical easing by senior central banks?

Monetary velocity is still going down and Mister Margin is watching.

Precious Metals

The opposite conditions between the gold sector and orthodox investments continue. The world is enthused too complacent about stocks and lower-grade bonds. The world is shunning precious metals. From time to time we have discussed "opposing action" as possible in a post-bubble contraction and it has been "on" with some force since September.

The big stock market is working on a rounding top that will likely be a cyclical peak.

Precious metals are working on a cyclical bottom and the condition is gloomy to desperate, which we have detailed over the past few weeks.

Relative to gold, silver was lagging on the decline, and in getting the gloom, drove the Daily RSI on the silver/gold ratio down to 22. This exceptional low was set on April 2nd.

Last week, silver bullish sentiment got down to only 28. This really is as bad as it was good at the 84 RSI reached in September, which as we noted was indicating "dangerous speculation".

That was on September 13th - the day after Bernanke announced his aggressive bond buying program. The street read in "inflation" and bought precious metals. These have deflated as bond prices inflated.

Indicating possible change, the silver/gold ratio has recovered from its low of .170 on Friday to .179 yesterday. It has checked back to .176 and it could take a good test of the low to accomplish the turn.

At important highs silver will begin to slow its advance before gold does. This shows up in the reversal of the ratio. The opposite holds at an important low for the sector.

We would continue to buy on the down days.


An Economy Addicted To Debt

An Economy Addicted to Debt
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Credit Expansion and Stock Market Inflation

Total Debt vs S&P 500 Level Chart
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Junk vs Treasuries

JNK:TLT SPDR Barclay HY Bond/iShs T-Bnd 20+y NYSE/NYSE + BATS

Bitcoin Chart

Market Capitalization
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Link to January 12, 2013 'Bob and Phil Show' on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2013/04/gold-plunges-markets-sell-off



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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