Correspondence School PhDs in Central Banking

By: Bob Hoye | Thu, Dec 18, 2014
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The following is part of Pivotal Events that was published for our subscribers December 11, 2014.

Signs of The Times

"Hedge funds are shutting at a rate not seen since the financial crisis."

- Bloomberg, December 1.

"U.S. corporate bond sales swelled to an annual record as a late-year rush by borrower to lock in low rates."

- Bloomberg, December 2.

"Bond investors who helped finance America's shale boom are facing potential losses of $8.5 billion."

- Bloomberg, December 2.

"Plunging oil prices sparked a drop of almost 40% in new well permits."

- Reuters, December 3.

"With stocks loitering in record high territory, corporate America remains a major buyer of shares."

- Financial Times, December 5.

Stocks "loitering" is an unusual description that may have a sinister connotation.


Well it didn't take long to realize that falling crude oil is not an overall blessing.

The business, financial and academic world has become addicted to chronic inflation.

What's more, they even grant doctorates in currency depreciation and interest rate manipulation. Rumours that PhD's in central banking can be obtained through correspondence school seem unverifiable.

By "inflation" we use the classic definition which is an "inordinate expansion of credit". And this is associated with soaring prices for tangible and/or financial assets. Problem is that today's interventionists still focus on "inflation" as having to due solely with consumer prices. This goes all the way back to the mid-1920s when the Fed was the "new" toy for intellectuals to experiment with. Impressed by the the post-1920 crash in commodities, they were deliberately "easy" with credit to prevent commodities from falling further. After getting burned in commodities, the public chose to speculate in financial assets. And then stayed beyond when it was time to sell.

The mania for hoarding tangible assets, then hoarding of financial assets has always been followed by hoarding of cash and/or gold.

Cash has been taking on value relative to most commodities since 2011, junk bonds since June and the S&P since Friday.

Gold has been taking on a lot of real value since its cyclical low against commodities in June. Our Gold/Commodities Index has rallied from 328 in June to 420.

These are common features of a post-boom contraction.

Others are the reversal from narrowing credit spreads and the reversal from curve flattening to steepening (Tuesday ?).

Since it opened its doors in 1914 the Fed has never been able to prevent overdone credit markets from reversing to adversity. That's when the time is right and that seems now.

Credit Markets

The action in spreads this week has been riveting, with JNK/TLT dropping 2 percent yesterday. It has taken out the low reached in the October setback and is back to the levels of late 2012.

Junk has been bid down to an oversold reading. HYG is not there.

The chart of BBB spreads relative to treasuries follows. Narrowing with the boom reversed in June and with a number of corrections widening is the trend. It seems to be running a month or so behind the turn in 2007. Also, it seems to be about 50 bps behind in yield.

Treasuries have been vigorously bid up to an overbought condition.

The spike high set with the unusual loss of liquidity in mid-October was 147.75. That was in the December contract and it has rallied from 141.11 in early November to the 145 level. A test of that high has been needed.

Overall, the rally from 127.35 a year ago has driven the Weekly RSI from 30 to 72. The last time it was this high was on the rally that topped at 152 in June 2012.

The best is as good as in and it looks like ending action.

This could apply to the European bond market as well.

The German yield has declined from 1.95% a year ago to 0.66% earlier today.

On the same move, the Spanish yield has declined from 4.24% to 1.79% on Monday. It has increased to 1.89%.

The Greek yield declined from 8.84% to 5.54% in September. It surged to 8.98% in October and declined to 7.24% on December 4th. Today it is breaking above 9.00% and this is concerning. The chart follows.

If the former Soviet Union had issued bonds what yield would they have traded at in 1981 when those for the US reached 15 percent? Interesting, but useless conjecture.

Those for the Neo-Soviet Union soared to 12.79% in 2008 and then declined to 6.53% in 2013. This reached 12.95% on Tuesday, which exceeds the monthly number reached with "The Panic". The chart follows.

We have not seen any official boasts that the Russian problem can be "Contained".

Back to the US and as measured by 2s to 10s yield ratio, flattening has run for some 12 months with the Daily RSI making a big swing to overbought. Often booms have run some 12 to 18 months against a flattening curve and the reversal marks the end of the boom. We are watching this one for change.

The action in credit markets has become concerning.


Grains (GKX) continue to act well and remain our favourite in this department. At the low of 290 in October it was just as oversold as it was overbought at 424 in May. The high this week has been 330 at neutral momentum.

Base metal prices (GYX) rallied from the October low of 339 to 359 a couple of weeks ago. The hit at the end of November took out the 50 and 200-Day moving averages. The low was 340 and the bounce was to the 50-Day at 350. Now it is at 341 and not oversold.

What's more, Ross has a chart showing copper moves relative to a "coiled" Bollinger Band Width. The resolution will likely be to the downside.

Iron ore prices continue to decline. The high with the cyclical peak in metals in 2011 was 184, the low in October on the big Monthly chart was 80.09. The December contract is at 69.66 today.

Ron Griess, the genial proprietor of the ChartStore, has a thorough perspective on any number of charts. The update on the big swings in crude's deflated price shows that significant declines have been in the order of 70 + percent. The chart follows.

Our review of crude oil crashes noted that they ran for some six to seven months. The conclusion of forced selling counts out to around January.

The outlook for most commodities remains bleak.

Precious Metals

Gold's real price as determined by our Gold/Commodities Index continues to advance from its bottom at 328 in June. This has driven it to new highs for the move (420) and the following updated chart adds conviction to our call that this has been a cyclical bull market.

Keep in mind that the more crude falls relative to gold, the more profitable gold mining becomes. Also, the more base metals decline relative to gold the less profitable base metal mining becomes.

This will keep a lid on wages and on the cost of mine supplies. We are told that after years of scarcity, big tires are again readily available.

Our advice last week was to begin to commit some funds to the sector.

Credit Spreads: 2014

Credit Spreads: 2014
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Credit Spreads: 2007

Credit Spreads: 2007
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Russian Ten-Year Yield

Russian Ten-Year Yield


Greece Ten-Year Yield

Greece Ten-Year Yield


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Crude Oil: Deflated By CPI' With permission of Ron Griess,

Crude Oil: Deflated By CPI
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Link to December 12 Bob Hoye interview on



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

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