Beggar Thy Taxpayer

By: Bob Hoye | Wed, Feb 25, 2015
Print Email

The following is part of Pivotal Events that was published for our subscribers February 19, 2015.


Signs Of The Times

"[B]iggest single-year drop since 1931-1932."

-Bloomberg, February 10.

On declining farm commodity prices.

"Central bankers are now open all hours. Just as they worked weekends through the financial crisis, policymakers are again signaling they can strike at any time for the good of their economies."

- Bloomberg, February 12. Emphasis added.

The extra hours for this and other agencies must add up to a lot of overtime.

Authorities seem to be off on another fundraiser:

"New York's financial regulator has sent subpoenas to Goldman-Sachs, Credit Suisse, BNP Paribas, and Society General....possible rigging of foreign exchange markets."

- Bloomberg, February 13.

"Central banks are resorting to ever more radical means to prevent deflation strengthening its grip over European economies."

- Financial Times, February 13.

"They are only in their early to mid-20s, but some young bankers on Wall Street are the most sought-after financiers around, with lucrative pay packages dangling before them. Investment bankers who graduated only last year are being madly courted by private equity firms, Apollo, Blackstone, Bain, etc.".

- The New York Times, February 11.


Perspective, indeed. A lot is required if the reporting is not exaggerated.

Historically, there have been extreme paper-inflations in Banana Republics, China, Hungary and the Weimar Inflation, to name only a few. Despite 50 years of exhortations by gold bugs, such inflation in the senior economy with an established credit market has been impossible. Central bankers still believe that "stimulus" increases producer prices and forces business expansion. But markets are democratic and the public gets to decide which assets get inflated. Lately, it has been the equivalent of "hyper-inflation" in financial assets.

And, ultimately, public ambition runs into Mother Nature and Mister Market. This time around, senior central bankers have been the most reckless since John Law and his Banque Royale in 1720. When that bubble collapsed the public became so incensed that Law was lucky to escape France with his life.

History records that wealth, wages and savings have suffered major hits when credit/currency inflation ends.

The reporting is not exaggerated and the perspective is fascinating.

Credit Markets

The great global financial manias that erupted in 1873 and in 1929 enjoyed local stories.

In New York it was that some well-known "pool" was about to buy a certain stock. Such pools were outlawed in the early 1930s, but the Fed and the ECB have been operating just such a "pool" to manipulate the bond market. The Plunge Protection Team has been today's "pool" in the stock market.

The irony is that when the credit cycle matures and begins to reverse, it has overwhelmed the Fed's ambition to "keep the recovery going" or to "stay the course" to use the jargon.

It is best to keep in mind that the Fed was formed to prevent financial setbacks - because - they are followed by recessions.¹

¹Repeating the observation that the Fed has failed in its initial objective some 19 times since 1913 may seem tedious. But no more tedious than constant boasting about the Fed's ability to, well, keep the recovery going and to prevent bad things from happening.

Credit spreads began to widen in June and reached an excess in December. JNK registered a Springboard Buy and the price rallied from 36.91 to 39.5 yesterday. This has accomplished a big swing in the RSI from very oversold to overbought. Moreover it is registering the opposite reading - a Springboard Sell.

Last Friday's ChartWorks called for a "Risk On" trade and now the best is in.

The general stock market is now the most vulnerable to widening spreads since 2007.

But has been supported by the flattening Treasury curve.

The Treasury Curve from the 2s to the 30s became very overbought and is working on what could be an important reversal. This is essentially due to the action in the long end, which following the spike up in price to 152 it has dropped to a little under 144. A relief rally seems to have started.

Municipals (MUB) ran with Treasuries and became equivalently overbought. The drop has been to a level of support. A relief rally seems to have started on Tuesday.

Since the 2009 disaster, MUB has had three bull-moves where the 100-Day ma provided support. The significant hits in 2011 and 2013 were preceded by failure at the 100-Day.

This was violated on February 10th at 110. The low was 109.76 and the rebound is testing the 100-Day. If the attempt fails and MUB rolls, as in the two earlier examples, an intermediate price decline would follow.


"Currency Wars" is very much the talk of the times. This was the case in the last postbubble contraction when many countries were seeking to enhance exports through depreciation. This "beggar thy neighbour" policy was the feature of the early 1930s. This time around it is an intelligentsia stricken by the fear of deflation and trying to ramp up anything that trades. But commodity markets and producer prices have not been "accommodating" central bankers. Instead there has been rampant inflation in financial assets, which has reached excessive levels of speculation.

Clearly, it is a "beggar thy taxpayer" policy.

Essentially a desperate move to prove specious theories of intervention.

In June our view was that the rally in the dollar could go from "overbought" to "superoverbought", which was reached at almost 96 in late January. A trading range between 95.23 and 93.83 has prevailed. However, Sentiment as well as Commitment of Traders numbers are still very bullish. A correction to support at 92 seems possible, which would also test the 50-Day ma.

As noted last week, the plunge in the Canadian was severe enough to register an extreme oversold. Stability first, then a bounce and getting through the 50-Day would be constructive.


Crude oil prices are still the main focus.

Our target was for a potential low in December or January. Previous such crashes lasted for 6 to 7 months and January was number 7. The low was 43.58 at the end of January at the most oversold on the Weekly RSI in twenty years.

It has rallied to a trading range between 54 and 50. It is concerning that there has been three attempts to break above the 54 level.

Technically, the condition is opposite to that for the dollar. Very oversold and how does the market shed the condition? Through a big rally or a trading range? A chart showing sentiment follows.

Historically, crude crashes have not ended with a "V" bottoms, but by months of attempts to stabilize. We will stay with this likelihood.

Also historically, crude prices have been shifting to the "New Paradigm" whereby chronically weak commodities is one of the features of the Post-Bubble condition. The other force is the earlier example of natural gas prices finding a much lower trading range.

The energy sector is for traders, not investors.

Precious Metals

Most commodities are experiencing the "new" paradigm of chronic weakness during an old-fashioned Post-Bubble contraction. Gold's real price is experiencing its unique "paradigm" of generally firming during such a contraction.

Gold's real price set a cyclical low in June and in rising since is in the early stages of a cyclical bull market. This represents improving operating profits for gold miners and it should soon start to help the stocks. The benefits of much cheaper energy prices is beginning to be included in some comments by gold bugs.

Where the investment demand for gold's unique liquidity has been driving the real price up, investors will gradually increase their holdings of gold shares.

Our advice in November was to begin accumulating on weakness. We are not fully invested yet.

On the nearer-term, gold's price in dollar terms has been likely to decline to the 1200 to 1225 level. Yesterday's low was 1197 which meets the ChartWorks target. Ross is reviewing the level for a trading opportunity.

Growth of $1000 - S&P 500, Price Only
Larger Image - Source: Josh Brown and Michael Batnick, Ritholtz Wealth Management


Larger Image - Source: David Woo, Head of Global Rates, Bank of America Merrill Lynch

Authoritarian Government and Depreciation

Larger Image - Source: Simon Hunt, Simon Hunt Strategic Services


Link to February 21 Bob Hoye interview on

Listen to the Bob Hoye Podcast every Friday afternoon at



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

The opinions in this report are solely those of the author. The information herein was obtained from various sources; however we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance.

Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or options or futures contracts. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk.

Moreover, from time to time, members of the Institutional Advisors team may be long or short positions discussed in our publications.

Copyright © 2003-2017 Bob Hoye

All Images, XHTML Renderings, and Source Code Copyright ©