The Age Of Intervention Continues

January 28, 2015

One key perk to working alongside investing seers is the opportunity to ask them the big questions. Wondering what lies ahead, I asked Casey Research Chief Economist Bud Conrad and technical analyst Dominick Graziano to share their views on what investors should expect in 2015.

These two gentlemen blow me away. Bud can make big-picture forecasts with uncanny accuracy. Dominick is a pure trader, relying on historical charts and graphs and seeing relationships in a way I had never before experienced. He is totally unemotional in his approach and makes decisions based on what the charts tell him. Like Bud, Dominick has made so many calls ahead of time I’ve stopped keeping track.

Here’s what Bud and Dominick had to say.

Dennis Miller: Bud, I’ll start with you. We’ve experienced a lot of changes in the last few months. A new Congress is being sworn in, the Federal Reserve has stopped Quantitative Easing, and the energy industry is now quite volatile. What do you see as you look into 2015?

Bud Conrad: To get the discussion positioned, I’ll make some summary evaluations: the US and China are doing comparatively well. I gave a keynote speech in China to a huge mining conference where everything is booming, including the pollution. The US is benefiting from the reflation of our monetary bubble and hasn’t gotten to the end of this round yet.

Europe is declining from sanctions, burdensome bureaucracy, and weaker peripheral nations of Portugal, Ireland, Italy, Greece and, Spain (PIIGS). Japan has returned to slow growth despite money printing and should be a warning to the rest of us that money printing has its limitations.

Today governments and central banks can drive the markets even more than traditional measures like profits or rational supply and demand. So to predict markets, we need to predict the actions of the big players: central banks, government regulations, sanctions, political alliances, and wars.

The expansion of government debt is at record highs for many countries. We will see further money creation by most of the world central banks to manage the government deficits and big private debt by keeping rates contained. That means that the Fed will be back with some form of money creation, probably in 2015.

Today the central banks have distorted the markets so much with their zero-interest-rate policy that they cannot return to normal minor market interventions.

The base US economy is not doing as well as aggregate statistics tell, because the rich are doing especially well, while the middle class is hollowed out with manufacturing moving abroad. The stock market is doing well because there is no better game in town. Lower oil prices leave more money for the consumer to spend, and thus for companies to profit, so it is supportive for stocks.

For the first half of 2015, I see stocks doing well, although there are many problems like new wars or the rise in the dollar that could change the situation, so caution is warranted for the second half of the year.

In discussing the power of big institutions to affect markets, we should realize that interest rates are manipulated by the central banks that intervene directly to buy up government and private debt. Today’s rates are not market set. This manipulation is not concealed. The trading is huge, with $450 trillion of interest rate swaps notional value out there. The London Interbank Offered Rate (LIBOR) was rigged and billions of fines paid.

The central banks under fiat currency rules can support this for only a few years. In the longer term—probably beyond 2015—this will not work as new Fed programs will cause inflation fears. Instead of interest rates falling, they may rise from a new Fed stimulus program as people lose confidence in the dollar itself.

We have recently seen the prosecution of big banks for manipulations of foreign exchange, and now the London gold market fix. This leads me to say “There are no markets, only interventions.”

Dennis: Dominick, I know you approach things differently when you look at the investing world. What is your analysis telling you about 2015?

Dominick: Dennis, as you know I take an intermarket approach to analyzing global markets. Global markets are like a machine, albeit a clunky one. I look across all asset classes, currencies, commodities, stocks, and bonds to see where money is flowing. To be a successful investor or trader requires following the money.

There were several developments in the second half of 2014 that will be the driving forces for this coming year. First and foremost, the US dollar broke out of a multiyear consolidation pattern. Dollar strength will likely continue into 2015. That dollar strength has translated into commodities being under pricing pressures. This will also continue into 2015. I expect oil, copper, and industrial metals to continue to show relative weakness this coming year, in general. As always, we should expect countertrend rallies, but these should be viewed as selling opportunities.

Most immediately, I think we could see a sharp rebound in energy stocks at the beginning of the year, but this rally will likely fail.

Long-dated US Treasuries will continue to be a beneficiary of the strong US dollar. They are currently overbought, but the trend in bonds is higher and yields lower.

The strength of the US dollar will start impacting earnings of large-cap US equities in 2015. The majority of large-cap US companies obtain a fair portion of their earnings from overseas. While US major equity market indices are near all-time highs, I think we are in the process of building an intermediate to longer-term top.

The plunge we saw in October was a warning sign. We will see the emergence of a major bear market as 2015 progresses. Bear markets rarely leave any sector unscathed, but utilities, health care, and consumer staples will likely show relative strength. Continued low interest rates could also benefit REITs. In contrast, growth stocks should be avoided. I think equities should generally be underweighted and cash over-weighted in 2015.

Dennis: Bud, Dominick, thank you. This was exact the long-range discussion I was hoping to have.


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The symbol for silver ‘AG’ comes from the Latin word ‘agentum’ meaning silver.