An Analysis Of All Markets From Central Bankers’ Views

November 19, 2014


The US election indicates a profound change in political direction and we have frequently described Obama's policy moves as being the regulatory equivalent of building the Berlin Wall. This was being accomplished through a mainstream media that abandoned its critical faculties and started cheerleading massive intrusions upon basic freedoms.

The towering intellects of Nancy Pelosi, Harry Reid and Obama's teleprompter have been bypassed by the commonsense of many voters. What's left of Obama's term is being described as a "Lame Duck Presidency". Yeah, a duck with the teeth and tenacity of a piranha.

Political dissatisfaction during periods of rampant inflation can turn into murderous revolutions. The two greatest examples are the French Revolution that in the 1790s turned into the Reign of Terror. And then there was the Russian Revolution and another reign of terror that began in 1917. The fall of the Berlin Wall can be described as a great reformation. Putin's attempts to restore the Soviet can be described as a counterreformation.

Obama has no specific ideology other than the lust for power and control with the Rules For Radials being equivalent to Mao's Little Red Book.

In just the last one hundred years there has been some dramatic setbacks to the long experiment in authoritarian government. These have turned with the end of a boom. One of the most outstanding commodity booms blew out in 1920 and collapsed. Soviet Russia turned from pure communism to sort of a socialism. In the US, John Moody explained the wonders of the 1929 boom as due to America's turn from socialism and nationalized railroads.

The boom radiating out of Tokyo in the late 1980s fostered outstanding speculation in commodities and global real estate (remember "Trophy" items such as Pebble Beach Golf Course). As recorded by the Nikkei, the peak was at the end of December 1989 and the Wall came down in November.

The "Glorious Revolution" of 1688 occurred during a deflationary period as did the American Revolution. Both were essentially conducted by the middle classes who avoided neurotic intellectuals that prevailed during the nasty revolutions.

The White House has been overrun by anxious intellectuals and it is time for another reformation conducted by the middle classes.

Stock Markets

As we have been noting, the "oversold" of mid-October determined that the setback was a "correction". With huge amounts of central bank promises (Japan's was remarkable) and a very refreshing election the rebound set new highs for the senior indexes.

Last week, we listed a number of the key "plusses" that were in the market. Forgot to include that over the past few weeks financial news programs have been talking up the favourable October to May seasonal tendency.

We will stay with our list of accomplished stages:

Exuberance, Divergence and Volatility got us to the big swings into and out of October.

Resolution to excessive speculation has yet to be discovered.

We thought that Small Caps (RUT) and the STOXX were leading on the way to the "correction". RUT set its high at 1213 in July with the Daily RSI at 70. The October low was 1040 and down to 30 on the RSI. The rebound has made it to 1186. This is at a resistance level and has reached an RSI of 70.

Recording the action in Europe, the STOXX set its high at 3325 in June with a Daily RSI at 72. The October low was 2789 with the Daily RSI down to 26. The rebound high was 3142 last week and is not overbought.

The NY Composite (NYA) set its momentum high at 11106 in July and declined to 10557 in August. The September high was 11108 and the October low was 9886 and oversold at the RSI of 28. So far the high has been 10911 and at the RSI that ended the September rally.

As noted above, inspired by a number of really good stories the stock market has enjoyed a vigorous rebound. Our work in mid-October had Springboard Buys on the S&P and JNK. It is uncertain how long this rally may last.

It is worth checking commodities and credit markets for some guidance.

Credit Markets

Lower-grade bonds have been volatile. JNK slumped into a Springboard Buy on October 14th and the rebound was sufficient to register the opposite on the following week. JNK (without the interest payment) reached the 50-Day ma and has been following it down. At 40 now, taking out the October low of 38.93 would extend the downtrend.

Out of the October hit, spreads briefly narrowed and the widening trend has resumed. The chart showing new "wides" follows.

It is worth keeping in mind that as commodities decline so does the ability to maintain prices at the retail level. This reduces general earnings power and the ability to service debt (chart follows). Then credit-rating agencies get busy with downgrades and eventually junk issues live up to the worst descriptions in their prospectuses.

Last week we thought that on the next slide in the stock market the bond future would rally. The loss of liquidity in the world's most liquid market on October 15 was without precedent. That drove the future up five points at the opening to a price of almost 148.

The low was 140.5 on Friday and it has firmed to 141.25. The high needs to be tested and that becomes our target.

The Russian note needed to rise above 10.22% to exend the trend. It did it at 10.24% today.

Central bank recklessness reminds of hanging out with a Martini-drinking crowd some years ago. The cocktail was referred to as "Martins" or "Electric Waters". There were certain levels of intoxication, but I can only remember the last one. You had become invisible. The reasoning was that you were doing such stupid things that it would be best to be invisible.

They called for transparency in central banking, but invisibility is too much.


In 1980 we recall that as Reagan won some important primaries the dollar would firm up the next day. Upon taking office the DX rallied from 97 to 164. It was helped by commodities blowing out in the grandest fashion since 1920. Paul Volker had nothing to do with either event.

Reagan was one of the leaders that inspired the reform of excessive government that swept the world in the 1980s. Margaret Thatcher had a parliamentary majority and made huge advances. The equivalent by Reagan was denied by a Democratic Congress.

This time around, political change will be led by a reform-minded Congress and opposed by the Obama faction. Republicans will likely win the White House in 2016, when a massive reform can really get underway.

The dollar was expected to rally as the financial boom ran out of momentum. The DX broke out at 81 in July. After 85 was reached in September the jump to 88 was largely driven by offshore buying of US stocks and bonds. The DX has yet to have a strong rally based upon financial asset deflation.

On the near term, the DX rally reached a lofty 85 on the Weekly RSI and the index reached 88 last week. Perhaps this is the best on foreigners buying US paper.

Perhaps DX could correct some more. The next rally would likely be due to weakening asset prices and a minor start to political reform.

Precious Metals

In early September we thought that a buying opportunity would appear in the latter part of October. In the middle of that month we decided to wait for the "buy". Our November 4th Special (Caveat Venditor) outlined how gold and silver really work during a credit cycle.

The key was that gold's real price has been rising since what seems to be a cyclical low in June. This could be the early stages of a cyclical bull market for the real price. Improving profit margins will follow.

The November 7th ChartWorks noted that silver's plunge had become severe enough to register a Downside Capitulation. A significant rally is pending.

The November 4th Chartworks "Gold Miners Bounce" called for that.

This and last week's Pivot have been looking for gold stocks to begin outperforming the bullion price.

The HUI/GOLD ratio plunged from .44 in 2011 to .13 on November 4th. It has recovered a little and we would like to see some stability over a few weeks. The bear since 2011 has

been brutal and stability would provide the base for the start of a new bull market for the Precious Metals sector.

On the bigger picture, the recent collapse of HUI/GOLD seems similar to when the ratio plunged to .13 in late-November 2001. That cyclical bottom drove the Weekly RSI down to the low 20s, similar to now.

In the last two weeks of October, the HUI dropped from 185 to 146 on November 4th.

The bounce made it to 164 yesterday and the low needs a test.

Crude Oil and Recessions: Ten Years

crude oil and recessions 10 years

  • Note the "Peak Oil" peak in 2008.
  • The current failure is becoming serious.
  • Is it indicating technological revolution?
  • Is it indicating global recession?
  • Perhaps both.

Crude Oil and Recessions: 1970 to 2010

crude oil and recessions 1970-2010

  • Crude's plot is rate of change.
  • From 1970 until the mid-1990s there was great belief in the powers of OPEC, the erstwhile oil cartel.
  • When OPEC was headed by Sheikh Yamani, it was said that he commanded all of the attention that is focused upon a cross-eyed javelin thrower at the Olympics.

Producer Price Index and Recessions: 1913 to Date

producer price index and recessions

  • The cyclical low was 168 in March 2009.
  • The high for the move was set in April at 208.3.
  • A double top was set at 208.3 in June.
  • The latest posting is September's at 206.5.

S&P Earnings and Commodities

S&P earnings and commodities

  • This year's high for the CRB was set in June at 313.
  • The low for the year was set last week at 266.
  • According to the chart, earnings should follow.

Credit Spreads: Now Worse Than On October 17th

credit spreads chart

  • On the near-term, rising above 171 bps set on October 17th would extend the trend.
  • This was accomplished on November 7th.
  • It is now at 173 bps and stair-stepping up.
  • Widening has taken out resistance at the March "high".

Link to November 14 Bob Hoye interview on

Bob HoyeBob Hoye is the chief financial strategist of Institutional Advisers.

Silver has 47 protons and 61 neutrons