Signs Of The Times

July 31, 2016

Good at any time:

"Men who look upon themselves born to reign, and others to obey, soon grow insolent, selected from the rest of mankind their minds are early poisoned by importance, and the world at large, that they have but little true interests, and when they succeed to government are frequently the most ignorant and unfit of any throughout the dominion."  - Common Sense by Thomas Paine, 1776.

Did he have PhD central bankers in mind, or just plain socialists?

Thinking of the former, Bernanke's March 2007 testimony to Congress included:

"The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained."

Oh Yeah!

"Luxury Home Sales Plunge In Long island's Tony Hamptons"

- Yahoo! News, July 18.

"US Companies at Risk of Default Close to Record High"

- From Moody's, July 18.

"Sea of Defaults Does Not Lead to a Crash"

- Seeking Alpha, July 19.

One can't help but wonder if the researcher was attempting to emulate Bernanke as he continued with:

"The default rate could continue to climb, but the impact will be negligible."

A chart on the default rate follows.


It is one thing to see trouble developing in the credit markets and it is something else to conclude that the consequence of the trend is calamity. That's the term the establishment used described the 2008 "unpredicted" contraction.

Even with today's unprecedented distortions of the credit markets, markets are doing generally what they should be doing. When outgo exceeds income there is default and defaults are becoming noticeable.

Another consistency is that the financial boom can run for some 12 to 16 months against a flattening yield curve. The reversal to steepening indicates that speculative demand for short-term funds is diminishing, which says that the boom is failing.

For us, this has worked well. In January 2000, we counted it out to around that fateful March. In 2007, it counted out to around that fateful May. In both cases, the contraction turned severe later in the respective years. It is worth noting that the count was into a window of around 3 months.

Flattening ran for a year into early 2015 and the reversal preceded the stock market high in May.

This flattening has run for a year and is now trying to reverse, which is a warning on the latest stock rally. Flattening need not run to inversion.

Stock Markets

Reliable calculations place the P/E for the S&P at 25, which is very high. And as noted last week, the plot is at the upper right-hand corner of the chart. This reminds of "back in the day" when we plotted by hand on K&E graph paper. When starting a new graph one had to estimate just how far the trend would run. Then you had to choose the scale, hoping it would accommodate the trend.

Inevitably, the observation would be, "Hey, this rally can't go any further."


"It's at the top of my page."

Well, the plot is at the top of the page now and last week's conclusion was that the fun could run into August.[1]

But, we will stay with the non-confirmation by the Transports on the old Dow Theory. Also, Banks and Broker/Dealers are well-below last year's highs. Last week we noted that Banks could firm up with the initial phase of curve steepening. They have.

On the overall thrust, the widely-publicized "Fear & Greed" indicator has soared into the low 90s on the Greed reading.

Things to watch continue to include spreads, the curve, the dollar and crude oil.

Things to not watch continue to be Fed announcements and speculation about such announcements. Perhaps the move to have Russian athletes "Banned for Doping" should be applied the Janet Yellen?


Our general theme for commodities through August is a trading range.

Crude's rally from very oversold at 26 to 51.76 was outstanding. The decline has been to 44.56, which seemed to be enough for the correction. The upside which could run through August could be limited by resistance at the 50 level.

Taking out the 200-Day at 41 would trash the trading range.

It was poorly performing gasoline prices that supported our negative view on crude in mid-2014 and in mid-2015.

Gasoline reached 1.67 in May and declined to 1.35 a couple of weeks ago. That was right at the 200-Day and the rebound made it to 1.45. Yesterday's low was 135 and the moving average is at 136.

Today's weakness in crude is concerning. A sharp decline would impair wide spread euphoria.

We haven't reviewed the thermal coal price since earlier in the year. It firmed slightly to 43.8 at the end of May and it is now at 39.5, a new low for the bear. The cyclical high was close to 80 in 2011.

So far, the correction has been to 249 and today's rally seems to be based upon the decline in the general stock market.

Our November study reviewed the conditions needed to end the bear and set up a cyclical bull market. All, hopefully, in place by around January.

One of these was that gold stocks would begin to outperform the bullion price.

US Industrial Production

  • Tenth straight month of decline.
  • Recession?

Linn Energy bond 8.625%, due in 2020

  • The full price drop appears to be from 99 to 1.80 (no typo).
  • Is it over?
  • Can it be contained?
  • The report with the chart included: "The default rate could continue to climb, but the impact on the markets will be negligible."

US Car Sales

  • Boomed into mid-2015.
  • Close to breaking down.

Global Corporate Defaults

  • The number for 2015 exceeded that for 2008.
  • Will it be resolved quietly or in a panic?

Speculative Grade Default Rate

  • Note the lag from the turn up in the default rate to the onset of the recession.
  • Except in 2008, when typical of the end of a great bubble, the economy collapses with the stock market.
  • In the "normal" cycle for business and stock certificates, stocks lead the economy by around 12 months.
  • "Normal" is not on.

[1] The classic example was with Ross in the 1970s. The scale on the first chart on gold was set at 0 to 200. A number of pages had to be added as the price zoomed to 850 in 1980. Some years later, when the Scotch tape had become yellow and the paper frail, it was taken down.


Link to July 22 Bob Hoye interview on

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

Peru became the world’s largest producer of silver in 2012.