It's nice to see other analysts out there who actually understand that QE is creating unprecedented asset bubbles across the capital markets - real estate (again!), equities (again!), US treasuries, and gold to name a few.
Unfortunately, the FOMC will not stop QE (unwind positions) until the US treasury bond markets decline forcing the US Treasury to take large losses on their holdings. The other scenario that stops QE is through government forces (i.e. US Senate forces FOMC to stop QE through political ratification). Don't forget about that Obama guy too, he loves Bernanke finance so the Senate will have to work alone for next four years. Also, it is doubtful that the FOMC will wind down QE if the unemployment rate is 6.5% and GDP growth is still near 0.0% say in Q3 or Q4 2013. The dual mandate is as subjective as what Bernanke has chosen for lunch today.
However, neither one of the former scenarios appears likely to occur in the near-term (US treasury prices still near all-time highs and current US government clearly favors democrats that support continued QE) which means that asset bubbles continue to grow indefinitely - a scary proposition given the outcome of previous asset bubble cycle bottoms.
Gold at $1,200 is among Saxo Bank's outrageous predictions for 2013. The reason: A strong economic recovery in the U.S. saps demand for the safe-haven investment. Eventually, central banks take advantage of the low price and buy (At the bottom? That would be a first). [View news story]
Is anyone else seeing these historically high correlations between spot gold futures and the US dollar index?
Taken from my GLD Blog post yesterday (12/18),
"The positive correlation between the US dollar index (DXY0) and gold (GLD) is starting to look historical. The 13, 21, 34, 55 day correlation metrics are all at multi-year highs. This is the growing development behind the scenes currently in the capital markets. Everyone knows that stocks rocketed higher today. How many investors know that the EUR/USD broke through a major resistance level while GLD was down -1.44%? DXY0 and gold are moving at a +0.66 21d correlation! They are both getting eaten by bears...Intermarket relationships can lag from time to time, but the gold/dollar relationship historically has a short lag time for obvious reasons. Who is selling gold in US dollar terms but also selling the dollar against other currencies?...Continue to watch this development play out. This is big!
As for GLD itself, volume (24 mil shares = +240% 200d EMA) and the price decline were tremendous throughout the day. Price did manage to retrace some of the losses in the afternoon, but closed (at 162.08) just below important intermediate-term support at 163.20. If today was a bottom blow-off day (possible given the location of price and volume), then tomorrow will need to bring a bullish reversal formation. Otherwise, things could get messy for gold bulls in the short-term."
Not a shocking consensus, but primary dealers as a group see higher Treasury yields in 2013. Of the 21, just 3 expect the 10-year yield to end 2013 lower than the 1.7% it sits at today. The world's most hated asset class looks like it will eke out another year of gains, TLT +1.8% YTD. A favorite of the Treasury shorts, TBT -14.6% YTD. [View news story]
Are primary dealers right? Or is the above news stream a contrary indicator for long-term US treasury yields in 2013? This was taken from my TLT Blog post on Friday, December 14th, 2012,
“This is the golden question with many sub-questions extending from the main focus – can central banks stop deflation?
If yes, then inflation is sure to come. How do they plan to control it? Managing reserves? Good luck with that, US securities and MBSs will get slaughtered in the open market.
If no, then the global economy is in deep trouble over the next 15-20 years. Evidence from Japan says that we can’t stop deflation. They have been deflating for 17 years since their growth peak in 1996. Their QE has obviously been ineffective.
It’s clear that the Fed has created this monetary policy monster which no one really knows what type of impact it will have on the economy over the long-term. Why or how they did this is irrelevant in 2013.
Ben [Bernanke] is a glorified economist, not a hedge fund manager, not an experienced individual investor, not a successful macro analyst. He learned these policy tactics at Harvard where they studied the 1930′s deflationary collapse at length. At Harvard and at various business schools across the country, there is no historical model to use as a forecasting tool for the current capital market environment. This is one GIANT monetary policy experiment with unrecognizable consequences.
I go back and forth between inflation and deflation. Which is stronger? I’m leaning towards deflation now but that can quickly change with higher interest rates and a lower USD.
We haven’t even talked about trying to control employment with monetary policy. That’s like trying to control what Emeril Lagasse cooks at his restaurants by only shipping him certain types of food. He is going to cook what he wants to cook regardless of what we ship him. Companies are only going to hire if they feel like it’s in the best interest for their business. Why would you try to expand your business in this type of economic environment (a stagnant 2.5% GDP growth)? For a business owner, there’s no reason to take on more payroll risk right now. Take on debt to expand operations? Same rational. Especially if they are already profitable.
I feel that there is only one certainty over the long-term (~5 years). Yields and spreads on US securities will be dangerously high. If I was a long-term investor, I would be building large short positions in these areas. This is a generational $$$$$ making opportunity.”
Gold slipping in the wake of the Fed's even easier policies doesn't surprise Uri Landesman, who sees a dramatic correction ahead. The metal performs best as a "flight to quality," he argues, and the Fed moves take that bid away. His downside target next year is $1,400/oz. [View news story]
The spot price of gold and the USD Index currently have a 13-day correlation at 0.52. This is a 15-month high and an above-average positive correlation between two traditionally inversely correlated securities. To put the long-term relationship into perspective, the 233-day correlation is generally constant at -0.75. Albeit a 13-day indicator is relatively short-term, this is a noticeable disconnect between the two markets over a three week period.
So if buying gold in dollar terms is a hedge for a declining dollar, then where were all of the buyers this week? The Fed stepped on the gas with another $45 bil/month treasury purchase program. From an intermarket perspective, either USD or GLD will head higher in the coming weeks. Both cannot continue to move in the same direction. The short-term positive correlation will not last.
Latin American central banks - of all places - have caught the gold bug, with Brazil, Paraguay, Argentina, and Colombia joining Mexico in adding to their reserves of the metal. Brazil seems to the best candidate for significant future purchases, with its gold stash at just 0.8% of reserves, and the central bank looking into diversification. [View news story]
Tulip bulbs in the 1600s, silver in the late 1970s, tech stocks in the 1990s, real estate in the early 2000s, and now gold. What do they all have in common? They are all examples of euphoric bull markets or bull market bubbles. And each one of these bubbles eventually popped and punished a lot of ignorant investors in the process.
The gold bubble will pop and when it does, investors will be in disbelief. Yes, gold can go down and it can go down hard. Central banks cannot manipulate the gold markets on their own with massive buying. This has been unsuccessfully attempted in the past with currency markets and eventually, natural supply/demand forces win out. Precious metals are one of the most volatile sectors in the capital markets.
We may not be at the end of the gold bull market, but long-term technical indicators are flashing some early warning signals. Taken from my blog today (12/11/12), "GLD is flashing some [long-term] warning signals to bulls:
1) In May 2012, GLD broke a long-term (6 years!) trendline on high weekly volume (not shown). Granted, this trendline broke before during the Lehman Bros. collapse in 2008, only to recover and double in price over the next four years. So just because a trendline breaks doesn’t mean that the trend is dead…yet
2) Price will need to retest and fail to reclaim the trendline at least once, and possibly multiple times, in order to validate the broken trendline signal. This happened recently for the first time in September 2012 with GLD.
3) Elliot Wave Principle (EWP) has potentially spelled out a completed 5 wave pattern as denoted in orange. IF this is the case, then GLD has experienced a major top that will likely hold for many years. I will concede that my proposed count does have overlap of wave IV on wave I. This by definition is a direct violation of EWP rules and the count must be false. However, since the overlap occurred during a liquidity crisis, was not sustained, and the recovery V-shaped, I think we can consider this count valid for now. Especially since wave V is clearly an extended wave and extended 5th waves have been known to show up in commodities, particularly the precious metals."
"It's my worst nightmare," says a long-only bond fund manager. "There's nothing I can do - the checks come in every day, and I have to invest (the money)." Aging baby boomers following conventional wisdom by steering their accounts away from stocks and to fixed income at these low rates could get a very expensive lesson, writes Jonathan Trugman. (see also) [View news story]
Tack, I mostly agree with you relating to the sensible outlook. One final question:
Would you buy TLT today if you thought it would test the all-time high at 132.21 over the next two months? That's a potential +5.6% ROE from its current level and you could limit your downside risk with an appropriately placed stop loss.
"It's my worst nightmare," says a long-only bond fund manager. "There's nothing I can do - the checks come in every day, and I have to invest (the money)." Aging baby boomers following conventional wisdom by steering their accounts away from stocks and to fixed income at these low rates could get a very expensive lesson, writes Jonathan Trugman. (see also) [View news story]
It depends on your investment time horizon. For long-term investors no, the risk is perhaps too large. There remains tremendous downside risk in holding long-term US treasuries for a 3+ year time window. For short to intermediate-term investors, yes it may be worth a long allocation with an appropriate risk management strategy. The capital markets can be irrational at times (i.e. 2001 tech bubble, 2007 housing bubble, current bubble in gold, and current bubble in US treasuries to name a few) and leading up to the busts of these bubbles was, and still is a great opportunity to realize profits. Technical indicators allow investors to ride these bubbles to profits and then exit when the bubbles pop. In fact, reversals in long-term trends also present great opportunities to realize profits so reversing the original investment may also be worth consideration during a bubble pop.
"It's my worst nightmare," says a long-only bond fund manager. "There's nothing I can do - the checks come in every day, and I have to invest (the money)." Aging baby boomers following conventional wisdom by steering their accounts away from stocks and to fixed income at these low rates could get a very expensive lesson, writes Jonathan Trugman. (see also) [View news story]
The long-term maturing US Treasury story is compelling. In no way does it make logical investment sense to invest in paper that yields 1.65% over 10 years from a country that has ~$16.3 trillion in debt. Especially with the global M3 money supply estimated at $15.5 trillion and steadily increasing. However, take a look at my blog post on TLT from Tuesday, November 13, 2012,
"As much as it doesn’t make logical investment sense, TLT is headed higher. When holding cash is not an option, money has to head somewhere and amazingly, investors still believe that TLT is a safe investment. Since we are currently long TLT (for a trade), i guess we should keep quiet. But man, this does not make sense.
Regardless of what we think is logical, technical indicators are smarter than we are, therefore, they should be respected. Price, momentum, trend, and intermarket indicators are currently forecasting higher prices in long-term US treasuries. With the next overhead level of supply at ~127, we may see some consolidation over the coming days. However, we should expect this to be brief because...this thing wants to go, higher. A sustained move above 127.72 will likely set up a test of the all-time highs near ~132."
Is GLD headed higher or lower? Take a look at this morning's excerpt from my blog on GLD:
"Yesterday (11/19) we talked about the possibility of GLD resolving upward from the denoted convergence zone. After the opening gap, bulls gave the 168 level three to four valiant attempts before stuttering back near the opening price at the close. This is indicative of the long-shadowed spinning top candle that formed. Furthermore, the formation of this top indicates indecision and a warning to bulls that price is not yet ready to eclipse the local high at 168.60. We’ll see if the bulls give it another go today.
For intermarket perspective, the US dollar index (DXY0) is sitting right below significant resistance (~81.50). This currently favors higher gold prices because it will take a large force in the Forex markets for this resistance level to be broken. It’s more likely that a small retracement develops in DXY0 during the current counter-trend rally in risk assets. That being said, if DXY0 is able to punch through this heavily resisted zone, then GLD will experience a tremendous amount of bearish intermarket force. Keep an eye on this development."
Taken from my 11/6/12 Blog, "Yesterday (11/6) was another day of TLT moving within the convergence zone as the revised downtrend line held for ~8th time since late July.
Let’s talk a little bit about what’s going on this morning in the US treasury markets. It looks like investors hit the “risk-off” button as the usual names are collectively down while the safety-asset family, including TLT, is up.
*We have a bullish breakout*
The revised downtrend line at 122.84 and the important 123.61 resistance level have both been broken this morning on what could turn out to be a breakaway gap. We’ll need to check the actual price move and volume after the close today for confirmation.
In summary, TLT gaped up this morning and is trading currently at 124.07. This is 129 bps away from our buy-to-cover point. Again, as I mentioned earlier this week, I’d like us to cover this position now at market price, but keeping it open for a portfolio hedge against our open shorts like XLF makes sense."
This position was closed and reversed on 11/8/12. We are now long TLT as a trade.
The big banks (XLF -3%) take a licking following the election, which also included making a Senator of Elizabeth Warren. The banks can probably work their way past those worries, but their fortunes remain tied to the economy and the trading environment, both of which show little sign of picking up. One bright spot is mortgage activity, but this comes with lower rates, meaning narrow interest margins. [View news story]
XLF has broken its 5-month trendline dating back to the June 2012 corrective bottom. Today (11/7), XLF gaped lower at the open and the selling did not relent until the close. Volume was incredible at +109 mil shares. Nearly 2x the 60d EMA. We expect continued selling in the Financials throughout the Q4 2012 as investors turn away from risk and into safety. The continued uncertainty revolving around the Bush Tax Cuts, US budget deficit ceiling, and bipartisan legislation appear to be the drivers of the selling. The MONY Report has an initial downside target of 14.60 for XLF.
This is a great article by Bespoke. I'd like to elaborate a little more on relative strength and how it relates to the current market enviroment. Taken from my 10/26/12 Blog on XLF "The leading sectors of the S&P 500 year-to-date (YTD) are:
1) Financials +21.96% 2) Consumer Discretionary +17.27% 3) Health Care +16.56% 4) Technology +13.61%
Last month Technology and Financials were tied at #1 +20.0%. Technology is down -6.33% over the last month (as of 10/26/12). When the outperforming sectors of the market start to decline it warns us of market distribution or a potential formation of a top. What’s relevant to the Tech decline is the likely progression of the other outperforming sectors. When the the equity market is near a top, the leading sectors begin to deteriorate one by one as the money that carried the market higher gets pulled out. It is because of this contributing relative strength principle that we have selected XLF as the target for upcoming selling in the market. The XLF is up 21.96% YTD and after the recent Tech decline, we should expect the Financials to follow."
Bernanke's Bull And Why I Hate QE [View article]
Unfortunately, the FOMC will not stop QE (unwind positions) until the US treasury bond markets decline forcing the US Treasury to take large losses on their holdings. The other scenario that stops QE is through government forces (i.e. US Senate forces FOMC to stop QE through political ratification). Don't forget about that Obama guy too, he loves Bernanke finance so the Senate will have to work alone for next four years. Also, it is doubtful that the FOMC will wind down QE if the unemployment rate is 6.5% and GDP growth is still near 0.0% say in Q3 or Q4 2013. The dual mandate is as subjective as what Bernanke has chosen for lunch today.
However, neither one of the former scenarios appears likely to occur in the near-term (US treasury prices still near all-time highs and current US government clearly favors democrats that support continued QE) which means that asset bubbles continue to grow indefinitely - a scary proposition given the outcome of previous asset bubble cycle bottoms.
Gold at $1,200 is among Saxo Bank's outrageous predictions for 2013. The reason: A strong economic recovery in the U.S. saps demand for the safe-haven investment. Eventually, central banks take advantage of the low price and buy (At the bottom? That would be a first). [View news story]
Taken from my GLD Blog post yesterday (12/18),
"The positive correlation between the US dollar index (DXY0) and gold (GLD) is starting to look historical. The 13, 21, 34, 55 day correlation metrics are all at multi-year highs. This is the growing development behind the scenes currently in the capital markets. Everyone knows that stocks rocketed higher today. How many investors know that the EUR/USD broke through a major resistance level while GLD was down -1.44%? DXY0 and gold are moving at a +0.66 21d correlation! They are both getting eaten by bears...Intermarket relationships can lag from time to time, but the gold/dollar relationship historically has a short lag time for obvious reasons. Who is selling gold in US dollar terms but also selling the dollar against other currencies?...Continue to watch this development play out. This is big!
As for GLD itself, volume (24 mil shares = +240% 200d EMA) and the price decline were tremendous throughout the day. Price did manage to retrace some of the losses in the afternoon, but closed (at 162.08) just below important intermediate-term support at 163.20. If today was a bottom blow-off day (possible given the location of price and volume), then tomorrow will need to bring a bullish reversal formation. Otherwise, things could get messy for gold bulls in the short-term."
Not a shocking consensus, but primary dealers as a group see higher Treasury yields in 2013. Of the 21, just 3 expect the 10-year yield to end 2013 lower than the 1.7% it sits at today. The world's most hated asset class looks like it will eke out another year of gains, TLT +1.8% YTD. A favorite of the Treasury shorts, TBT -14.6% YTD. [View news story]
“This is the golden question with many sub-questions extending from the main focus – can central banks stop deflation?
If yes, then inflation is sure to come. How do they plan to control it? Managing reserves? Good luck with that, US securities and MBSs will get slaughtered in the open market.
If no, then the global economy is in deep trouble over the next 15-20 years. Evidence from Japan says that we can’t stop deflation. They have been deflating for 17 years since their growth peak in 1996. Their QE has obviously been ineffective.
It’s clear that the Fed has created this monetary policy monster which no one really knows what type of impact it will have on the economy over the long-term. Why or how they did this is irrelevant in 2013.
Ben [Bernanke] is a glorified economist, not a hedge fund manager, not an experienced individual investor, not a successful macro analyst. He learned these policy tactics at Harvard where they studied the 1930′s deflationary collapse at length. At Harvard and at various business schools across the country, there is no historical model to use as a forecasting tool for the current capital market environment. This is one GIANT monetary policy experiment with unrecognizable consequences.
I go back and forth between inflation and deflation. Which is stronger? I’m leaning towards deflation now but that can quickly change with higher interest rates and a lower USD.
We haven’t even talked about trying to control employment with monetary policy. That’s like trying to control what Emeril Lagasse cooks at his restaurants by only shipping him certain types of food. He is going to cook what he wants to cook regardless of what we ship him. Companies are only going to hire if they feel like it’s in the best interest for their business. Why would you try to expand your business in this type of economic environment (a stagnant 2.5% GDP growth)? For a business owner, there’s no reason to take on more payroll risk right now. Take on debt to expand operations? Same rational. Especially if they are already profitable.
I feel that there is only one certainty over the long-term (~5 years). Yields and spreads on US securities will be dangerously high. If I was a long-term investor, I would be building large short positions in these areas. This is a generational $$$$$ making opportunity.”
Gold slipping in the wake of the Fed's even easier policies doesn't surprise Uri Landesman, who sees a dramatic correction ahead. The metal performs best as a "flight to quality," he argues, and the Fed moves take that bid away. His downside target next year is $1,400/oz. [View news story]
So if buying gold in dollar terms is a hedge for a declining dollar, then where were all of the buyers this week? The Fed stepped on the gas with another $45 bil/month treasury purchase program. From an intermarket perspective, either USD or GLD will head higher in the coming weeks. Both cannot continue to move in the same direction. The short-term positive correlation will not last.
Latin American central banks - of all places - have caught the gold bug, with Brazil, Paraguay, Argentina, and Colombia joining Mexico in adding to their reserves of the metal. Brazil seems to the best candidate for significant future purchases, with its gold stash at just 0.8% of reserves, and the central bank looking into diversification. [View news story]
The gold bubble will pop and when it does, investors will be in disbelief. Yes, gold can go down and it can go down hard. Central banks cannot manipulate the gold markets on their own with massive buying. This has been unsuccessfully attempted in the past with currency markets and eventually, natural supply/demand forces win out. Precious metals are one of the most volatile sectors in the capital markets.
We may not be at the end of the gold bull market, but long-term technical indicators are flashing some early warning signals. Taken from my blog today (12/11/12), "GLD is flashing some [long-term] warning signals to bulls:
1) In May 2012, GLD broke a long-term (6 years!) trendline on high weekly volume (not shown). Granted, this trendline broke before during the Lehman Bros. collapse in 2008, only to recover and double in price over the next four years. So just because a trendline breaks doesn’t mean that the trend is dead…yet
2) Price will need to retest and fail to reclaim the trendline at least once, and possibly multiple times, in order to validate the broken trendline signal. This happened recently for the first time in September 2012 with GLD.
3) Elliot Wave Principle (EWP) has potentially spelled out a completed 5 wave pattern as denoted in orange. IF this is the case, then GLD has experienced a major top that will likely hold for many years. I will concede that my proposed count does have overlap of wave IV on wave I. This by definition is a direct violation of EWP rules and the count must be false. However, since the overlap occurred during a liquidity crisis, was not sustained, and the recovery V-shaped, I think we can consider this count valid for now. Especially since wave V is clearly an extended wave and extended 5th waves have been known to show up in commodities, particularly the precious metals."
"It's my worst nightmare," says a long-only bond fund manager. "There's nothing I can do - the checks come in every day, and I have to invest (the money)." Aging baby boomers following conventional wisdom by steering their accounts away from stocks and to fixed income at these low rates could get a very expensive lesson, writes Jonathan Trugman. (see also) [View news story]
Would you buy TLT today if you thought it would test the all-time high at 132.21 over the next two months? That's a potential +5.6% ROE from its current level and you could limit your downside risk with an appropriately placed stop loss.
"It's my worst nightmare," says a long-only bond fund manager. "There's nothing I can do - the checks come in every day, and I have to invest (the money)." Aging baby boomers following conventional wisdom by steering their accounts away from stocks and to fixed income at these low rates could get a very expensive lesson, writes Jonathan Trugman. (see also) [View news story]
"It's my worst nightmare," says a long-only bond fund manager. "There's nothing I can do - the checks come in every day, and I have to invest (the money)." Aging baby boomers following conventional wisdom by steering their accounts away from stocks and to fixed income at these low rates could get a very expensive lesson, writes Jonathan Trugman. (see also) [View news story]
"As much as it doesn’t make logical investment sense, TLT is headed higher. When holding cash is not an option, money has to head somewhere and amazingly, investors still believe that TLT is a safe investment. Since we are currently long TLT (for a trade), i guess we should keep quiet. But man, this does not make sense.
Regardless of what we think is logical, technical indicators are smarter than we are, therefore, they should be respected. Price, momentum, trend, and intermarket indicators are currently forecasting higher prices in long-term US treasuries. With the next overhead level of supply at ~127, we may see some consolidation over the coming days. However, we should expect this to be brief because...this thing wants to go, higher. A sustained move above 127.72 will likely set up a test of the all-time highs near ~132."
Under the Hood: How GLD Works [View article]
"Yesterday (11/19) we talked about the possibility of GLD resolving upward from the denoted convergence zone. After the opening gap, bulls gave the 168 level three to four valiant attempts before stuttering back near the opening price at the close. This is indicative of the long-shadowed spinning top candle that formed. Furthermore, the formation of this top indicates indecision and a warning to bulls that price is not yet ready to eclipse the local high at 168.60. We’ll see if the bulls give it another go today.
For intermarket perspective, the US dollar index (DXY0) is sitting right below significant resistance (~81.50). This currently favors higher gold prices because it will take a large force in the Forex markets for this resistance level to be broken. It’s more likely that a small retracement develops in DXY0 during the current counter-trend rally in risk assets. That being said, if DXY0 is able to punch through this heavily resisted zone, then GLD will experience a tremendous amount of bearish intermarket force. Keep an eye on this development."
Beware Of Choppy Markets Ahead [View article]
Let’s talk a little bit about what’s going on this morning in the US treasury markets. It looks like investors hit the “risk-off” button as the usual names are collectively down while the safety-asset family, including TLT, is up.
*We have a bullish breakout*
The revised downtrend line at 122.84 and the important 123.61 resistance level have both been broken this morning on what could turn out to be a breakaway gap. We’ll need to check the actual price move and volume after the close today for confirmation.
In summary, TLT gaped up this morning and is trading currently at 124.07. This is 129 bps away from our buy-to-cover point. Again, as I mentioned earlier this week, I’d like us to cover this position now at market price, but keeping it open for a portfolio hedge against our open shorts like XLF makes sense."
This position was closed and reversed on 11/8/12. We are now long TLT as a trade.
The big banks (XLF -3%) take a licking following the election, which also included making a Senator of Elizabeth Warren. The banks can probably work their way past those worries, but their fortunes remain tied to the economy and the trading environment, both of which show little sign of picking up. One bright spot is mortgage activity, but this comes with lower rates, meaning narrow interest margins. [View news story]
A Tale Of Two Sectors [View article]
1) Financials +21.96%
2) Consumer Discretionary +17.27%
3) Health Care +16.56%
4) Technology +13.61%
Last month Technology and Financials were tied at #1 +20.0%. Technology is down -6.33% over the last month (as of 10/26/12). When the outperforming sectors of the market start to decline it warns us of market distribution or a potential formation of a top. What’s relevant to the Tech decline is the likely progression of the other outperforming sectors. When the the equity market is near a top, the leading sectors begin to deteriorate one by one as the money that carried the market higher gets pulled out. It is because of this contributing relative strength principle that we have selected XLF as the target for upcoming selling in the market. The XLF is up 21.96% YTD and after the recent Tech decline, we should expect the Financials to follow."