pebblewriter

Tag: inflation

  • Update on Gold: Jan 2, 2020

    In our Aug 28, 2019 Update on Gold I noted that although GC had just reached our 1560 target, ZN had also reached our 132’100 target.  The picture was further muddled by the fact that DXY and GC had been moving in unison – an unusual occurrence, to say the least.

    ZN’s resistance could put the brakes on, meaning rates would rise and GC would theoretically fall.  But…I expect ZN’s pullback to be modest — possibly only 3-4% — suggesting GC’s pullback would also be fairly modest.

    As it turned out, GC and ZN both reversed.  Although DXY made a half-hearted effort to break out, it was limited to 1.5% and GC’s reversal was limited to 1446.

    DXY’s rally stopped making any sense at all once FOMC members began hinting at additional rate cuts. When the Fed resumed QE (QE-not as we like to call it), the market knew what to do: DXY has been steadily selling off and GC has climbed back to within $30 of its August highs.

    Does this mean more upside ahead?

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  • Inflation Games

    Inflation drives interest rates. Though the Fed probably wishes it didn’t, it’s an inconvenient truth.  There are much tighter correlations, but consider the strong positive correlation between CPI and 10Y notes.

    This matters, of course, because with $22 trillion in debt, the US faces the same problem as the ECB and Japan: High interest rates on rising debt levels (the blue bars below) would lead to insolvency.  The slight increase in average interest rates (the black line) between 2018 and 2019, for instance, sent interest expense (the red line) soaring.

    There are only two ways to keep interest expense from consuming untenable slices of the budget: cut back on spending or bring interest rates back down and keep them down. Since the government isn’t likely to cut spending any time soon, this means focusing on interest rates.

    Japan and the ECB have coped with runaway debt by manipulating rates below zero — negative interest rates where you pay the government money to borrow from you. Though not there yet, the US is on the same path, seen most notably lately in the repo market through Not-QE.

    The government plays lots of games with inflation.  There are many different definitions, some of which include or exclude different expenses such as food, gas prices and rent. Although just as flawed as any, I like good old-fashioned CPI as it includes food and gas prices — things that affect the budget of almost every American and is factored into many important calculations such as cost of living increases.

    CPI can be influenced in some very predictable ways, some of which are subject to manipulation such as oil and gas prices.  Without harping on geopolitical considerations [see: Coincidences and Consequences] all over again, it’s obvious that the Fed’s effort to keep interest rates low is dependent on keeping inflation under control which, in turn, is dependent on keeping the annual change in gas prices under control.  How so?

    CPI (which, remember, is a measure of the rate of change in prices) has averaged +1.74% through October 2019, while YoY changes in the price of gas have averaged -6.79%. Months such as January and February, when CPI registered 1.55% and 1.52%, corresponded with the largest YoY drops in gas prices: -13.05% and -10.65%.  In April, the only positive YoY change in gas prices (+1.58%) produced the highest CPI measure of the year: 2.0%.

    The chart below illustrates the relationship so far in 2019 which simple regression analysis reveals is:

    CPI = (0.0263 x YoY change in gas prices) + 0.01918.

    In November, the rate of change in gas prices was only -3.16%. All else being equal, this suggests CPI will come in around 1.84% – a modest uptick. However, the first reading in December (unless gas prices fall) would indicate a 9.8% YoY increase in gas prices and a CPI reading of +2.18% or greater.

    That, folks, is why the Fed is considering formal changes to the way it evaluates inflation as (not) detailed in the official gobbledygook offered last month. It also explains the various comments made by Fed officials – first suggesting that inflation should target a range rather than a specific level (i.e. 2.0%) and more recently suggesting that inflation should be allowed to “run hot.”

    As the Financial Times reported:

    The Federal Reserve is considering introducing a rule that would let inflation run above its 2 per cent target, a potentially significant shift in its interest rate policy.

    The Fed’s year-long review of its monetary policy tools is due to conclude next year and, according to interviews with current and former policymakers, the central bank is considering a promise that when it misses its inflation target, it will then temporarily raise that target, to make up for lost inflation…

    If the Fed adopts this so-called “make-up strategy”, it would mark the biggest shift in how it carries out its interest rate policy since it began to target 2 per cent inflation in 2012.

    Most economists would probably suggest that the Fed has been working hard over the years to get inflation up to 2%. I strongly disagree and believe the Fed has used the constant shortfalls as the primary rationale for accommodative monetary policy – the purpose of which is to keep interest rates low and support equity prices.

    This latest prevarication is intended to provide cover for the fact that oil and gas prices have been propped up in the lead up to the Aramco IPO.  Now that the IPO is in the rear view, we’ll find out whether central banks can really stomach 2.2% CPI or gas prices are about to tumble a good 6-8%.

    If the past is any indication, the Fed won’t take a chance on CPI over 2.0% and we’ll see oil and gas prices drop substantially over the next couple of weeks. The White House wouldn’t complain, especially if it helps keep interest rates low.

    If I’m wrong, and inflation heads back above 2% (remember, the next tariff is scheduled to arrive on Monday) then we face bigger problems in January (when December CPI is reported.) I’ll post oil and gas price targets below the break.

    Meanwhile, it’s Tuesday and futures were off substantially overnight, so of course there’s news on the trade front – particularly in light of the impeachment goings on.  S&P futures have spiked 25 points off their overnight lows, but have yet to break out of the falling white channel that leads to a 3.5% correction.

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  • CPI: Nov 13, 2019

    Today is off to an interesting start.  Following Trump’s call for negative interest rates and more grandstanding on China in New York yesterday, headline CPI came in hotter than expected but right in line with our forecast. As we’ve discussed, this is the result of oil and gas trending sideways in support of the upcoming Aramco IPO.

    On top of all that, the impeachment hearings get underway at 10AM and Powell testifies before Congress beginning at 11AM. EIA inventories are delayed until tomorrow due to the holiday.

    It was enough to knock ES down by about 17 points where it finally reconnected with its SMA10 on the 8th session in a row during which it tagged its 2.618 Fibonacci extension.

    It should be a pretty exciting day for a change.

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  • Why Interest Rates Must Not Rise

    In May 2014 many of us were shocked by a report that Ben Bernanke, who had recently departed the Fed, told a group of wealthy investors that he did “not expect the federal funds rate…to rise back to its long-term average of around 4%” in his lifetime.

    I remember feeling Bernanke’s statement represented both extraordinary hubris and wishful thinking. Surely, the trillions being pumped into the financial system would drive inflation to levels that would produce higher rates.  After all, I reasoned, the bond market isn’t as easily manipulated as is the stock market.

    Last year, I called attention to the fact that the cost of servicing the US debt had broken out to new highs [see: Why Rising Rates are a Problem This Time.]  Even though interest rates had fallen dramatically, the spiraling debt had send annual interest expense on that debt to roughly $450 billion in FY 2017.

    Bernanke’s 2014 words came back to me as I did the math.

    Clearly, if rates were to normalize the interest expense would be unmanageable… Between 2000 and 2007, the average interest rate was 4.84%.  On the current $20.6 trillion balance, that would mean an annual interest expense of roughly $1 trillion.

    Of course he was confident in his prediction!  He understood that rates could never be allowed to rise.  A return to normalcy — and, I don’t believe this to be an exaggeration — would absolutely destroy the economy.

    I had always found the Treasury’s increasing dependence on short-term, floating rate and inflation-indexed borrowings a bit unsettling. Why not lock in a boatload of 30-yr bonds at 2.1%?  Now we know.

    In their wisdom (or desperation…time will tell) the central bankers and those maxing out America’s Gold Card have bet our very futures that Bernanke was right — that everything will be okay in the end…as long as the end never gets here.

    By the way, here’s an update of the above chart…which has been appropriately renamed.

     

     

     

  • PPI Confirms Inflation Troubles

    PPI just confirmed what CPI declared yesterday: Despite official White House discourse, there is inflation.Of course, it’s very clear that food, energy and trade services are the primary drivers.  Without them, PPI is as low as it was in Aug 2017.As a reminder, when Aug 2017 PPI was announced, the 10Y was about 2.1% versus the current 2.5%.  WTI, shown below in purple, had doubled in the previous year and was on its way to a near tripling in price, eventually driving the 10Y to 3.248% as CPI topped 3%.We were reminded yesterday that the deficit has ballooned since then.  We’re on pace to top $1.1 trillion in fiscal 2019, putting the new total public debt around $22.7 trillion.  This is obviously not a great time to be ramping up interest rates.

    Yet, if oil and gas prices were to continue rising, this is exactly what would happen.

    While the algos are happy to track rising oil and gas prices, the handful of carbon-based traders out there who have done the math know that this is not a sustainable path.

    The Fed can pretend that food and energy prices aren’t relevant to their policy decisions.  But, they know full well that the consumers who are expected to keep the economy humming have to buy food, gas up their cars, and fork over their soaring rent payments (not owner’s equivalent rent.)

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  • Macro Factor Cycles and Regime Shifts

    Some time ago, I noticed that CL’s (WTI light sweet crude oil futures) three important tops since 2008 were almost the same number of days apart. This cycle certainly caught my eye.After tugging on that thread, I found a similar situation regarding CL’s lows. The 2001-2009 cycle was only 31 days longer than the 2009-2016 cycle — a 1.2% difference.

    This is exciting stuff for many reasons. In addition to supporting the fact that markets often move in cycles, it offers some very strong suggestions regarding financial markets over the next few years.

    I gave up on the Efficient Market Hypothesis about the time that central banks and other wealth-effect proponents began directly and indirectly propping up stock and bond prices in the wake of the Great Financial Crisis.

    The first few rounds of QE were effective — but expensive and difficult to fine tune.  There had to be a better way than throwing trillions of dollars into stocks and bonds.

    Since fundamental discretionary traders account for only 10% of trading volume, it turns out it is much easier and infinitely cheaper to “influence” the instruments (the tails) which signal the machines (the dogs) to buy stocks.

    The 90% of trading volume which is, in turn, driven by machines (indexers, ETFs, etc.) is only too happy to let the tail wag the dog. Since it typically drives stocks higher, very few investors complain.

     *  *  *

    I had traded in most of what I believed before 2007 for a mélange of chart patterns, harmonics, analogs and technical analysis. By mid-2011, it became apparent that patterns and cycles could be at least as valuable as fundamental economic data in forecasting markets.

    But, as machine-based trading gathered steam, these patterns often broke down.  In some cases, the patterns actually marked opportunities to force short covering by predatory algorithms — giving rise to such “strategies” as Buy the F-ing Dip.

    I devoted more effort to understanding algorithms and the factors they used to drive stock prices — a pursuit which has paid big dividends. Price movements in the factors themselves are much easier to anticipate if one knows how and when they’ll be utilized.  And, by accurately forecasting the factors, it is much easier to forecast the broader markets.

    We saw in 2018 what can happen when markets aren’t supported: an 11.8% plunge in February and a 20.2% nose-dive between October and December.  The latter decline so alarmed the market’s caretakers that the Fed backpedaled on its plans to normalize rates and the Treasury Secretary convened the Plunge Protection Team.

    Since then, stocks have recovered most of their losses, causing some participants to exclaim that the worst is over and we’re one trade deal press conference away from new highs.  Yet, many others see lingering cracks in the market’s veneer — cracks that presage new lows.  Which is more likely?  Can our new models offer any guidance?

    This post will attempt to elucidate the macro factors at work, how and when they are utilized to effect desired outcomes in the markets, and what they suggest about the next few years.

    continued for members…

    First, a quick review of the most influential factors: VIX, USDJPY and CL.

    VIX

    The chart below shows the obvious: VIX declines are strongly correlated with SPX advances.  I doubt that there’s an equity trading algorithm anywhere in the world that didn’t recognize this years ago.It wasn’t much of a surprise, then, when bearish events in VIX began to be engineered in order to prop up the stock market when it was distressed as well as to drive it higher.  At first, it was just a dip at the end of the day to propel stocks back into the green.

    Somewhere along the way, though, the dips became significant declines – often below significant trend lines, moving averages, or Fib levels.  The chart below shows how decisively the occasional spikes were hammered.  Plunges from VIX’s highs during this period were initially in service of allowing SPX to defend important Fib support at 1823. That worked so well that the same maneuver was used to rescue stocks from the shocks of Brexit and the US election in 2016.

    The US election was a watershed moment for VIX as a factor.  As it became evident that Trump was going to win the presidency, futures plummeted by 4.5%.  Yet, along the way, VIX started selling off.  It was hammered by 33% that night.  SPX actually closed in the green the following day.

    Who would sell downside protection in the midst of the sharpest downturn in over five years? It was akin to cancelling your homeowners policy as a tornado bears down on your house. The only explanation that makes any sense at all is that VIX was hammered in order to trigger algos to buy stocks.

    Everything changed following that particular rescue.  VIX broke below horizontal support, TL support and moving averages. Most notably, tags on the yellow channel bottom changed from once every year to two of every three days.

    VIX, long known as the “fear gauge,” had officially become a tool with which to prop up stocks.  It isn’t the only one — though it is the only one which is mostly free from economic consequences.

     

    USDJPY

    The yen carry trade hinges on a sustained drop in the value of the yen to drive stocks higher [see: The Yen Carry Trade Explained.]  It has been instrumental in two strategic moves and countless tactical moves over the past twenty years.

    A decline in the yen relative to the US dollar drives the USDJPY higher. The chart below shows the USDJPY and SPX moving in sync during two significant stretches — each of which culminated in an equity selloff.

    From SPX’s point of view…From USDJPY’s point of view…

    Unlike VIX, USDJPY can only rise so high before it causes problems.  If the yen becomes too cheap, Japanese inflation rises to a level (Japan imports much of its food and all of its oil) which pressures interest rates higher. CPI reached nearly 4% in 2014 as USDJPY broke out of its falling white channel.  With debt-to-GDP approaching 250%, Japan had a very strong incentive to ensure rates kept falling.

    Recall that in the wake of the 2011 Fukushima disaster Japan shut down all of its nuclear reactors and turned almost exclusively to oil and gas for power.  Oil had risen 345% since bottoming in 2009, meaning power costs soared.

    Soaring debt and inflation is a bad combination. If the USDJPY was going to break out of its falling channel and drive stocks any higher, something had to give.  That something was oil. Oil began its 76% crash on the exact same day that USDJPY broke out.

    Nineteen months later on February 11, 2016, as USDJPY was plunging below its critical 120.11 support and stocks were being pummeled to a 2-year low, WTI bottomed out.  It is no coincidence that Feb 11 was the low for the S&P 500, the NASDAQ, the Russell 2000 and the Wilshire 5000.

    Oil

    February 11, 2016 was a very odd day.  Janet Yellen testified before the Senate Banking Committee that the Fed’s decision to raise rates in December (the first time since 2007) made so much sense that the Fed might continue to raise rates.

    This was an extraordinary comment, given that CPI averaged just 0.12% in 2015, spending half the year below zero. How could Yellen be so confident in raising rates unless she knew something the rest of us didn’t about oil prices and inflation?

    It sure seems as though she did. CL tripled over the next 32 months, topping out at 76.90 on Oct 3, 2018.  The S&P 500 followed its lead — soaring by 62% over the same period.

    The chart above raises plenty of questions. The most obvious is whether the third period ended on Oct 3, 2018.  If so, it would be only about 965 days.  The two previous periods were 1823 and 1925 days.  Adding the average of those two (1874 days) to Feb 11, 2016 would put the end of the period at Mar 30, 2021.

    It’s a fair question.  After the 2003-2007 period, the rally in CL far outlasted that in SPX.  After the 2009-2014 period, SPX far outlasted CL. There were economic and market reasons for both.

    In 2007, stocks had already doubled when the GFC came along.  As markets fell apart, I believe an effort was made to prop up stocks with CL.  But, all it accomplished was driving CPI up to 5.60% and the 10Y above 5%.  Clearly, stocks were no longer inspired by high interest rates and inflation as SPX sunk into a bear market and GDP turned negative.

    Remember, USDJPY was in the process of crashing too.  As stock markets around the world began crashing, Japanese hot money came pouring back into Japan.  The USDJPY plunged (yen soared) 30% from 124 to 87 between Jun 2007 and Jan 2009.  It wasn’t until CL finally found its feet and QE was ramping up that stocks finally bottomed.

    We already discussed the divergence between stocks and CL in 2014.  It was necessary in order to give the USDJPY room to rally.  Oil, which in the wake of the Fukushima disaster was pushing Japan’s inflation and interest rates to unsustainable levels, needed to crash.

    Before we move into the analysis and forecasting segment of this post, I think it’s helpful to look at the combined influence of USDJPY and CL.  Note that the most serious downturns between 2002 and 2019 were those not “covered” by USDJPY and/or CL: the 2007-2009 crash and the 2015-2016 correction.SPX’s Feb 2016 lows were prevented from getting any worse by CL’s bottoming and subsequent tripling and, of course, our old friend VIX.

    VIX broke down through a trend line which had been in place since Aug 2015 and began construction of the falling purple channel which guided VIX lower for the next two years.

    Continued Mar 21, 2pm

    A quick aside: Powell and the Fed essentially threw in the towel yesterday: full tilt dovish. This fits our forecast nicely.  We’ve been looking for rates to drop for months — even after the phoney baloney December bounce. The 10Y tagged our next downside target 2.498% and bounced a bit.  The ZN (10Y price) came very close to our next upside target.

    ES which had dropped through its neckline, rose after the dovish announcement and then dropped into the close, shedding more points overnight.  It was forming a nice little falling channel until shortly after Thursday’s open when it started climbing… …primarily on USDJPY’s bounce off its SMA50 (which was just a backtest) and DXY’s rebound.  It was also helped by AAPL, which shot up through its SMA200 but is closing in on its .618 and channel top.

    VIX has tagged TL support.Ok, back to the forecast…

    I’ll lead off with where I think this is going and then see whether or not the charts support that outcome or something else entirely.  I know it’s somewhat ass-backwards, but I think it’ll make sense once I lay it out.

    Here’s my favorite case: a drop to 2138 shortly before the 2020 US election.This is a more alarming alternative.I’ll explain — and, my apologies in advance if I step on any toes.  I tend to dislike most politicians, so I’m not taking sides here — merely speculating on what those who are writing the script of this market might have in mind.

    If I’m a Fed President, senior Treasury official or senior commercial or investment banker, I live in fear of a second Trump presidency.

    Yes, I know that the market has rallied nicely so far under his term — though I would argue it is largely because of the algos and has little to do with what he has actually done (other than front-loading corporate profits via the tax bill.)

    Unless he resigns, dies or is impeached or indicted, he’ll be running for office again.  I believe most people in government and finance think he’s a loose cannon (one of the more polite criticisms) and would love to have him out of office next go ’round.

    The democrats would be stupid to impeach him.  It would merely stir up supporters and, if successful, it would land Pence in the presidency.  Pence would plainly be harder to campaign against — lots less ammunition. If they’re smart, they’ll drag out the investigations, etc. as close to the election as possible and release the most damning stuff in, say, October.

    Now, even those who hate Trump have to admit the market is up 33%.  It’s a good argument for him to hang his hat on.  I can see the bumper stickers: “He might be a dolt and a sexual predator, but the market is up 33%!”

    But, what if the market cratered between now and then?  I think that might be the plan — though with a couple of caveats.  First, the decline could be halted very quickly if he were no longer in the picture — as long as no one truly looney on the left or the right became the front runner. Second, if it became quite obvious (much more than in 2016!) that he was not going to be reelected there would be little incentive to force it any lower.

    How did I jump to this conclusion?  Simple, the charts suggest it.  If SPX can successfully defend 2703, then this theory falls flat on its face. But, it has dipped below 2703 many, many times in the past 14 months.  Since the next lower major Fib is 2138, it’s the logical target if SPX breaks back below 2703.

    As it happens, next Fall represents the intersection of the rising channel bottom from 2009 and 2138.  So, the timing is perfect.  2138 is also the Fib where SPX was when Trump was first elected.  So, it would represent a return to the starting point.

    At 25% from here and 27% from the top, it would alarm plenty of people — except the insiders who have hedged on the way up and those who study Fibs.

    And, we have a pretty good example of how to execute it in the 2015-2016 backtest of 1823 which lasted 2 full years from the time SPX pushed up through 1823 for good in Feb 2014.In 2015, SPX obviously pulled back before reaching 2138.  It made the short call much easier.  I think the same thing was planned for 2703, but circumstances got in the way.  RB and CL spurted higher at the end of 2017 – sending SPX up well past 2703.  By the time CL and RB moderated, the damage was done.

    Note that the difference between 2703 and 2138 is 565 points. The drop from January’s highs to December’s lows was 526 points — not much of a difference.  Had it started when the channel top reached 2703 in June 2017, it would have had 5 months to accomplish the drop and tag the channel midline — comparable to the 21.6% drop from between May and October 2011.

    Members might believe I entertained this notion before. The big channel shown below is clearly a better fit than the one above which includes the Jan 2018 highs.  Note the multiple tags on the channel top all along the way — and plenty of midline tags, too. The problem, though, is that it called for a drop to 2138 by the end of March 2019 – next week.I haven’t ruled it out completely, but the odds of that big a drop by March 30 are certainly a lot lower than they were when I posted this three months ago.

    Then, there’s the Dec 24 lows — a much bigger problem. Remember how alarmed everyone was?  Mnuchin even called in the PPT!  Why such a big deal?

    The answer lies in the white channel midline. If SPX had stopped at 2410.90 — its low on Dec 21 — the 1.618 extension of the drop would have been exactly 2138.04.  But, SPX plummeted through the midline on Dec 24.  This was an accident.

    How do we know?  Because USDJPY dropped through its SMA200 on the 24th — probably because the guys who normally watch such things had taken off for Christmas, and the poor kid who was stuck in the office got caught by surprise.This is all pure conjecture, of course. There was plenty of negative news coming into the session.  But, look at how ugly USDJPY got over the next few days.  If the PPT hadn’t crushed VIX beginning on the 24th, SPX would likely have headed much lower.

    Let’s look at whether 2138 is even feasible.  As we noted above, big drops like this depend largely on a lack of support from CL and USDJPY.  We’ll start with a look at CL.  Here are the cycle charts from above, but with lots of members-only good stuff.  We’ll look at all the reasons why CL might have already put in a significant top and is ready to decline.

    1.  First, let me point out the huge rising yellow channel which does a fantastic job of demarcating the highs, lows and the breaks in between.  It is perfectly aligned with the smaller channel connecting the 2016 and 2018 lows.2.  Note that the latest bounce from Dec 24 looks an awful lot like the bounce in early 2015 which led up to the 2015-2016 correction (a perfect duration match would be Mar 31.) The price ranges are even almost exactly the same:  42.41 to 62.58 in 2015 versus 42.36 to 60.39 for CL (the SMA200 is just above at 61.85.) I’ve highlighted the latest range and copied it to 2015 for comparison purposes.  What made the 2015 drop especially unsettling was that CL never quite tagged its SMA200.  It went sideways for six weeks, then gave up and plunged 57% over the next 8 months.

    3.  The cycle tops are almost exactly the same distance apart — arguing that the 10/3/18 top was a major one.

    4.  The falling white channel from 2008 is a pretty good fit — almost as though it was planned.  CL just bounced off its midline and is closing in on its .786 line – which is also the midline of one of the smaller rising white channels. I put the exact intersection of the two channel lines right at the SMA200.

    5.  Economics:

    There are three causes of rate declines: economics (usually low inflation), central bank manipulation, and fear.  When the 10Y reversed off 3.25% in October, the economics were increasingly scary.  Shortly thereafter, it became about fear. Since January, the Fed has been in the process of trying to shift into manipulation mode.

    Most readers will remember this chart which shows how a slight rise in rates would exacerbate an already frightening debt and interest expense crisis.

    At 3.25%, TNX had reached the top of a long-term channel.  Given the above, a breakout of this long-term trend would have been unthinkable.Interest rates had to be brought back down, which as we’ve discussed meant bringing inflation back down which, in turn, meant bringing oil and gas back down.  That’s why when CL peaked on Oct 3, TNX peaked two days later.I’ve charted this relationship many times in the past, but a quick reminder wouldn’t hurt.  CPI is highly correlated to oil prices.Though, the more dramatic comparison is between CPI and the YoY changes in oil prices.

    We see an even closer relationship between CPI and YoY changes in gasoline……especially over the past few years.  When CPI fell below 0%, YoY RB spiked.  When it topped 2%, YoY RB slumped. The last two years has been focused on keeping CPI in the sweet spot: right around 2%.

    Changes in CPI have been very strongly related to “problems” in interest rates over the years.

    The 10Y usually peaks before CPI, presumably as bonds “price in” expected shifts in inflation.  There have been seven tests of the channel top over the past 30 years — the last one occurring on October 5, 2018.  Each test and reversal was accompanied by an inflation “event.”

    The events varied in nature.  In Jan 2000, for instance, the 10Y (the blue line) shot up to 6.8% when CPI (red line) pushed above the highs reached in 1991.  CPI topped out two months later at 3.8%.

    Between 2003 and 2007 the 10Y had difficulty keeping up. The 10Y peaked at 5.3% even as CPI surged above its 2000 highs to 5.6%.

    Since the crash, the moves in CPI have been tailored to keeping the 10Y on track — with the latest drop delivering a 2.50% 10Y yesterday.

    I have meetings outside the office most of the day Friday.  I’ll continue this post Friday afternoon.

     

     

     

     

     

     

     

     

     

     

     

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  • Update on Gold: Dec 26, 2018

    Back on August 15, we noted that gold was nearing an important downside target.  From Charts I’m Watching: Aug 15, 2018:

    [Gold] has reached triple support –the .618, yellow TL off the 2011 highs, and the red TL from 2010.  We’ve targeted 1173.60 since the yellow TL broke down in May and gray channel broke down in June.  I strongly suspect it will bounce here.

    GC dipped slightly lower, bottoming out at 1167.10 the following day, then began an arduous climb that reached our 1268.30 target last week.

    As it threatens a breakout, we’ll take a fresh look at the road ahead.

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  • The True Price of Oil

    As enjoyable as it is filling up the Family Truckster for only $2.36/gallon, what if it meant the the death of thousands of Kurds?  Here’s what we know.

    For months, OPEC ignored Trump’s demands to bring down the price of oil.  Trump was correctly concerned that spiking oil prices would push inflation to new highs (they did) and thus cause interest rates to reach unsustainable levels (they did.)

    Trump’s tweets began in April…

     

    …but, oil prices continued to climb until October 3 — which just happened to be the very day headlines proclaimed that Jamal Khashoggi was murdered in the Saudi embassy in Turkey, presumably at the direction of Saudi Crown Prince Mohammad bin Salman.

    Since October 3, oil prices have dropped over 40%.  Coincidence?

    We commented back in October about the connection [see: Coincidences and Consequences] and speculated that it would finally give Trump the leverage he needed to force oil and gas prices lower.

    Condemnation of Saudi Crown Prince Mohammad bin Salman was nearly universal.  The lone holdout/apologist?  Donald Trump.  Highlights from his statement:

    …the Kingdom agreed to spend and invest $450 billion in the United States…it could very well be that the Crown Prince had knowledge of this tragic event – maybe he did and maybe he didn’t!  King Salman and Crown Prince Mohammad bin Salman vigorously deny any knowledge of the planning or execution of the murder..we may never know all of the facts surrounding the murder of Mr. Jamal Khashoggi. The United States intends to remain a steadfast partner of Saudi Arabia…

    It’s not much of a leap to conclude that the price for Trump’s equivocation was a big decline in the price of oil.  CPI, which reached 2.95% in July, came in at only 2.18% in November.  In December, it will likely return to below 2% as the YoY delta in gasoline prices turns negative.

    The 10-year treasury, which topped out at 3.25% on Oct 5, is back down to 2.75%.  The Fed is under renewed pressure to scrap plans for additional rate hikes.  Mission accomplished.  But, there was one thread which threatened to unravel the whole deal.

    According to Turkish President Recep Erdoğan, recordings of the entire incident were shared with the US, the UK, France, Germany and Saudi Arabia.  He specifically mentioned providing a copy to Secretary Pompeo and to the CIA, which shortly afterwards concluded that MBS was behind the killing.

    Caught between a rock and a hard place, how could Trump convince Erdoğan to refrain from publicly releasing the recordings?  Apparently after deciding that handing over Gulen would be a little too repugnant, even for Trump, he handed them an even bigger prize.

    Without US troops at their side, most observers believe the Kurds in Northern Syria will be easy prey for Erdoğan. He has graciously agreed to postpone the massacre.

     

     

  • Mixed Messages

    The headlines have been coming fast and furious over the last 24 hours.  First, Trump’s tweet yesterday morning regarding trade negotiations with China touched off a rumor, declared false this morning, that a trade deal was imminent. But, SPX soared yesterday anyway.

    Then AAPL’s earnings came out.  The numbers were underwhelming; and, the company’s announcement that they’d no longer report unit data was very poorly received.

    The chart we put up yesterday prior to the close [see: All Eyes on AAPL] showed substantial downside potential… …which after-hours trading is confirming.Then there was this morning’s payrolls data: a 250K increase with a 3.1% increase in average hourly earnings.  While no doubt  It’s exactly the sort of data the Fed needs to justify further rate increases in the face of the collapse in oil and gas prices — the last piece of the puzzle.

    Gasoline has now fallen over 20% since our Oct 3 short call and tagged another downside target yesterday.Oil is off over 16% and just broke beneath horizontal and channel support.  To be sure, it will keep October’s CPI low and will delight voters driving to the polls on Tuesday.  But, like the employment data, there are repercussions.By the way, I have updated our oil and gas forecasting results, available at the links below.

    Oil Results
    Gas Results

    I hope to post currencies, VIX and gold later today or this weekend.

    Futures melted up to backtest the SMA200 early this morning and have since fallen 16 points to the algo-darling SMA5 200.  It remains to be seen how the mixed messages being sent up from Washington and Cupertino will play out.  But, for now, I’m leaving our targets in place.For the moment, at least, VIX’s 50/200 cross is on again.continued for members… (more…)

  • FOMC: What Elephant?

    Over the last 20 years, we’ve seen two yield curve (2s10s) inversions: essentially all of 2000 and Dec 2005-May 2007.  The inversions themselves posed no issues for equity markets.  It was the dramatic unwinding of those inversions that produced crashes.Eight months ago, we almost had another.  2s10s had fallen to a trend line connecting those two previous curve lows. Instead of bouncing, however, 2s10s continued falling — reaching a low of .18 on Aug 27.

    Unfortunately, the optics of this approach to an inversion are troublesome.  It is commonly believed that inversions presage recessions.  So, the brain trust in the Eccles Building has a little tightrope walking to do.

    They need to increase the short end of the curve to stave off (understated) inflation and build some cushion for the next financial calamity.  But, to avoid an inversion, they must scale back their intervention in the 10Y — at least enough so it can keep pace with the rapidly rising 2Y.

    Eagle-eyed observers might note that both recently out above the trend line connecting previous highs. Not so coincidentally, this occurred as the above-referenced trend line connecting the 2s10s lows was breached and equities began their Jan-Feb swoon.Can the Fed keep the plates spinning a little longer?  Without question.  Especially if Powell is successful in convincing investors algos that the economy is strong but there is no wage pressure and inflation poses no real threat.

    Should that narrative fail, however, the spectre of higher rates alongside soaring debt levels might finally awaken equity and bond investors to the elephant in the room.

     *  *  *

    So far, the damage resulting from Friday’s channel breakdown has been contained to the August highs.  But, still ahead, EIA inventory reports and the FOMC statement and press conference.

    continued for members… (more…)