2016-05-29
So Fed Chief Janet Yellen indicates that interest rates will soon rise again …”gradually and cautiously” … “in the coming months”.
My statement: The Fed should put up or shut up. Stop playing the marketplace, spinning us like a top. Like the Nike way – Just Do It (or Not). If you do it, then tell us why. If you don’t do it, then tell us why. But what you are doing by stringing the marketplace along is really laying the groundwork for your insider tipping, which is how your friends continue to get wealthier. Fed decisions should be made secretly with the minutes reported a week later – after the market has reacted. But that way, the public would have confidence that if decisions were leaked in advance, investigators could determine by whom. The way the system works today is that blowing smoke is just a cover for the reality.
Am I a skeptic, you bet. The entire financial system is corrupt from the head down, and the Fed is the stinking head.
The implications of a rise are fairly clear – a moderate rate rise strengthens the Dollar on the belief the economy is strong, so banks and economically sensitive stocks are encouraged to continue trending higher, while precious metal interest is crowded out by “real” investment opportunities. The equity Bull would continue charging.
Should rates not rise, investors would believe that the economy is seen by the Fed as not strong and so the Dollar would weaken, along with banks and economically sensitive stocks, while precious metal prices would lift. The equity Bull would stumble.
What is the market saying? Recently, technical indicators are reflecting a break-out to higher prices – in the US and abroad — whereas the price of gold has been softening.
What do I believe is happening today? As before, I say the equity market remains in a long-term topping phase where the next intermediate cycle decline is likely to be more serious than the one at the beginning of this year. The next one is likely to be quite serious for investors who are 100% long and unhedged. The major market indexes could fall 25% to over 30% — AFTER a 35-40% plunge in the first week — causing investors to engage in widespread panic selling. Trillions of dollars in capital would, of course, be wiped out.
As to the usual questions of when, why, how… I continue to say there will be a linkage of topping broad market equity prices to a blow-off cycle top in gold, which will be a sign that the Fed would have to quickly ramp rates higher. That would sound the final alarm for equities. A small rate hike can be accommodated by most investors; however, if the hike is too much, too fast, the delicate balance in markets would come unglued, and investors would panic.
Until this year, the illegal interventionists who operated the gold exchanges in London and New York manipulated their benchmark price by using futures and swaps. But the Shanghai Stock Exchange changed that a couple months ago by posting a Yuan-denominated benchmark price that is based on physical sales in the country, which now happens to be the biggest physicals market for gold. So, presumably, that benchmark is much closer to reality.
I say closer because when it comes to money, the whole world is corrupt.
How high the gold price might go depends on demand (which is affected by price) and that situation, I think, will be linked to the Chinese economy.
Today in China, there has been much over-building of construction projects across the country resulting in a serious problem with unproductive assets. The first place Chinese investors would typically be turning to under most conditions is real-estate; however, with that market reaching price levels that do not produce an economic return, like last seen in the U.S. in 2006 (and probably again presently), just before real estate prices there bubbled and crashed, I believe they are going to gold. So with lots of available capital looking for a home in China, and India, gold is in favor now, and will be until that market bubbles to previous highs around 1900 USD.
My sense of the timing of the gold Bull spike is September-October as Americans are in the final stages of accepting who their new President is likely to be. Either choice there is going to be such a negative for so many investors that they will be nervous and ready to pull their money out of markets. Some investors will be speculators during the gold bubble that I say might be occurring at that point, but most will be focused on corporate fundamentals in the non-golds. The problem there is that the revenue and earnings data to be reported after the third quarter ending September will not be as impressive as the FED and their Wall Street friends would have you anticipating. So, most investors will want to sell assets at least until after the November election in the U.S.
This is a scenario I expect to be played out; however, none of us (except maybe the Fed insiders and their closest bed-mates) can accurately predict the future. For that exact reason, I decided to pull out of my once prodigious writing in order to build a proprietary database management system I could rely on. That project btw now involves many people and is coming along well, if not as fast as I had been hoping.
In any case, pretty soon you will be hearing me talk about evidence-based trading and portfolio decision-making rather than engaging in guessing games as I am today. I have tired of hearing stories from pundits because it’s all just people talking their book or shills for them. I prefer to be making decisions and writing material for your consideration that is based on substance.
Enjoy your day – Memorial Day in the USA.
/Bill
