Sunday, May 22, 2016

The Dog That Didn't Bark



In one of Sir Arthur Conan Doyle's well known stories, the story of "Silver Blaze", there is the famous line about the dog that didn't bark in the night. A racehorse had disappeared and a man had been killed. But the dog didn't bark during this incident. Holmes was sure this indicated that no stranger had been at the scene. The dog didn't bark because there was nothing to bark about.

The above thought came to me as I watched another in a long line of talking heads on one of the business channels talking about the great swoon yet to come in the stock markets of the world when the Federal Reserve raised interest rates. The recurring theme over the last few months has been that the "market has not priced in" the raising of interest rates by the U.S. Federal Reserve Bank.

Yet, everywhere I turn I am hearing about the imminent raising of interest rates or how the stock markets of the world will sell off in the consumation of this radical deed that will unsettle the world's financial arrangements.

But the dog is not barking. The S&P is perhaps 3% off of the all time highs and has been in a range for over one year. Yet is at the high end of this range. When will the dog bark?

The stock markets are forward looking. And after several sharp selloffs over the last few years, including the "Taper Tantrum" of a few years ago and the "flash crash" of more recent, I would think that the responsible money out there has found a safer way to invest, or at least, the intestinal fortitude to withstand a 1/4 point interest rate rise.

Much depends on the actual state of the world economy. Much of the world has been in slow recovery for several years. The recovery, according to most accounts, is agonizingly slow and has dissappointed all who long for the good old days of debt creation and GDP growth above 2%. However, as I stated recently, the consumer is coming back due to a period of savings growth, or at least debt reduction, and coming back also due to a strengthening of wages. The cost of energy seems to be stabilizing at a lower level and this will give some confidence. On a personal level, just watching what is going on around me, I see the traffic on the freeway going stronger than ever, the slow lanes filled with trucks carrying goods, and vacationers on the highway in numbers. I see people changing jobs with the confidence that they will find another and survive the change. And the ranks of the retirees are swelling and younger workers are taking the reins. This makes me optimistic about the dynamism of the world and in particular the U.S. economic situation.

How the markets react to any raise in short term interest rates is anyone's guess but I am guessing that the dog has not barked for a reason and that the markets will survive a strong economy, despite their own worst fantasies.

There may be a knee jerk reaction when and if the dreaded day of an interest rate increase arrives, but this amateur thinks that reaction will be the twitching of algos whose instructions are in need of a paradigm change driven rewrite.

Time will tell.

Control your risk,

gh

 

Tuesday, May 17, 2016

Confirmation

We all know about 'confirmation bias'. That tendency for humans to look for information and opinion that supports their own beliefs or opinions. Sometimes that bias is just that, a bias that leads one astray. And sometimes one is right in ones beliefs and the signs of confirmation are just that. Confirmation of a trend or event.

The numbers on consumer spending and prices came out today and showed surprising strength.

This is the first strong sign of possible inflation because when consumers pay higher prices they can afford to pay higher prices and higher prices allow further price rises, etc.

Higher prices stimulate production which requires money and money is credit, etc...

And all of this together means the money tends to circulate faster....

The gold bugs may be right again.

Keep an eye on the U.S. Dollar. The next question will be 'when is the Fed going to raise rates to control this inflation?'.  My answer is that the Fed is in no hurry to nip this delightful prospect of inflation, and a weakening U.S. Dollar, in the bud. I think they will want this economy to regain some money velocity so they will drag their heels on raises.
The "bond vigilantes" have been neutered. They are licking their wounds so this counterbalance is a long ways off, not to say that bonds may not work their way down some....

If I had to pick one day to spot a trend change in the disinflationary trend of the last years this would be it.

Time will tell.

Consumer price news today

Keep an eye on the Baltic Dry Index...

Control risk,

gh

Monday, May 9, 2016

Dollar Rally Over?

I am seeing some cracks in the U.S. Dollar today. The slide may continue soon.

The selloff in the indices of the last few days is tepid, and I saw no sign of serious selling.
That could change with time of course but for now it doesn't appear to be worrisome.

Check your static lines, prepare to exit the aircraft.



The dollar will descend, emerging markets will rise, and banks will finally see some light at the end of the tunnel.


Is that clear?
Control risk,
gh

Tuesday, May 3, 2016

A New Idea!

With a lull in the action over the last few days I cast around for new ideas for trades or investments.

This chart jumped out at me.

Time will tell if Vietnam takes off like it has in the past. The volume is a bit low on this latest rally. But in keeping with the constant ebb and flow of money around the globe......


Much will depend on the appetite for risk in the stock markets. I feel we are running out of buyers. The volume near the top of the S&P here seems weak. Feeling a bit bearish here. We'll see...

Control risk,

gh

Thursday, April 21, 2016

When money moves..

The long commodities bear market has left all economists wistful for the good old days of robust demand for basic materials. All hope seemed to have left the space in just a few short years.

But the piles of money that influence interest rates to be so low could start to move. The world is waiting for the next big thing.

Africa as a land starting to develop.

India short on infrastructure after all these years.

It really shouldn't take too much to take up the China slack. There are more people every day.

This is what I am reminded of.

This from earlier


Friday, April 8, 2016

Peak Financial Economy

There can be little doubt that the last 25 years of declining interest rates and disinflation has been good to the big banks. We have seen the financial havoc that bank shenanigans have wrought. And we have seen the extent the Central Banks will go to in order to "save" the banks from themselves.

We have witnessed over the last decades a financialization of the world economy, and certainly the U.S. economy. There is a bank or insurance company on every downtown street corner. Working men and women save for retirement by investing in the stock or bond markets. And providing financial advice is a big business.

During this time paper assets have gone up many multiples in price. What good, though, to a consumer or a retiree, or a nation, for that matter are paper assets. We CAN consider these paper assets as "savings".  So what happens when the world needs to spend these savings.

I think of the sovereign wealth funds of S. Arabia, et. al., cashing in some chips and using the proceeds to fund their societies.  These savings, which I presume were denominated in US Dollars, are now used to buy actual physical goods. This lowers the value of the Dollars and raises the price of goods.

If this idea catches on. This cashing in of paper to actually use the 'value' for something. If this starts to raise the price of real goods and lower the value of paper we may see something we haven't seen for a long time. And there is a whole lot of paper out there.

I asked the question: "What is the effect of inflation on big banks?"

Here is an old article from the Richmond Fed. Written before the last decades of paper.

Richmond Fed on Inflation

I sense a change happening.

Control risk,

gh

Wednesday, April 6, 2016

Reflexivity?

Here is a thought.

Let us assume the world is oversupplied with oil. So there should be a fundamental pressure to push down on the price of oil.

Several nations, mostly in the middle east, have grown accustomed over the decades to a relatively high price of oil and their societies are dependent on a subsidy from oil exports.

Recent liquidations by sovereign wealth funds pushed down the stock markets. The liquidations were presumably to raise cash for sustaining the economies and societies of oil producers suffering from a low oil price.

Oil is mostly transacted in U.S. Dollars. Oil overproduction tends to support a strong dollar. However, years of profits by the oil producers were invested in stocks and bonds, and as sovereign funds liquidate those funds, the currencies realized are spent in the real economy. To the extent that the original profits were in US Dollars, can we assume that the liquidation of profits will be in US Dollars? This should be the "freeing up" of US Dollars. The spending of savings. Perhaps the reversal of the financial economy/"saving economy", and resuming the spending of that 'savings'.

As these monies are recirculated they will stimulate. Demand for oil will rise, the price will rise, inflation will become evident, interest rates must rise, bonds will be sold; those savings come into the economy providing further stimulation and demand. A reflexive feedback occurs. Inflation is seen as good after decades of disinflation. Big bond holders reduce holdings and invest in equities.

We may still have a "5th Wave" coming in equities.

And then the oil runs out. Yikes!

Tuesday, April 5, 2016

Double Top in U.S. Dollar

From a technical perspective there is a double top in price in the US Dollar index.

This shows up well on the weekly chart perspective. From my experience, the longer the perspective the more true the indicator in question.

Some of the great trades are made in the big moves in commodities prices and the US Dollar is the ultimate commodity.

There is the possibility of a dramatic fall, on a weekly perspective, with a break through the 'neckline' of this price chart. At the least this chart signals a change in sentiment for a strong dollar.

Don't fight the Fed.


VALE is strong.

Control risk,

gh

Wednesday, March 30, 2016

Down and Dirty

I think the dry bulkers are in a bottoming process.

At least for those that survive.

It occurred to me that I remembered Jim Cramer talking up Diana Shipping some time back. A google search revealed that it was in Nov. of 2009. He never seems to pick a bottom for his devoted followers. Mostly he picks tops. On a couple of occasions I have looked at a chart of something he is recommending and the chart looked fairly strong, but the stock then sells off strong. I think his recommendations are used to distribute.

I, on the other hand, despite my professed desire to buy late and sell early, also cannot resist the temptation to pick bottoms. Although there are many bottoms, the trick is to be there at THE bottom, and that is only evident in hindsight. So the first rule is do not lose too much on the bets. The way I do this is watch the volume for evidence of accumulation or short covering and buy on the way up, trying to have a maximum or near maximum position on when the stock finally confirms a bottom by a price pattern over a period of time. Rounding bottoms are my favorites for this exercise. (look at a chart of GLD)

Here is Jim Cramer's Call in 2009


Here is my call:


Control risk,

gh