I watch charts closely and in real time. Yesterday GLD went below the low of the 2nd and 5th previous days and there was NOT a sharp move down. This is unusual for gold and GLD. And it indicates, so far, that there is not much nervousness in this market and perhaps that there is accumulation by stronger hands. Time will tell and things change. Let's watch.
Read the chart:
A lower open this morning and the volume is subdued.
As interest rates look set to rise in the U.S. and in Europe as these economies seem to be picking up steam it may be wise to wonder what effect higher interest rates in the world will have on Japan. The search for yield makes the money flow, in general, to those places paying the best return while taking risk into account.
Japan depends on debt to keep their government running. In fact they have one of, if not THE highest debt to GDP ratios in the world. This has been so for some time. Usually when a country reaches the 90-100% debt to GDP level alarm bells start to go off for lenders to that country. This happened in the U.S. a few years ago, and the bells rang loudly, particularly in the political circles. The U.S. debt, as a percentage of GDP has improved. Of course this is a ratio, and is dependent on the level of debt as well as the level of economic activity. (GDP)
Investors are always on the lookout for the next BIG thing that may derail a recovery or cause turmoil in financial markets. Japan may be a big deal in the future with the level of debt they are in and if interest rates rise around the world. Japan has been the source of lending from Japanese banks at the same time their government has propped up those banks with borrowed money. This has been going on for decades now, since the 1990's real estate bubble burst in Japan. (the US has repeated the pattern remarkably so far) Japan's government does hold a high level of domestic debt, meaning they have borrowed from their own citizens to a great extent. How much more they can save and lend to their government is an open question, particularly if exports take a hit due to decreased competitiveness caused by currency or energy.
Here is a list of world countries and statistics of debt. Pay attention to the debt/GDP numbers.
And the chart of the Japanese Yen as represented by the FXY ETF.
The chart says look out for a rise in the value of the Yen. A rising Yen makes repayment of debt more difficult and usually is the result of a rise in interest rates in a country, but is actually a valuation RELATIVE to the world. Any rise will crimp a country with a high level of debt. And there is a good chance of a financial dislocation with any sudden moves. ( google "Reflexivity") A rising currency makes exports less competitive and Japan depends on exports.
Safe havens like gold usually do well in these scenarios.
Economy: Interest rates can fluctuate according to the status of the economy. It will generally be found that if the economy is strong then the interest rates will be high, if the economy is weak the interest rates will be low.
All I have heard for months if not years now is how the economy, and most certainly the stock market will crash if the U.S. Federal reserve raises, or allows interest rates to rise. The are said to have a mandate to optimize employment and to ensure stable prices. (Here)
If the economy is strong enough to let the Fed finally act after these years of low interest rates and lack of growth it will be past time.
And furthermore interest rates will not be raised, but allowed to seek a more natural level. If interest rates go up it will be because the economy is strong and that means there is more demand for money and debt, and less demand for the safe haven of U.S. Treasury Bills.
More demand for money.
Need I repeat that.
More demand for money.
More dollars will come into circulation and the velocity will increase.
There will of course be some fluctuation in stocks since there are many still dependent in their minds on the Fed and "cheap" money. But the fact that interest rates rise is proof of demand.
Sell those bonds. Buy stuff that is real or does real things.
The main theme of the year so far has been the volatility in the tech stocks, with may high fliers dropping overnight, including the biotech darlings of the last few years. The money seems to be rotating into the materials. The possible reversal of the US Dollar strength along with firming in the price of energy has contributed. I have been anticipating this for some time. Probably because my heart is in the commodities, imprinted like a turtle, if you know what I mean....
It is about time to see a bottom in the dry bulk shippers. The charts support this with volume drying up even as new lows are made. This, if it proves a bottom would be for a long term trade as it may take a couple years for things to get really going again....
The U.S. Dollar may decline from here. The chart of UUP certainly suggests a decline in the Dollar Index.
A decline in the U.S. Dollar could be the result of a decision by the Federal Reserve to delay raising interest rates as has been expected. This delay, or change in mindset, may be due to the effects on the U.S. balance of payments and on the exchange of goods in particular. 3M came out with earnings today (HERE). Their earnings have suffered due to the strength of the USD as this raises the price for foreign buyers of goods. In the spirit of "mercantilism" that seems to have become the way countries compete in this modern age, and due to the fact that the first country to actually raise interest rates and thus appreciate their currency outright give up advantage in trade and thus employment, I believe the Fed will delay an actual rate increase. As this becomes apparent the USD will decline.
Then we will be back to worrying about the foreign holders of US Debt, and thus long term interest rates again.
GLD looks demoralized lately, as do some of the energy and miner stocks. So now is a good time for a bottom, as investors look the other way....
Economic trends are social phenomenon. At present in the U.S. there is pressure building to raise wages for low income workers. Hardly a week goes by that I don’t see a demonstrators somewhere demanding a rise in the minimum wage. This time to $15. Nearly double what it is now. It is about time that labor woke up. I guess all it took is the stock markets going up for five years and zero interest rates for the same time.
So, it looks like low interest rates will cause inflation, and not just in the asset prices. The social public is not unaware of the rises in stocks and assets in general, and the greater divide between the rich, those who benefit from low interest rates, and the poor who watch the goings on and become increasingly angry. Angry enough to demand a share of the largesse.
Economics is a social phenomenon.
Look for wages to rise over the next couple years. Look for prices of goods to rise moderately as the increased buying power of the lower working classes pushes the cost of basic goods higher. They won’t be buying Tesla cars, they will buy Fords and Hyundai cars, and new cell phones.
Business may see a shrinking of the profit margin, but volumes will increase and this will be the carrot in front of investors who will hope to rein in the labor costs or increase productivity in order to regain the lead in money accumulation.
This is a recipe for inflation. The central banks will be reluctant to kill this golden goose after decades of deflation terror. The Fed will lag the inflation and therefore encourage prices to rise and the Dollar to decline. All the while "keeping their eyes on the data".
Now is the time to look long term at energy, metals and even the banks who will lend as the velocity of money increases with the wealth infusion at the bottom of the pyramid. There will be extra money in the hands of those without debt. They will want to catch up fast.
The next few years may make the 70's look tame.
The trend will change!