Bob Hoye: “The Fed is behind the action.”

Posted by Bob Hoye - Institutional Advisors

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Signs of The Times

The following headline is perhaps one of the most egregious policy statements in financial history.

“Bernanke: More execs should have gone to jail for causing the Great Recession.”

                                                                                                                – USA Today, October 5.

If one’s research extends beyond the 1929 Bubble and collapse, the observation would be that every great financial mania has included bad dealings that are only revealed in the crash. Individual or corporate fraud may exist, but it does not cause the contraction. Typically, fraud is revealed in the bust.

Is Bernanke deliberately naïve?

Well, he is flogging a book.

Quite simply, every financial bubble ends with a compulsive surge in speculation. The over-extension of leverage can only be supported by rising prices. Without momentum the mania fails. All of the great bubbles suffered heavy liquidation in the fall of the year.

Bernanke has been considered to be today’s outstanding scholar of the last Great Depression. His writings indicate he is familiar with economic theories about the 1930s contraction, but knows little about the pattern in the curve and spreads going into the climax of 1929 or the five previous examples.

The Fed’s aggressive ease in the 1920s, the 1960s and radical ease of the last decade may not be criminal according to law. But is definitely criminal intrusion upon the workings of free markets. Although policymakers talk about “managing” the economy, the net result has been chronic currency depreciation. Purchasing power of the dollar has declined to only some 3 percent of what it was when the Fed began operations in 1914. 

In our books, this is state theft. In Dante’s book, false money-ers are consigned to a certain place in hell.

In the meantime, a more temporal punishment would be constructive. No system, even a Federal Reserve, should be allowed to operate without constraint.

“Federal Reserve Vice Chairman Fischer said he doesn’t see immediate risks of financial bubbles in the U.S.”

                                                                                                                      .– Reuters, October 2.

The irony is that if the Fed identified a financial bubble, it would have to do something about it.

No central banker wants the responsibility of taking away the punch bowl. This leaves the responsibility to Mister Margin, who never shirks his duty.

A bubble in lower-grade US bonds peaked in June 2014. A bubble in the NYSE seems to have peaked in July. Upscale residential real estate is in a remarkable bubble. “JP Morgan Financing Los Angeles Mansions Starting At $115 million”

“Including several on a speculative basis.”

                                                              – Bloomberg, September 28.

Fischer must be intentionally behind the challenge of identifying bubbles.



Fortunately, a comprehensive review of upscale homes in Los Angeles was published in August by LA Curbed. We can’t help but wonder if “infinity pools” can provide appropriate perspective?

Here is the link for the article

We have said it before and will say it again: Like civilizations, great bull markets are born stoic and die epicurean.

Stock Markets

On the S&P, a rebound out of Black Monday would likely reach 100 on the CCI momentum. That was obtained at 2026 in the middle of September. Our target then became the low close on August 24th.

That was accomplished. The extreme low set on the bad day was 1867 and last week’s low was 1872. This was showing considerable pressures going into the release of an unemployment number. The number was so bad that it banished the prospect of the dreaded “Fed hike”. Massive short-covering followed. 

Our view has been that such conjecture is a waste of time and pixels. Whatever happens, the Fed will be behind the action.

Technically, the key rally to the CCI 100 ended at close to the 50-Day ma. The latest jump has made it to just below the moving average.

Our July 7th call on banks and financials was that they were a “Widows and Orphans” short. The BKX high was 80.87 on July 23rd, the August 25th low was 67.80 and the rebound made it to 73.39, just below the 200-Day ma. The extreme low on Friday was 66.70.

For this year, the banks outperformed the S&P until July. Underperforming since. The decline in the BKX itself and relative to the general market is not oversold.

The overall market (NYA) is also not oversold. The extreme low on August 24th was 9509. Last week’s low was 9565 which was the test. The rebound has made it to 10156 and there is resistance at the 10250 to 10300 level.

Once the CCI momentum bounce was in the close on Black Monday became out target. This has been accomplished. The other probability was that the extreme low could be taken out.

How probable is this?

One guide has been the DX breaking out of its squeeze between the 50 and 200-Day moving averages. As of this week, it is breaking down, not up.

The other guide would be further widening of credit spreads. After reaching new “wides” for the move at 13.23 percent, the Junk spread has checked back to 13.05. The correction continues.

The probability of a seasonal low in October is now a near-term view.
Our “Friends of the bull market” kept us positive until around July.
We should have something equivalent to keep us cautious, on an intermediate basis.

Breaking below the 50-Week ma marked the end of the bull market in 2000 and 2007. Using this along with some other determinants, we marked the end of the Bull market on July 23rd. The initial intermediate decline completed some four months later. Four months from when the SPX took out the 50-Week counts out to around November.

An intermediate bottom could complete within the next six weeks.

Credit Markets

Usually, we don’t comment on employment numbers other than to note that the calculation behind the reported numbers seem wondrous.

At any rate, the one last week was interpreted to be unusually bad. Bad enough to defer any putative increase in the Fed rate. Big short squeeze in global stock markets, which coincided with credit spreads narrowing. For four days.

The Junk spread over Treasuries did the second big breakout on the way to 13.23% on October 2nd. Yesterday’s post was 12.70%. ETF spreads are widening a little today. 

Whether in 2007 or 2008, the second big breakout on the cyclical reversal to widening is a negative for the stock market. The setup to this important phase of widening was accomplished in July.

Widening beyond 13.23% for Junk seems likely. On the BBB the worst was 242 bps, also set on Friday. At 234 bps now, through 242 bps seems likely.

The hit to the Pimco High Yield (PHDCX) price was from 9.93 in May to 8.93 in August. The bounce was to 8.99 and the October 2nd low was 8.60. At 8.80 yesterday, taking out the last low seems possible and would be a warning on further credit problems.

Long-dated Treasuries (TLT) rallied up to 126.21 on Friday and have trading around 123. This has been supported by the 50-Day ma, which is at 122.70. Taking it out is probable. There is support at 118.50.

Precious Metals

Last week’s quip about “Precious on, precious off” could do with some expansion.

Gold spiked down to 1072 on the week of July 25th, the week the S&P topped.

A “precious off” moment.

Gold’s real price bottomed between May and July and then soared to a sharp high on August 24th.

A “precious on” moment.

This “opposing” action is appropriate. Traditionally, the golds have done well during post-bubble contractions. Mainly because the real price and operating margins go up, as the pricing power of most industry and commerce decays.

The problem for the precious metals sector is that sharp setbacks to orthodox investments in stock, junk bonds and (shudder) commodities have been good for gold. But have forced gold equities down.

It is the way financial history works.

When will it work for the precious metals sector?

When the continuing increase in the real price has driven profitability to attractive levels. The rise into August drove the real price to a new high for the move that resumed in June 2014. However, the rise in the nominal price to over 1900 in 2011 prompted a lot of mal- investment.

These mistakes are being worked out and at some point the liquidation will end. Life in exploration “juniors” has been particularly hellish.

We have noted that every bear market in the sector is the worst you have ever been in. This is an impressionistic measure.

Anyhow, the “ancient miner” may have a new indicator of dismal. His exploration company has outstanding prospects, decades of experience and money. Younger guys with otherwise good companies are very discouraged. Discouraged to the point of wanting someone to take the company over – at any price.

When will the nightmare be over?

Every rally since the bear started in 2011 has been sharply up with lots of instantaneous enthusiasm. The last one popped out of December and stopped at the 50-Day ma. Also momentum on the silver/gold ratio got somewhat high.

This showed there were still a number of bulls all too willing to play the “Fed bad – dollar down – gold up” mantra. This hasn’t been working since 2011.

What we have been looking for on the re-entry is not a “V” bottom, but stability.

The key low for the GDX/GLD index was 120 on August 24th and the bounce made it to the 50-Day at 135. The next low was 122 and last week we noted that rising through the moving average would be a positive step. That was accomplished on Friday and the move continues.

The other way of monitoring stability is through the sector outperforming the S&P.

GDX/SPX had risen to barely above the 50-Day and needed further gains. Gains have been good this week as is getting above chart resistance at 75. It is now at 79 and the next resistance is at 82. The 200-Day ma is at 87 and represents a lot of resistance.

The latter is possible and could take some time.

Link to October 10, 2015 Bob Hoye interview on