News of Fresh Disasters

Posted by Bob Hoye - Institutional Advisors

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Signs Of The Times

Rationalization for reckless behaviour continues:

“Because stronger growth in each economy confers beneficial spillovers to trading to trading, [easy money] policies are not ‘beggar-they-neighbor’ but rather…’enrich-thy-neighbor’ actions.” – AP, March 25

That was Bernanke and it reminds of the big deal in the equity markets in the late 1960s. That was during the “Conglomerate” mania that celebrated the discovery that “two plus two equals five”. Deflated by the CPI, the real high for the stock market was set in 1966 and the decline amounted to 62% at the bottom in 1982. The portfolio rationalization was that institutions were very underweight in equities and the buying would go on “forever”. What’s more, with a greater presence in equities fund managers would provide stability to the stock markets. The tout was that there would be a “shortage of equities”.

Sounds like today’s central bankers buying bonds.

“Two regional Federal Reserve presidents said the central bank isn’t doing enough to spur economic growth…should keep buying bonds through the end of 2013.” – Bloomberg, March 27

The latter statement is so arbitrary. One notion is about the amount of bond buying, the other about how long it should continue. Despite the ambition of arbitrary authority to keep each of the series of bubbles going, Mother Nature and Mister Market have a way of looking after speculative excesses.

“Cyprus is the main source of foreign direct investment into Ukraine.” – Bloomberg, March 28 

Then there are the consequences of reckless behaviour by governments:

“The global pool of government bonds with triple A status, the bedrock of the financial system has shrunk 60% since the financial crisis triggered a wave of dangerous downgrades across the advanced economies. The expulsion of the U.S., the UK and France from the nine “A”s club [goes along with] the amount of “A” bonds outstanding dropping from $11 trillion to just $4 trillion now.” – Financial Times, March 26


The problem with central banking is that there are no longer any bankers in central banking. Too many economists, particularly of the interventionist kind. The latter spend their time and taxpayers earnings in trying to alter economic history, rather than understanding it. The most glaring error is the notion of a “national” economy. When it comes to credit markets, they have been international since at least Roman Times when Cicero observed:

“If some lose their whole fortunes, they will drag many more down with them. . . believe me that the whole system of credit and finance which is carried on here at Rome in the Forum, is inextricably bound up with the revenues of the Asiatic province. If those revenues are destroyed, our whole system of credit will come down with a crash.” – Cicero, 66 B.C. (Translation by W.W. Fowler, 1909) 

Another blunder is more subtle and that is the error in logic called a “primitive syllogism”. This insists that because two things occur at the same time they are causally related. Yes, credit does increase with a business expansion and vice versa. But credit expansion does not cause the business boom. Actually, in the final stages of a boom speculators leverage up against soaring prices. In which times, credit expansion depends upon the boom.

How could so many for so long be so wrong?

Central bankers get wages and glory for their attempt to provide unlimited funding for another sordid experiment in unlimited government.

The problem is that even with electronic printing presses and endless buying of lowergrade bonds market forces eventually overwhelm arbitrary ambition.

As for “wages and glory”, the former should be viewed as rent-seeking and the latter as ephemeral.

                                                                              Stock Markets
On a big rounding top not all stock exchanges peak at the same time, and within one market not all sectors peak at the same time.

On the big NYSE, enthusiasm was enough to register momentum and sentiment numbers seen only at important highs. That was in February and after a brief consolidation the action became even hotter, the S&P reaching its best at 1573 yesterday. 

On the way, instability arrived with an Outside Reversal Day being set close to the February high. There was another on March 25th that included the senior stock indexes, VIX, Transports, Real Estate, Banks, Junk and Municipals. The DX and the long bond did the big reversal, but in the opposite direction.

There were a few items that led this reversal, which appears to be profound. One was the celebrated 10 trading-day run for the Dow and as Ross observed, when they occur in the fourth year of a bull market it is close to the peak. The typical lead was a couple of weeks.

The other anticipation was provided by the turn up in our Gold/Commodities Index. The low was on February 22nd and breakout accomplished on March 19th. And the typical lead from the breakout has been a couple of weeks.

Often the Broker/Dealer Index (XBD) leads the high in the general market.

Last Thursday’s Pivot reviewed these and noted that the potential top “Counts out to around this week”.

Support for the decision was provided by developing “Negative Divergences” in the “Euro/Yen”, “Bullish Percent” and “Silver/Gold Ratio” models.

The advice has been to sell the rallies.

Yesterday clocked a noteworthy slump in money-center bank stocks with Citigroup slipping 3.7%. The bank index (BKX) dropped 2 percent to set the breakdown from the peak. It is only two weeks off of a multi-year high for the Weekly RSI. By comparison the senior gold stocks (HUI) plunged 4.6 percent to a multi-year low on the Weekly RSI.

                                                                         Credit Markets

The general hit to stock and commodity markets has been associated with generally firming bond prices.Treasuries have extended their move that began from a double bottom set in February-March. The TLT has rallied from the 115 level to 119.14. This is at neutral momentum and with some consolidations can continue the uptrend.

Junk remains steady as indiscriminating buyers emulate central bankers in buying risk. The dreadful sub-prime mortgage bond continue to trade at the 69.5 price level, which we take as a huge “test” of that high set early in the year. The interim low was 66.

That’s for the “benchmark”(designated as AAA.06-2) we have been following. A lesserrated A.06-2 has jumped in price from 6.12 to 7.12 a couple of days ago. Who knows what the thing is yielding but the price advance has been rather good. It also shows speculators getting into the game.

On Tuesday the Washington Post reported “Obama administration pushes banks to make home loans to people with weaker credit.” Democrats are deliberately repeating their nonsense that contributed to the housing disaster.

The ECB continues to buy Euro bonds with the benchmark Spanish Ten-Year yield declining from 5.08% last week to yesterday’s intraday low of 4.86%.

However, lesser issues as represented by Slovenia have soared from 5.40% in mid-March to almost 7 percent. The high with last summer’s panic was 7.30 percent. Perhaps the ECB is “selective” in its “buy” program.


The connection from central bank madness to rampant price inflation on commodities is not direct. Otherwise, the CRB would have shown an immense parabolic growth curve from when the Fed opened its doors in January 1913. Instead, there has been significant cyclical swings in commodities that confound central bankers. These cycles are set by market forces, not by arbitrary Fed ambition. This, from time to time, confounds commodity perma-bulls.

Indeed, Fed “experts” don’t understand markets. The commodity crash in 1920 was extremely violent; so violent that the Fed was very easy during most of the 1920s. In order to keep commodities from falling. Instead the “big ease” went into speculation in financial assets, and to a lesser degree into real estate and commodities.

Financial history was setting up another classic financial bubble and the Fed unwittingly added fuel to the fire.

It has been adding fuel to the fire, ever since, and lately the public has been speculating in stocks, lower-grade bonds and to a lesser degree in commodities. This presents a problem to the “inflationist” camp that believes that eventually all the “stimulus” will drive tangible assets to the moon.

Not likely, as America’s first business expansion out of a natural crash is mature and, if commodities continue their role as an indicator, is rolling over.

One way of monitoring this probability is through gold’s real price. One proxy is our Gold/Commodities Index and it has accomplished a turn up, that looks like a cyclical reversal. In which case, a cyclical decline for the orthodox world of stocks, low-grade bonds, commodities and GDP would follow.

Quite likely the CRB high of 473 in 2008 was a secular peak and the high of 370 was the
peak for the global business expansion out of the Crash.

On the nearer-term, Base metals (GYX) have taken out key support at the November low
of 359. However, the Daily RSI is oversold enough for a brief rebound. The Weekly is not

For the grains GKX) the plunge has taken out the December low on the way to a moderately oversold on the Daily.

The Weekly RSI is not oversold.

Hot action in crude ended on April 1st with an Outside Reversal. With no significant strength in the dollar, crude, as with other commodities, succumbed to gravity. However momentum is neutral and often the good season extends into May. We would not be positioned in this one.


Today’s news of “fresh disasters” is the 3 1/2 percent plunge in the yen relative to the dollar. It is worth reviewing that until 1989 Japan’s policymakers (MITI) were celebrated around the world as best in history. Of course this was due to the sunshine radiating from a great financial bubble. The mechanism was called Zaitech, or in so many words–financial engineering. Since the consequent crash that began in January 1990 “they” and Zaitech have been trying to inflate another bubble and their reputations. 

Today’s Zaitech is huge, but more of the same. It reminds of the prosecution of World War One. In that horror trench warfare killed millions of young men as the generals on both sides pushed war of “attrition”. The premise was that the side that could have the most casualties would win. Someone compared the official insanity to trying to remove a screw from a board with a claw hammer. It can’t be done. In the end it was won by those who could manufacture the most ordinance and who could come up with a new tool, which was the mobility of the tank.

This was, relative to wood, the equivalent of the screw driver. No matter how big it is written or promoted, Zaitech is still a claw hammer. Some of the young staffers swinging the hammer at the Bank of Japan may not have been born as early as 1989, when MITI and the four big brokers could inflate almost anything to any price. Now they can’t, and at some point businessmen and the general public will say “No!” to the nonsense.

The financial equivalent of the screw driver will be discussed at another time. The advance on the US Dollar Index stalled out at 83.2 and it is quoted at 82.63 today. It could trade at this level for a week or so. This could get rid of the modest overbought and set the action up for the next rally. There is support at 82. Rising through resistance at 84 would launch the move to around 90. This would be an extension of the pattern it has been in so far this year.

Link to April 5, 2013 ‘Bob and Phil Show’ on