NFTRH; A Casual Conversation

Usually interim updates are all business, talking about changes in indicators or technical analysis or parameters.  Well, this market is getting beyond the black and white and bears some discussion, from one market participant to another.  So pretending that you casually asked me ‘hey pal, what do you think about the markets?’

I think that the macro pivot we started the year talking about is at hand.  This would be the grinding out of a phase toward economic contraction, where gold finishes its bear market, stock markets top out, economic data start decelerating and the utter faith and confidence in policy makers begins to fall apart again.

A bad week in the stock market does not tell me this, but first and foremost the Gold-Commodities ratio does.  You will recall that Au-CCI never did lose its uptrend throughout the stock bull market that started in early 2009.  You will also recall that had this indicator somehow broken down, we’d have been compelled to admit our incorrect course.  Well, it did not break down and we remain on the correct course.

au.cci

So where are we at?  Well again, pretending I am sitting next to you at a coffee shop counter and we strike up a conversation about current market events, I’ll tell you what I think…

I think that this mess is finally good and volatile, which means that change has finally arrived.  I’ll tell you one thing, I write a financial market report and that thing just got a hell of a lot more interesting to do every weekend.  You know, writing about a market that is incrementally rising week after week is not much fun at all.  Trying to tell people why they should be careful of something that is rising and making people money week after week is not fun either.

There is so much hype and noise out there that when you write about things like macro pivots (that seem to take forever and a day to engage for the public to finally see) and talk about changes and shifts to the financial landscape you can get lost in the din.  What sells after all, dynamic sounding information (i.e. hype) or the constant struggle to stay on the right course over months and years because an indicator says so?  Hype sells, and it is everywhere.

Anyway, what I see now is a phase where every jockey with a trading account will no longer make money.

Hey, while I’ve got you in this one-way conversation, I want to remind you that much of what is posted publicly at biiwii.com dovetails with what we cover in NFTRH.  So while the public gets bits and pieces, you get more information to go with our formal themes.  An easy way to stay on top of this is to subscribe to the site by email or RSS, each available at the right side bar.  Personally, I like the email option better.  Post goes up, email pops into your inbox.

Stock Market

Back on the markets… stocks have obviously topped out and it should be a good bear trade at least.  With all the negativity suddenly front page news I am not ready to call an end to the big bull just yet.  But I also have no need to do so.  Right now any longs taken are just a quick trade, bear positions are favored and the regimen – given the downtrend – has shifted to ‘sell the rallies’.  The markets are technically broken for an intermediate time frame and have broken down in line with several indicators that showed the party was ending (ref. junk to quality bond spreads, etc.).

Precious Metals

As certain fundamentals have crept to positive over the last few months, others like the 10 year – 2 year Treasury yield curve remained bearish.  Well, here is what the 10-2 has done this month…

10.2

That is a pretty big jump in the curve (gold is shaded in the background).

Recall that we have stubbornly refused to go bullish gold’s price prospects (while maintaining a resolute and calm orientation on its long-term value proposition) with technicals in the dumps and fundamentals – despite the raving of promoters who were either naive or agenda driven – not nearly fully baked.

Well, the fundamentals appear ready to pop out of the oven.  As we noted, the gold-silver ratio and USD rising together would eventually eat away at economic data and combined with the rising Gold-CCI ratio would indicate the economic contraction would be uninterrupted.  This would put pressure of policy makers and potentially paints them into a corner (ZIRP-infinity anyone?  How about future QE?).  While 2 crazy weeks in the market do not make a confirmed counter cycle, they sure do further its case.

Gold Stocks

Despite silver’s tendency to lead, I continue to favor gold over silver for the current macro backdrop.  If gold’s fundamentals are coming in line, those of quality gold mining operations (relative though the word ‘quality’ is in this case) are coming in line by orders of magnitude.  That is because the gold mining industry would leverage the macro environment in the form of gold’s out-performance to cost input commodities and human resources.  Those are direct fundamentals.  But another key is gold vs. the stock market, which would be a psychological underpinning if it continues to rise.

Commodities/Inflation

I for one do not think inflation is dead.  What I think is that every damned commodity and inflation bull had to be debunked by a deflationary resolution before the next inflationary phase can begin.  Now, do I think we are going to hyper inflate to the tune of oil getting back to its highs any time soon or silver going 50-plus?  No, not any time soon if even in our lifetimes.  But against the macro backdrop, they will try to inflate because frankly, I think it’s all they’ve got in their tired bag of tricks.

Fed/Policy Making

I think the cycles will roll on but on the big picture a deflationary backdrop has taken hold.  Against this, policy makers will continue to b/s us that with just the right amount of inflation they can guide us through.  What I think will actually happen is that the Yellen Fed will eventually be seen in at least as negative a light as the Greenspan Fed was a decade ago and the Bernanke Fed was in early 2011.

That is another big psychological underpinning for gold and the gold sector, a breakdown in the firm, unquestioned confidence in Policy Central.

Buying Opportunities

If the stock market is going to create selling opportunities, the gold sector, which has been in the mirror to the US stock market on the interim up cycle, would present buying opportunities.  The technicals as we know have not made much headway but all we can do is track them week to week.

But one thing the sector now has going for it is a fundamental backdrop that is making big gains.  This brings us toward the long-awaited 2008 style risk vs. reward proposition, which was epic.  But here we should realize that the HUI probably lost 200 to 300 points even as its fundamentals were coming in line rapidly in Q4 2008.

I don’t want to get caught up in other peoples’ misperceptions so until technical signals firm up why don’t we just assume that there can be more downside?  The good thing is that in an improving fundamental backdrop, downside is a buying opportunity whereas previously buying the drops was just gambling.

Going Forward

With that, we now go back to our weekly management.  I think NFTRH will get a little less regimented with its usual charts and a little more succinct because we have transitioned from projected bearishness to actual bearishness.  Things are dynamic and we should manage that dynamism accordingly.