Merry Christmas folks, and happy holidays of all persuasions.
Let’s jump into an abbreviated, summary style report [edit: of course it did not quite go that way as the thoughts, words, pictures and logical deductions came as they would] this week and keep it simple at the dawn of 2023.
While 2020 was interesting due to the effects of dovish Fed policy on steroids that guided us bullish, 2021 was bland to the upside as market funda (or is it funny) mentals faded with the market’s signals that the Fed was going to have to hawk, and 2022 was bland to the downside as the market rolled its trends over in a thus far very normal looking bear market.
2023 is going to be another interesting, maybe even exciting one like 2020, only it will be completely different from 2020 because as we enter 2023 the Fed is closing out the process of taking back what it gave in 2020. This leads me to our first [not so] mini segment…
Post-Bubble Contraction (a deviation from normalcy)
Some prognosticators are already forecasting when the Fed will begin to cut the Funds rate in 2023. This is based on stalling short-term Treasury bond yields, which look like they are rolling over and more importantly, have fundamental reason to roll over. The support pillars of our current Q4-Q1 seasonal rally plan are that in the short-term, casino patrons may find a ‘Fed relief’ bid on beaten down stocks, leverage the normal positive seasonal and reset sentiment (with a side order of historically positive post mid-term election thrown in for good measure).
Because of the extreme readings in Fed policy and the indicators that reflect it I continue to think about things now broken that had remained intact all the way through my market experience, starting in the late 90s Tech bubble, through Greenspan’s policy driven rescue of the economy and inflationary aftermath with a giant credit bubble blown as a result. There was a boom into 2000, a bust into 2002, the Greenspan boom (credit bubble) into 2007, a bust into 2009, an inflationary boom (cue: Bernanke, the hero using new and highly unusual policy tools) into 2011, a bust of the inflation stuff but then a Goldilocks boom (and yield curve flattener) into 2019. Then came the bust of 2020 and boom cooked up by Powell’s Zero rate policy (ZIRP), QE, market manipulations of new and even more unusual kinds (including a new fad called Modern Monetary Theory) with a result being this gross distortion in M2 money supply, among other market distortions.
You just don’t have a continuum of decades of calmly but steadily rising money supply abruptly blown out to the upside (2020) without some sort of reaction to that abnormal action. If this reverts to trend, markets inflated with the big up surge in M2 are likely to implode with it. That is why I am suspect of a resumed bull market any time soon, especially if we do resume the Q4-Q1 seasonal party in the short-term. If that happens I’ll be thinking much more about cash, bonds and select short positions along with the sector that would eventually leverage this economic pain, the gold mining sector.
The Fed blew the above out of whack. The ‘Continuum’ below shined a light on the ‘out of whack’ Fed’s abnormal policy and as we tracked all along the way, it and other indicators of the inflation problem they created demanded a flip to hawkish from the ‘transitory inflation’ story they had been telling. That is because the picture I’ve used all these years to portray the gently disinflationary normalcy of long-term bond yield trends went abnormal as well in 2022 as the green moving averages (former downtrend resistance colored red) have been altered and would be markers of an important test of support to the new macro picture at such time as the 30yr yield – under dis/deflationary pressure – may test the 2.5% to 2.8% zone.
But a test does not imply success. It’s a test, which means the process is in question. What if the Continuum is not broken from its deflationary signaling and the hysterical spike is a one-off knee jerk? The low hanging analytical fruit is that such a test would hold the yield at/above 2.5% and the next inflation trade would begin. The harder fruit to grasp is that maybe these distortions are going to be fixed in a deflationary situation where inflationary hellfire freezes over into deflationary hell.
Even a retrace in the yield to 2.5% could bring some deflation fears (with allowance for some interim Goldilocks – not too hot, not too cold – pleasantries), but what happens to markets if M2 is going to drop all the way back on trend? What about if the Continuum was on an epic macro indicator head fake and is destined to crack back down below the neckline and moving average supports at 2.5% to 2.8%?
With all due respect for my shorter-term potentially bullish weekly chart inverted H&S imagining, what about how SPX (monthly chart) has only declined 20% in a thus far routine, oh so normal looking bear market? Beyond the relief trade that may or may not regenerate (parameters per this update) in the near-term, when Bob Hoye looked for a post bubble contraction (PBC) during bear #1 (2000-2002) and bear #2 (2007-2009) the PBC plan was ultimately foiled by the evils of Keynesian, inflationary, debt leveraged monetary
chicanery, err policy. Something is broken… some things are broken that have not been broken before in most of our market experiences. Never mind that measures of True Money Supply YoY change have also smashed back down to bust territory and the Fed is nowhere near easing (how can they be with the likes of the big distortion in M2 and the hysterical spike in the Continuum, among other extreme indicators?
So, macro fundamentally I see potential for the Hoye PBC squirrel to find his nut this time. And if that comes about, he’s right, the gold mining industry will shine as it so often has failed to do for any long period of time. You know, I can’t qualify the mechanics of it, but my gut tells me that the Fed in control of the boom-bust cycles over the last couple decades has impaired the case for gold and especially gold mining. Well, maybe I can qualify it; we have for years noted that cyclical inflation is NOT good for gold stocks and the Fed has been able to manufacture cyclicality from inflation at every bust to this point.
So again we should question whether the Fed has the ability to micro manage the coming cycle or will markets finally take back the reins from the manipulators to clear the distortions and abnormalities, like M2, like the Continuum, like the stock market price and valuation bubbles?
If a real post-bubble contraction is finally going to come about it makes sense that it would come about with the entity that fought it from cycle to cycle having its hands tied by out of whack macro indicators like Money Supply YoY change tanking and M2 still far aloft, distorted but wobbling downward.
Oh and yes, the Continuum’s break of a trend that lasted decades. Every step of the way over the last 20 years I noted that the disinflationary trend gave license for the Fed to inflate when needed, battling each contraction (and impulsive decline in long-term yields) with new bubble materials that would one day deflate and be fought again by the heroic, inflating Fed.
Tell me again why inflation touts also touting gold miners are wrong? Oh yes, because in Goldbugville it’s always time to try to keep ’em bullish and inflationary Fed obsession is as good a story as any. But for those interested more in reality, a real PBC could actually breathe enough life into the gold mining industry to have it viewed one day as a real industry instead of the laughing stock (to the average market participant) that it has been much of the time along the Continuum.
Sound like a plan, folks? Can the age of the all-omnipotent Fed be coming to an end? To this point throughout my whole market life I’ve had to make funny (to me) memes and jokes about it, but there was truth in it. I think that elements are in place that could cease the Fed’s control of the macro.
If this view of a neutered Fed and self-sustaining markets is correct, there could be more pain than anything most (or all) of us have witnessed before. The way I would see things going is roughly as follows…
- US markets resume their bear trends. For the last 10 months our downside target for SPX has been a normal bear market decline to 3200 (+/-). That remains my working target. But if the thesis about a restricted Fed above is on track, there would finally be the potential for a major liquidation event and crash that does not ‘V’ bottom and blast upward again in a next bubble phase, as it has done reliably before. If we really are post-bubble, that is.
- Since a strong USD would not necessarily be a component of this particular PBR some global markets like EM could be wild cards. Asia could do its own thing for some of its own reasons. But it is difficult to see the world’s markets bucking a heavily bearish US situation.
- Commodities are cyclical and they are the materials of economic growth in physical areas, like homes, buildings, autos and other transportation equipment, in food and in Tech oriented equipment, devices and systems, not to mention the energy for transportation and power, whether through oil/gas, battery metals, uranium or rare earth elements. A real economic contraction that bites hard with no or little Fed interference would croak the economic cycle and thus impair demand for commodities.
- As Hoye says (based on his study of history), in this environment gold would gain a liquidity bid as, I believe, would Treasury bonds with the usual bid receiver, the USD, something of a wildcard. Can we have deflationary event with a weaker dollar? I keep thinking back to the strong dollar that ran against the most intense phase of the 2021-2022 inflation trades. Just thinking aloud, you know it could just be time for gold as the main liquidity receiver if there is panic in the 2023 air about a sidelined or mostly toothless Fed.
- Boiling it down to the gold mining sector – and in this environment I’d favor miners over royalties – we will closely track gold’s ratios to cyclical, inflation sensitive and risk ‘on’ assets.
If these daily charts resolve to significant new uptrends as I believe they will in 2023 it would be not only a confirming picture of a post bubble contraction (a countercycle), but also of the beginning of the proper investment backdrop for gold mining.
If mining product (gold) trends up vs. mining costs (energy, materials, humans) and gold outperforms stock markets where casino patrons have played with barely a care in the world (assuming a dovish Fed at every danger point) the play could be good for gold in ’23. Again, something is broken. That’s part of what gold is for. When something breaks. If there is a break in the Fed’s manipulative grip, so much the better.
Meanwhile, the chart below shows that all recent themes regarding gold stocks in the Q4-Q1 seasonal relief party are as they were. Nominal HUI is dealing with its 200 day average, poking at it frequently in December. They say the more times a stock or index pokes at resistance or a resistant moving average the weaker that resistance becomes. Okay Huey, time to party on if the rally is going to endure well into 2023.
HUI/Gold ratio, a beneath the surface indicator for the precious metals is intact after a drop earlier in December.
HUI/SPX ratio seems to think it’s going somewhere. What we can think is that gold stocks over broad stocks has been in effect since September 1 and today on Christmas Eve, it remains that way. Not bad, Huey.
Bottom Line (bigger picture, 2023)
I had thought the report would be much briefer and easier to digest. Well, it is not. But the macro at a time of potentially profound change is not easy to digest.
- Inflation continues to moderate.
- Fed remains in control policy-wise. But we have indicators that demand they maintain control. The Fed may adopt a more neutral stance, but by then I think that damage will have been done. The problem will be in their projected lack of ability (or will) to inflate again ‘onDemand’.
- If markets finish silly season rallies and eventually resume their stress as expected, it’s not going to be pretty. That’s the view I have based on an impaired Fed due to indicators that I think can hog tie them.
- If this happens and the world goes counter-cyclical I’d be careful about the ‘commodity & resources’ bull calls. Those are inflationists promoting little difference from gold>silver>tin>oil>hogs, etc. under the handy and promotional terms ‘hard assets’ and ‘resources’ as if those components all have the same utilities.
- Only gold is gold because only gold is a monetary anchor to value (until maybe a box of marbles, a handful of seashells or maybe even fancy chess pieces are decreed to have that value).
- A gold mining operation does well on balance when its product sells dearer while its costs are lessening. Simple. At every economic bust the Fed has insinuated itself into markets for decades in order to break such a fundamental situation by printing cyclical inflation phases that have driven up fuel costs, materials costs and people costs, often in relation to the mining product. Elements are in place to change that.
Bottom Line (Q4-Q1 seasonal party)
- Still intact after main US indexes (except for the SOX) have filled their gaps and not yet made lower lows to the November 3-4 lows. Now we find out promptly whether or not a Santa rally will happen next week and then if so, whether it will extend materially into January or even a majority of Q1.
- This is viewed as a bear market until upside levels are taken out (for example, a higher high to August SPX high of 4325.28).
- That would set in motion talk of the bear’s end. But for entertainment purposes let’s also keep in mind that the index could rally off the bull pattern I imagined last week and test the highs, with some indexes possibly ticking new highs. Happy days are here again! Okay well, it’s a possibility, that’s all.
- Well, no, happy days are not here again. If the pattern even develops and activates (and as yet it’s just a ‘what if?’ novelty) I am going to view it as a potentially epic bull trap suck in. Either that or I am completely wrong about the hog tied Fed. That’s possible too.
- Meanwhile, the trends are down and it’s a bear market, eh?