Planet Yelnick

GOLDENFREUDE: Gold as the Next Bitcoin

Amazing drop in gold this morning. First Bitcoin last week, now Gold. It hasn't declined this sharply since the prior all-time peak in 1980. One of the major goldbugs, Dennis Gartman, has written that in four decades of gold trading, he has never seen such a bloodbath.

Of course, if you follow this blog, you were well prepared, as Yves called this months ago.

It now is entering what Prechter calls free-fall territory, as it has has busted below a support level (first chart) and a technical level (second chart):

 

Goldenfreude is the pleasure of seeing goldbugs lose their shirts. A lot of prosaic punditry trying to explain this, and getting it worng. Most of the immediate selling was out of Asia, and was caused by Abenomics, the shock and awe of massive QE by the Bank of Japan. Buyers of Japanese bonds may have been leveraging their purchases by using gold as collateral, and now are liquidating to cover as the Japanese bonds plunge. The proximate cause for the two-day rush to the doors is likely Friday's China GDP report, showing a slowdown. Commodities are also taking a bath.  

This should not have been "unexpected", the common word used by mistaken punditry. We had two large gold sell-offs during the Great Recession, both driven by expectations of massive central bank intervention:

1) July 2008, right before the Lehman debacle and following on the heels of a parabolic blow off top in oil

2) September 2011, as the Euro crisis hit and central banks intervened

You cna see what the gold plunge is predicting: another bout of central bank intervention to keep the wheels from flying off the global ecopnomy. The first out of the blocks is the Bank of Japan's QE. The punditry expects the massive BOJ QE to respark inflation. Gold is signaling the opposite, of deflation.

Milton Friedman got the punditry thinking that inflation was due to the increase in base money (central bank money and reserves), but this is too simple:

1) The Quantity Theory of Money had inflation as based on quantity times velocity of money. Velocity has plummeted in the Great Recession to levels BELOW those of the Great Depression. 

2) Modern Monetary Theory has popularized the view that the quantity of money is not based much on base money, but on bank lending, as banks create the quantity of money. Put another way, banks do NOT lend out of reserves; they lend out of opportunity and then scramble to find reserves if needed.

The striking increase of bank reserves, and QE, have done little to spur bank lending; the reserves sit in the vault so to speak. Instead, QE has spurred excessive speculation in assets, what Minsky called the Ponzi Finance stage. Asset bubbles rage back and forth across commodities (oil! corn! coal! Bitcoins!), debt and margin are used to juice returns, and as each bubble collapses the velocity of money shrinks and the speculators fall back. 

Japan is now (as John Mauldin aptly puts it), a "bug in search of a windshield." Abenomics is leading to money washing back and forth across the globe, much as Hoover wrote in his memoirs about the sovereign debt crises of the 1930s. Is Cyprus the new CreditAnstalt?  This is not how a real recovery begins, but how a false recovery ends. 

Yves Calls Gold Spot On

Yves sends in an update on his gold call.  He said it would go down to $1450. It is now below $1500, down 20% from the peak, and is "officially" in a bear market:

Now to Yves update:

Our target of 1450 $ is in sight!

We have been bullish through a decade of bearish action on gold. We have equally been bullish over a decade of bullish action on gold. We have always been bullish through bull and bear market on gold.

We have learned to sidestep the market when desired. This sets us apart.

We adopted a neutral stance two years ago. It was meant to suggest a long pause and/or correction. This adjustment would be a combination of time and price.

We think players do not understand the length of the cycle. Our model suggest rising rates for 30 years.

It is with great excitement that we watch what is happening.

Gold is driven by the future perception of the US dollar. It is expected to go higher. Money managers have completely redeployed funds into the buck. They were substantially under invested at the start of the year.

We have a different view. We view the euro currency in a new bull market.

Gold bugs should stand up and listen ! You will get a weak US dollar in a coming future. The way you position yourself in light of events will be exciting.

Yves

http://lamoureuxandco.com/

Classic Formation: Fall Below Trendline, Retest and Drop

AllAboutTrends midday update shows how the S&P is following a classic structure: it dropped below a recent trendline of support, came back to retest from below, and has since fallen off. This is a bearish sign, at least with respect to the rise since mid-March. The bears are out quickly to say "it's the end!" while some more cautious pundits like Neely see a final and more vioent upwards thrust to come.  

 

Funny: Bitcoin ATM Shows Up in Cyprus

The only way to get your money out?? Thanks to AllAboutTrends for this:

Yves Goes Bullish on China Stocks

Yves has made some bold calls recently.  In 2007 he called the top in China stocks. Now he calls a bottom and says it is time to go long.  Here is his chart, and below his commentary:

We are now very bullish on Chinese shares. We called the top here in 2007. It was a few weeks before the market hit 6,000 on the Shanghai Index. The piece was called Party Like Its 1999. It focused on similarities that bubbles have. The rate of ascent was becoming parabolic and was unsustainable.

For most of the punditry, it was the Chinese miracle. I guess people never learn. Participants have the hardest of times to shake off their biases once in a bubble. 

I have been a witness to long term negative sentiment toward Chinese shares in the 2003-2004 period. I felt that the sequence had the hallmark of a final C wave. I got very excited in 2005. I felt very strong that the market was prepared to go up in a final 5th wave sequence. I was right. From a base level of around 1,000 the index proceeded to trade to 6,000 in a little bit over two years.

We did explain to our subscribers recently that there are great dislocations between the economic reality and the stock index behaviour. It is even more prevalent with the Shanghai market.

Years of impressive growth have never guaranteed a higher market. Why would it matter now?

The stocks have this uncanny ability to confuse most participants anyways.

We have held to our bearish stance since 2007 to only turn to the bull camp recently.

We are very bullish. We think that we are facing a wave 3 of 3. This large sequence could in fact propel the market back to its old highs. The market could double and even triple from here. 

We remember a time where Chinese funds were the rage. They are not anymore as they have lost their popularity. Long term sentiment is very negative toward China. We believe it is consistent with the psychology of a corrective wave two.

We think Asia has the upper hand in the debate of credits versus debits. Most of our work is derived from behavioural economics. We think it better lends itself to today's environment. 

Market observers are out of touch with today's world. Do yourself a favour to dig in the past as it is very revealing of our future. 

Yves Lamoureux http://lamoureuxandco.com/

China's First Debt Default - Harbinger of End of Credit Bubble?

For the first time, a mainland Chinese company has defaulted on its bonds. Shocklingly, it is a high-flier solar panel maker that trades in the US market - Suntech Power.  Its stock shot up in a classic parabolic FOMO pattern (FOMO = Fear Of Missing Out), and has now fallen like a broken windmill blade below the parabolic liftoff. The irony is that Chinese solar makers have used easy credit to scale up, and throwing the solar cell market into a huge glut, crushing Western manufacturers; and now it is coming back to bite the Dragon by its own tail. 

Sure, it could be a one-off, but Chnia's corporate bond market is much larger (adjusted for GDP) than the US equivalent and is highly misallocated due to easy credit and political malinvestment. While unconnected to the Euro crisis, coming so swiftly after Cyprus, it may be another harbinger that the wheels may be slowing coming off the global credit train.

Cyprus Crisis Pushes Global Economy to the Tipping Point

The EU decison to sweep 10% of deposits may signal the beginning of the end for kicking the can down the road. Cyprus itself is small, but its banks have been attracting deposits and lending to high risk countries like Greece in amounts much beyond the Cyprus economy - and attracting foreign depositers (particularly Russians) with high interest. (In the US this is restricted - as a bank gets into trouble it is not supposed to be able to issue high-yields on deposits.)

Banks runs have swept Cyprus, and the government has called several days of bank holidays to get a vote on the bailout through before depositers can get their cash out. It is not clear the votes are there.  

Sunday evening in the US, currencies are racing to "risk off" (ie out of the Euro and into the USD). The S&P is approaching the point of the Triple Top, and is certainly close enough that any drop from here may signal the end. Technical signals are sending warning signs, such as this chart from Zerohedge that shows stocks again at nosebleed levels vs. forward earnings, just like the prior two tops of this Triple:

The Cyprus bank-runs are eerily like the beginning of the sovereign debt crises in 1931-2 that drove the global economy off the edge. The same sorts of events seem to be unfolding, but in slow motion as central banks dump liquidity to stem the crises.  

You might think that it can't happen here in the US, but it did, in 1933: FDR confiscated gold in exchange for paper Dollars, then re-valued the gold ratio from $20/oz to $35/oz - effectively confiscating 40%, well beyond the Cyrpus action. Because transactions in the US stayed priced in Dollars, it appeared to be a wash, but inflation began as US prices re-marked to real money.

Martin Armstrong, a student of financial history, looks at this and conjectures that when the Fed faces a similar crisis, for example when it begins losing control over interest rates and has to get more buyers of Treasury debt at low rates, Treasury may issue Savings Bonds and Congress pass a law to force purchases of them. This acts like a gold swap or deposit sweep in that the forced savings are likely to be traded into an illiquid and below-market asset, the savings bond. He calls it Patriot Act II - a good patriot woud buy the bond. 

Short term, however, this may be bullish for the US as money races to US assets as a safe haven. After an initial jitter in stocks, the on-rush of foreign capital spikes the S&P to new highs. Looking at the market since 2000, it appears to be in a trading range, but over-shot below the bottom in 2009; typically it would now over-shoot above the top of the range before the end.

 

The Dreaded Triple Top Cometh

The market seems to be in its final run to an epic Triple Top back to 2000. Chris Martenson supplies a nice piece of analysis, expecting a 40% drop after we top.  His chart shows this in the S&P:

Zoran Gayer, whose analysis updated Wave Theory with Chaos Theory, demonstrated how triple tops are good indicators pf trend changes. The Chaos Theory view, which is based on Thermodynamics, is that markets move in Thrusts and Plateaus, where a Plateau is the market on the edge of chaos, seeking order. A Thrust is order.  All non-linear chaotic systems show this behavior, including weather and market economics.  The formation in the S&P is a classic Plateau after a really strong thrust up in the '90s. The Plateau does not pre-determine the next Thrust, but Zoran found that after a triple touch of a trendline, the Plateau usually was showing exhaustion and the Thurst coming out of it would be the other way.  In 2002-3, for example, we had a strong Thrust down, then a triple bottom in what he called the Iraqi War Triangle, followed by a Thrust up into 2007 that marked one of the largest asset bubbles of all time.  

The timing of the triple top looks to be within the next few months. Seasonal patterns usually top around April or May, followed by a correction into September. Some pundits (like Neely) expect a sharp rise towards SP1600 in March, with a top in early April.  Whichever it is, expect a bit of a throw-over at the end and then a really sharp "bifurcation" move down to mark the top.

The Plateau since 2000 marks a huge experiment with economic history, where all of us are the guinea pigs: central banks are trying to apply the lessons learned in the Great Depression to reflate the global economy. Problem is, they first created a terrible asset bubble in real estate, and after that corrected, they are now putting the global economy on central bank life support. As more fiscal borrowing is pumped out into the system, nominal GDP levels atrophy as the ever-increasing debt puts pressure on continuing this flow of monetary oxygen into an increasingly-moribund economy.  As the system approaches the Rogoff Level of 90% debt-to-GDP, economies began to sag. Europe is already entering recession, as has Japan; and the US is skipping across the 0% GDP level, skating on very thin ice. Worries abound about China as well.

The Triple-Top Plateau therefore reflects markets at the edge of chaos on whether this huge central bank experiment will work.

Looking forward, history says this long secular bear market should last 16-20 years.  The last one from 1966-1982 was 16 years; the prior one from 1929-49 was 20 years, and we saw a similar long plateau around Dow 100 from 1901-1921. The Depression of 1874-1896 was even longer, as was the one from 1837-1859. This puts the bottom out to between 2016 and 2020. 

Yves Calls a Top! Led by the British Pound

Sharp drop today has the bears on the prowl. Technical analyst Glen Neely cautions that in the formation we are in - an expanding triangle (actually nested at three levels), a sharp drop often happens before the top - and is a bear trap. He still expects a final runup into late March or April.

I have been expecting a triple top with the S&P highs of 2000 and 2007 - and we are close but not quite there yet (ie 1565-1600 would be a better finish).  

Yet with all this hemming and hawing and cautionary notes, there is one analyst who has stepped up to a clear and brave call.  Yves Lamoureux has called the end of the Bond Bull Market, and also a top in Gold, and now calls a top in US equities, before a Great Bull Market in equities.  Enjoy!

Is The British Pound Giving A Market Top Warning?

We have been absolute bulls on stocks. Interest rates are too low and have been for too long. The crowd has caught on. We believe in an important market top now. Some observers are calling for the end of the equity bull market. We have a separate view of this. 

A solid pullback should be part of a larger degree wave two. We maintain that stocks will double from the 2013 bottom. The market appears, so far, on the path we have been describing to our subscribers since last year.

A correction now would increase our confidence in the next stock melt-up. It is a large phenomenon and best ascribed to risk preference and behaviour. How would you explain the recent stock jump? Most participants are at loss and are mostly invested in bonds. They are playing catch up.

We, on the other hand, are exiting our long stock plays. We have increased considerably risk off positions as described recently in "How to Catch This One Impressive Rally". We are very excited about introducing investors to the coming wave 3 of 3 in agriculture. We suggest direct long exposure. Our timing relies on a proprietary weather model.

 

We show you today this one clear warning. It is associated with the British Pound. We have seen a similar behaviour back in 2009. The Pound as a precursor is a great tool. You have to combine this with patience as well. In 2009 the Pound started to move down. It did so for many months. The stock market finally caught on. It resulted in the May flash crash. We think similar conditions are in place. The "all in" crowds have a stop loss strategy. Momentum will turn down and we think it could begin a negative feedback loop of selling. Remember that in absolute terms cash is low.

The market has risen with low volume. Illiquidity events are going to be more common in our opinion. They should be seen more frequently as the Fed starts to pull back on quantitative easing.

The Pound in effect acts as an early warning system. The recent drop has to do with a huge UK money expansion. Measured on a year over year changed rate, it is up 100%. We think something more is going on.

You will see above a long term chart of the Pound. We have labelled the drop in five waves. We think the bounce is a clear correction. It is indicated as an A-B-C pattern. This suggest new lows ahead. Is the market now set up to catch on? We think so.

Now is the time for a defensive stance!

Yves Lamoureux http://lamoureuxandco.com/

 

Yves Makes A Bold Gold Call

Yves Lamoureux, our new Bond King, has made a series of bold calls around the end of the epic bond bull supercycle.  Besides being bullish on stocks, he now has a view on gold.  

Why Our Model Values Gold At $1450

We have watched the big wave one and two unfold in the bond market of Europe. We think we have seen the turn. It is therefore likely that a huge wave three in rates has begun in earnest.

It has been our contention that the interest rate cycle would turn in 2010. It did in Europe. We stuck to our 2.5% US long bond call has the recipient of scared money. Massive spikes are always deemed turning point. We explain this phenomenon in “The End Game is Here”.

We attach a lot more importance to what takes place in Europe. Our gold model is geared that way.

The recent behaviour of gold is the best proof. How can you account for a weak gold price when the US dollar is weak? We do cover the grounds on this topic in a recent gold article. Some of the intricacies of movements are popular trades being undone. 

The start of a wave three in rates sets up a deflation trap once again. Primary waves all sport typical 5 waves form. The corrective nature is mostly of a zigzag type. This is why we are short 10 years Italian Treasuries from 4.20%.A quick look at wave two is beautiful textbook Elliot. We are now at 4.62%.

The market thinks it has everything to do with politics. As you are a good student of waves, you know better. Keep the cycle in mind as we cover the gold valuation model. 

We thought that gold would top in September 2010. We think of this time spent as a large degree consolidation. We have not been at all worried to miss the bull market. We have fully participated in it the last 10 years. The recent bounce is more likely viewed as a B wave. I suspect, we are at the start of a C wave. I factor the coming rates increase. Our model values gold at $1450.

We look to make a big entry once again. We are extremely disciplined and wait for things to be aligned perfectly.

Yves Lamoureux, http://lamoureuxandco.com/