Tops, bottoms, rallies and Emergencies! (Real or imagined)
The President of the United states, Donald Trump has declared a state of emergency!
What is the emergency?
Well according to him its the threat to national security that illegal immigration poses in the form of “drugs and gangs” crossing into the US from mexico.
Now Illegal immigration is a problem and of course crime and drugs are too, but weather you agree with the idea of building a wall or not one thing appears clear to me.
This does not constitute a NATIONAL EMERGENCY, and if it did it is an imagined one at best and a pure fabrication at worst.
This is an attempt at carrying out election pledges by any means necessary and a desperate and pretty disingenuous attempt to save face after a humiliating defeat at the hands of the democrats, who have basically forced him to accept a funding deal that is less than the amount originally offered to him prior to the government shutdown in December/January (art of the deal indeed).
And just to be clear if I was an american I would be a republican and would likely have voted for not against Trump.
Now if he wanted to declare a real national emergency then I can think of no better candidate for one than the NATIONAL DEBT, which has just recently surpassed $22 Trillion.
But just like most people walking the earth the President is equally oblivious to the threat that particular emergency posses to the US and the whole global economy.
And speaking of the global economy more and more bad news just keeps on piling up. The most recent example being of the retail figures for December 2018 which were absolutely diabolical! In Fact the worst figures since the Great recession 10 years ago.
So let's take a quick look at those figures:
The expectation was for 0.1% The actual headline number for retail sales was -1.2%!
That is the biggest decline in a decade.
But guess what the stock market doesn’t care.
There was a Lot of confused bulls and media pundits who simply dismissed the figure without providing so much as a believable explanation for it
In fact the one that was used the most and is so dumb it actually hurt my brain to hear it was that the government shutdown caused the bad figures! Haha seriously?
The government shutdown began on the 22nd of December in a month where almost all retail spending occurs on the run up to the Christmas holiday early in the month and the sums allotted for that spend already accounted for with no possible way any government employees would assume the shutdown would be the longest in history and therefore skimp on Christmas.
Then you have January a month of low spending anyway as everyone reigns in and tightens there belts after getting there credit card statement post holiday spend.
No, the figure was shit because retail sales were shit!
The media don't understand it because they don't understand what is and to some extent has already happened to the US economy and by definition the average US consumer.
The average US consumer is already tapped out and drowning in debt and anyone hoping that the consumer is going to magically find more money to spend in future quarters is dreaming. In Fact figures are likely to only get worse. And the trend in downward revision of earnings estimates and guidance is not a temporary upset but set to continue. But don't fret, the President is still saying “the US economy is the strongest it has ever been” and the media continue to peddle the same nonsense. The US economy is not even close to the strongest it has ever been in fact it is probably the worst it has ever been.
I reckon that the damage rising interest rates has caused in restricting spending and the increased cost of servicing all this debt has already had an impact and the FED changing tone now is already too late.
The damage has been done and we will see the result in coming quarters.
And in the meantime things are likely to only get harder for the US consumer over coming months as Gasoline prices are only likely to go up.
Take a look at the chart for OIL (WTI)
So it is likely with a solid looking bottom being formed in WTI (inverted head and shoulders) that the short term reprieve in gasoline prices the US consumer has welcomed will soon be over and higher prices will return.
But this current stock market rally doesn’t seem to care about much other than “good news” which we have actually had none of. The absence of bad things happening in the world or simply ignoring them when they do does not constitute good news in my book.
If you buy the constant positive spin put on the US China trade news or lack of any of news as “good news” you have to ignore the fact that in reality we are no closer to any meaningful deal and if one is struck it is unlikely to change anything serious and likely be little more than window dressing.
In fact the “tremendous progress” line from Trump regarding trade talks has seen more use than a festival toilet over the last year.
This rally started on a softening tone from the FED regarding future monetary policy but is has been sustained on pure FOMO. The declaration that the FED will likely not be raising rates further is an admission of a weak economy and one that is slowing down, that is bad news.
But in a totally broken system where leverage and liquidity are the only thing keeping the bubble inflated then anything that keeps money cheap or at least not getting any more expensive is good news.
This is going to end in tears and in my opinion much sooner and more horribly than anyone who has been suckered into this rally realises.
It is my belief that this is a retail investor driven rally and is becoming dangerously complacent. So let’s look for some clues as to what is going on.
Let's take a look at Gold.
Central bank purchasing of Gold has climbed to astonishing levels not seen in half a century (they know what is coming soon) and this risk off, long term hedge against inflation and market uncertainty has been going from strength to strength over the last few months.
Let's have a quick look at the chart.
Gold is looking very strong with the current technical setup and I am convinced we have now started the next leg up in this massive cyclical Bull market.
Remember that at the turn of the millennium Gold was at $350 now it is £1321 this is what happens when massive printing of base currency destroys its value combined with the constant interference of central banks in the economy with the manipulation of interest rates. Gold always conducts a full accounting of all currency in circulation when a crisis comes along and based on the increase from $850 Billion of base currency in circulation 10 years ago to what is now over $4 Trillion, Gold’s next accounting will take the price beyond anything most can imagine and with it Silver too.
According to the world gold council Central banks increased their purchasing of Gold to record levels in 2018, reaching levels not witnessed since the US ended the last global monetary system (the gold standard) under Nixon in 1971. From that day the world has been on the Dollar reserve system and this monetary system is now approaching its end days and central banks around the world know it. They are turning back to gold for its primary purpose as the only true reserve asset as the world prepares to move away from the dollar.
2018 saw a 74% increase in the purchase of gold by global central banks and this rate continues to increase. The realisation that some sort of intrinsic value is going to be required to backup whatever new monetary system eventually emerges is starting to dawn on central bankers around the globe with Russia leading the way a country doing all it can to move away from a dependency of the US dollar as a reserve asset. (Russia also has one of the lowest debt to DGP levels in the world for an economy of its size and level of developement).
What next? Let's take a look at the dollar index.
An interesting situation. While everyone one seems to be very confident in the Stock market rally and full of hope about trade deals, the US dollar meanwhile has been catching a safe haven bid and has rallied strongly in the last month.
However this pressure from a stronger dollar has not hampered gold from pressing higher which as any trader know’s is a little unusual but by no means impossible.
It stands to reason however that with a softening stance from the FED regarding interest rates that this US dollar rally days are now numbered.
There is a bearish divergence formed in the RSI and we could be setting up a Head and shoulders pattern to put in the top.
Imagine how gold silver and oil prices could perform when the pressure of a strong dollar is relieved and it resumes its downward trend.
So if the Dollar is topping out we would expect to see evidence of currencies trading against the dollar to be showing signs of bottoming out?
Here is the AUSUSD
Here is the GBPUSD
I have mentioned before how I feel that LONG GBP might be a great forex trade for this year.
Many are to concerned with Brexit and overly caught up in all the constant media noise.
The fact is that this currency has become very oversold on long term basis and there is still a lot of value in the UK economy (well relatively) and buyers will work their way back into the market.
So there is plenty of evidence to support the idea that the dollar has peaked and is putting in a top and this is backed up by bottoming patterns appearing in paired currencies and now also supported by the fundamentals of a shift in FED policy.
The US debt is $22 Trillion and the annual deficit is over $1Trillion. That deficit will explode in a recession and Trump still wants massive infrastructure spending and further Military Spending and is still going to “build a big beautiful wall”.
Combine this with the likely reaction of the FED to a market downturn being more QE what level of debt can we expect in the near future $30 Trillion Debt? $40 Trillion? maybe Deficits of $2,$3,$4 Trillion?
Oh and all of this is just the funded liabilities by the way.
Unfunded liabilities are estimated at anything between $70 Trillion and $200 Trillion.
So the dollar is going to weaken in the short to medium term and implode in the longer term.
All the Time the US economy is slowing and falling into a recession.
And so that brings us back to the markets (Those crazy markets) that just keep going up.
We have Gold moving higher central banks buying it like its going out of fashion and all this at the same time as both the dollar and stock market all going up at the same time. Oh and bonds (risk off asset) are going up as well of course. So that all makes perfect sense… in this mad world.
So either the retail investors buying the stock market are right and the world's central banks and institutions buying Gold, Silver, Bonds and the US dollar are wrong or maybe just maybe it's the other way round and the retailers are going to be left holding the bag when the market takes its next leg down.
Now a look at this mad market rally and where we might go from here.
I will admit freely that this rally has taken me by surprise in regards to its size and speed in which it has taken shape.
But in all the arrogance and complacency of the raging Bulls lies the possibility that regardless of how high the price has recovered that this is still the first big correction of a new Bear market.
So if we are going to run out of steam and start the next leg down then $2800 looks like a likely candidate to kill the bulls hopes of “10 more years" or whatever they believe is possible.
The building of a wall and the Mexicans that want to get over under or around it, is not an emergency
Private, corporate and Public debt is an emergency!
A global sovereign debt crisis, currency crisis and global monetary reset is an emergency!
And that is where we are headed.
Take care all of you.
The opinions and ideas shared in this article are that of the author and do not constitute financial advice.