SIGNS OF
THE TIMES
"Chinese
industrial company profits dropped 6.2 percent in August from a year ago, the largest decline this year and the fifth straight
monthly deceleration."
-
Bloomberg, October 22
"Bernanke:
You can't fire me - I'm going to quit in 2014"
- Business
Insider, October 23
Weird thinking - but, can that be
made retroactive? To around now!
"It's bad
luck to kill wizards."
- Arnold
Schwarzenegger, in Conan The Barbarian (1982)
"Rural
Savings Threatened After Collapse"
- Sydney
Morning Herald, October 25
The article was about a non-bank
lender that had been paying high interest on debentures and lending it out as
mortgages or commercial property loans.
"Ford will
shut three European plants, its first factory closings in the region in a
decade."
-
Bloomberg, October 25
Credit Markets
Ross noted in September that trends
in money market stuff run "forever". That's the instruments with
maturities of less than a year. Specifically, the Ted-Spread continues to
narrow. At 0.581 as the mini-panic ended in late 2011, the spread-ratio has
narrowed to 0.203 this week - clocking 19.4 on the Weekly RSI.
The chart begins in early 2008 and
the previous most extreme was 23 in 2009. The trend change,
and it is uncertain when it starts, will reflect a profound change in the
main credit markets.
Within the Ted is the 3-month Libor
and its Weekly RSI is down to 6.6. It was as low as 8 with the reversal in
March 2008. The jump that began in that fateful September marked that
disappearance of liquidity in the London Interbank Offered Rate. That was a
shock to the current generation in the money markets, as well as in central
banking.
Can this reverse?
Yes!
When?
????
What would be the mechanism?
The ability of governments to run
increasingly reckless policy through their central banks has always depended
upon the gullibility of the general public. Also prevalent has been the
assumption of unlimited funding through confiscatory tax collections and
unlimited abilities to issue credit/currency.
Obviously, taxpayer complacency is ending.
Most taxpayers have had to tighten their belts and have been attempting to
force thrift upon their extravagant governments. The more immediate effect
has been upon local governments. State or provincial governments are one-step
more remote, but will eventually be forced to be accountable.
In so many words, the
"makers" have had it with the "takers".
The paramount evil has been the
federal level with not just the prerogative of issue, but increasingly
evident lately, the ability to buy endless amounts of bonds out of the
market.
Historically, practically and morally
this has been absurd and will be overwhelmed by political and market forces.
The drive to today's outbreak of
bureaucratic despotism began around 1900 and where traditional means of US
finance were limited by the constitution, the Federal Reserve System
subverted this on the way to providing virtually unlimited finance.
As late as the mid-1960s the latter
was considered impossible, but lately it has been widely accepted and widely
discounted as "printing money". The latest belief-surge maxed out
on September 14th and a significant decline seems to have started.
This would mainly involve stocks and
commodities and it is doubtful that even the most desperate of central
bankers would be willing to add these to their buying mania. Stocks and
commodities don't have a maturity date.
Some may ask about the distress we
expected "this fall" in most bond markets. In June-July the bond
future soared up to a magnificent high that triggered our technical models. A
significant price decline was possible. Maybe twenty points but the ten-point
slump finished the move and stability is easing the overbought condition.
Similar strong overboughts
were sequentially registered on corporates (LQD) and emerging debt (EMB).
There are two ways of getting rid of an outstanding overbought condition. The
one we prefer is the straight down; the other is a period of consolidation.
The latter has prevailed and perhaps the continuous and big bid by central
bankers is helping.
The long bond has been rallying with
the setbacks in stocks and commodities. There is nothing new to this, and it
could continue over the next number of weeks.
Treasury bill rates are at
"Depression" lows but corporate bond yields are not at
"Depression" highs. This "divergence" can't last forever.
Currencies
China's announcement of massive
stimulus prompted a review of their currency system, which used to have holes
in each coin. Today's coins no longer feature these, but their monetary
theories are full of holes.
To be serious, the Dollar Index
traded down to 79.1 on Wednesday, which level was support from early October.
Today's jump marks that as a successful test of the low and reaching 80.5
marks the break above 80.25 resistance.
Tuesday's ChartWorks
pointed out that with the break out the initial move could be to the 82 to 83
level. After consolidating the gain, the next target is around 90.
This could be considered as an
involuntary trend towards "sound money", that would be your basic
central banker's worst nightmare.
In time, this trend and widening
popularity of "sound money" could fill the holes in Western
monetary theories.
Bob Hoye
Institutional Advisors
The opinions in
this report are solely those of the author. The information herein was
obtained from various sources; however we do not guarantee its accuracy or
completeness. This research report is prepared for general circulation and is
circulated for general information only. It does not have regard to the
specific investment objectives, financial situation and the particular needs
of any specific person who may receive this report. Investors should seek
financial advice regarding the appropriateness of investing in any securities
or investment strategies discussed or recommended in this report and should
understand that statements regarding future prospects may not be realized.
Investors should note that income from such securities, if any, may fluctuate
and that each securitys
price or value may rise or fall. Accordingly, investors may receive back less
than originally invested. Past performance is not necessarily a guide to
future performance.
Neither the information nor any opinion expressed
constitutes an offer to buy or sell any securities or options or futures
contracts. Foreign currency rates of exchange may adversely affect the value,
price or income of any security or related investment mentioned in this
report. In addition, investors in securities such as ADRs, whose values are
influenced by the currency of the underlying security, effectively assume
currency risk.
Moreover, from time to time, members of the
Institutional Advisors team may be long or short positions discussed in our
publications.
This essay is part of Pivotal Events that was published for our subscribers August
16, 2012.
Copyright © 2003-2008 Bob Hoye
|