Are we reaching peak mania?

OK, so what is a mania? According to the dictionary, it is: mental illness marked by periods of great excitement or euphoria, delusions, and overactivity. Does this describe what is happening in many markets today? It does to me, especially in stocks and bonds. And does it describe the state of our society?

I read many recent articles by educated commentators who claim our Western society is going downhill fast. One aspect is the kerfuffle/confusion over gender/sex. Not only is being gay/lesbian practically mandatory for some jobs, but in the age-old spirit of ‘catch them while they’re young’, five-year-olds in some UK primary schools are being taught about trans and other variations of gender from September this year.

And recently, it was reported that children will be allowed to select which gender they wish to be just by ticking a box. No medical checks needed.

Whether you believe this is appropriate or not, the fact remains that the current trend is to include everybody in society, no matter how ‘different’, and has probably reached some sort of outer limit. And this can only happen as great bull markets peak, when social mood is extremely positive and which has been that way for many years/decades.

Belief in the wealth-creating power of financial assets is at an all-time high. The recent ISA season has just ended and we were all told of the wonderful benefits of saving in a shares-based ISA. Very little attention was given to cash ISAs as a great investment. It is a given that shares beats cash ‘over the long run’.

In previous bearish, dark times, such as the 1930s in Germany and in the 1970s in the UK, such inclusion would have been unthinkable. There was then a great discrimination against anyone who was considered ‘abnormal’ and not one of ‘us’.

But is the inclusivity tide turning? Already, some parents in mainly Muslin primary schools in Birmingham are pulling their children in protest against these trends.

How many believe cash is an asset class to rival stocks?

There is much discussion about whether a recession is approaching. Many pundits say no – their indicators does not support it. Others say Forget the Yield Curve Inversion: it’s different this time! Yet others say we could have a dip in GDP growth, but that’s healthy and so get ready to buy the next dip.

There are few who contemplate the possibility that the next recession will turn into a depression and that shares will suffer a heart-stopping (for the bulls) crash. And fewer still who advise getting into cash (or cash equivalents). That is what makes this idea so appealing to me!

Just about all measures of bullish mania I follow are practically off the scale. For instance, cash held by retail investors at brokerage accounts is at a record low. Despite what some say about the negative mood of retail investors, they are all in. Remember, polls are just opinions while money talks.

I showed a useful chart recently that showed that when the yield curve inverts, a recession follows

The updated chart shows the blue line crossing the zero line in March and producing the seventh yellow bubble. It has since then bounced.

And here is another very telling chart

The blue line is the Fed Funds rate which is set by the Federal Reserve. Note that every time the Fed lowered the rate it marked the area of a major top in the share index – and a major low in the US unemployment rate.

But the curious thing is that those drops in the interest ate preceded the previous two recessions! So what is the conclusion from this evidence? Simply that lower interest rates produce a slower economy and a drop in share values! Last week, Mr Trump bellowed at the Fed to lower them with this headline:

“Trump tells Fed to cut rates and put a rocket under US economy”

On the basis of the above chart if they did that, it would almost guarantee a slump!

This is just one of many examples of how the conventional ideas about how the economy and stock markets work are totally upside down. Please don’t make that mistake!

The factor missing from the conventional equation is the overall desire – and ability – to take on more loans regardless of the amount of credit offered – the pushing on a string effect. With debt levels at record highs, can the economy and consumers soak up even more?

And the above chart is extremely relevant to the latest data point out of the US – the much-anticipated JOLTS job openings. It shows the number of openings plunged in February and severely narrowed the gap with unemployed workers data. This is not the sign of a ‘goldilocks’ economy that the bulls imagine.

The unemployment rate (in above chart) is flatlining – and the latest JOLTS suggests it may well start to turn up and give yet another warning of a major recession ahead.

And then there’s Brexit…

Will the ECB go the Full Monte?

I guess most of us have got used to the whacky antics they have pulled – mainly by setting their interest rate below zero at -0.4% in an effort to stimulate consumption in the eurozone (and to steer investments into assets). So how’s that going? Not bad as the latest data shows retail sales growth of 2.2%.

But the flip side is that banks’ margins are getting mightily squeezed and their share prices are reflecting that fact. The long-mooted merger of Deutsche Bank and Allianz hasn’t exactly set their shares on fire.

But with Germany now into a recession that can only get deeper, the pressure is on the ECB to either keep that negative rate on hold or to push it even more into the negative. What a thought! Of course, what they should be doing is raise rates to boost the German economy (see above).

The amazing thing is that there are buyers for these Confiscation Bonds. The only rational explanation is that the buyers believe rates will get even more negative – and they can then sell their holdings for a profit . We may find out on Wednesday.

And they could be right – but if they do that, I believe there will be few buyers for the new more negative bonds as the limit of this madness would have been likely reached. That’s when the whole House of Cards will topple. Many other central banks around the globe offer negative rate bonds and they will be forced to match the ECB.

Already, US T-Bonds yields are rising and I expect that to continue which will take the pressure off the yield curve inversion. In fact, I have our US T-Bond campaign down as one of my Top Trades for 2019. Bullish sentiment towards them is at an extreme (DSI bulls over 90%) as they enter a savage third wave decline. And that will surprise a whole lot of conventional pundits!

Suddenly, the Cryptos have caught fire!

In my blog of 2 April, I covered the amazing Bitcoin rocket as it surged by $800 in a matter of a few hours. There was utter confusion about why it happened – there were no discernible ‘news’ to account for it coming from the usual suspects. That was because the confusion arose from them still clinging to the erroneous concept that the news makes the market and such a strong move requires some sort of visible ‘catalyst’.

But markets do not work in that way. On that day, there was obviously a mis-match between the buy and sell orders and that the motivation of the buyer(s) was to push the price higher, probably testing the waters beforehand for the likely success of their plan.

It is precisely the same method used by Jesse Livermore a hundred years ago as described in his famous memoirs Reminiscences of a Stock Operator – a book I fully recommend to all traders who aspire to make it in trading.

Remember, for a price to rise in such an explosive way, both buyers and sellers must agree to it. If the sellers resisted the move, they could muster their forces and apply more selling pressure. But they didn’t. Because cryptos have no benchmark of value to be marked against, the price is free to swim with the tide of sentiment – and that is bullish (as I forecast back in February).

So has the price been knocked back down by the bears? No – in fact, it is tracing out a beautiful flag/triangle:

This formation is a continuation pattern – and odds are high we shall see the bull run continue. I remain bullish against our first entry at the $3800 area.

Interestingly, Facebook is entering the crypto world with a ‘stablecoin’ that will be backed by a basket of real (fiat) currencies, which will be a first. This could prove to be a game-changer especially in the uptake of blockchain technology.

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