Weekly Wrap

Market Commentary

I have been forecasting a deflationary depression now for quite a few years (when it was on the radar of very few) and all of a sudden the chickens are coming home to roost in 2015. And how!

Most pundits I have read are calling the oil price 50% plunge ‘ one that no-one could have predicted’. I have news for these people – maybe they didn’t see it coming, but that’s what happens in a deflationary depression! The signs were all there if you cared to look. The consumer price index and also producer price index have been falling for years and are both below the zero line in the eurozone – and this will spread to the UK and USA.

There is over-production of virtually everything with insufficient demand at market prices. Glancing at the very first chart in our Economics 101 textbook, we see that if demand at a price is insufficient, the price must fall to meet that demand. That is why the UK supermarkets are under extreme pressure to cut prices.

The string-pushing Keynesian money-printers of the central banks have evidently got much more sophisticated theories and charts to replace the supply-demand curve.

Central banks are desperate – and out of ammo

Central banks’ desperation to get inflation up to its target 2% have failed miserably – yet they keep doing more of it! If that is not madness, what is? And has anyone asked why 2%? The huge pile of debt that the banks, corporations, governments and consumers have amassed is the albatross round their collective necks. It will be their downfall. Interest rates are already pinned to zero (or negative in some cases!). The ammo box is empty.

And now, social mood is turning very nasty, especially in Europe (remember, I made a forecast a few years ago that such unrest would start there, as the downturn in economic conditions would originate in Europe). Recently, I mentioned the growing anti-immigrant movement in Germany – Pegida – that is especially ominous as it appears to be at its most vigorous in that country with such a rich history in internal racial/religious conflict.

And now, this week the events in Paris are underlining this ramping of social tensions. Antisemitism is especially rife in France and I read reports that tensions and attacks on Jews are so widespread now that there is a mass exodus of them leaving the country.

Of course, because stock markets are an instant barometer of social mood, they are slowly moving in synch with this mood. But because central banks have been pumping liquidity into stocks (and other assets), it has been a titanic battle between the upward forces of money printing and the downward forces of deflation. Since 2009, central banks have won that one hands down.

But now, with oil prices (and other commodities) plunging (deflationary) and total fantasy-land sovereign EZ debt bond yields trading under – relatively risk-free – US Treasuries, markets are suddenly waking up to the yawning chasm between expectation and reality.

The dollar is poised for a hefty reversal

For stock markets, the key is the dollar, which has been in vertical mode for some weeks. As you know, I have been banging the drum for the dollar when sentiment was in the basement. But last week saw the first up week for the euro in many weeks. Bullish sentiment towards the dollar has reached manic and record proportions, so if this budding euro rally can be maintained, stocks will fall very hard.

Last week, just repeated whispers of QE from the ECB was enough to excite the algos, but that rally was reversed in yesterday’s trading. It is often the day after a ‘news’ event that produces a sharp rally that is important for traders – and I believe yesterday’s close on the lows is pointing to weakness next week – and the start of a new third wave down.

Gold is set to move much higher

The charts are looking very constructive here. Gold has failed to move lower with oil, so what cannot go down must go up. The market is telling me that there will be a massive flight to safety into PMs as shares collapse.

DOW

See my Trader email of yesterday. It shows a symmetric Fibonacci 78% reversals. Here is the rally to the Fin 78% level off Tuesday’s low showing a lovely five up with a solid momentum divergence – pure textbook:

A break of the w2 – w4 line was another sell signal.

I added to shorts on this rally.

GOLD

Is shaping up for a huge rally. Here is the daily:

Nice wedge forming and if market can push up out of it, my $1250 target is within reach. And if this is a third wave, much higher targets are likely.

I remain long from $1152 and again at $1188.

AUS/USD

The Aussie is showing signs of life. I am now long and this trade was alerted in my TT Alert service where I started posting this promising set-up in December. Details here.

Have a great weekend!