Weekly Wrap

ANNOUNCEMENT

I am now writing articles for Interactive Investor and every Monday I cover a major UK share in Chart of the Week.

Here is my latest article on Pearson plc.

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Market Commentary

Hurrah! The US economy is reaching ‘escape velocity’ according to yesterday’s ‘bumper’ jobs data set, which showed lots of new jobs created and earnings increasing (although unemployment rate increased!).

So stocks are set to continue their impressive rally, right?  Not so fast.

This one chart should put a chill into the heart of any bull:

This one chart shows the level of debt globally racked up by households, corporate, government and financial sectors.

The important sector is household debt – responsible for 70% or so of GDP. From 2000 – 2007, household debt rose by 8.5% pa compounded.  But from 2007 – 2014, it only rose by a measly 2.8% pa.  HOUSEHOLDS HAVE MAXED OUT ON THEIR CREDIT CARDS.

Despite the temptation of record low rates, consumers simply have run out of ability and/or desire to take on more debt.  The situation is so desperate in the US that auto loans are now being pushed on sub-prime borrowers at ridiculous rates and terms (I have even seen 9-year loans – for a car??).  Does that remind you of any recent event, say in 2007/2008?

But what’s this?  With yesterday’s trumpeted jobs data, bond yields spiked as did short-term market rates.  Whoa!  If rates are now on the increase, what will that do to the above pile of debt holders?  Yes indeed, borrowers will be put in some distress, to put it mildly.

And corporates have been issuing massive debt for share buy-backs and other financial engineering party tricks.  Not for productive income-generating use, mind you.

While everyone (except yours truly and a few other brave souls) has been assuming low rates would last for ever, this groupthink has lulled them into driving yield of the debt of Italy, Spain and others into insane and totally uneconomic low levels.

US Treasury 10-yr yield was likewise forced down to the 1.6% area recently – surely demonstrating a touching faith that the Fed would keep rates at the ZIRP and that deflation is here to stay (plunging oil), giving a real yield higher than the nominal 1.6%.

But ten years is a long time in the markets! Yesterday, ten minutes was a long time as yields shot up!  Does anyone seriously believe inflation will stay near zero for ten years?  If so, I have a bridge in Brooklyn to sell them.

Here is the hourly chart of one of my favourite markets the T-Bond (30 yr):

If my EWs are correct, we are at the start of a third wave down and my first target is lower tramline.  Odds are strong that we have seen the highs (low in yields) for many months to come.

Remember, the Treasury bond market is a wiser one than stocks – and usually gives better leading signals.

The stock bull trap door is shutting

I have long forecast that rates would rise much sooner than most expect and that this ‘surprise’ would hit stock markets very hard.  Bullish enthusiasm for stocks is off the scale on a whole multitude of measures and is primed for a similar ‘surprise’.

I am maximum short T-Bonds and ready, willing and able to re-short FTSE/Dow/DAX.  

I believe we shall see an uncoupling of bonds and stocks so that both will decline together.  This would be a most unusual development, since they normally trade contra to each other.  But both markets are primed for big falls since both are running at record high bullish sentiment (also very unusual – showing the crazy central bank – induced financial world we are in).

Last week I showed the budding rally in crude oil – and that rally continued last week with a rise to $54 from a low of $44.  Shorts are being mightily squeezed here.  If the low can hold for a few weeks, more traders will begin believing prices will stop falling, aiding bearish sentiment towards debt.

The Bond Bubble is on its last legs (see pin approaching the balloon).

GOLD

The rally failed yesterday:

From the wave 5 low, my first guess was for a 1-2-3-4-5 pattern up, but yesterday’s plunge forces the other alternative – an A-B-C where the C wave hit the Fib 78% level.  As I guessed at the time, that was going to be the big test and was the reason I took profits at the $1300 area.

But now, my rally thesis hasn’t faded completely but is much weaker because of yesterday.  If stocks do fall hard very soon, there will be a flight into gold and the rally will regain its footing, making the A-B-C marked the first larger wave up before $1300 level is breached.

But my policy is to sit and watch chart developments for now.

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Have a great weekend!