Where’s the cash?
Saturday’s blogpost contained a comment that I suggest bullish sentiment towards UK gilts surely must be reaching a peak, as has already occurred last month in US Treasuries where the 30-yr T-Bond has declined by seven full points to Friday’s close. This was from a position of extreme bullish sentiment as measured by DSI and COT data, as well as US MSM headlines.
Long-time readers know that I place great store in the (not so hidden) messages sent by the MainStream Media (MSM). My thesis is that by the time this section of the media has picked up on a particular trend in the headlines, that trend must have been in operation for some time, otherwise they would not have noticed it!
Of course, in specialist and more professional outlets, a new trend may well have been noted but only by a few. But it takes time to filter down to the MSM because they are not in the business of forecasting turning points, or helping their readers make sensible decisions. They are in the business of stating the bleedin’ obvious – in order to maximise their readership to the less sophisticated investor (the majority).
Also – and this is very important – most financial reporters and even editors in the MSM (and possibly elsewhere) are in their 20s to 40s and have never seen a bull market in bond yields! Since the early 80’s, interest rates have been trending down, down, down. How about that? Imagine – for all of your life – the cost of money has been falling.
Even Mark Carney, the Governor of the Bank of England, was just graduating from high school when interest rates topped! And when he started his professional life, rates were already well on their way down.
I happen to be from an earlier generation who experienced the high inflation and 15% rates of the 1970s/early 80s, so I have no bias in this regard.
And I would venture to say that most operators in the financial world today are too young to have experienced a long-term bond bear market.
So what is the state of sentiment in the UK MSM regarding interest rates?
If yesterday’s Sunday Times offers a clue, here are the headlines of articles in the Money Section I spotted:
“When rates are this low, you have to move up the risk scale”
“Sleepless in Britain: savers are fretting as low rates force them to take a risk”
“Savings just for losers?”
Not to mention the prominent articles on the hit to pensions from the low gilt yields.
Of course, the underlying assumption is that rates will stay low as far as the eye can see, so moving out of savings is a no-brainer. Indeed, it has been noted that the markets have not priced in a Bank Rate rise for several years at least. So we are all agreed, right?
I am sure I do not have to tell my loyal readers that the theme of moving out of savings accounts and into shares and more risky assets has been going on since at least 2009! Which makes this theme at least seven years old – just about time for the MSM to finally notice it.
I can say that 100% of the articles I have read in recent years has assumed that an ‘intelligent’ investor would move money out of savings into another asset, be it shares, high-yield bonds, vintage cars, property, stamps, art, fine wine, collectibles, gold, even Bitcoins.
Not a one suggests moving into cash! Cash is utterly hated. Everyone is either chasing yield or capital growth. Cash is nowhere to be found.
This failure speaks volumes about the universal mania for financial assets that has built up in the fiat money era since around 1971 when Nixon decreed that the US dollar was no longer convertible by the Federal Reserve into gold.
But with T-Bond prices now declining, the US yield curve is starting to get steeper and this usually signals a changing attitude towards stronger economic growth and/or higher inflation – and more pressure on the Fed to raise rates so as not to be seen as being ‘behind the curve’.
Now with everyone expecting short-term interest rates to stay low forever, and long term yields on the rise, the scene is set for an almighty clash.
I have a feeling that when the inevitable deflationary crash gets under way, investors will wake up to the many attractions of cash. I noted the most hated commodity – coal – was in a ‘surprise’ bull run. And the most hated asset class today? Undoubtedly, it is cash. Like coal, that assessment will not last.
Silver pauses before final new high
We have had some fun with silver this year, but the ‘easy’ money has already been made. We were long from the Jan/Feb lows and rode the waves up to the $20 area last month. Here are my EWs that I believe fit the chart the best:
The rally off the winter lows is an A-B-C correction to the main downtrend. This a stance I have maintained all year. And as it happens, I can fit a lovely A and B label. From the B wave low, the C and final wave will be a classic five up. I have waves 1 and 2 (purple) and wave 3 is exceptionally long and strong, as befits a third wave.
Since reaching the wave 3 high at around $21, the market has been in a classic consolidation wave 4 which I expect will be a textbook wedge, which should contain the usual five sub-waves. Today, we are in wave 3 down and when that ends, I expect a wave up, then a final wave 5 down and then a surge up out of the wedge in the final purple wave 5 which will terminate above $21.
That is my roadmap which so far the market has been following closely.
In terms of trader sentiment, latest COT data reveal hedge funds almost 4.5/1 bullish – a near record. They are all on board the silver bandwagon. The bull run is in its late stages.
I am preparing VIP Traders Club members to gear up for a mammoth slide in gold and silver prices