Will it be 25 or 50 on Wednesday?

Dear Trading diary: That question must be at the forefront of the minds of investors and analysts. Just like the highly polarised politics today, investors are two camps with diametrically opposed outcomes. It is a binary choice, according to the MSM. At Wednesday’s FOMC we will know.

But is it as simple as that? Last week we saw strong index rallies with AI back in favour. And with Gold making new ATHs my long trades are performing well – and I saw every reason to reinstate my long positions in the Gold Miners, having taken good profits when gold seemed to stall at the $2,430 ‘ceiling’. And when the market pushed strongly above that on Thursday, I was given the green light to reinstate the miners in my portfolio.

But this week’s strong action in shares sent me back to my drawing board and I now have this option as a valid outcome for the S&P

Wednesday’s FOMC decision may help to confirm – or not. Tactically, I am back on the sidelines in these most volatile index markets and awaiting developments.

Debt, debt and more debt: If anyone is doubting the US consumer is fully tapped out then this chart should elucidate. Total revolving credit card debt has just made a new high while the savings rate a new low. Mind the gap! And amazingly, this is all happening as interest rates on that plastic are rising into new highs above 23%. Yes, unsecured lending commands a rate of 23% while car loans are around 10%.

US consumers are living on the never-never as never before!

And as I reported recently, credit card defaults are increasing rapidly as payments are missed by the evermore squeezed consumer. Rising defaults translate into even higher interest rates for those that can repay.

And when the chickens do come home to roost, as they will (and probably soon), they will lay an egg (N American slang).

The stimmies and furlough payments during Covid have been well and truly spent. And that spending boost supported the economy and boosted inflation, as we well remember.

But now the consumer cupboard is bare, consumer prices remain elevated and consumer interest rates will almost certainly not drop very fast despite what the market believes how low the Fed Funds will drop.

And is the US government also tapped out? I see that the interest on US debt has now reached the amazing figure of $1 Trillion a year – a record high. That represents a staggering 4% per year of GDP. It is also growing fast and in November, the US electorate will decide which candidate will ramp it up even further.

Of course, the US government with its ‘exorbitant privilege’ can print as many dollars as it wants – and has already done so. The price for that is always in the market with a depreciating dollar.

But with that notion firmly in traders’ minds, it has likely reached a low in sentiment and price. I have been trading it from the short side recently (long EUR/USD and GBP/USD) testing the hedge funds’ ability to resist a large short squeeze.

And over in the land of the rising sun, the yen carry trade is in the process of a major unwind with dollar/yen in a sharp decline that should intensify over the coming weeks. I remain short dollar/yen which has lost a cool 7.5% off its July 1 ATH.

The Net Zero mood music is getting more largo from its former vivace! All around, Western eco politicians are quietly scaling back their ambitious (aka mad) target dates to rid the world of essential plant food. Now VW as one of Germany’s most successful businesses is planning on doing the unthinkable – shutting down a couple of its car plants in Germany for the first time in decades as European EV demand plummets. This trend can only spread with layoffs to come.

And our very own home-grown government geniuses are being pressured by business to push back their target dates to rid the country of the evil CO2. Of course, they have to save face and so that will only happen at the very last moment as any major decision must grind its way through consultants and then committees galore and then to a spokesman. Inevitably, as the sheer madness of impoverishing us dawns on the public (while in China and India it is business as usual with cheap coal energy – see last week’s blog), these targets will be abandoned altogether.

Already, Chinese EVs are taking over the market because of their lower costs of production, great quality (and subsidies!). The EU and USA are already imposing large tariffs to try to protect their domestic manufacturers, but they are like King Canute as he demonstrated that even a ruler (aka government) could not stop the tides (he wasn’t daft to believe he could, unlike our present day rulers).

With energy prices in the eco states sky-high which are caused by the political ‘transition’ to ‘renewables’ and the banning of cheap Russian NatGas, the German politicians are shooting their own companies in the foot. It is a mystery how the German stock index has managed to reach the heights it has given the weak business sentiment. A triumph of hope over reality, methinks.

The ATH was set at the same time as that of the Dow and like the US indexes, it should follow hard down given the huge mom div at the top. I see 3 September as the likely date of the final buyer’s exhaustion. And it is occurring just when the retail public has ramped up its share investments as a pc of household wealth to a record high. This is remarkable when the equity in their homes is also at ATHs. They just can’t get enough shares – and what a poetic time for the markets to reverse.

The public have been piling into passive share index ETFs right at the top in recent weeks.

But this is a textbook example of the maxim that the public buy at tops (and sell at bottoms). As the markets work lower, public selling will intensify. Then panic will set in. My best guess is that phase will be reached in a few weeks.

As I stated to members on 3 September, I am not sure if stocks will crash soon or remain elevated for a few weeks (as they did in 1929) before starting the panic phase. Of course, that is the period when I want to be maximum short.

Back in 1929, the Dow made its ATH on 3 September and held up pretty well until the Black Thursday crash on 24 October which kicked off the vertical hard down phase. That was a span of about seven weeks before the start of the panic phase. And the S&P made its high on 20 September

Will a similar elevated period apply today? I have no firm view on this and so my strategy remains very simple. I am willing to enter occasional small short index positions with wide stops which offers me at least a possibility to be on board a hard down train if it should develop that way. And if not, I have much firepower remaining to add to shorts when I see the panic phase start. That is the coward’s strategy – and fully justified since we are seeing multi-hundred point daily ranges in the Dow that can all too easily stop me out.

Remember, we see the largest rallies in bear markets, not in bull markets

Update on my Gold campaign: Bingo! On Friday, Gold surged to my long-held $2,580 area target. I have been trading long since the major low in October 2022 at $1,600. The ride up has not been in a straight line! But the most recent move has.

My best guess is that the market is in a very powerful wave 3 of 3 of 5 up. Odds are that there is more upside before this wave reverses to wave 4 of 3 of 5. I have reinstated my Gold Miner longs in Pro Shares.

But it is Silver that has suddenly caught fire after lagging Gold for a very long time. I remain long and will look to add on a break above the $32 old high.

Are US indexes really making new highs? In nominal depreciating dollars, they are, But how are they doing as measured in real money (Gold)?

This picture speaks a thousand words! The S&P is back to where it was when Gold was unshackled from the dollar in 1971 and was free to be traded in the open market. Shares have gone nowhere in 53 years. With Gold now in a powerful bull run, I expect the ratio to begin a strong decline especially when stocks make their final highs.

And now for something completely different: Who is trading the agricultural commodities today? While Gold is starting to grab the headlines from a low base and AI continues to dazzle, I would guess precious few. But from quiet markets often spring amazing opportunities – if you get your timing right, of course. The early bird catches the worm!

And I believe the timing is just about right in Corn, Wheat, Soybeans and Cotton. Here is the weekly Corn chart

From the wave 1 or A top at $8.25 back in April 2022, expanding harvests pressured the market lower and lower. But now at the four year low of $3.70 (a drop of an almost Fib 55%) and into the major long term support zone, it has the potential to enter a major rally phase. Just as the cure for low prices is low prices, farmers are less inclined to plant corn if the margins remain low. And there is always the global weather factor that may be beneficial to higher prices.

But as a Buy Low Sell High proposition, I see this market as a prime candidate. I am embarking on a (hopefully) long term campaign in Corn and also the others.

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