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This Financial “Seismograph” Signals A Monetary Earthquake
Stock markets in the U.S. are trading approximately 2% from their all-time highs, the German DAX has slightly retraced from its all-time highs, the Nikkei index in Japan has almost surpassed its 2000 highs in recent days, the Shanghai stock index used to be a laggard but is making up at an incredible pace (currently trading at 7-year highs). Indeed, it feels like nothing can go wrong.
We are not yet in bubble territory, and the market is not setting up for an implosion as it did in December 1999 or July 2008. However, we are in the midst of a monetary bubble, driven by an explosion of the monetary base and an implosion of interest rates. Paper assets, as opposed to hard assets, have been pumped up by the liquidity that is being funneled into the economic system and the markets.
But exactly that perception that nothing can go wrong is so dangerous. The number of divergences in the system is becoming mind-boggling, a red flag for secular investors.
Economic activity is not reflecting the performance of the stock market at all, or vice versa. The headline figures all seem to tell a recovery story, like consumer confidence which is back at pre-crisis levels, or the unemployment rate, which is seemingly ok. Nothing new so far.
However, deepdiving into the world of economic data proves otherwise. Case in point: close to 50 economic data points which are highlighted in this “chartfest” (from Ed Yardeni) learn how shaky the recovery is. We have chosen three charts to justify our point of view.
The global growth barometer has collapsed in 2014. It was undoubtedly driven by the oil market collapse. Low commodity prices are no sign of economic health.
Potentially more concerning is the economic surprise index by Citigroup reflecting the direction and level of economic surprises. If it rises, it means that economic data are on average better than expected (positive surprise). Currently, it shows a negative reading similar to the depths of the 2009 crisis.
(H/T: Charlie Bilello, @MktOutperform)
One example of a negative surpise is the profit cycle in the U.S. The indicator used for the profit cycle is the forward earnings of S&P 500 companies (red line in below chart). Forward earnings are highly correlated with industrial production, and both are clearly in decline since 2011. That is playing out while the U.S. stock market is reaching one all-time high after another.
So far, these divergences have not resulted in a meaningful correction of stock and bond markets. Mainstream investors have gotten at the point of “acceptance of the new normal.” And rightfully so, because why worry if markets are climbing higher, indicating that everything has to be ok?
The acceptance of the new normal is the most worrisome fact for investors.
And that is exactly the time when things mostly take an “unexpected” turn. One of the most reliable indicators of stress in the financial system is the TED-spread. It should be considered as a “seismograph.” It telegraphs that something is brewing under the hood. Its long-term chart below shows that there were plenty of signals in 2007/2008 that telegraphed a significant correction.
Although the TED-spread has not generated any extreme readings, a clear rising pattern is unfolding, as evidenced by the five-year chart. Note that the rise started a bit after QE3 ended (in our words: QE infinity). The TED-spread has broken through a first resistance point (lowest red line) and is approaching a second one dating back to the end of 2012. That does not bode well.
The uptrend in the TED-spread is visible on the next chart, showing the rate of change in purple. Clearly, the “strength” of the rise is the strongest in two years.
Is a correction in the markets brewing? There is definitely a fair chance, in particular if the TED-spread keeps edging higher.
But what if this turns out to be more than just a correction? With interest rates heading into negative territory, and with a monetary base that has exploded since massive monetary stimulus started in 2009, what are central planners going to do when the next severe correction or even crisis hits? Or, even worse, what if they inadvertently induce a new crisis as a result of their decisions?
Obviously nobody has a clear answer to that question. There is no way for central planners to know how things will play out as there simply is no empircal evidence whatsoever. There are a lot of assumptions and opinions, but who cares about these? At the end of the day, your personal wealth is at risk.
Secular investors, in our view, protect themselves with hard assets. Just because hard assets are out of fashion, it is a right time to consider them. That does not mean that investors should go ‘all the way.’ The point is that there will be a time when hard assets provide the protection they have always provided in history.
Here is one scenario that could be playing out right here right now: a weakening economy with rising inflation. Impossible? Everyone thought so in the 70ies. But “stagflation” could be back, and we would urge you to not judge until you have read the following two facts.
The chart below shows wages and salaries growth compared to interest rates. Janet Yellen has expressed several times the importance of wage growth; it appears to be one of her favorite ways to achieve the desired 2% inflation target. According to the chart, wages have risen from below 1.5% at the beginning of 2014 to 2.5% today. Higher wages imply more spending.
On top of rising wages, inflation expectations are stubbornly refusing to go lower. In other words, the market continues to anticipate inflation. That is evidenced by TIPS, as recently explained and shown in “What Is Really Driving Gold” Inflation expectations have been on the rise since last year, and are on the cusp of breaking out. Gold is not anticipating that trend yet; from the moment it does, we would have the ultimate confirmation of rising inflation.
For the pundits that are cheerfully praising the highs in the stock market, it should be noted that, when put into perspective, stocks remain well below gold's quadruple rise since 1999.
If inflation goes higher, and we believe that eventually it will, people will flock to gold and gold-related assets. In such an environment, which asset would you trust most: government backed assets or hard assets?
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yawn. somebody/thing gonna tell me the inferno is just down the road?
There's so much wrong with these chart interpretations the article is not worth addressing.
Next.
(That's not to say no correction is coming. One always is, and it could happen any time.)
Dave Kranzler: Retail Investors Are All In, Margin Debt At Record High; Stock Crash Next?
Full story: http://thenewsdoctors.com/?p=465168
hm. if i plot a chart of SP500 vs Gold from 1989. It sure looks different from the article's.
In de optiek van RuitenTeam ligt de blauwdruk van het systeem 'Leven en Laten Leven' op straat. Het is alleen de vraag of een ex-advocaat (Bram M.) of een ex-CEO (Carly Fiorina) het lef heeft om hiermee de VN om de oren te slaan.
http://www.volkskrant.nl/dossier-4-uur-nieuwsbreak/bram-moszkowicz-een-p...
In ieder geval krijgt PVV'er Martin Bosma nog niet HET ANTWOORD op de vraag 'hoe de relatie is tussen DE VRIJHEID en de ABSOLUTE WAARHEID?'! Al beweert de voormalige topvrouw van Hewlett-Packard wel dat 'ze weet hoe de economie en de wereld werken'. Ze durft zelfs de voorspelling te doen dat zij als Republikeinse presidentskandidaat de Democratische HollywoodHillary kan neutraliseren.
http://www.volkskrant.nl/dossier-verkiezingen-in-de-verenigde-staten/oud...
Netwerk @GuusjA gaat ervan uit dat de Duitse bondskanselier Merkel dat ook weet. Dat de Duitse geheime dienst BND de Amerikaanse NSA heeft geholpen bij het traceren van netwerk @SuperWil was logisch.
http://www.volkskrant.nl/buitenland/merkel-bespioneren-van-bevriende-lan...
Al had de minister van Binnenlandse Zaken Thomas de Maiziere meer aan de informatie van PisStrak dan die van WildeGradjA.
http://www.marketwatch.com/investing/bond/tmbmkde-10y?CountryCode=bx
smells burnt in germany.
Get that media coverage using "Quake" inyour title on a a quakey quake quite quakey weekend...Similar work lookup free hits...Oy Vey!
"We are not yet in bubble territory, and the market is not setting up for an implosion"
Thanks for the chuckle. ROTFLMFAO. You gotta be shitting me. I been watching markets since 1967 and the is the MOST BLOATED I have ever seen markets.
At least 2 dozen indicators say we are in the TOP. But Then It IS different this time. eh?
Yes, it is different this time. "This Time" has been here for at least 6 years.
What U and I don't know about what's really keeping the stock market from imploding (or at least some 300-1000 point declines every so often) would likely fill a thimble for how simple it is. My guess is that Hank Paulson Jewish handlers at Goldman Sucks, told him that if the government and the FED save them from bankruptcy by allowing them to become a bank with FDIC guarantees, and forking over a trillion over seven years, they would act as buyer of last resort to keep the stocks held by pension funds from ever going down significantly.
That way Lord Blankfein and other shysters in the Investment banking fraud schemes, would avoid any penalties, and save the bacon of a quadrillion in pensions to be paid out over the next 50 years.
The investment banksters cut a deal that assures the market will react only nominally to fundamentals for the next 100 years, affecting not widely held stocks only. The Widows and orphans funds, and other accounts that could find themselves unable to make the monthly payments to those dependent on them have escaped the liquidation problem that they would have had in a declining market and that's all to the good.
Staying long is the only way U can make any headway in your own investments (gambles). Short players abound thinking that some day their yacht will come in. Good luck with that.
yup, that was my cue to stop reading the article
It is different this time around. Back then, the money makers wanted the markets to go down and profit from that. Now they are the only ones holding the market up. If it goes down, they hold the bag.
when you got CB's buying 80% of tresuries what do you expect? you will not calculate these markets ever again unless they
stop manipulating!
"the unemployment rate, which is seemingly ok." What world do you live in? The US is at depression level employment.
Only the low IQ crowd is unemployed.
Then I take it you are not currently working.
Yep. The majority in 10 years from now - if not sooner.
Not sure about that. They get free food, free housing, tons of free time. The rest of us are working to pay their way. Which group has the lower IQ?
That's the problem with "democracy" : the greatest moron has as much weight as the greatest genius at the ballot. The sheeple is plain stupid and the politicians know this. While intelligent people ALWAYS try - against all indications - to keep the barge floating. However, there is always a breakpoint and it is my feeling we are approaching it rapidly as also more and more intelligent people are being replaced by machines and computers.
however, we don't really live in a democracy. we haven't for over hundred years - at least at the national/federal level. we are presented with choices that have been 'groomed' by TPTB (i.e., the people w/ the money). TPTB don't really care who we choose (democrat or republican) because they control whichever one gets elected.
so that part of your argument doesn't really work.
however, i agree that more & more people will be replaced, on all levels of employment, by machines. so the people that own the networks and machines will either need to find a way to keep us all fat and happy when that time comes, or figure out a way to thin the herd considerably so they can keep more of their money. i sort of think nuclear war, while the most expedient choice is probably off the table since it will really fuck up the planet for those that are left. maybe a series of EMPs all over the globe to put most of us back to the stone age so we starve & kill each other. maybe ebola?
i would not be surprised that the recent ebola scare, ferguson & b-more riots, as well as this new 'isis' attack along with Jade Helm are trial balloons to start getting us accustomed to what's coming.
Stagflation ... no kidding ? Dude that has been the mantra here on ZH for years... nothing new. Its actually here if one compares rents, college tuitions, auto prices, food, etc.. versus WAGES. The only variaable to keep Stagflation from being the aedline is that DEBT is at an all time high.
Once debt cannot be serviced ... and that time is close .... then it will be come a headline. Forget your TED spread charts watch for bankruptcies and credit card debt default.
yeah - i'm curious from what alternate universe the wage increase data on the FRED chart was fabricated.
Whoever you are, diversify your holdings. You should have been doing this all along if you are truly a good investor. The nursery rhyme maxim "Don't put all of your eggs in one basket" is so true ( I have chickens, and one of my children did drop the egg basket once and cried as I tought him a valuable lesson, because most of the eggs were broken).
Soon there will be lots of crying because the people who have full baskets of paper, metal, pork bellies, etc. will get to see what a spilled single basket looks and feels like. It does not have to be that way.
One of my other children came up to the house crying another time telling me that the eggs got dropped. I saw that half of the eggs were gone, but the OTHER basket was untouched. He received a gentle scolding, and then the rich praise he deserved. Just thinkin'
The markets are looking like the line of slot machines in a casino, people putting money in and hoping for a payoff...somehow....
Ain't No Lie!
Diversify!
No, really, diversify.
I'm of the opposite opinion. Put a few good eggs in one basket...now watch that basket closely.
Where are you going to hide? Stocks? Bonds? Dollars? ETFs? Really. What asset is left to put your money except in your home, a car, tools, etc., and gold and silver. Nothing else will survive what is coming.
The U.S. and Europe will put capital controls on the buying and selling of physical Gold while simultaneously crashing the spot price via the paper markets.
It's looking like most decent people will have to expatriate to Russia, or India; anywhere Gold isn't captured. Sewing it into their clothes like Jews trying to escape the Nazi's.
If you want to leave the USSA with your metal, better get it out while you can... if you can. Or keep it safely hidden until the danger of posessing it passes. If it passes.
http://www.zerohedge.com/news/charlie-munger-civilzied-people-dont-buy-g...
Charlie meant to say, "Civilized people don't buy gold, they rehypothecate it."