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What Happens When Stocks Catch Up With Commodities?

Phoenix Capital Research's picture




 

Since 2009, the global markets have been largely steered by Central Bank policy, NOT organic economic growth. With the debt-based monetary system dangerously close to shutting down during the 2008 meltdown, Central Banks stepped in as the “buyers of last resort” to provide a backstop to the system.

 

The problem is that the individuals running the Central Banks are prone to human hubris, specifically overconfidence in the validity of their opinions and abilities. Since most Central Bankers are Keynesian economists at heart, they believe that granting Central Banks MORE power is always a good thing.

 

Thus, rather than stepping back once the Crisis had passed (2011-2012), Central Banks continued to prop up the markets and push for greatest Centralization of the global economy.

 

As a result of this, the initial distortions in the capital markets induced by QE and Zero Interest Rate Policy (ZIRP) became systemic in nature. Investors no longer bought assets based on perceived value relative to the real economy. Rather, they bought based on perceived Central Bank actions and promises.

 

The most egregious example of this pertains to the sovereign bond market where investors began to front-run Central Bankers QE programs.

 

Indeed, the promise of “more QE” was one of the most powerful tools in Central Banks’ belts. Mind you, it was the promise of QE, not the QE itself that had the biggest impact on bonds.

 

Consider what happened in 2010.

 

QE 1 ended in June 2010. Soon after, the Fed began to hint at launching a new program, QE 2. Bonds rallied hard throughout this period as investors bought bonds to front-run the upcoming program. Once QE 2 was actually launched, bonds FELL.

 

 

This was a classic case of “buy the rumor, sell the fact.”

 

In plain terms, the bond market’s risk profile was skewed not only by Central Bank policy… it was skewed by the promise and hope of additional policy. Indeed, the largest bond moves occurred BEFORE QE 2 and Operation Twist were announced.

 

Below is a chart showing the performance of the 10-Year Treasury. Periods in which the Fed was actively engaged in QE or Operation Twist are white. Periods in which the Fed was hinting at or promising additional policies are in green. Note that the largest bond rallies (meaning yields fell) occurred during periods in which the Fed was PROMISING to do more, as opposed to actually DOING anything.

 

 

And since the Fed began hinting at additional policy soon after any actual policy ended, the bond markets became permanently skewed as investors were continuously reacting to hype and hope more than economic realities.

 

The implications of this are tremendous. Modern financial theory dictates that sovereign bonds, particularly, US Treasuries, are the only true “risk free” rate of return in the current financial system. ALL other asset classes trade based on where sovereign bonds, particularly US Treasuries trade.

 

So if the US Treasury market’s risk profile becomes skewed by Central Bank policy (and verbal interventions in the form of promises of additional monetary policy), the entire financial system’s risk profile becomes skewed.

 

Stocks (both developed and emerging), commodities, corporate bonds, muni bonds… EVERYTHING was skewed based on the fact that the sovereign bond market was pricing risk based on Central Bank policy rather than economic reality.

 

We’ve already gotten a taste of what happens when asset classes finally “adjust” to underlying “demand” with the commodity markets: having operated based on Central Bank money printing for five years, they then wiped out ALL of those gains in six months as they adjusted to the economic realities of a weak global economy.

 

 

Developed stock markets have yet to make a similar adjustment, but they will…  and when they do, it will be a DOOZY.

 

 

Smart investors are preparing now.

 

We just published a 21-page investment report titled Stock Market Crash Survival Guide.

 

In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

 

We are giving away just 1,000 copies for FREE to the public.

 

To pick up yours, swing by:

https://www.phoenixcapitalmarketing.com/stockmarketcrash.html

 

Best Regards

 

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

 

 

 

 

 

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Thu, 12/17/2015 - 20:11 | 6937585 CrabbyR
CrabbyR's picture

Keynesian overlords are absolutely determined to prove austrian economics works better, but will anyone be left to say the proverbial "I told you so"

Wed, 12/16/2015 - 12:33 | 6930819 Bemused Observer
Bemused Observer's picture

Stocks have become the haven for money that can't attach itself to anything else of value to justify itself.

It's like, I have a billion dollars. Can't keep it all in cash, so most of it has to be 'invested' in something as a placeholder...and these days, all the usual avenues have tanked in value. This means I'd have lost a great deal of my 'wealth' if I'd put my money there, so what else? Treasuries? Bonds? Forget it...the only game in town has been stocks. So that's where it all went.

But like all such investments, eventually you need, or just want to get your money out. Because stocks are the where everyone has ended up, what happens when the selling starts?

If you are a very large holder of stocks, you have to have considered this...it's going to be hard enough for the little guy to unload if things go south, but how are you going to get rid of all that paper YOU have? Unless you can sell it at your price, it isn't worth what you think it is. Maybe a whole LOT less.

All that great wealth we have "created" is phony. It has less of a basis in reality than current oil prices...but look what happened to THEM. At some point it will occur to a critical mass that the only ones who will walk away with anything are those who leave NOW.

There is nowhere else for the rest to go, and they will be left with all the worthless paper.

I'm sure this is why Zuckerberg did what he did...all his 'wealth' is in stock. But as such a huge holder, any selling he does would be seen as a 'signal', possibly destroying the value of the rest before he could unload it all. It wouldn't surprise me at all if the big players are already 'out' of stocks in any meaningful way, and the little guy will get creamed again because his 401k and pension fund were the ones who bought their positions..."It's FANG stock! There's no limit to the upside! Thank God we were able to buy the dip!"

They'll be so confused when those stocks keep going down..."But how can Facebook be losing money? Me and all my friends are on it every DAY!"

Wed, 12/16/2015 - 11:13 | 6930311 actionjacksonbrownie
actionjacksonbrownie's picture

For those that are math-challenged, 7859.69 for 500 coins = 15.72 per coin.

 

Scammer

Wed, 12/16/2015 - 05:27 | 6929595 TheBeatles
TheBeatles's picture

EurGold are selling all of their 1oz silver coins for just €12!

 

These include:

1oz Silver Vienna Philharmonic 2015.

1oz Silver American Eagle 2015.

1oz Silver Canadian Maple Leaf 2015.

1oz Silver Perth Mint Kookaburra 2015.

 

https://www.eurgold.de/silver/silver-coins/

 

Silver 1oz Vienna Philharmonic 2015 Master Box (500pcs) - €7,859.69.

https://www.eurgold.de/silver/silver-coins/500-x-1oz-silver-vienna-philharmonic-2015-master-box/

 

Silver 1oz American Eagle 2015 Master Box (500pcs) - €7,949.17.

https://www.eurgold.de/silver/silver-coins/500-x-1oz-silver-american-eagle-2015-master-box/

 

Silver 1oz Canadian Maple Leaf 2015 Master Box (500pcs) - €7,775.52.

https://www.eurgold.de/silver/silver-coins/500-x-1oz-silver-canadian-maple-leaf-2015-master-box/

 

All major credit cards accepted. Sale ends 31st December 2015.

Wed, 12/16/2015 - 04:52 | 6929580 emmadavis
emmadavis's picture

Now a days all the analyst are bearsigh about the market and that make me think what might be upcoming for the U.S. economy in 2016.

Wed, 12/16/2015 - 01:36 | 6929315 surf@jm
surf@jm's picture

With all the drug money being laundered by these bankers, does it surprise you that they learn from their heroin dealing buddies how to addict the masses?.....

Tue, 12/15/2015 - 22:49 | 6928715 RMolineaux
RMolineaux's picture

The author does not take into consideration the fact that the prices of agricultural commodities were falling well before the Saudi announcement on oil.  This was part of the normal market reaction to bumper crops.  And, of course, we know that sovereign Saudi decisions on oil production were the cause of the enormous drop in the price of petroleum.

Tue, 12/15/2015 - 17:02 | 6927358 TheBeatles
TheBeatles's picture

All 1oz Silver coins are €12 @ EurGold

https://www.eurgold.de/silver/silver-coins/

Wed, 12/16/2015 - 13:40 | 6931168 Bunghole
Bunghole's picture

You want to advertise on ZH?

Buy a freaking ad from the Tylers, douchenozzle.

Tue, 12/15/2015 - 15:14 | 6926908 SILVERGEDDON
SILVERGEDDON's picture

Save us some brain damage, and just post the fucking 21 page report already.

Wed, 12/16/2015 - 08:24 | 6929760 Arnold
Arnold's picture

Summary:

 

1.The world can appear solvent longer than you can

2.The crash will be worthy of Cecil B Demille.

Tue, 12/15/2015 - 14:00 | 6926524 Seal
Seal's picture

And vice versa as Casey Stengel used to say 

Tue, 12/15/2015 - 21:58 | 6928513 Casey Stengel
Casey Stengel's picture

My favorite: Does anyone here know how to play this game?

Wed, 12/16/2015 - 09:13 | 6929864 mrdenis
mrdenis's picture

Pete Rose does ......

Do NOT follow this link or you will be banned from the site!