Chart #1 – US 30 Year Bond Price

(Source: Stockcharts.com)

Theory says that the index should consolidate before heading down in earnest. Minimum target move is 152.5 – 137.5 = 15 points. Minimum target destination is 142.5 + 15 = 127.5 – which is where the index first gapped up in August 2012.

Looking specifically at the yield chart below, we see a mirror image, but without the gaps:

Chart #2 – US 30 Year Bond Yield

(Source: Stockcharts.com)

Target move is 34.5 – 25 = 9.5

Target destination is 32.5 + 9.5 = 42 (4.2%)

Note that a move to 4.2% will take the yield above its 200 week moving average.

Conclusion:

The market is calling an imminent end to the Fed’s game playing in respect of yields. Regardless of what Mr Bernanke may be saying, fundamental factors are now beginning to prevail. We can expect a 15/142.5 =  >10% fall  in the long bond price, which will translate to significant capital losses in the long bond market. In principle, the direction of bond prices in general is likely be down and capital shortages will be the likely result as lenders become risk averse.  For various reasons the general rise in cost of capital will weigh heavily on the equity markets.

BB Comment:

There are those who will argue that a rise in yields will presage a coming era of price inflation and that, therefore, we can expect this inflation will drive equity and gold prices “up”. Yesterday’s overview (“Equity Market Risks Rising”) emphasised the dependence of corporations on rising sales volumes to drive rising profits on a sustainable basis.  At this point in history, if US corporations raise prices faster than they raise wages, then consumers will have less disposable income to afford to buy the goods and services that drive the economy. Therefore, generally increasing prices will be accompanied by generally falling sales volumes and the US economy as a whole might contract. We are too early in the Kondrat’eff up-cycle for emerging technologies to drive “green shoot” revenues. The debt bubble needs to deflate as a condition precedent to future economic stability, and given the rising ratio of credit/GDP in China (>200%) – supposedy the most dynamic economy in the world – the global sovereign debt deflation process may be closer than many commentators would anticipate. (See: http://www.smh.com.au/business/china/chinas-credit-bubble-is-unprecedented-fitch-20130618-2ofkc.html#ixzz2WZ9TVp3Z )

From the perspective of historical precedent, a replacement “artificial” economic driver might be introduced. The last time that happened was in the 1930s, leading up to World War II. Time will tell whether humanity has evolved beyond reaching for the Neanderthal option of beating your enemy over the head with a club to get what you want. The evidence suggests not, but the optimists live in hope. They point to the tsunami of emerging technologies that has been building. They point to the Gross National Happiness Index in Bhutan and hope that it is the first emerging sign of a possible shift in human values.

(See: http://www.grossnationalhappiness.com/  and http://www.grossnationalhappiness.com/wp-content/uploads/2012/04/Short-GNH-Index-edited.pdf

Brian Bloom

Since 2000, it has become increasingly evident to ordinary thinking people that the world economy is experiencing headwinds,  that ethical behaviour amongst society’s leaders has been the primary casualty, and that their attempts to manage human affairs have become increasingly odious. In 2005, Brian Bloom decided that it was time for democratically imposed common sense to prevail in the decision making process regarding how we might organise our future affairs. Via the light-hearted and entertaining fictional storylines of his two fact-based novels, he attempts to define the core problems, explain how they arose and to make some suggestions as to what we might do about addressing them.  His hope was that his novels would add some creative value to the exchange of ideas.

Buy The Books

The post Sell signals on US Treasury Bond Charts – Brian Bloom appeared first on Brian Bloom.

Post GFC, US corporate profits have been very likely rising for reasons that are more related to cost savings and margin increases than to real revenue growth. These cost savings have now worked their way through the system and future US corporate profit growth will be more dependent on price inflation and/or sales volume growth.

US balance of payments may improve as a result of improved energy exports but, because the country is now oriented to a service economy, any growth in export volumes of manufactured goods is unlikely to impact significantly on the economy as a whole. In any event, with the rest of the world in recession, the likelihood of a growth in export volumes is low.  With government spending sequestered, an implication is that employment opportunities will have to be driven by private enterprise.

With the above in mind, the fact is that employment has not been growing as a percentage of population. At best, it seems that employment growth is likely to remain close to population growth.

It follows that any price increases at the corporate level are likely to be offset by falls in volume (and hence, ultimately, the velocity of money). Further, because real consumer wage rates have been flat to falling, and because over two thirds of the US economy is driven by consumer spending, overall growth in nominal corporate revenues seems likely to be benign.

Finally, the reality is that the main impact of Quantitative Easing has been to drive up investment asset prices. This served to underpin an improvement in consumer and business sentiment which, in turn, prevented an economic collapse. However, Price/Earnings ratios are now once again in the “overvalue” range. A continuation of QE will likely push the P/E ratios to “bubble” levels which will be extremely counterproductive.

Overall, therefore, because overvalue P/E ratios can typically only be justified by high profit growth rate expectations and because US corporate profit growth is likely (at best) to be flat for the foreseeable future, the US equity markets are now looking extremely vulnerable. An adjustment to “fair value” P/E ratios will imply at least a 20% fall in the US stock market assuming sales volumes do not decline.

Unfortunately, given that QE served to underpin consumer confidence because of rising asset prices, it follows that falling assets prices will likely serve to undermine consumer confidence and increase savings levels. The flip side of this is that corporate sales volumes (and profits) will be experiencing downward pressure.  The above reasoning leads to the overall conclusion that the US equity markets have probably peaked and may fall significantly in the foreseeable future.

***********

The monthly chart below of the SPX (courtesy decisionpoint.com) gave a technical “buy” signal when it broke to a new high a few weeks ago. But the core question is whether the rise from the low of 800 since early 2009 was a result of the Quantitative Easing. If so, then the latest technical buy signal may be false.

Chart #1 – Monthly chart of S&P 500Industrial Index

There is a limit to how far corporate profits can rise as a consequence of financial engineering. At the end of the day, profits flow from a simple formula:

Revenue – costs = profits

There is no doubt that corporate profits have been rising in recent times but the question that needs to be addressed is What has been driving this rise?

1. Has it been falling costs or rising revenues?
2.  If rising revenues, has this been driven by price (and margin) increases or by volume increases?

Common sense dictates that if profits have been rising for any reason other than increased volumes of sales, then continuing profit increases will be unsustainable.

Employment Costs

Historically, manufacturing productivity in the US has been increasing because of increasing automation

Chart #2: US Production output vs Employment numbers

But the US is no longer a manufacturing oriented economy.

Chart #3:   Goods vs Service Industry Employment in the US

Source: http://www.careergravity.com/goods-vs-service-industry-employment-trends-chart-of-the-week/

Employment in general in the US did not rise in May 2013 and the percentage of the population that is employed has generally been flat for the past 12 months.

Quotes:

• “Both the number of unemployed persons, at 11.8 million, and the unemployment rate, at 7.6 percent, were essentially unchanged in May.”

• “Total nonfarm payroll employment increased by 175,000 in May, with gains in professional and business services, food services and drinking places, and retail trade. Over the prior 12 months, employment growth averaged 172,000 per month.”

• “The employment-population ratio was unchanged in May at 58.6 percent and has shown little movement, on net, over the past year.”

(Source: http://www.lanereport.com/21880/2013/06/u-s-unemployment-rate-up-slightly-to-7-6-percent/ )

Importantly, labour costs are now back to where they were before the Global Financial Crisis.

Chart # 4: US Labour Costs  1982 – 2013

Source: http://www.tradingeconomics.com/united-states/labour-costs

Finally, there is an upward pressure on hourly labour rates – albeit fairly benign at present:

Quote:

• “In May, average hourly earnings for all employees on private nonfarm payrolls, at $23.89, changed little (+1 cent). Over the year, average hourly earnings have risen by 46 cents, or 2.0 percent. In May, average hourly earnings of private-sector production and nonsupervisory employees, at $20.08, changed little (+1 cent). (See tables B-3 and B-8.)”

(Source: http://www.lanereport.com/21880/2013/06/u-s-unemployment-rate-up-slightly-to-7-6-percent/ )

Interim Conclusion #1

Overall, corporate costs savings associated with lower labour costs post GFC has probably ended.

Cost of Capital

It seems clear from the chart below that interest rates have probably bottomed and that, therefore, corporate cost savings flowing from lower interest rates have probably ended.

Chart # 5:  30 Year Bond Yield

Source: Decisionpoint.com

Transport Costs

Corporate savings flowing from lower transportation costs post GFC have very likely ended, as can be seen from the following chart.

Source: http://www.forecast-chart.com/inflation-transportation-cost.html

Chart # 6:  US Transport Cost Inflation

Energy Costs

Although energy costs per kW hour have been falling in real terms, because US industry has become increasingly service oriented, these falling costs are likely to be more beneficial to consumers than to US corporations.

Chart #7: Average Retail Price of Electricity in the US

(Source: http://www.eia.gov/totalenergy/data/annual/showtext.cfm?t=ptb0810 )

Occupation Costs

Commercial real estate prices have been rising, which implies that any post GFC costs savings in this area have now ended and, if business conditions improve, there will likely be an upward pressure on occupation costs.

Chart #8: US Commercial Real Estate Prices

Source: http://www.td.com/document/PDF/economics/special/USCommercialRealEstate.pdf

From a different perspective, it seems that any occupation cost benefits from falling domestic real estate prices have also worked their way through the system and consumer disposable incomes will be under pressure because of rising interest rates and rentals.

Chart #9: Domestic Real Estate Prices

Source: http://www.jparsons.net/housingbubble/

The chart below is noteworthy for the two spikes that have occurred post GFC. Although the savings rate is now just over 2%, the first spike took it to over 8% and the second took it to over 6%. The chart, overall, shows a “rounding bottom” formation, which implies that sentiment is turning. On balance, it seems that the US consumer – who has historically been the driver of sales volumes in the US economy – is now becoming conservative.

Chart #10: US Personal Savings Rates – 1982 – 2013.

Source: http://www.tradingeconomics.com/united-states/personal-savings

Finally, all the above needs to be seen in context of Price/Earnings ratios on the equity markets. The chart below shows that P/E ratios are in the overvalue range.

Chart 11: S&P Index relative to normal P/E Range

Source: DecisionPoint.com

Overall Conclusion

Flowing from Quantitative Easing, P/E ratios are in overvalued range which, in turn, suggests that investors have an exaggerated optimism regarding the future growth rate of corporate profitability. However, this optimism seems to be misplaced and US equity prices are vulnerable for three reasons in particular:

1. Because the US economy is service oriented and because export opportunities are limited by moribund offshore economies, and because government spending is now subject to sequester, US unemployment rates cannot be expected to fall significantly from current levels.
2. Average hourly pay rates have been flat and there is no reason to expect them to rise in real terms
3. There is evidence that consumers – who are the primary drivers of US economic activity – are becoming cautious about the future

Because QE had an artificially positive impact on the US economy, if share prices fall from this level this will very likely have an exaggerated negative impact on consumer confidence. In turn, this will place a downward pressure on corporate revenues and profits. In turn, it seems likely that we are facing downward pressure on Price/Earnings ratios.

Risks associated with equity investment seem unacceptably high and are rising.

Brian Bloom

Author, Beyond Neanderthal and The Last Finesse

www.beyondneanderthal.com

Since 2000, it has become increasingly evident to ordinary thinking people that the world economy is experiencing headwinds,  that ethical behaviour amongst society’s leaders has been the primary casualty, and that their attempts to manage human affairs have become increasingly odious. In 2005, Brian Bloom decided that it was time for democratically imposed common sense to prevail in the decision making process regarding how we might organise our future affairs. Via the light-hearted and entertaining fictional storylines of his two fact-based novels, he attempts to define the core problems, explain how they arose and to make some suggestions as to what we might do about addressing them.  His hope was that his novels would add some creative value to the exchange of ideas.

BUY THE BOOKS

The post Equity Market Risks Are Rising appeared first on Brian Bloom.

No time horizon is capable of being forecast.

Too few understand that:

• the Fed’s purchases of existing government debt does not add to the money supply and, therefore, it is not inflationary. (I read a scathing “expose” of Dr Bernanke’s stupidity and it was clear that the person attacking him did not understand the bookkeeping entries. Reference to the September 2012 quarterly Fed report at     http://www.federalreserve.gov/monetarypolicy/files/quarterly-report-20120930.pdf    shows that year-on-year growth of notes in circulation was 5%)
• the slowing velocity of money across the planet serves to place a drag on both the money multiplier and the increasing money supply. Therefore, the Fed’s printing of money is losing its potency to drive the US economy, which is potentially deflationary.
• the underlying reason for the Cyprus deal structure was that the Greek public debt would have had to have been marked to  market if the deal was not done in that way. If one of the two banks had been liquidated, the value of Greek sovereign debt would have become transparent. In turn, this would have triggered a cascading domino collapse of supposedly solvent banks who would have been forced to mark to market
• this situation of keeping sovereign debt on the books at full value is not sustainable. At some point, European sovereign debt will have to be marked to market. Should this happen, it will certainly be deflationary
• the people who will benefit most from deflation are the mega wealthy; the people who will have access to both income and cash in an environment of falling asset prices.

With these facts in mind, the above chart becomes believable, but I stress that the time it might take is unknowable.  I have been blogging for eleven years trying to explain the real drivers of the economy. After due consideration, for me to continue blogging now will be pointless. My two fact-based novels make constructive suggestions. If people are interested in my thoughts in that regard then they should read those novels.

From time to time I will upload links to interesting and relevant articles and videos.

Brian Bloom,

Tea Gardens, Australia, April 22nd, 2013

The post $784.70: P&F chart’s new destination for the Gold Price appeared first on Brian Bloom.

“Velocity of circulation” X “Money supply” = GDP

(It’s not as clear cut as that, but its an effective mind-model)

The Japanese Government has recently announced yet another a massive monetary stimulus program. Many people cannot understand why the Japanese economy has not begun to expand after all these years. The answer lies in the fact that even though the Japanese Central Bank has been pumping money into the economy, the ageing Japanese public has demonstrated a preference not to borrow and spend. The Japanese culture is oriented towards “value-add”, “saving” and “clean living” (for example, 3.9% of the Japanese public is obese, as compared with 33.8% in the US and 24.6% in Australia – source: OECD statistics). In simple terms, the Japanese public has no interest in hedonistic living. Unlike in the USA and Europe, for example, they have no interest in borrowing money to spend it on “stuff” they don’t need.

The chart below – published in Tony Boeckh’s latest report (WWW.BOECKHINVESTMENTLETTER.COM) – shows what has been happening to velocity of money in the West, including Japan (the green line).

Chart #1 – GDP divided by M2 Money supply = Velocity of Circulation

Velocity of M2 Circulation

This begs the question: If velocity of circulation has been falling across the globe, why are the central banks still pumping cash? Think of it in analogous terms: If I’m telling you that I’ve had enough to drink, why do you insist on offering me more water?

Here’s a clue: We had a professor of Applied Mathematics when I was at school who drummed the following idea into our heads:

“Rotation without translation is not progress.”

Roughly translated, what he meant was: “Going round and round doesn’t necessarily translate to forward movement.”

Politics is all about “action”. In today’s world, the goal of a self-centred politician is to get elected, not to manage the country’s affairs with reponsibility. Men (and women) of action get elected – even if they only score 2 for 22 on the basketball court – provided they are personable,  have the gift of the gab and tell voters what they want to hear.

But the refusal/inability of the decision makers to behave with integrity will not end well.

 Quote from Boeckh Investment Letter # Vol 5.06, April 5th 2013

Whilst I have enormous respect for Tony, I find myself unable to agree with him that cashed up corporations are going to drive economic growth in the US going forward. The available cash that is sloshing around on their balance sheets is a necessary but not sufficient element of the equation.  Importantly, it is not ”supply” that drives economic activity, it is “demand”. The economy is driven by activities that others perceive as value-add, and by the exchange of the results thereof. I make a shirt, you make shoes. We each want what the other produces. Therefore, we both see an opportunity. I make two shirts and you make two pairs of shoes.  We each keep one and swap the other and we both land up with one of each.

The world economy has reached a point where many middle class people in the West own all the shirts and shoes they need. In recent years, they have borrowed money and spent it on “stuff” that wasn’t necessary but was nice to have.

And then the Global Financial Crisis hit.

They are now typically acutely conscious of the dangers of debt, they are watching the retirement years approaching and they are wondering how they are going to survive. At the other end of the spectrum, people who rely on food stamps to survive cannot typically afford to buy iPads. So, in the rich countries, it’s the “young educated adults who are free of responsibility” who are driving economic activity. In poor countries, the economies have grown by default because the rich countries needed their resources. But politicians in poor countries tend to have sticky fingers, so infrastructure development in many poor countries did not expand. By contrast, in China’s centrally controlled economy there was excessive infrastructure development – again driven by action-oriented politicians – so China is now sitting on massive excess assets in which there has been mal-investment: People who earn $7000 a year can’t afford to buy apartments at $100,000. Building infrastructure for the sake of it is not constructive.

The falling velocities of money are providing hard evidence that the “young, educated adults who are free of responsibility” do not have the gravitas to drive the economies on their own.

Where is all this leading? Its it CLEARLY (in my mind) leading to shift in values. In the past seven days I have watched Wayne Swan arguing that the rich should not hide behind tax breaks in their bloated superannuation funds and I have seen a similar sentiment expressed in the USA. Its  not a difficult concept to grasp: The masses will readily embrace the idea that the rich should not live in luxury whilst the poor face starvation.  It used to be that the poor had hope that they might one day become rich. For example, 100 years ago there were opportunities galore for entrepreneurs to capitalise on. People “needed” shoes and houses and cars. Now they “want” better or more shoes and better houses and fancier cars.

Well, there’s nothing wrong with that – except for one thing: If you want a Lamborghini, then what similar value-add can you offer (that I both need and want) that will justify my handing you the Lamborghini that I produced?  The problem in a nutshell is this: The wealthy (who own 90% of the assets) are no longer in “need” of anything except ego massaging.  The poor don’t have the ability to produce anything that the wealthy need and the poor can’t create wealth amongst themselves because the rich own the capital.

It follows that the only way out of this mess is if humanity starts to evolve Beyond Neanderthal; and starts to value people for who they are and not for what can be gotten out of them. In its purest analagous form, its Facebook versus Link-In but the Linked-In (gain-oriented) people are starting to enter the Facebook (socially oriented) world and are contaminating it – so that those who previously enjoyed interacting on Facebook are falling by the wayside as they discover that the gain oriented people are mining Facebook for financial gain. The gain-oriented people have turned feral;  not because they are evil, but because this behaviour has been forced on them as a matter of survival by the psychopathic decision makers.

Logic dictates that the velocity of money will not increase whilst the central banks continue to flood their economies with cash. Unless we kick the psychopathic decision makers out of office, this will all end very badly.

From this analyst’s perspective, the evidence is mounting: As long as the fox remains in charge of the henhouse, our days of eating eggs are numbered.  North Korea’s behaviour is just another symptom of what really ails a self-centred global society that has been brainwashed into believing that its every person for himself and that the end justifies the means.

Brian Bloom

Tea Gardens, NSW

April 6th 2013

The post Velocity of money slowing since 1998 – Brian Bloom appeared first on Brian Bloom.

Anxiety and skittishness build. Now transfer those emotions to the market participants. Below is the evidence:

There are a couple of subtleties about the following chart (courtesy decisionpoint.com) that “smell” odd to me:

1. The $SPX has been drifting further away from its rising 200 day MA (an elastic band that keeps stretching generates increasing tension for a retracement)
2. The PMO (Price Momentum Oscillator) has been drifting gently downwards since February
3. There have been three volume “spikes” and those volume spikes have been associated with down days

Chart #1:  – Daily Chart of the Standard & Poor 500 Industrial Index

In this next chart, we see that the % of stocks with PMO above zero has been slowly receding from above the 90% level. Note that the market bottomed in November when the %PMO above zero hit 35%. By the same token, 90% is at the opposite extreme – as is the current >80%. The $SPX can be expected to pull back from here.

Chart #2 – Percentage of $SPX stocks with Price Momentum Oscillators above zero

Note from the next chart the number of days in the recent weeks that the $VIX has spiked upwards. (Courtesy stockcharts.com). Anxiety and skittishness are building.

Chart #3: Daily Chart of the Volatility (Fear) Index

Note how gold gave a “sell” signal today

Chart #4: Traditional Point & Figure Chart with scale of

$10 per box X 3 box reversal

As can be seen from the chart below, a break below $1,535 an ounce will be very serious

Chart #5: 3% X 3 Box reveral P&F Chart of Gold

Based on the horizontal count method as applied to the first P&F chart, the $1,535 level is expected to be penetrated on the downside.

Conclusion

The window of opportunity to cash in those gambling chips maybe closing

Comment:

One of the issues with which I have been grappling in my mind over the past few weeks revolves around the human propensity for ignoring bad news that becomes visible years in advance, and then to expect that the problems will be addressed as a matter of urgency when they finally become visible. Life doesn’t work that way. By the time the frog focuses on the fact that the water is boiling, its typically too late to jump out. I have been talking and writing about “solutions” for years,  and that these solutions will revolve around higher EROEI energy paradigms than fossil fuels, the re-emergence of ethical thought processes amongst decision makers, and a change in human values. They will not revolve around the ownership of gold, for example.  Also, natural gas is a stop-gap energy paradigm that might see us through to 2050, but it does not represent a “solution” either.

Right now, we have the following “urgent” social issues with which to contend:

1. The so-called solution to the Cyprus problem turned out to be more unethical than anything I could imagine. This served to undermine confidence in the entire world’s banking system. When I suggested to my wife recently that we should invest a small amount in convertible preference shares of one of Australia’s AA rated banks, she looked at me as if I was insane. She has no interest in the subject of finance/economics and wouldn’t know what a AA rating is,  but she watches television and she understood in her guts that the Cyprus solution was sufficiently dishonest as to render ALL banks untrustworthy. The public is not as stupid as their elected leaders assume them to be. As it happens, my wife has a higher IQ than I do. She just happens to have different interests in life.
2. The possibility that North Korea may be a Straw Man is something that I wrote about extensively in my second novel, The Last Finesse. Who knows if North Korea is just an object of fear and loathing for the Western leaders to dangle out there when it wants to deflect attention away from the more fearsome realities of the day, or whether the threat from North Korea is real? The images of goose stepping soldiers are not particularly encouraging sights but the blankness in the eyes of its newly elected leader,  a 30 year old army  “General”, is hard to mask. Is anyone actually at home inside that head? Maybe he is capable of behaving like a psychopathic moron. Maybe it doesn’t matter because he is not the decision maker. How will North Korea finance its war against the West? Will JP Morgan lend them money, backstopped by a US Government guarantee? Or will Russia divert the proceeds of some of its oil and gas – just to maintain the balance of world power?
3. Next comes Syria: The civil war that rages and the reactions of China and Russia are not confidence builders. The country is destroying itself and they want to keep a hands-off stance because Syria is a sovereign nation? What kind of madness is that? Their stance is not about protecting the lives of Syrians, it is also about the balance of power amongst nations.
4. Iran’s sabre rattling is an enigma in context of the Ayatollah’s statement that building a nuclear weapon would be against the will of Allah. The fact is that the thought processes of Islamic extremists may be likened to corkscrews, and one has to wonder if the people who fall into this category are actually certifiably insane. Its hard to think sane thoughts when you genuinely believe that if you blow yourself up in a crowd of innocent civilians you will be rewarded with more virgins in heaven than exist on earth. And what will you do with those virgins if you have left your corporeal body and exist only in the spirit world?
5. And then there’s Iraq and Afghanistan – so its not only the Islamic extremists are showing signs of insanity. The West – based on supposedly reliable intelligence regarding Weapons of Mass Destruction – invaded Iraq. In Australia Little Johnny Howard chose to ignore the protestations of over 700,000 of this country’s citizens against such mindless stupidity as he chose to brown-nose the Anglo -American allies. And who knows what the objectives are in Afghanistan? Its vast resources? Its poppy fields that seem, miraculously, to remain intact? 90% of the world’s heroine originates from Afghanistan and we are shooting at those who lust after virgins?
6. And, finally, we have some US leaders who spend around ¼ of their time on vacation – and use Boeing jets to get to their short-hop holiday destinations against a background of sequestration.

Struth! A Mad Hatters Tea Party, is what we’re all living in.

And, against this background, there are managers of Other People’s Money who talk about contra-indicators and argue that because it always darkest before the dawn, now is the time to invest. The markets are going to explode upwards – they believe. Really? Well, from where I’m sitting, it seems that the billowing storm clouds are creating the appearance of darkness and that the sun hasn’t even set yet. We are nowhere near midnight. The party is certainly not over and, thanks to Benny boy, the punch bowl runneth over, still.

By contrast, there are some who genuinely believe that they are pragmatists and that the “solution” is to buy gold, precious metals and  other “strategic” assets. Yeah, right. And all the other problems will just fade away as the sun rises over the horizon and a bright rainbow emerges.

So, the question I have been asking myself in the past few weeks is: What’s the point, Bloom? You’ve done what your social conscience told you to do and you’ve been doing it for over a decade. Maybe its time to give it all  a rest. There is absolutely no doubt that there are solutions to our problems. We have the technical ability and the knowledge to address all our problems. What’s missing is “honesty”. No one can trust what comes out the mouths of people like Cheney and Obama and Putin and I’m-in-a-dinner-jacket and Al-Assad and Mursi and Gillard and Merkel, and Xi and, and, and …. And yes, when you cut through all the rhetoric and its associated static noise, our “democratically elected” leaders are all cut from the same cloth.  Will the docile public ever find the courage/wisdom to kick all the psychopaths out of office?

At the end of the day, that is the relevant question. If the fox remains in charge of the hen-house then we can’t expect to eat eggs for much longer.

Brian Bloom

Tea Gardens, Australia

April 4th, 2013

The post Markets: Straws of angst in the winds (Brian Bloom) appeared first on Brian Bloom.

1. USA

a. There are 47 million people (>15% of the entire US population) who rely on Food Stamps to make ends meet.

b. The participation rate (percentage of working age people who are looking for work) has fallen by 2.5% from 66% in 2008 (when the  Global Financial Crisis manifested) to 63.5%

Chart # 1

Source: http://ycharts.com/indicators/labor_force_participation_rate/chart#series=type%3Aindicator%2Cid%3Alabor_force_participation_rate%2Ccalc%3A&format=real&recessions=false&zoom=10&startDate=&endDate= )

c. The US unemployment rate is “officially” 7.7% as per Chart #2 below, having fallen from 10% in late 2009, roughly a year after the GFC emerged.

Chart #2

(Source: http://www.tradingeconomics.com/united-states/unemployment-rate )

Of course, if one adds the 2.5% reduction in participation to the 7.7%, then one sees that the effective unemployment rate is still above the 2009 peak. Arguably emphasising one statistic, whilst ignoring the other, is both misleading and unethical.  As mentioned in my most recent article, “One consequence of this generalised deterioration in the level of ethical behaviour across all levels of society is that the so-called “Rule of Law” has become separated from the foundation of ethics on which it was originally constructed.” The above is one example. It is becoming ever more attractive to take the stance that, if the government can lie and cheat, then why shouldn’t I?

All this needs to be seen against a background of the $SPX index having been flirting with all time highs.

Chart #3

(Source: decisionpoint.com)

Finally, the next chart is of the $VIX, which reflects investor sentiment of fear. At extremes of high fear and low fear there is potential for exaggerated price movements in the opposite direction. High fear leads to strongly rising prices and vice versa

Chart #4 – 12.5% X 3 box Point & Figure chart of the Volatility Index

This chart shows that fear in the markets has reached its lowest point since immediately prior to the GFC, and fear is still falling. This reflects amazing complacency and is a strong contra-indicator.

Interim Conclusion #1

Even if the US economy is improving (which is difficult to validate from charts 1-3) the stock market should be bouncing up from a trough, not threatening to break up through “Triple Top” resistance dating back 13 years.  In any event, this latter outcomes looks highly unlikely in context of exceptionally low $VIX.

Author comment: As explained in last week’s article, the reason the markets have been rising is more likely related to rising liquidity in the financial bathtub than to improving economic fundamentals. This rising liquidity has underpinned demand (funded by continuing credit) and has allowed corporations to fatten their margins – in turn, allowing profits to continue rising, regardless of underlying volumes. Given the virtual absence of fear, the US equity market may be extraordinarily vulnerable to a “black swan” shock, if sentiment should turn negative.

2. Europe:

The EU 27 unemployment rate was 10.7% and rising as at November 2012, with Greece and Spain hovering around 26% and Portugal at 16.3%. Cyprus, where an unbelievably draconian proposal relating to to savings “confiscation” has just been announced, had an unemployment rate of 14% (source: http://www.guardian.co.uk/news/datablog/2012/oct/31/europe-unemployment-rate-by-country-eurozone#data )

3. China,

which was reported in March 2011 by SBS TV in Australia  to have 64 million unoccupied apartments (worth close to 90% of the Chinese annual GDP in 2011) has a stock market that has been showing signs of softening since March 2011. It is now 40% below is 2008 high compared to the $SPX which has risen 20%. Readers can watch the SBS documentary via the link on my website at http://www.beyondneanderthal.com/research-links/economicsfinance/ 

Chart # 5 Shanghai Index Relative to $SPX

Source: http://finance.yahoo.com/q/bc?t=5y&s=000001.SS&l=on&z=l&q=l&c=&ql=1&c=%5EGSPC

4. Japan

The Japanese stock market is trading at roughly 70% below its 1989 high and, whilst there are some who believe that this export-oriented economy is starting to stir from the doldrums, the sharp rise in the yen seems likely to create significant headwinds to further growth in a country that has an ageing population.

Chart #6 – Yen:US$ Exchange Rate

(Source: http://www.indexmundi.com/xrates/graph.aspx?c1=JPY&c2=USD&days=1825 )

Interim Conclusion #2

The optimistic behaviour of the stock markets of the world’s major economies belies the historical lack of vitality in their underlying economies

Author Comment:

Arguably, the seemingly robust markets are more likely a reflection of liquidity than of economic vibrancy.  Of course, one could also argue that if the economies are bottoming then the markets have room to rise further and that “labour” will not be a constraint. But this latter argument ignores the fact that the markets are not taking into account the headwinds that will flow from sovereign debt.

One “black swan” that was referred to in Interim Conclusion #1 above, might well be the development in Cyprus and its potential impact on consumer confidence in the financial/economic system. It is recommended that the reader study carefully what is being contemplated, and links to three articles on the subject are provided in my website at http://www.beyondneanderthal.com/research-links/the-last-finesse/ethics-the-boundaries-between-personal-rights-and-social-obligations/ .  In short, the concept of ethical behaviour has been ravaged by the recent Central Bank proposal. Rather than subject the depositors in Cypress to an impost that will be used to protect the depositors of the two banks that are expected to fail if the E10 billion sovereign debt is not refinanced, what these amoral (unethical) bankers are proposing is that it is the debts of the two banks in question – and also the loans of the sovereign lenders – that should be partially backstopped by the imposts without consultation with or agreement of the depositors.

Let’s continue be honest ….

Now I want to turn my attention to a set of facts that you will not read about anywhere else because they are unique to me personally, and they are also representative of what is happening in the market as a whole.

I have been submitting blogs to various websites over several years (since 2002) and, one by one, the publishers have fallen by the wayside because I have been writing about what people “need” to hear as opposed to what they “want” to hear.  Without naming names, the business models of the financial/economics oriented websites are based on low costs (authors are not paid to submit their articles) and high readership. What’s in it for the author is that he/she gets broad coverage and thousands of readers get to hear about him/her. What’s in it for the website owner is that large traffic flows can command reasonably robust advertising fees and/or attract fee paying clients for professional services to be rendered. This arrangement has the potential to have a genuine win/win outcome, provided the website owner does not pick and choose what he publishes. Of course, by picking and choosing that which the website owners think their readers “want” to hear, what happens is that the credibility of the author may be undermined because the thread of his thought processes is interrupted.  There are a few website owners who have been of sufficiently high integrity to publish all my articles, and one of these has been The Market Oracle. I am reporting this not only because I want to throw a bouquet at Nadeem Walayat, the editor, but because that fact has facilitated the following analysis:

If the reader will navigate to the following page on The Market Oracle (http://www.marketoracle.co.uk/UserInfo-Brian_Bloom.html ) – the one that lists all the articles I have published there over the years, and the numbers of people who have read these articles – the reader will see that the particular article of mine that was read by maximum number of people was the one published on May 3^rd 2009. It was read by 49,244 people. By contrast, last week’s article was read by 2,135 people.

Cynics will argue that the former article got it wrong, and that’s why readership has dropped off. However, one reason for the sharp drop has been that I have been writing about what I believe people “need” to hear, when what most people “want” to hear is: “How can I improve or maintain my personal financial situation?”.

The fact is that the most-read article last week was read by around 5,000 readers and so one might argue that – if the 49,244 readers article was top in its week, and given that the 5,000+ readers article was the top article last week, then the number of people who are reading these articles has fallen by around 90% from the peak.  Yes, I got it wrong in that particular article, but it appears that readers are generally more fair-minded than the cynics.

Advertisers should recognise that this comparison has the potential to be statistically misleading because one should be comparing moving average mean or median readership rather than peak readership. I sincerely believe that this fall in readers is less a reflection of the quality of the articles being submitted, and more a reflection of the percentage of private investors (maybe as high as 90% but very likely smaller) who have fallen by the wayside.

Interim Conclusion #3

The trading activity that has pushed the stock market from its 2008 low to its current peak has been primarily driven by professional managers of “Other People’s Money”.

Author Comment:

The above is an extremely important concept to grasp because, of course, those who manage Other People’s Money, will be less fearful of incurring losses than the owners of that money – which has likely been a contributory reason for the sharply falling $VIX index.  Of course there will likely be little fear amongst participants in a market when all the managers of OPM have to do to keep their jobs is to match or beat the indices – whether the indices are rising or falling.

Now let’s cut to the chase: The above is not necessarily something the reader “wanted” to hear, but – as the Late Steve Irwin (Australian wild animal handler) used to put it: By Crikey, in my view, the reader absolutely “needed” to hear it – and The Market Oracle’s propensity to behave with integrity is what has facilitated this understanding.   Three Cheers for Nadeem Walayat (and others like him); may his (and their) businesses grow from strength to strength.

So, if rising liquidity and a more cavalier attitude to risk have been driving both corporate profits and stock market prices, then what are the risks?

The main risks revolve around the low propensity of managers of OPM to appropriately assess risks in general and, also, rising consumer price inflation and rising consumer propensity to pay down debt rather than spend. Both of these latter phenomena – if they should manifest – will place a downward pressure on volumes of goods and services sold – which is something that the managers of OPM seem likely to overlook because the published statistics to which many refer are not volume oriented.   More importantly, a continuing consumer propensity to spend will require a continuing confidence in the system – which confidence will clearly be eroded if the Central Banks make another outrageous move like they did in Cypress.

Interim Conclusion #4

Because the economic/financial system is becoming increasingly unstable, it is becoming increasingly non-productive for individuals to think in terms of planning for a “better” future. The most sensible attitude investors can adopt relates to how he/she can protect what they have.

There are three approaches to achieving this outcome:

1. Balance your budget by focusing on cost cutting rather than increased income (sound familiar?). If appropriate, downsize your home and car/s and use the surplus equity to pay down your debts. And treat this as an urgent priority. The window of opportunity may be closing.
2. Become conscious of the risk that volumes of goods and services changing hands in the economy might contract, and of the propensity of professional managers to be focussing on price indices rather than on volume indices. In short, do not allow professional managers the unfettered opportunity to lose your life savings because of their congenital predisposition to be optimistic. It’s your money. Second guess the managers and hold them accountable.
3. Start focussing on what you “need” to know rather than what you “want” to know.

In today’s environment what people “need” to know is:  What are the threats to the system as a whole”?  And “What might we collectively do to minimise those threats?” This will require a different mindset from the self-centred mindset to survive and prosper in a “naked” capitalist environment.

Overall Conclusion

Flowing from all of the above, it seems far more sensible to  focus on investor needs than on investor wants.

Author Comment:

My future articles will attempt to identify possible modifications to the social systems, which modifications will have the objective of minimising the risks of systemic collapse. My most recent article summarises the areas on which I will be focusing and you can access it at http://www.beyondneanderthal.com/banksters-obtuseness-brian-bloom/ .

Also, my two fact-based novels already summarise some of the key opportunities, and the quality of these books might be assessed by checking reader reviews to date at:

http://www.amazon.com/Beyond-Neanderthal-Brian-Bloom/product-reviews/0977535614/ref=dp_top_cm_cr_acr_txt?ie=UTF8&showViewpoints=1  and

http://www.amazon.com/The-Last-Finesse-ebook/product-reviews/B00873GSQC/ref=dp_top_cm_cr_acr_txt?ie=UTF8&showViewpoints=1

Book sales have been growing nicely and doubtless, over time, the number of these reviews will grow. Perhaps you can add yours.

In my forthcoming articles I will be providing links to interesting articles and facts that I will analyse in context of “systemic” risk. The reader will not necessarily get rich from acting on what is contained in these articles but you might protect yourself from losses, and you might also contribute your voice to the growing wave of pressure to keep the world’s decision makers honest as they move to shore up the system. The last thing we want is for the system to be shored up in a way that furthers the interests of the powerful at the expense of the ordinary people like you and me. (For example, one way of their achieving this will be to declare war on some supposedly heinous country and send your sons and daughters out to be killed – and/or limit your democratic rights – in the process of stimulating a war-footing economy). The second last thing we want is to rob Peter to give hand-outs to Paul – whether Paul is amongst the world’s very rich or the world’s very poor. Economics is all about adding value. To earn a subsistence reward, you have to add subsistence value – even if all you do is sweep the streets or clean public toilets. To earn super rewards you need add super value. Executive remuneration needs to be carefully scrutinised in terms of value-add. The time has come to get real.

Brian Bloom

Tea Gardens, March 19th, 2013

The post Let’s be honest … (Brian Bloom) appeared first on Brian Bloom.

********

Summary and Conclusion

The world economy has become moribund. “Money” does not power the economy. It merely acts as grease for the economic wheels. For some reason, the banksters are obtusely refusing to see this. Perhaps they don’t fully understand. Perhaps the lobby groups who are influencing political decisions don’t want them to see/understand. Perhaps they do understand but don’t know what to do about it. Whilst the Long Economic Wave may be bottoming – at least in the US – the next “upswing” will very likely not resemble previous upswings. There has been a chronic dilution of the potency of the forces that drove the Industrial Revolution which commenced in the mid 1700s. In this context, we cannot apply historical thought paradigms to future planning. A new mindset must evolve. The longer it takes for the decision makers to recognise this, the more difficult it is going to become to address the core issues.

*******

The “cause” of the moribund world economy has not been the existence of a fiat currency system or the absence of a gold standard. For example, those who are arguing for a gold standard as a partial solution to our economic problems are missing the point by a country mile. Yes, a gold standard might be nice to have – rather like an Indian motorcycle would be nice to have. It will make those who own it feel better. But, like the Indian motorcycle, if the engine is worn out and/or if the gas tank is empty then the vehicle won’t be going anywhere. Arguably, the global economy is worn out and is running on fumes.

Growing sovereign debt is a symptom. Volatility in the capital markets (including the precious metal markets) is a symptom. Budget deficits are symptoms. The time has come to lift our sights and understand the “real” issues that are impacting on the global economy – the drivers of the symptoms. Without such understanding there is no hope of addressing those issues.

However, before we do this, we need to examine what has been happening within the world economy.

At one end of the spectrum – in the largest economy amongst the deficit nations – the US Fed stubbornly continues to inject substantial quantities of new liquidity into the US economy. Quote:  “The Fed is currently buying $85 billion in bonds each month and has said it plans to keep purchasing assets until it sees a substantial improvement in the outlook for the labor market.” (Source: http://news.yahoo.com/bernanke-face-fed-critics-testimony-congress-050311854–business.html ).

 At the other end of the spectrum, China – which is (supposedly) the largest economy amongst the surplus countries, and is also a centrally controlled economy – has (so far) constructed over 64 million apartments that remain unoccupied within China, and is also constructing apartments outside China, which also remain unoccupied.).

This staggeringly large number was reported by SBS Dateline in March 2011. As SBS is an Australian Government sponsored TV network, I was prepared to accept it at face value. (The reader can access the actual documentary program, and the article on African apartments at: http://www.beyondneanderthal.com/research-links/economicsfinance/:

At the low end, $70,000 to $100,000 was mentioned  as the value of these individual apartments. At the high end, asking prices of $300,000 were discussed.

Assuming that the average apartment is worth (say) $100,000, those 64 million apartments represent around $6.4 trillion of dead capital. On an annual salary of around $10,000 (mentioned in the documentary) the affordability ratio is 10X. (Price divided by annual income).  This multiple compares with around 6.9 X in Australia, in 2009, and with “a ratio of 5 considered severely unaffordable”  (Source: http://economics.hia.com.au/media/House%20price%20to%20income%20ratio%20-%20FINAL.pdf )

The $6.4 trillion number – which happens to be around 42% of the entire $14.9 trillion GDP of the USA in 2011 – also serves to explain what has been “driving” the Chinese economy, the wheels of which have been spinning.  Yes, rubber is being burned, but the tires on those wheels are enjoying little traction. $6.4 trillion also happens to represent nearly 90% of China’s entire 2011 GDP. (see: http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal) ).

Now let’s look more closely at some of China’s fantasy numbers:

According to that country’s statistical year book, China’s GDP has been as follows since 2000 (source: http://en.wikipedia.org/wiki/Historical_GDP_of_the_People’s_Republic_of_China ):

Table #1: China’s Annual GDP, 2000-2011. In US$

Interim Conclusion #1

It took China 12 years to add slightly more cumulative value to the world economy than was added by the US in 2010 and 2011. If the SBS Dateline numbers are correct, the centrally controlled Chinese economic miracle is not what it seems. It has not been adding “real” value to the extent claimed.

And then there’s Europe, MHDSRIP; and Japan, whose stock market looks like this: (source http://www.tradingeconomics.com/japan/stock-market )

Chart #1 – Nikkei 225 Index – January 1982 to February 2013,

(with trend line).

 After peaking at 38,916 in December 1989, the Nikkei was trading approximately 70% lower as at March 4^th 2013 (23 years later).

 Table #2 – 2011 GDPs of the top 4 economic regions of the world, in US$ (Trillions)

• (source: http://www.gfmag.com/gdp-data-country-reports/631-the-european-union-gdp-economic-report.html#axzz2MXnmgfuf )

Interim Conclusion #2

The top 4 regions of the world – whose economies account for 62.8% of the total world economy – are currently moribund.

From an investment perspective, if the majority of the world’s output engine is on the verge of becoming obsolete, this raises a significant question regarding the following chart of the S&P 1200 Global Industrial Index. Are we witnessing the beginnings of a rebirth – as new technologies emerge to replace old ones?   ( http://www.google.com/finance?cid=10264130 )

Chart #2 – S&P 1200 Global Industrial Index

Superficially, the similarity between the shape of the above graph and that of the red line in Chart #3 below, of nominal US median household income, should be seen in context of the blue line below (inflation adjusted US median household income). (source: http://beforeitsnews.com/economics-and-politics/2013/03/understanding-failed-policies-wealth-effect-wage-effect-poverty-effect-2450392.html ).

By implication, asset prices have been rising because the central banks have been flooding the markets with cash. i.e. The rising stock markets have not been anticipating economic growth. The primary driver of this “may” have been the rising level of liquidity in the monetary bathtub. In simplistic terms, the cash had to land up somewhere.

Chart #3 – Median US household incomes – nominal vs real

Recognising that is has been “sound bites” that have contributed to the broad state of confusion of the general public perhaps we should look a bit deeper below the surface. Maybe there’s more to what’s been driving the stock markets than meets the eye.

Clearly, from the analysis above, the most relevant economy in the world remains that of the USA. On its own, it still accounts for 21% of the world’s total; and probably more if you adjust for the Chinese puffery.

One of the most competent economic analysts that I have come across in the past 45 odd years of watching and analysing the markets is Tony Boeckh, originally one of the founding editors of the Canada-based Bank Credit Analyst and now the publisher of the Boeckh Investment Letter. ( www.boeckhinvestmentletter.com )

In his letter of February 21^st 2013, entitled “How sustainable are elevated corporate profits?”, Tony makes the following point  pursuant to a fascinating high level analysis of US corporate profits:

“The long wave economic decline discussed above is probably in its troughing phase and poised for the next upswing. The high level of [corporate] profits relative to wages, if it does not create a poisonous and destructive backlash, will play a key role in driving the next long wave upswing.”

The following chart reflects the fact that corporate non-financial profits have been growing as a percentage of the national income pie since around 2000, whereas financial profits have been decreasing. This chart talks specifically to the “value-added” by the two sectors.

 Chart #4 – U.S Corp. Profits as a Share of National Income

Hopefully, I am not doing Tony a disservice by attempting to cherry pick from his arguments, but there appear to have been three reasons for this improving level of corporate profitability:

1. Employees have indeed suffered a decline in real wages and corporate profits have benefited from this.
2. Interest rates have been declining,
3. Corporations have been extracting productivity gains from their work-forces in preference to making new capital investments, which has significantly benefited their cash flows.

The net result has been that US corporate balance sheets are in good shape – as are the balance sheets of banks in general – and the US is now cashed up and ready to invest. In any event, corporations now need to invest because productivity has been declining in recent months.

Unfortunately, (this is now my interpretation, not necessarily Tony’s) the US economy was kept alive by allowing consumers to live on credit, and because government stepped in to increase its share of the economic pie (also on credit) to soften the impact of reduced corporate investing.

I agree with Tony that we may well be witnessing a troughing of the Long Economic Wave – at least in the US – but this pesky debt won’t just go away. Further, as he argues, there is likely to be growing market pressures for increases in both wages and interest rates. From one perspective this is likely to put a damper on corporate profits. However, from another perspective, if wages start to rise in real terms, and given that the US consumer accounts for 2/3 of the US’s GDP, this is likely to put a “floor” under corporate profits because corporations will likely experience rising revenues that will (partially?) offset falling profit margins. Net, net, it will be a satisfactory outcome if corporations can maintain profits or suffer minor falls in profits in the immediate years ahead. But it seems to me that this positive change in circumstances will more likely give rise to a churning of the stock market as consumers use part of their increased incomes to pay down debts, and as the budget balancing focus of government causes its share of the economic pie to shrink; even as the corporate share grows – hopefully to compensate.

Interim Conclusion #3

Given the headwinds implicit in the debt overhang, the downward pressures on corporate profits because of anticipated rising wages and rising interest rates, and the likely rebalancing of capital contributions between the public and private sectors, the economic “healing” process is more likely to take decades than years. Things might well start to improve, but we are decades away from hitting a similar “sweet spot” in the economy that prevailed in the years leading up to 2000 – if ever.

Now we come to the meat of this analysis:

In this analyst’s view, the sweet spot will never return. It has not yet become generally recognised or accepted but the very nature of the game has changed, and the drivers of this change need to be understood. Whilst the economy will continue to consist of people and organisations exchanging value that they have created, the old rules that applied to wealth accumulation will no longer apply in the same way.

From a high level, the following macro forces are ultimately driving the symptoms that were referred to in the opening paragraphs of this article and, because the forces are global in nature and, because the world economy has become symbiotically interdependent, local politicians in individual countries are effectively spitting into the wind. That is one reason why what may have worked in years gone by will not be effective in the years ahead.

It will be a gradual change. Over the coming months it is my intention to look more closely at the relationships and the implications of what follows. For the present it will be sufficient merely to document their existence.

1. In 1945, the world’s population was a little over 2 billion. Today the number is a little over 7 billion. In round numbers, the world’s population has increased by 250% since the end of World War II. This has given rise to a heightened sense of competitiveness in a world that has embraced the concept that it is self-interested behavior that drives economic activity.
2. Given that our planet’s resources are finite (although still relatively plentiful) the population explosion coupled with the mindless rush to gain access to these resources for self interested profit ahead of competitors has given rise to unacceptable levels of pollution. This has had several impacts, the main ones of which have been:
   • Deterioration in the quality of topsoil which impacted on agricultural yields per hectare; and which impact was ameliorated by the use of chemical fertilizers which, in turn, have found their way into the waterways.
   • A serious deterioration in both the per capita availability, and the quality of potable water – without which no terrestrial life can survive.
   • Increased acidification of the planet’s oceans, which is impacting on the ecological balance of the entire planet.
   • Destruction of vast swathes of oxygen producing forests as land has been cleared for agricultural purposes and also for the profits flowing to the timber industries
   • Rapidly increasing concentration levels of Carbon Dioxide in our atmosphere which millions of years of planetary history tell us has accompanied climate change. (It is not relevant whether CO₂ is a cause or an effect. What is relevant is that our climate is changing in ways that no one alive has experienced at the coal-face.)

The following is a photograph of what human living conditions have become in some areas of the economic miracle called China, and should serve to rebut any “flick-of-the-wrist” dismissal of the impact of pollution on the planet’s ecological balance.

The lake of toxic waste at Baotou, China, which has been dumped by the rare earth processing plants in the background

Read more: http://www.dailymail.co.uk/home/moslive/article-1350811/In-China-true-cost-Britains-clean-green-wind-power-experiment-Pollution-disastrous-scale.html#ixzz2McW44XiI

3. As the pace of competition has hotted up, the levels of testosterone in our largely Alpha-male dominated society have been rising. In my first fact-based novel, Beyond Neanderthal, I devote a couple of chapters to explaining how this occurs. Suffice it to say now that raised levels of testosterone, coupled with egocentric behaviour, leads to chest beating of the type manifested by silver-backed gorillas in the jungles of Africa when they want to cow their potential competition into submission. Inevitably, as the competition for limited resources hots up, the chest beating morphs to become violent disagreement and a “winner-takes-all” attitude. In turn, this has led to a society-wide mindset that “the end justifies the means” and the level of aggressive behaviour in society has been rising – because books, movies and TV programs have been sending out “macho” messages to the general public on a ground-zero level, and because such a mindset has sanctioned the arrogant behaviour of politicians and Captains of Industry on a higher level which, in turn, has led to the Clash of Civilisations on the highest level.

By way of illustration, below is a photograph of a political demonstration by Muslims in London.

The meaning of the word “Islam” is “to submit” (to the will of God). Anyone reading these signs might conclude that the “will” of Allah is more related to violence and hatred than to love and peace. Clearly, the souls of the Imams who preach these messages of vitriolic hatred to their communities are inhabited by their own personal ego and toxic testosterone demons. Islam was never intended to be a religion of “behead[ing]”, “massacre[ing]”, “annihilate[ing]” - was it?

4. One consequence of this generalised deterioration in the level of ethical behaviour across all levels of society is that the so-called “Rule of Law” has become separated from the foundation of ethics on which it was originally constructed. Quite absurdly, the function of the legal profession has morphed to become largely that of advisors to self-interested entrepreneurs and corporations on how they might “avoid” complying with the law or a contract, rather than what their clients should be doing to comply with them; and “compliance” with the law/contract has now been reduced to a robotic exercise in box-ticking. Nowadays lawyers are paid huge sums of money to find gaps between the boxes. When they do, and to fill the gaps, the lawmakers then move to introduce yet more boxes to tick, and the function of the courts has been reduced to interpreting behaviour relative to ticked (or un-ticked) boxes, rather than interpreting whether the behaviour complies with the underlying intention of the laws/contracts.  By way of example, this analyst has seen many, many contracts where one of the opening boilerplate paragraphs that precede the actual contract reads: “The headings in this Agreement are for reference only and shall not affect the interpretation of this Agreement.”  What this translates to mean, in English, is: “Please disregard any principles that you think might be implicit in this contract, and focus on the detail.” If it were not so serious it would be laughable. And thus, the Rule of Law continues – unnoticed – to disintegrate.

5. Historically, education was all about providing all students with the ability to fish in any waters – from oceans to rivers, to lakes, or wherever. Now, an increasing proportion of students is being churned out on conveyor belts with a modest proficiency in fishing, using a particular type of rod and a particular type of bait, in a specific local pond. Amazingly, when ordinary (middle to lower class) students fail to pass muster, the educational standards are lowered so that many schools are churning out “graduates” who have inadequate proficiency in the “Three R’s” of reading, writing and ‘rithmetic. Mass education today is all about preparing students to earn a living as they hit the work-force. And of course I am generalising here. The reader should not fall into the trap – like many lawyers – of focusing on the detail. The principle is that our education system in the West is not providing ordinary students with the ability to cope with any change, let alone the rapid change we have been experiencing. Many who are amongst the ranks of unemployed today will never be employed again.  Its not that they don’t have the skills. It’s that they don’t have the basic skills to acquire the different skills that are needed.

6. Finally, and overarching all of the above, the past 30 odd years has seen a deterioration in the Energy Returned on Energy Invested in fossil fuels across the board. If the reader has an interest to gain a detailed understanding of this, he/she might refer to a study entitled EROI of Global Energy Resources, by Lambert, Hall et al, and submitted to the UK’s Department for International Development on November 2^nd 2012. The importance of this deterioration in EROEI flows from two facts:

• Against a background of “flat” gross global annual output of energy per capita, the net output of energy per capita has been falling for 30 odd years.
• As energy is what facilitates economic activity, a contraction in net per capita output of energy translates to a contraction in the ability of the global economy to continue expanding – quite apart from 1-5 above. (See “What Caused the Global Financial Crisis at  http://www.beyondneanderthal.com/what-caused-the-global-financial-crisis/ )

Overall Conclusion

Whilst the US may well be experiencing the troughing out of the Long Economic Wave, the evidence suggests that the historical emphasis on economic “growth” – that has prevailed since the dawning of the Industrial Revolution in the mid 1700s – will not be achievable (or appropriate) on a go-forward basis. Whilst the emphasis on economics will continue to revolve around value-add and exchange of values, “volume” of output (real GDP) will very likely not be “the” measure of success in the future. Acquisition (and accumulation) of wealth will be a function of adapting our entrepreneurial and investor behaviour to satisfy market needs ahead of frivolous wants. As governments become more parsimonious in their handouts, individual discretionary spending will come to be much more carefully allocated – as was the case in the post Depression years. Drawing a long bow, it seems that value-add will come to be a function of quality of output rather than of quantity. For example, doubling the output of the coal mining industry will unlikely add to the overall quality of life on this planet. Apart from anything else, it will require significantly more energy to clean up the coal; or to clean up the environment if the coal is not cleaned.

Author Note:

Of course, the above begs the question as to how we will be able to move from where we are to where we want to be. This, in part, is what my two fact based novels attempt to address, but they will need to be read by large numbers of people to have any impact. Hopefully, you will play your part by helping to create a broadening interest. In the coming weeks/months I hope to focus in my blogs on some specific aspects of this question of a migration road map.

Brian Bloom

Author, Beyond Neanderthal and The Last Finesse

www.beyondneanderthal.com

The post Banksters Obtuseness (Brian Bloom) appeared first on Brian Bloom.

A “Head and Shoulders” chart formation is one of the easiest for a technical analyst (chartist) to spot, but many make the basic error of not checking for “confirmation”  of the pattern by examining volumes.

As a bull trend approaches an end, it can culminate in a bang (an explosion of hysterical buying pressure) or a whimper (a contraction of buying pressure). The Head and Shoulders is more reflective of a whimper.

What  happens is that instead of volume “pressure” pushing prices up, prices tend to float up as the numbers of buyers dwindle but hopeful holders hold on – tenaciously.

Against this background understanding, it is usual to see high volume on the left hand shoulder, followed by low volume on the head (as prices float up); and followed by low volume on the right hand shoulder.

Then, as the investor mood changes, from hopeful to fearful, the volume should rise following a break below the neckline of a head and shoulders pattern as selling pressure creeps in.

Below, courtesey stockcharts.com, is an analysis of the daily gold price over the past few months:

Chart #1 – Daily Bar Chart of Gold

One problem that technical analysts are faced with in today’s environment is that there are large pools of money sitting on both sides of the bull and bear divide, looking to make a short term scalping profit; and the evidence suggests that these pools are so large as to be able to influence short term outcomes. Since the advent of algorithm trading – which is effectively insider trading by those who have split-second earlier access to information – many short term charting techniques have lost their capacity to be predictive with any degree of  confidence. By way of illustration, the chart below is a 1 minute bar chart that shows trading in gold over the past five days.  (courtesy ino.com)

Chart #2 – 1 minute bar chart of gold with 4 hour Moving Average

Note the dark “blobs” of blue – particularly on Monday, February 11^th; and around midday on Wednesday, February 13th. Normally, the price of gold will move maybe a few cents in any one minute trading period. These dark blobs reflect several consecutive one minute trading periods where the price fluctuated by more than $2 within that minute. There has clearly been a battle raging between those who want the gold price to fall and those who want it to rise. The battle for supremacy has become bare knuckled slugging. In this context, one should be extra cautious of drawing conclusions from the head and shoulders pattern until after a break has manifested on high volume.

What “should” happen thereafter is that the price should float back up towards the neckline and then head south in earnest as selling pressure emerges and the stale bulls bale out.  What “will” happen is anyone’s guess.

It is because of this unfair price interference (from the perspective of the little guy)  that I have been focusing on the strategic implications of breakouts on the Point & Figure Charts. Suffice it to say that it’s time to move on in our thinking. Too much analysis can lead to paralysis. From an investment (and economic management) perspective, we need to focus on the likelihood that the banks will win this latest skirmish and, also, that they have no hope of winning the war. (None. Zero.)

In my view, we (all of us, including the bankers) need to understand the dimensions of that war and we need to see if we can pick a pathway forward.

The bottom line is that even if the banks win this skirmish, investors (including the banks) need to understand that we are not facing “more of the same”. We are facing an entirely new game with new rules of engagement.

What ordinary thinking people need now more than anything else is clarity of understanding and purpose. A modest contribution to that outcome is what my next few articles will, hopefully, contribute. They will also provide a background understanding of why I wrote my two novels and why it might be constructive for a broad spectrum of society to read them.

Brian Bloom

The post Time to lift our sight beyond gold (Brian Bloom) appeared first on Brian Bloom.

The (selected) charts are pointing to a rising probability that the cloud of uncertainty that overhangs the world economy – with particular reference to the Sovereign Debt Bomb – may be clearing. Specifically, the evidence is (so far, tentatively) suggesting that the banks can be expected to win the war for control over the global economy.

Implications of this are moderately bearish for gold, seriously bearish for gold shares, moderately bullish for the nominal economy, moderately bearish for the real economy; and one implication is that investment in bank shares may be both prudent and profitable.

The analysis below supports the argument of some, that the central bankers’ strategy for repaying sovereign debt will be to deliberately engineer an environment of negative real interest rates against a background of moderate inflation. If, coupled with this, legislation is passed to “manage” the proportion of retirement savings that is invested in government bonds, then this will allow governments to rob Peter (the nouveau riche and middle class) to pay Paul (those who have lent money to the sovereign borrowers).

All this will happen under controlled conditions where the global economy will remain on an even keel. The big losers will be individuals and legal entities who have made their money over the past 40 odd years by “playing by the rules” of the Fiat Money inflation game  – rules that the charts are signalling are about to change.

*******

Below is a series of Point and Figure charts. (All charts are courtesy of stockcharts.com).

For the reader to gain maximum value from this article it will be helpful to understand how Point & Figure charts are constructed. The charts take no account of time. A perpendicular column of X’s denotes prices that rise according to the price movement scale chosen by the chartist. A perpendicular column of O’s denotes falling prices.  Trend-lines are of secondary importance. Of primary importance are “breakouts” – above previous resistance levels or below previous support levels.  For the direction of the price to change from “up” to “down” and vice-versa, the price will need to retrace the number of boxes in the scale that the chartist chooses. Thus, a 3% X 3 box reversal chart will show a price rising (or falling) at the rate of 3% of the previous total; and a reversal of direction will only be charted in the event of a retracement of 3 X 3% = 9%.

Experience has shown that the distance one might expect the price to travel following a breakout will be a function of one of two factors:

1. A technical reaction (against the preceding trend) will typically be more violent, the longer the price has been consolidating. As a rule of thumb (not always true) the vertical number of boxes that will follow a breakout will be a function of the horizontal count of unbroken columns that preceded the breakout. (This is known as the “horizontal count” method of price targeting)
2. A continuation of an existing trend will be a function of the volatility that preceded it. As a rule of thumb, the number of boxes in the column that was associated with the most recent “run” will be the same as the number of boxes that can be expected in the coming move following the breakout. (This is known as the “vertical count” method of price targeting)

Clearly, it becomes important to decide whether the coming break is a technical reaction or a continuation. The charts below – all sourced from Stockcharts.com – have built- in predictors based on the vertical count method.

It should be noted that technical analysts will typically not  look at 8% X 3 box reversal charts because this size of move falls outside the parameters of short term trading mentality. I have used them in this article to hone in on bank behavioural “trends”, and a fascinating picture emerges.  (Remembering that an 8% X 3 box reversal scale requires a 24% move before the direction of price movement can be deemed to have changed, the bigger the scale the lower the probability that we are witnessing a “false” breakout).

Final confirmation of a change in “trend” arrives when the 45 degree trend-line (either red or blue) is eventually penetrated.  Typically, this is of no help to tacticians but it does tell strategists whether they should be in or out of the market as a matter of strategic policy.

With this in mind, let us proceed:

The first two charts are of the price of JP Morgan Chase’s shares.

Chart #1 – 3% X 3 Box reversal P&F chart of JPM

Chart #2 – 8% X 3 box reversal P&F chart of JPM

The reader will note that both are giving buy signals but that the second chart is not yet at an all time high. However, given that the prevailing trend line is “blue”, it seems likely that the price will eventually break out to a new high.

The next two charts are of Citigroup’s share price

Chart #3 – 3% X 3 box reversal P&F chart of C

Chart #4 – 8% X 3 box reversal P&F chart of C

Again, both the above charts are giving buys signals but the 8% scale chart looks like it means business. It has broken above previous resistance and also above the falling red trend line on an 8% move. This is unlikely to be a “false” breakout.

Next are two charts of Bank of America’s share price.

Chart #5 – 3% X 3 Box Reversal P&F Chart of BAC

Chart #6 – 8% X 3 Box Reversal P&F Chart of BAC

Once again, “serious” buy signals are being given

The next two charts are of the Ten Year US Treasury note yield

Chart #7 – 3% X 3 Box Reversal P&F Chart of 10 Year US Treasury Note Yield

Chart #8 – 8% X 3 Box Reversal P&F Chart of 10 Year US Treasury Note Yield

In terms of the first chart that has a target of 2.839%, it seems likely that the red trend line of the 2^nd chart will be penetrated on the upside – simultaneously with a penetration of a previous double top (2 columns of Xs).

Note that as this will represent a change in direction, the horizontal count target move will be a function of the number of preceding columns. Including the current column, that number is “6” and the yield can be expected to move up by 6 * 8% = 48% of 2.376% – to a target destination of  3.5%. The charts are therefore anticipating a possible up-move of around 1.5% from the current 10 year yield. The time taken is impossible to anticipate. It might be weeks or years.

I watched a curious video today that, at face value, seemed somewhat fanciful. (see: http://www.wealthyskeptic.com/index_video4c_vwo.php?ne= ) Its reasoning was roughly as follows:

• The way the world is going to pay off sovereign debt is if inflation exceeds interest rates so that governments can borrow at negative cost. This will transfer wealth from savers (investors) to governments
• It will be done subtly so that the outcome is not blatantly obvious. No “hyperinflation” – just steady erosive inflation against a background of negative real yields
• Legislation will be passed to “force” managers of pension funds to invest a portion of money under management in government bonds – which will maintain monetary capital value over time but the effect will be a loss of real value.

I did not agree with their conclusions regarding the likely impact on the gold price but, keeping my mind open, I decided to see what the charts might be saying about this theory. Remarkably, the charts suggest that the theory might warrant serious attention. Here is the reasoning:

If interest rates are rising, then – assuming the above argument is true – we can expect the rate of inflation to increase by (say) 1% – 2% p.a. more than the rise in interest rates. Thus, for example, if inflation is (say) 2.5% p.a. at present and the ten year yield is 2% p.a., then the ten year T-Bond yield is already negative by around 0.5% p.a. (I haven’t checked the inflation number, which is likely fudged in any event). By implication, if the 10 year yield is to rise by (say) 1.5% then inflation might be expected to rise from (say) 2.5% to (say) 6% and the US Government will be able to borrow money at negative real rate of 2.5%

But if this is true then why are the bank stocks giving buys signals?

The most rational answer is this: Probably because the banks will see the opportunity to raise margins. The commercial banks can currently borrow short term at (say) 1% p.a. (see chart below)

Chart #9 – 3% X 3 Box Reversal P&F Chart of 3 Month US T-Bill Discount Rate

If the banks borrow at 1% and “lend” at (say) 7% spread – i.e. at (say) 8% – then they can make a positive real return of 2% p.a., assuming inflation at 6% p.a.

This implies the following banking strategy:

• Governments will transfer wealth – by stealth – from savers to repay sovereign debts.

• An illusion will be created of growing GDP (in nominal terms)

• Commercial banks will be the main beneficiaries of this strategy

Interim Conclusion #1

The charts are confirming that this proposed sovereign debt repayment strategy may well be in the pipeline. Therefore, a sensible place to invest one’s money might be in banking shares

So what will all this mean for the gold price?

There will be some readers who are aware that this analyst has been talking about a possible “intermediate term” pullback of the gold price within it Primary Up-Trend.

I have published the following chart several times and have drawn the reader’s attention to the target move to $1109 an ounce – which remains the prevailing target based on vertical count method.

Chart #10 – 3% X 3 Box Reversal P&F Chart of Gold Price

Okay, the time has come to open the Kimono. If the gold price is indeed in a Primary Up-Trend, then the anticipated pull-back target move needs to be calculated using the horizontal count method. There are 6 unbroken columns that precede the current one. Therefore, if a break “down” should occur below $1535, a target move of 7 X 3% = 21% of $1535 can be expected – to a target of $1,212 – which happens to be the exact same row that the previous resistance was broken on the upside. As all technical analysts understand, previous resistance equates to future support, so the $1,212 is believable. Once again, timing is impossible to anticipate: It might be weeks or years; and the target might even be negated if the gold price rises above $1,888.

Will it?

Based on the charts above, probably not in the foreseeable future – but the Primary Up-Trend will remain intact.

As an aside, it might be of interest to some that, when I first mooted the possibility that the gold price might fall, I was deluged with “hate mail”.  So, in the interests of keeping the discussion rational and sensible, let’s look at the logic that flows from the above charts:

Let’s not forget that the gold price is a barometer of “fear” in the battle for supremacy between responsible financial management of the world economy and those who would retain control thereof – regardless of consequences to others – namely the banking sector in general and the central banks in particular.

Yes, the above strategy might lead to price inflation and negative real returns to sovereign lenders (negative cost to sovereign borrowers) – and this price inflation would ordinarily translate to a rising gold price – IF THE WORLD WAS HEADING TOWARDS A GOLD STANDARD.

But a “gold standard” is the very last thing that the bankers want – so the gold price is ultimately a means of measuring who is winning the battle for supremacy.

If the above strategy works, then the bankers will retain control – which implies that the gold will no longer be viewed as a “currency” and it will revert to being viewed as a commodity.

So let’s look at the ratio of gold:commodities

Chart #11 – 3% X 3 Box Reversal P&F Chart of The Gold Price/$CRB

The above chart is showing extraordinary resistance to further up-moves of the gold price relative to commodities, and the number of vertical columns that precede this one is 10. If the ratio were to fall below 514.35, it can be expected to fall – as a rule of thumb – by 33%

Clearly, if it breaks up, then gold will win the battle for supremacy and the banks will lose.  In terms of the vertical count method, the ratio will likely rise by 36% if the break is up

So, in context of the buy-signals that are being given on the banking charts and the Bond Yield charts, what can we conclude?

Interim Conclusion re gold:

The probabilities of the relative strength chart breaking to new highs are low. The gold price will unlikely rise above $1,888 and may fall as low $1,212 an ounce – within its Primary Bull Trend

Author Observation:

Perhaps this is why the gold shares have been so weak relative to gold. At the end of the day, in addition to the negative impact of inflation on operating costs such as labour, energy and transport, gold miner profits are highly geared to two things:

1. The gold price
2. The cost of borrowing

If the banks are going to win this war, and one implication is that they are going to raise lending margins, then gold mine profits will be caught in a pincer of falling gold price and rising costs of borrowing (in addition to other rising costs)

Below is the balance sheet of Newmont Mining (http://finance.yahoo.com/q/bs?s=NEM+Balance+Sheet&annual )

Note how NEM’s cash balance has been falling over the years and how money has been ploughed into long terms assets. $19.6 billion (2011) from $15 billon (2009)

How have these extra $4.6 billion assets been financed?

Well:

1. Short term debt has risen from $157 million (2009) to $689 million (2011).  Some of this is actually long term debt that is falling due for repayment
2. Long Term debt and deferred charges – when added together – have remained fairly constant at around $6 billion
3. Retained earnings have risen by around $2 billion
4. Minority interests have risen by around $1 billion
5. Other current liabilities have risen by around $700 million
6. Other bits and pieces

Newmont Mining Corp. (NEM)

-NYSE

45.04 Feb 6, 4:00PM EST

Analysis

Newmont has been placing some reliance on short term liabilities to fund long term assets. This will put them in a position of negotiating weakness in the event of a credit crunch.

As long term debt falls due for repayment, the banks will either make it harder for Newmont to roll over its debts or they will raise the amount they charge for long term money.

Now, when we look at how much interest Newmont has been paying, we see the following:

• 2009: $120 million
• 2010 $279 million
• 2011: $244 million

And when we look at the actual profits of Newmont, we see the following:

• 2009: $1.297 billion
• 2010: $2.277 billion
• 2011: $366 million (because the gold price has not been rising)

Assuming that interest rates charged by the banks rise by (say) 3.5%, then Newmont’s borrowing costs will rise by at least 3.5% of $4.5 billion = $157 million.

Interim Conclusion re future profitability of gold mines in general

If the gold price remains flat or falls by (say) a further $300 an ounce then, coupled with rising costs of capital, the profitability of gold mines will come under significant pressure.

Chart #12 – 3% X 3 Box Reversal P&F Chart of Newmont Mining Corp

Author comment: Of great interest here is whether the fall from $68.92 to $42.95 was a reaction within a Bull Trend or whether it was the beginning of a Bear Trend. If the latter, then the retracement back up to the level of $56.04 has already met the horizontal count target for a reaction. If so, and if the price of Newmont should fall below $42.95, it might fall by a further 36% based on the vertical count method. In turn, this would be consistent with a profit rout flowing from falling gold price and rising borrowing costs.

Overall Conclusion

The ratio of gold shares to the gold price is critically important. Many believe that the gold tide may be turning for the better. Of course, it might well do so, but if that ratio starts to give sell signals then it will be an indicator that “the market” believes that the banks will retain control over the world economy. Right now, “the market” has already voted with its feet regarding future profitability of the banks. Are you prepared to bet against “City Hall”?

Author Final Comment:

From my perspective, this outcome that favours the banks in the short to medium terms will be a means to an end rather than the final outcome.  The numbers are against “City Hall” and voters will remain quiescent only for as long as it takes to become comfortable that “catastrophe” has been averted. If a currency war erupts, the all bets will be off and catastrophe will be the logical outcome. However, if a currency war can be averted, and debt slowly paid down then, as pressures build on standards of living of the majority, the lifestyle of the rich will come under focus and pressures will build for an entirely new economic system. It is my understanding that The United Nations already has a task-force that is investigating alternative ways of managing the world’s economy. Unfortunately, this may span a generational time frame and will only benefit our children and grandchildren. In my view, if the market moves essentially sideways for some years, the emphasis on “risk” is going to shift from “financial risk” to “business risk”. Investment profits will flow to those Funds Managers who have a better than average understanding of business risk. Unfortunately, as the majority of Funds Managers in today’s world have little understanding of this type of risk, investors will need to become highly selective regarding selection of third party Funds Managers.

Brian Bloom

Tea Gardens, Australia, February 10th, 2012

The post Defusing the Sovereign Debt Bomb – (Brian Bloom) appeared first on Brian Bloom.

An open mind is essential for economic survival in today’s fast changing world – but one should be conscious of the potential for being attracted to arguments that lead to prejudicial outcomes.

The chart below (courtesy stockcharts.com) is a 5% X 3 box reversal Point &Figure chart of the ratio of gold shares/gold price. I have chosen this scale for the purpose of identifying long term trends

Chart #1: 5% X 3 box reversal Point & Figure Chart of the ratio of $XAU (gold shares/$Gold (gold price

Clearly, in terms of this chart, the ratio of 87.34 represents the “ultimate”  support level dating back 12 years. Equally clearly, if the support is penetrated on the downside, the ratio could fall precipitously. On the other hand, if the support level should hold, then this might evidence an impending turn in the gold tide.

Bearing in mind that this is a “ratio”, two alternatives are possible in context of a change in the trend:

1. The gold price might fall even as the shares have bottomed
2. The gold price might bottom or even start to rise – in which case the shares would represent an exceptional investment opportunity.

In the past two days I have received two separate analyses in my inbox – from highly respected analysts – calling for a rise in the gold shares:

• Quote from Tony Boeckh’s latest letter – January 24th: “Gold producers are looking particularly attractive” (WWW.BOECKHINVESTMENTLETTER.COM )
• Quote from Bob Moriarty’s analysis on January 25^th : “In the next short while things will turn. The DOW and S&P are going to tumble; gold shares are going to rocket. Everyone loves the DOW, loves the S&P and hates gold.” (http://www.321gold.com/editorials/moriarty/moriarty012513.html )

Whilst both analysts believe that gold shares are going to rise, Tony is less bearish on large cap industrials than Bob.

The question arises: If gold bottoms around here and/or start to rise, why would it do so and how far might it rise?

Arguably, the above chart shows that gold shares have been leading the way. The fall since 2010 merely presaged a consolidation/pullback of the gold price. As an analytical starting point, if the ratio rises, this might be attributed to the market expressing its view that the gold price has stopped falling for the time being. Under those circumstances, the ratio might easily double – without the gold price rising to new heights.

The following chart – also courtesy stockcharts.com – shows that the gold price has (tentatively) broken above the “last” Fibonacci (blue) resistance level:

Chart #2:  Weekly bar chart of the gold price including Fibonacci resistance levels (blue)

and key trend lines (green)

Important observations that arise from the above chart are as follows:

1. The gold price is currently below its 20 week MA and above its 40 week MA – i.e. “indecision” still prevails
2. The price broke above the resistance of the last Fibonacci semi circle but ended the week on a down note at the support of the rising green trend line
3. The MACD histograms below the line have been contracting – indicating that the rising green trend line will probably hold
4. There are three falling “fan” lines dating back to October 2011, and a final resolution of this formation is likely to emerge within the next quarter:
   1. If the gold price breaks above $1750, and then $1800, it is likely to continue rising to at least $1900
   2. If the gold price fails to break $1750, then a fall below $1700 will evidence a “failure” to break above the fan formation. In this case, the gold price might continue falling – to $1109 – as argued in previous articles.

Interim Conclusion

Regardless of any indecision that will need to be resolved, it seems clear that the gold price is likely to rise during the coming three month period. Gold shares seem an attractive trading proposition.

Let’s put some perspective on this last statement. Below is a 3% X 3 box reversal chart of the $XAU

Chart  #3: 3% X 3 Box reversal Point & Figure Chart of $XAU

Although the prevailing trend line is “blue”, this is not a particularly bullish chart. Arguably, there is a rounding saucer top that dates back to late 2009.

The “iffiness” of all this discussion can be readily seen from the following monthly chart of the gold shares index that dates back to 1984 (courtesy DecisionPoint.com)

Chart #4 – Monthly Bar Chart of the $XAU

Clearly, from this chart, the share prices began to rise in earnest in 2002 but the PMO started giving warning signals in 2011 that the long term trend might have peaked. (Note that although the index rose to new highs, the PMO did not).  Importantly, the PMO is still pointing down but we might see some support at the 150 level of the index as the PMO also encounters some support at the zero level.

Which brings us back to the “why?” question.

Ultimately, in the view of this analyst, the reason devolves to uncertainties surrounding the method/s by which the now $47 trillion sovereign debt overhang is going to be addressed.  The two camps are still at odds. There are those who are adamant that the only course of action available to the authorities is to print their way out. The “other side” points to the fact that the impact on GDP per dollar of new money supply has been falling. There is simply no point in continuing down this road.

In this context, the recent resignation of Tim Geithner may be more easily understood.  The following quote is from a recent article that reflects on his tenure:

“To his fans, he is the figure most responsible for stabilizing the banking system and preventing a catastrophic economic collapse. To his critics, he was excessively generous to bankers and failed to change a system where some banks remained “too big to fail.” (source: http://www.newrepublic.com/blog/112152/timothy-geithners-exit-interview )

Arguably, the simple reason that Geithner withdrew  is that he ran out of ideas.

From a high level, it might also be argued that – if the $47 trillion sovereign debt level did not exist – the global economy might be facing boom times of extraordinary dimensions. The US economy is strengthening, the Chinese economy is strengthening (albeit the statistics may be “fudged”) and the natural gas energy paradigm is approaching critical mass in several countries. Further, the array of new technologies that is now emerging at the commercialisation phase is mind blowing. To get a taste of this, the reader might go to my website page at http://www.beyondneanderthal.com/mission-overview/ .

Unfortunately, the $47 trillion debt mountain does exist and the “next step” that United States (the world’s leading economy) takes will be critically important.

When one cuts through all the political posturing, one factor becomes clear: President Obama is now starting to face the reality of a need to at least talk in terms of balancing the budget. He has thrown so many rocks at the Republican led House of Representatives that it would be easy to be lulled into accepting that his views regarding how to handle this debt ceiling issue have not changed. Many people assume that he will continue down the road of bulldozing his ideas through. But the evidence does not support this conclusion.

In an interview with President Obama  that appeared in today’s media at  http://www.newrepublic.com/article/112190/obama-interview-2013-sit-down-president the following two quotes caught my eye:

1. 1.    “I always read a lot of Lincoln, and I’m reminded of his adage that, with public opinion, there’s nothing you can’t accomplish; without it, you’re not going to get very far.”  From this it can be reasonably concluded that President Obama is starting to see the error of his tactical approach of trying to end-run the system.   Arguably, he sees the recent federal appeals court ruling for what it was: a rap on the knuckles for trying to be too cute. (see: http://www.washingtonpost.com/politics/court-says-obama-exceeded-authority-in-making-appointments/2013/01/25/b7e1b692-6713-11e2-9e1b-07db1d2ccd5b_story.html  for a report on that decision)

1. 2.    “.. if we can get through this first period and arrive at a sensible package that reduces our deficits, stabilizes our debts, and involves smart reforms to Medicare and judicious spending cuts with some increased revenues and maybe tax reform, and you can get a package together that doesn’t satisfy either Democrats or Republicans entirely, but puts us on a growth trajectory because it leaves enough spending on education, research and development, and infrastructure to boost growth now, but also deals with our long-term challenges on health care costs, then you can imagine the Republicans saying to themselves, “OK, we need to get on the side of the American majority on issues like immigration. We need to make progress on rebuilding our roads and bridges.”

The reader’s attention is drawn to the words “this first period” (the period during which a decision needs to be made regarding US public debt limit) and “sensible package”. From this quote it seems clear that President Obama now fully understands the self defeating nature of “QE to infinity”.

Of course, whether the Industrial Equity Indices will rise to new highs or dither around within a trading range or collapse in a heap is still open to discussion, but the following chart should offer some context:

Chart #5 – Monthly Bar Chart of the $SPX

Clearly, the 1526 level represents significant resistance to further upside and the driver of any move to new heights will need to be extraordinarily powerful.

In the absence of QE to infinity, it seems reasonable to conclude that the headwinds associated with the world’s sovereign debt in general and the US’s public debt in particular are going to be too great.

Conclusion

The near term bounce in gold share prices – should it happen – is likely to be sufficiently strong to warrant taking a trading position, but it is likely to be short lived.  When reality bites regarding the difficulties President Obama is going to experience in satisfying a hostile Congress and also in bringing the American public along with him as he steps back from his reliance on Executive Orders and clever tricks, a period of cold sobriety seems likely to emerge on the markets.

Note: As can be seen from the chart below, the debt level is not going to be the only headwind with which the US economy is going to need to cope. Interest rates look like they may be positioning for a spike. Note how the PMO is now rising from an historically low level and how the 30 year yield has broken up from a two year intermediate down trend.

Chart #6: Monthly chart of the US 30 year treasury yield (1948 – 2013)

Overall conclusion

The markets look more likely bat around within trading ranges than to enjoy any “spectacular” moves – either up or down. In particular, the anticipated  up-move in the gold universe seems more likely to be a damp squib than an explosion. The long term technical target for the gold price – of $1109 an ounce – still prevails.

Brian Bloom

Author, Beyond Neanderthal and The Last Finesse

The post Is the gold tide turning? (Brian Bloom) appeared first on Brian Bloom.