Wednesday, September 26, 2012

$CRX:$SPX Ratio May Have Hit Bottom. Uh Oh!

This is the third in a series of articles dedicated to the $CRX and its relationship with the S&P 500.  The original installment was first published May 12, 2011 and as reported by Mr. John Lounsbury, that particular piece became the #1 most read article on Global Economic Intersection over the following 2 quarters.  For a completely inexperienced writer that was a rather surprising but welcome development because not only did it act as a vote of confidence that perhaps I should consider continuing to write the occasional article, it definitely indicated that readers were seeing merit in the revelations that particular study contained.  A follow up article was published on Jan. 2 of this year once it became apparent that significant changes were occurring in the ratio and that it was indeed behaving as predicted.  More specifically, as suggested would likely happen, the ratio began to reveal the fact that deflationary forces were showing up in the $CRX long before they would become readily visible to the naked eye by most other measures.

Ultimately the original goal of this study was to determine firstly whether or not the commodities only related stocks had been behaving differently than the stock markets in general over the past dozen years and secondly, to determine whether or not the results of the study could be used as reliable evidence that might assist in determining the future direction of the overall stock markets.  The answers to the first question was "yes they have and in jaw dropping fashion".  And the answer to the second question was "most likely, since the ratio is very sensitive to the inflows and outflows of funds as a direct result of inflationary or deflationary forces".

In this installment we're going to zero in on a very recent development that seems to be pointing to the real possibility that after a year and a half of watching the commodities related stocks seriously under-perform the S&P 500 [for the first time in a dozen years], somebody has apparently lit a match to the bed of kindling otherwise known as the entire global commodities sector.  I say that a bit facetiously because it's more than obvious that a good deal of the history of the flight of capital into the commodities markets certainly wouldn't have occurred had the central banks of the world not provided oodles of liquidity in the first place.  But on the demand side there's no question about it, in certain sectors of the commodities industry there currently exist very real shortages that in itself would absolutely drive commodities prices higher... whether the world was flooded with new liquidity every week or not.  In some cases that is definitely what's suddenly happening right now.

For example, although off the recent highs, the price of corn has exploded higher by 52% just since the end of May.  Soybeans have risen from $1100 to $1780 in the space of just 9 months.  That represents a whopping increase of (oh my, the Elliotticians are going to love this one) 61.8%.  And the most frightening one of all... in the span of one month from mid June to mid July the price of wheat on the world markets popped a stunning 55%.  Not all of these increases can be attributed directly to the generosity of Mr. Bernanke.  A good deal of it is without a doubt weather related although let me be the first to theorize that any time the corn belt suffers a drought, that too is most likely Bernanke's fault.  Regardless of the reasons why grains are exploding in value, the net result is that in the past few weeks, ironically since QEternity was officially announced (or perhaps not ironically), the US dollar, the $CRX, the $SPX, and the $CRX:$SPX ratio itself have all broken significant trend lines.  In doing so, each and every one of them is signalling that the world may once again suddenly be in the process of blasting off in a new round of inflation, perhaps crushing inflation.  These are serious trend lines, months in the making.

If history is to be considered a reliable guide we should trust that any time we see the $CRX rising and it's ratio with the S&P 500 rising, the stock markets in general have risen as well... every single time.  So ultimately what we want to know is whether or not the ratio has indeed recently turned higher with conviction... and whether or not it is likely to be a sustained assault.  So we begin with the monthly chart below which covers the entire duration of this study going back to late 1999


$CRX:$XPX ratio Monthly Click here for a live and updating version.  If I'm not mistaken, non-subscribers to Stockcharts won't see the annotations.  If that's you, you can click here for a "print" version which will show them.

The first thing that just jumps off the chart, the very reason for this article, is the fact that for 4 weeks now the ratio has been putting in an effort to find a bottom.  True enough, it is entirely possible that it could be nothing more than a standard re-test of the yellow 13 year long rising trend line.  However, fundamentally I think there are numerous reasons to doubt that's the case.  For one thing, the central banks of the world have made it very clear, they are all going to print their own currencies in an effort to reflate the entire world.  It's essentially an admitted no holds barred race to the bottom for the currencies.  The second reason is that the overall food supply for all of humanity is deep, deep under water.  And no I'm not talking about the fish supply because that's the only food source that should be deep under water... and it's not there.  The food supply for all of mankind is in trouble and possibly irreversibly so.  In other words we may never catch up from here, especially with the population of the planet continuing to grow relentlessly while the sources of food diminish every single day.  It's a head on train wreck happening in slow motion right before our very eyes.  Jim Rogers is no stranger to the scary implications these trends carry.  I'd like to be able to claim that Mr. Rogers and I had a lengthy telephone conversation about the situation last evening but unfortunately I cannot.  It seems that every time he calls me I'm busy putting a new roof on the igloo or something.  In any case, here's Jim Rogers' take on the worsening food commodities story:




So we definitely want to drill down to a weekly chart in order to better investigate what's really happening "on the local scene" as it were... time-wise.  Admittedly this is a big chart, but it provides a beautiful "one stop shopping experience" in that we can see all 4 components of this entire study and how they relate to each other, in one glance:

$CRX:$XPX ratio Weekly:  Click here for a live and updating version. 

It appears that what we're witnessing is that funds are beginning to flow back into the commodities only related stocks after 5 straight quarters of having fled that sector.  Or at least seriously threatening to.  As the original study showed, the ratio itself revealed that for over a decade liquidity had been more than abundant as witnessed by the fact that between 1999 and May of 2011 the commodities only stocks gained 6400% of the amount the S&P did.  In other words over those 12 years the $CRX rose 64 times as much as the S&P did.  How remarkable is that?  After the recent 12-15 month correction in the ratio, we find that the commodities only related stocks are now only sporting 21 times the gains of the S&P 500.  That really is a significant correction.

The bottom line was that although the Fed had been supplying liquidity for decades in order to prop up the bond markets, not to mention supplying a crack addicted, sick leaderless government spearheaded by a totally inept and corrupt congress, a huge percentage of those funds were being channeled through the central banks where it was immediately converted to "fun money" for their own use in the higher risk casinos of the world.  Commodities markets are one such casino.   And although that casino appeared to have gone out of business when the ratio peaked in the spring of 2011, it seems the high rollers may indeed recently have stepped back up to the tables. 
 
The most obvious recent development seen in the weekly chart above is that all 4 components of this study broke a major weekly trend line during the week of September 3rd.  Note  the number of "UH OH"s on the chart.  In the case of the S&P 500 though, the break is not yet impressive.  In fact it looks more like a relatively weak overthrow at this stage.  Nonetheless, 10 days later, to borrow a sentence as reported here,  "A third round of quantitative easing, a set of asset purchases designed to increase the money supply, has been announced by the Federal Reserve. It said it would keep easing until job growth accelerates, and continue a "highly accommodative" monetary policy "for a considerable time after the economic recovery strengthens."
 "FOR A CONSIDERABLE TIME AFTER THE ECONOMIC RECOVERY STRENGTHENS".
Friends, that's a long, long way off.

What Mr. Bernanke is promising the world is that the Fed is going to hold rates down to zero pretty much at any cost under the guise of trying to save the world.  The truth is that they're not "saving" but "enslaving" the world.  In order to print they need something to buy.  The debate seems to be about whether or not there's enough junk out there in the world for the Fed to purchase on an unending basis.  Personally I don't think that's the only important question.  I think the real question is "when is the world going to sit up and realize that the real goal is that they want to do just that, purchase every single debt in the world so that they have complete and total ownership of it.  Of us.  That is their ultimate goal, world domination by enslaving every debtor on the planet for eternity.  At that point, who cares if the entire world defaults?  Certainly not the central bankers, not as long as they have title to all things saddled with debt, which by the way includes most real estate on the planet and half the governments of the world.  And of course, the governments are the people.  And after all the smoke has cleared the bankers will be standing there holding title!   This is exactly how they're carrying that objective right before our very eyes.  We are currently in the end game no matter which direction the markets finally decide to travel.


Ok, in summary here's what has happened over the past 20 months.  Early in 2011 we got the first signs of a top in the ratio.  That signaled a major turning point in the business of "inflation".  From that point forward it was starting to become abundantly clear that deflationary forces had indeed been creeping out of the bottle all over the globe,  Over the ensuing 12-15 months it appeared that the great deflationary cycle had begun.  I was certain that the great deflationary collapse was upon us.  Tonight that no longer seems the case.  It truly looks like the deflationary phase might over although another week or two will likely be required before we can be more comfortable that we know what lies in store for perhaps years to come.  At minimum, the ratio is currently trying to bottom and is at least 'threatening' to rise back above that incredible 13 year old trend line.  If successful, the implications are that the world has reverted right back to the old standard,13 year theme of "print, print and print some more.  Deflation must be defeated at any cost".  The implications would be very, very inflationary, especially if the banks even 'dare' to issue loans in big numbers.  Stock markets don't tank in such a scenario.  At least they haven't in the past.  Which leads to one more horrible possibility.


THE WORST POSSIBLE OUTCOME:  It is possible that in spite of their every effort, the central banks of the world might not be able to contain a bond market sell-off.  In that case they would surely just crank up the printing presses even faster in an ever-failing effort to hold rates down.  That would just feed into the inflationary theme, at least as pertains to the CRX.  However, rising rates would be devastating for the bond markets and for the economies of the world.  And if funds were to flow out of the bond markets, well... you know where they end up.  At the end of the day if the bankers were to lose the bond battle the result would almost assuredly be an inflationary depression in many aspects of our lives, like in the cost of things we need but don't have such as food and fuel.  Those items would soar.  But deflationary in things we already have but don't necessarily need... like a piece of land to park our trailers on.  The value of real estate would crumble.  In either case, whether the central banks are ultimately successful or not, the outcome would probably be best described as stagflation.  Which would ultimately lead to a depression of the most horrid kind.  Because if the world economies are sputtering while rates are at zero, with unemployment already as high as 25% in some countries (Spain) imagine what would happen to them with rates at 4%, 6%, 8% and higher.  I dare say that's one scary scenario we'd rather not walk into.  Ultimately we may not have a choice.  As of this moment though, thankfully that outcome is no more than just a mere 'possibility'.

So at this early stage of what 'could be' a major inflection point, we have to consider the inevitable question; "Is the ratio just back-testing the 13 year long rising trend line?".  I dare say the answer is; "No, that prospect is exceedingly unlikely.  The ratio is likely to break up through that trend line with inflation resuming yet again.  Bernanke as much as promised that outcome."   Nevertheless we need to respect that all options are still open and that the central bankers of the world might indeed fail in their quest.  We have no choice but to simply monitor these charts in the weeks ahead.  One thing we know with 100% certainty... they will not lie to us.

To that end, I've included a daily chart below so that we can watch these critically important developments over the coming days and weeks.  Feel free to bookmark this chart as it will update in real time.  What we're watching for is whether or not the ratio climbs back up above the rising 13 year old trend line.  Beyond question the Fed's goal, if successful, would ensure that outcome.  All that remains to be seen is whether or not they succeed.

$CRX:$XPX ratio Daily:  Click here for a live and updating version.

From the Elliott Wave perspective, one important aspect seen on the daily chart above is that the current rise in the ratio could still just be a 4th wave higher which would imply that there would be at least one more thrust lower.  But I have a rather difficult time accepting that as the likely outcome since it would also imply that equities would be falling fairly hard over the next few weeks.  Right in front of a US presidential election that is only 6 weeks away?  I don't think so!  But stranger things have happened I guess.  For example, as a teenager I had a friend who had a big wood screw in his belly button.  I asked him what it was for.  He claimed he didn't know so I suggested he take it out.  So he unscrewed it and his ass fell off.  But I digress.

So there we have it.  We're absolutely at a critical inflection point.  Either the $CRX:$SPX ratio is going to explode higher from here which would be the logical outcome if the Fed's policy succeeds - OR - the ratio is going to plunge in a 5th wave lower (at least) and the deflation genie will officially be out of the bottle.  More than likely this ratio and this study are going to provide a concrete answer earlier than most other indicators out there.  At least that's the goal.

On a final note, what kind of a father would I be if I didn't take this opportunity to wish my son a great day on this, his birthday.  Happy birthday big guy.  Can't wait until we can finally get together again and try out your sail boat.  Love ya!

Thanks to all for reading and until next time... smooth sailing!




......

106 comments:

  1. Maybe it starts with inflating commodities and deflating real property, that bankrupts the middle and lower class. Then when massive debt default hits  credit contraction (everybody will have bad credit) and the money supply contracts, then nobody has money even for food, and prices drop in the commodity sector too.

    Whatever. Pffft, I'm not worried. We've got iPhones and Mexican restaurants.

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  2. One thing is for sure, it won't end well.

    The only issue as I see it, is whether it all falls apart fast...or slowly.

    Either way, it doesn't change the end experience for the sheep, but then, they have only themselves to blame.
    --

    For the moment, I'm guessing deflation still more powerful, but if the vast money being locked up in the banking system somehow finds its way out into the real world, then inflation could spiral outta control real fast.

    Good posting AR.

     

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  3. "For the moment, I'm guessing deflation still more powerful, but if the
    vast money being locked up in the banking system somehow finds its way
    out into the real world, then inflation could spiral outta control real
    fast.
    "

    Exactly, exactly, exactly and exactly right.  And for now I'm still hanging onto the thread connected to the "I'm guessing deflation is still the more powerful" part... just barely.

    Glad you like the post PD.  Thanks.

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  4. Every time over the past year or more when I heard rattlings that the housing market had bottomed I laughed.  But now, with all the hints starting to appear that severe inflationary forces just might be threatening to break loose, I'm a heck of a lot more hesitant to laugh and more inspired to take a closer look at housing.  Here's an article hot off the press on that topic and I'm wondering to myself... "Jesus, what if... just "what it" this is true?".

    Even though it's almost sacreligious for a person with an understanding of the bond markets and of money and where money comes from, to even contemplate an inflationary scenario, I think it's within the rules to ponder the possibility that the ultimate deflationary outcome could conceivably have been postponed 4 years.  I know that sounds unthinkable Papa, but those whores who print money seem to know no bounds.  You know me PB, you know what I know.  And yet neither you nor I know what it is that we "don't know".  I'm really, really wondering what it is that we don't know that could possibly allow the charts to evolve the way some of them seem to be threatening to evolve... in a manor sympathetic to an inflationary outcome.

    I'm not convinced yet, not by a long shot.  But at the moment it looks like that might be the more immediate outcome with the deflationary scenario to come much later... or as I said in the article, maybe never.  If the bankers are successful at crashing all the currencies into oblivion and coming forth with the solution of a One Realm Currency [known heretofore as the ORC] the deflationary outcome would never materialize at all, at least not as we've been envisioning it all along.

    I'll bet you dollars to donuts that the price of oil is going to skyrocket as soon as this silly charade of "slap it down immediately upon the release of QEternity" comes to an end.  Very likely immediately after the election would be my guess.  If that's what happens then I'll be a hell of a lot more convinced of the inflationary scenario is what's in store.  Let's try to hang on until then, lol.

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  5. I can only hope the banksters hold on tight to their trillions of digital currency for at least another presidential term.

    If however they decide that its better to spend it, than hold it, then we are indeed going to see a major inflationary bout, at least to rival the 1970s. I was a child back then, but I sure do remember, the 70s sucked.

    So..anyone with any sense should be praying for a deflationary wave lower, if only to forestall the possible hyper-inflationary cycle that may lay ahead.

    --
    *Spain remains a tinderbox...keep ya eyes on that one. If there is going to be a 'black swan', it'll be implosion of Spain. The fact the catalonians want to secede from their lazy non-producing Madrid overlords, is only adding to the growing moodiness.

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  6. AR great work as always and I am glad you updated this series. It does seem this wants to go higher and I doubt once it does the CB's will be able to control it. Something like, "inflation is not a problem, Oooops". Thanks AR.

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  7. I'll bet you dollars to donuts that the price of oil is going to skyrocket

    It's interesting how nature seems to play its own role during downward social mood waves -- the Dust Bowl occurred during the Great Depression. One thing may follow another (or appear to) once this thing gets started. I remember reading that several leading agencies and experts have switched positions on Peak oil, some quietly, from "It'll never happen!" to "Oh, that's old news!" So it's just a ticking clock to when the first real supply shortage starts a huge price surge. 

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  8. Yup, Spain is ready to explode.  On top of the horrid unemployment, Spain is made up of 17 autonomous regions that don't all get along with each other.  In fact my daughter has a good friend from Nicaragua who is of Spanish origin.  He once told me that his family "supports Barcelona, not Madrid."  I had no idea what he was talking about and only later found out about how fractured Spain could really become.  This lad's family has lived in Nicaragua for generations, his grandfather being an instrumental player in the recent history of that country and a friend of Che Guevara, and yet he feels the polarity in Spain apparently just as much as native Spaniards do.  Strange world we live in.

    You said you hope the banksters hold onto their digital currency.  If they do that there will be no real organic growth in the economy... only more shenanigans.  If they decide to loan it into the economy, that's when the magic of fractional reserve banking would kick into 3rd gear (of 9 gears, lol) and really get inflation going.  But from our own selfish perspectives, if we can hit it right and be long the equities markets at the right times, we just might come out the other end of it all with enough wealth to be able to provide at least a modicum of support and security for our families.  From that perspective I'm hoping the deflationary phase is deferred for years.  All of us as investors should be pulling for that.

    Other than from that perspective, yeah, it's probably better in the long run if we get it over with now.  At least that way, if we were to go the deflationary route right now, many of the banks would finally fail.  That is a fate that they all deserve.  Unfortunately not all of them will fail and there will sadly just be more consolidation and perhaps two or three giants who just get that much gianter.

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  9. I've recently been awakened to the fact that oil is not a product of "dead dinosaurs" and "dead vegetation".  Unbelievably, there's a ton of evidence emerging that oil is in fact "abiotic"... it's not a fossil fuel at all.  Instead it's created by the earth itself.  Can you imagine the ramifications of this if it were to be proven true, which I think is inevitable?  Wouldn't the fascist oligarchy look stupid with that much egg on their faces for lying to us for so long and for teaching us untruths in schools and universities?  Schools and universities by the way that are controlled either by banks or the Vatican?  Funny that eh?

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  10. You're welcome TRB and thanks for taking the time to read it.  There's no "theory" involved here... the ratio either surges from here or fails to penetrate the rising trend and instead turns lower.  In either case, it's gonna tell us the truth.  I only put it out there now because we've reached the point where the debate seems about ready to be decided.  It's gotta make a decision now.  But hey, as long as we (you, me, our friends) see it coming and get on the right team, we can benefit either way over the next years.  We have to cast our egos aside and just go with the flow.  That's not a statement about being selfish... that's just a statement about trying to survive and help our families survive.

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  11. Charts as fine as ever AR!

    I'm sure I'll regret dipping my ill-equipped toe into fundamental analysis waters, but the following got me thinking:> The food supply for all of mankind is in trouble and possibly irreversibly so.  In> other words we may never catch up from here, especially with the population of the> planet continuing to grow relentlessly while the sources of food diminish every single> day.Socionomics hypothesizes that conception rates correlate with social mood.  Of course, births are actually only part of comparative measures of "growth," not-death being the other part.World population and growth estimates from the US Census Department illustrate a well established downtrend in population growth rates:http://rationalinsolvency.com/2012/09/pop092612a.pngNow, they're still positive growth rates, to be sure.  Is decelerating growth relentless growth?  I dunno.  So, rather split hairs over the choice of adjectives, I'm instead inclined to raise the question of whether the assumption of continued population growth is necessarily something we should take for granted.Viewed another way (perhaps to over-exaggerate), here's the world population, S&P 500, and the year-over-year population growth rates between 1950 and 2011, scaled by their minimum and maximum values, in semi-log scale:http://rationalinsolvency.com/2012/09/pop092612b.pngRandom asides:What's most shocking to me is to take the WWII period, add 16-18 years (approximate start of child-bearing years for those conceived during the war), and look what the pink line did.  Amidst that steep uptrend.  Granted, the early 1940s were one of the more massive dislocations in population statistics of all time, but they were also relatively brief in the grand scheme.  While they don't have the spectacle of an event, the decades of deceleration since the early/mid-1960s look pretty daunting to me.I also found it interesting that the table of comparative historical (10000BC-1950AD) population estimates the US Census Bureau has published reveals that the USCB's 1950 population estimate is the highest among all comparative numbers surveyed.  What's 150M people between friends?http://1.usa.gov/JCtBYn

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  12. I agree AR. There should be lots of room to be on the right side of this either way. Whether it is long commodities stocks or short. Or the inverse play double play of rising rates and long commodities. I really do appreciate the heads up with this article. Nicely done my friend.

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  13. Thanks Zimmer, great charts.  I don't really think we have to worry much about the world population for much longer anyway.  The drums of war are beating.  Besides, the message on the Georgia Guidestones tells us that the goal of the NWO is to maintain the global population at 500 million souls.  Let's just hope they wipe us out before the food runs out.

    Actually, even if I might have unintentionally overstated the growth of the global population and insinuated that it was accelerating rather than actually decelerating (as it is), the flow of funds into the $CRX doesn't seem to be aware of my mistake, lol.

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  14. Thanks Good Sir AR,
    Excellent article, and very thought-provoking.  This inflation or deflation debate has gone on for four years, two of them with me participating.  It's become tiresome.  And your indicatory should give us an answer either way, and that will be a serious contribution to this quest of what comes next.  Thanks for sharing your research.  I think you touched on this with your mentioning grain prices ... this time with China showing signs of slowing, it may not be metals that go parabolic, but food prices.  One article mentioned going long NZD.USD for that reason -- they export  meat and wheat, and that might be what inflates with QE3 this time.  Anyway, you've given me much to think about in my commute ... I was pretty sold on the deflation scenario, so this will take time to process as a possibility.  And I will be watching the developments of your indicator. 

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  15. Hi GP, how've you been bud?  Haha... yeah that's one of my tricks of the trade.  If readers need a quick chuckle and think they might find one in an article I've written, they're gonna have to mine for it.  That's how I get people to keep reading before they get bored, lol.

    I'm not 100% sold on the idea that we might have another huge inflationary phase ahead of us, but with each passing week my mind gets a little more comfortable that it's possible... more possible than any of us from the 'deflationary camp' used to dare to envision or admit to even thinking about. 

    The way I see it is that the only way we're going to see a big deflationary event is with a major default.  Heck, just the Lehman Bros. failure was big enough to trigger the 2008 melt-down.  But Greece has already effectively defaulted and really... nothing has happened.  Portugal nearly defaulted, Ireland nearly defaulted and still... nothing.  Because the bankers simply aren't allowing 'anything' to derail the current train wreck we're riding on.  Spain is on the verge and then Italy is going to step up to the plate and Italy's debt woes are reportedly about twice what Spain's are.  It's just nuts but the bankers just keep on bailing and bailing and bailing...

    I just don't know bud but there's so much fiat money on the banks' balance sheets now that one day, one day they might eventually begin to put it to use in the economy and start lending it out in earnest.  I'm not even certain that is even possible.  But why wouldn't it be?  I don't know that answer for sure.  In any case, if they did that, it would really kick off an acceleration in inflation but it would also set off rate hikes as a method of taming inflation.  Been there... done that before.  I remember when gold rose from $400 to a record $840.  Before gold peaked, mortgage rates had topped at about 18% before the inflation was finally tamed.  It takes years and years to stop it once it gets started. 

    In my lifetime there has never been any question about whether or not inflation would happen as a result of monetary expansion.  Today we're questioning whether or not inflation is even possible in the face of monetary expansion.  If it weren't for the possibility of defaults by governments we wouldn't even be asking the question.  So these are really strange times where we are sailing in seas never sailed before.  I'm just trying to discover which way is north, lol.  But yeah, this indicator is certainly helping shine some light on that topic.

    Hope you're doing well buddy.  Say "hi" to your dad for me, lol.

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  16. Fantastic Article, i always be happy to read such great articles. 

    Intraday Commodity Tips
    Nifty Tips India

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  17. AR - terrific analysis and I think right on from a number of standpoints.  Although you infrequently post now, when you do it's very worthwhile.
    It would be most interesting to see a chart of a CRX:Gold ratio.

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  18. Hi Al.  Thanks for the generous words.  I'm glad you find the time spent worth while.

    I've often felt that to compare almost 'anything' to gold would be an exercise in futility thanks to the decades long practice by the manipulators of slapping it down in order to mask the fact that they were destroying the currencies so badly.  Except that to compare the other precious metals would be useful.  But here's a link to the monthly chart from the article above where I just substituted the S&P for gold.  So here's the $CRX:$GOLD ratio.

    We can see that generally speaking they move in the same direction although the $CRX has far more amplitude in its swings.  Just like it had far more amplitude than the broader stock markets.  Unfortunately there was no nice trend line that resulted from the $CRX:$GOLD pair or anything else of great value that I could spot in a rather quick glance at the chart.  But if you look at the price of gold in the top panel (the white line) we can see that it too has broken its recent down-sloping trend line.  So gold is also sniffing inflation although we already knew that.  So it would be pretty hard to argue against the thought that the price of gold is just reinforcing the likely outcome of the $CRX breaking above the yellow trend line and that the longer term outcome is probably more likely to be inflation than deflation.  Of course none of it makes the assertion that the great deflationary unwind can't happen, just that it might get deferred for a year or 2 or 3.  Unless the entire global monetary structure collapses under its own weight and we end up with a new global currency entirely.  God forbid.

    Thanks for dropping by.  It's always nice to see ya.

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  19. Chart is showing about what I'd expect in an inflationary environment: CRX:Gold essentially flat lining.  Thanks.

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  20. You're welcome bud.  BTW, GEI is going to publish this piece tonight and add it to their RSS feed whatever that is.  John Lounsbury said that that move would put this article out there for any other website syndicated to them to pick it up.  Some of them are huge, like MoneyMorning.  I don't have any reason to think anybody would pick it up but it's kind of a fun way to find out.  I did see one of my articles on MoneyMorning though... which kinda scared me to be honest because their mailing list alone is 750.000 people, lol.

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  21. If you look at aud/nzd chart that should be clear already. Its broken below long term trendlines.

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  22. Greg's comment was regarding the NZD:USD not the AUD:NZD.  I didn't particularly like your tone in your last comments here and I don't like the tone of this one.  It insinuates that for some reason you seem to think you're above others here.  I've seen a ton of your comments over at Tim Knight's site and trust me, you aren't above others here or there..

    Would you mind clarifying what exactly "should be clear already" as indicated by the AUD:NZD?  Is it the inflation/deflation debate?  That China is slowing as Greg mentioned?  That food prices might go parabolic as Greg mentioned?  That one should go long the Kiwi?  What exactly is it that you claim is so clear now?

    And I suggest that you don't come back with the attitude of talking down to anybody, ok.  Perhaps you could honor us with a chart?

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  23. That last photo on the wikipedia page sure got me chuckling.  "Jesus Will Beat U SATANIST" !!

    Let's just hope the supply trend insulates these boys from $CRX's dire suggestions:
    http://rationalinsolvency.com/2012/09/hop092712a.png 
    It's one thing to be hungry.  But thirsty!?

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  24. Really cool conjecture.
    Stumbled upon these in the process of abiotic meandering:
    http://bit.ly/UQA1Kq
    http://static.scribd.com/docs/j79lhbgbjbqrb.pdf 

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  25. Thanks for the picture Zim.  I wasn't aware that others had gotten to that monument and painted the same message there that I would have.  Nobody knows who paid for that monument but speculation is that it was Ted Turner.

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  26. Thanks again.  Yeah, when we think about what happens if we were shoot an elephant and leave it's body right there on the spot, how many years would it take for the body to be covered by 10 feet of earth.  A million years?  His body would be nothing but dust in one year.  By time his body was 5000 feet below the surface where oil is found it would have been nothing but powder a few million years earlier.  There's not much oil in powder.  But never was there a time on this planet when trees lived anywhere where their very roots are now covered by 12 miles of rock.  But strangely, that's where they're finding oil now, 60,000 feet down.  There's just no chance whatsoever that that particular oil was formed by intense pressure and heat on a pile of dinosaur dust or tree dust.  I feel like such an idiot for not having contested that entire theory when I was in 4th grade.  Even a normal 4th grader should be able to figure this out.

    Yes sir, our schooling system certainly teaches us the shit they want us to believe don't they?  And who writes those textbooks that promote such ridiculous theories and lies about history?  I find it all just a bit aggravating.  Not sure what I'm gonna do about it though.  Teach your children well... that's about all we can do and that's exactly what I have done.

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  27. If I were into gold I'd be unloading it now. All of it.

    Firstly, because gold prices and equities are moving as one now. Supporting the theory that both will collapse at the same time.Secondly, well, I know the conventional wisdom -- especially among gold enthusiasts -- is that what happened before can't or won't happen again. But actual history shows that, in most cases, what happened before will happen again.Don't be shocked if one day in the not-too-distant future the Fed is amenable -- or even eager -- to return to a gold standard, and along comes a Gold Reserve Act 2.

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  28. Bears frozen in the headlights. Even if this thing resolves lower and presents a clear fiver down from the top, as AR pointed out on a chart recently, we've seen clear fives down over the last few months and years that were followed by "corrections to new highs."
    So stunned bears can't trust fivers down, and they can't trust support levels not holding either. So it'll be way down before a lot of 'em start shorting again. If they can even find an entry then.

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  29. Obviously I'm chatty today. This is something I've thought for a long time: I think a big weakness of EWT is its rigidity. EW theoreticians, mostly male, like the rigidity and order of rulers and straight lines. But nature isn't composed of straight lines (or everything would look like Minecraft). Nature is filled with curves. Including Nautilus fractals and such.

    I think this is a huge oversight in charting. The chart I'm attaching isn't really a count, just an illustration of the possibility. (It's the current AUD/JPY, by the way.) If we would open our minds and see that often formation boundaries are sweeping curves -- like in the case of an expanding diagonal -- maybe it would suggest interesting targets that make sense. And allow for overlaps that make sense. And maybe resolve some of the consternation over some counts.

    http://i.imgur.com/9vsEO.jpg

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  30. I'm obviously new to this, but my understanding is that abiotic oil theories supplement, rather than contradict more pervasive/orthodox biotic theories (i.e. oil can be produced under both modes).  Could you point me to sources that say otherwise?  Thanks--hopefully I'll never be too old a'children for goods schoolin' :)

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  31. I'd agree with that totally Papa although admittedly when it comes to charting market I've been guilty of being the rigid, linear type.  I think the vast majority are.  But there "is" some room for flexibility.  It might be kind of like this:  we look at a chart and really it's only showing two dimensions but the markets and social mood move in 3 dimensions more or less like in the picture.  I definitely think we tend to view things in too rigid a fashion.  But to try to envision market direction in 3 dimensions is nearly impossible for a human brain, especially one like yours (LMAO... love ya and you know it).

    Dirtrockguy over at Pretzel's posted the second chart and on it he's drawn sweeping curves like you've shown.  I asked him how he did it using StockCharts tools but he never did answer my question.  But I've also tried to draw charts like that to show them to the crowd but of course I've had to use linear (lines) to try to draw a curve.  I'm with ya.

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  32.  Zim,

    Here's something you might be interested in

    http://en.wikipedia.org/wiki/Ancient_Pueblo_Peoples

    The anasazi have been studied extensively lately to fine tune physics models that are being applied to social sciences, and also because they are a classic example of an advanced civilization collapsing.

    The red line is from the historical archeological record. The black line is a computer model of the population growth based on environmental, social, and other parameters. The numbers were added by me after I noticed an elliott wave pattern.

    No one knows for sure how it happened. Some speculate climate change. Other have proposed invasion or civil war ("anasazi" means enemy in Navajo). One thing for certain is that the entire culture disintegrated and then reorganized into something entirely different.

    I prefer to think that what really happened was enough people just got fed up with the shit that was going down and packed up shop and split, but that's not a very scientific assessment. Still there's anecdotal evidence at least to support my theory

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  33. I'm gonna guess he pulled it into a photo editing app and added the curves there. That's what I do.

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  34. Chatty is good.  Fire away.

    I'd agree with that totally Papa although admittedly when it comes to charting market I've been guilty of being the rigid, linear type.  I think the vast majority are.  But there "is" some room for flexibility.  It might be kind of like this:  we look at a chart and really it's only showing two dimensions but the markets and social mood move in 3 dimensions more or less like in the picture.  I definitely think we tend to view things in too rigid a fashion.  But to try to envision market direction in 3 dimensions is nearly impossible for a human brain, especially one like yours (LMAO... I love ya and you know it).  But I love the way you think.

    Dirtrockguy over at Pretzel's posted the second chart and on it he's drawn sweeping curves like you've shown.  I asked him how he did it using StockCharts tools but he never did answer my question.  But I've also tried to draw charts like that to show them to the crowd but of course I've had to use linear (lines) to try to draw a curve.  I'm with ya.

    EDIT: What the hell?  The pictures didn't attach.  Let's try that again.  You must have thought I was nuts.

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  35. NOTE: My avatar has disappeared thanks to the ever-reliable Discus.  No worries, it' really AR but I just don't have time to fix it right now.  I tried but as usual Discus thinks it knows what's best.

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  36. Hey Greenface-
    Very cool, thanks.  Or should I say Ahééhee?  Sure has become a familiar looking pattern.

    Hope you've been well man.  I guess if you're busy using translated 13th century primary sources to corroborate migration studies, things can't be too bad, eh?

    He's got his own ecological bent, but Diamond talks about the Anasazi as one of several examples of societal collapse.  Even if you don't agree with his conclusions, it's an interesting list of case studies.  It looks like the Ancient Pueblo Peoples wikipedia page has a link to the book at the bottom too.

    > One thing for certain is that the entire culture disintegrated and then reorganized
    > into something entirely different.

    Sounds kinda like early 1970s Washington Senators fans...

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  37. Congrats AR!  There's no question the article is worthy!

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  38. Parabola tool (from the Line tool drop-down)?  It seems I was able to make a decent approximation:
    http://rationalinsolvency.com/2012/09/sc-pt.png
    You can see the three drawing points in yellow on the bottom curve.

    Al_Dente over at Cobra's intraday thread keeps everyone so updated with their latest that I don't even have to check StockCharts' own blog any more!

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  39. These count as curvy?
    http://rationalinsolvency.com/2012/04/spx041212els.png 
    http://rationalinsolvency.com/2012/04/spx041212gees.png 
    http://rationalinsolvency.com/2012/04/spx041212geesff.png 

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  40.  HAha. Yes, something totally different is happening this season in Washington that's for sure.

    I've heard of that book by Diamond but was always suspicious of his work because it sounded like he was trying to make those studies parables for a certain political agenda. Guns, Germs, and Steel was definitely a classic though so maybe I'll re-visit it. I lean more towards Tainter's complex society theory, but I suppose that could be because it fits more into my world view.

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  41.  Also here's great piece sort of on this subject about Pre-colonial North America

    http://www.theatlantic.com/magazine/archive/2002/03/1491/302445/

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  42. You've expanded my awareness of charts ... that's a very good idea and way to look for patterns.
    That being said, I've just discovered a very line-like fractal in the USDJPY.  But I suspect the Japanese are more anal about lines and candles than most.  I posted it above.

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  43. USDJPY

    A fractal appears to suggest a big wave 2 may have completed today.

    Some observations:
    1.  This big triangle is the same triangle angles, but twice as big as the first one.
    2.  Both have a 7 day decline at the end with a smooth landing ... like a plane on water.  One end of January and one yesterday.
    3.  Both are twice as long (time) as they are tall (price movement on the up wave).
    4.  Both triangles are on the support line which hits 3 points ... 2 of them are these 7 day landings at support.
    5.  This is now a 78.6% retrace of the move from 76 to 84.
    6.  Japan may retaliate after Ben hit the print button -- currency war on.

    Anyway, this is a good support line from which to go long with tight stops.  Good risk/reward IMO.

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  44. Yeah, that's good Zimmer.  I'm gonna have to experiment with it.  Thanks.

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  45. Shame they wouldn't answer your question :(

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  46. Not trying to be above anybody. Apologies if I offended anyone. Just look at
    Gregs comments. He means hard commodities (example iron copper) will be weak with China slowing as
    opposed to soft commodities which is exported by New Zealand. I thought that was what he was referring to.  Clearly visible in the aud/nzd charts. Posted my
    chart at evilspec if you have been following.

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  47.  But will definitely keep my eyes open for news about "stimulus" from China. If that happens. This pair is extremely oversold. Should be a good long then. But for now Kiwi trumps Aussie.

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  48.  Tried a couple of longs unsuccessfully past few weeks. Hopefully this time the turn is near. Dailyfx guys reporting SSI at all time highs. While retail is usually wrong, at extremes they mark a bottom in the pair.

    http://www.dailyfx.com/technical_analysis/sentiment/?technicalSentiment=USD/JPY

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  49.  Trendline breached retouched "kiss of death" and fell apart.

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  50. Yeah, I just googled "oil is not a fossil fuel" and a few came up.  I kind of trust the first one that popped up...  lol
    http://www.canadafreepress.com/index.php/article/3952
    http://www.youtube.com/watch?v=4kZotftLE0A
    http://rense.com/general67/oils.htm
    http://www.crisisbydesign.com/blog/global-warming/oil-is-not-a-fossil-fuel-2/
    http://brookesnews.com/093108co2oil.html

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  51. I don't mean to be a hardcase Newbfxtrader but I literally "had to" start this blog to get away from the trolls, the general assholes and the shit disturbers that infest every other investing blog where the blog owner doesn't give a shit.  That would be 'most of them'.  The very few people who contribute here have all been through the same hell I have and have had to put up with the same trolls I have, on the same site where it still goes on to this day.  That's why they're here... to get away from the personal attacks and from the pricks who's only goal it is to disrupt a blog and mess with peoples' heads.  And every single time it starts with some flippant comment that's meant to irritate.

    Just so you know, this is a very friendly place where we don't contest with each other.  We don't spar with each other.  We don't aggravate each other.  We share ideas and we do it respectfully, usually with some fun included or some humor.  None of us cares how big the other guy's dick is.  And naturally the same trolls immediately tried to gain a foothold here and start up their juvenile activities here.  I just shot 'em in the face with the troll gun, banned them for life and it seems the message was heard by the others loud and clear.  And I'm going to keep things that way.  Besides, there's a fair amount of traffic that comes here for the articles and most of those people don't care to participate in comments.  But they read 'em.  They don't need to be subjected to the incredible degrees of nonsense seen on some of the other sites.

    So if you'd care to participate here under those friendly conditions... welcome.  Beer is always on the house.

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  52. No offense taken. This blog is your baby and you should run a tight ship. Some of my comments over evilspec are meant specifically to some traders who want to keep shorting the market that refuses to go down. I used to be that trader. You know what I am talking about. Fundamentals don't match the price divergences galore yada yada. Doesn't matter price is still king.  Don't take it out of context.

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  53. Apple   http://chartramblings.blogspot.co.uk/2012/09/aapl_30.html

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  54.  Nice PB.George Bayer (a contemporary of Gann's but less well-known) believed that the true nature of markets is elliptical.An elliot guy called Fisher wrote a book combining EW with ellipses that was quite interesting

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  55. commodities importer/consumer China contracting: 
    new orders decline at fastest pace in 42 months
    http://globaleconomicanalysis.blogspot.com/2012/09/china-new-export-new-orders-decline-at.html
    http://www.bloomberg.com/news/2012-10-01/china-manufacturing-contracts-a-second-month-official-pmi-shows.html
    http://1.bp.blogspot.com/-HOuKVOHqxOo/UGccy8uM9bI/AAAAAAAAR8w/Oo1oQxI3Plo/s400/Markit%2BChina%2BMaufacturing%2BPMI%2B2012-09-29.png

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  56.  Beautiful chart.
    Did you see this one from San:
    http://niftychartsandpatterns.blogspot.com/2012/10/apple-bearish-doji-star.html

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  57. Squiggle time. Five down on the Augie/Doggie. Little bounce due mebbe mebbe.

    http://i.imgur.com/H7try.jpg

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  58. Hey AR
    Just thought I'd share my EUREKA moment with you here.
    I think I've solved the riddle of the USDJPY / AUDJPY / AUDUSD matrix
    They are ALL going down. 
    The bullish-looking wedge on USDJPY is dead, and it's still headed south IMO.
    weekly chart gaining clarity
    http://screencast.com/t/JuzJqW7KuaJ

    Stay well.
    DK

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  59. Hola amigo. Sorry I took so long to get back to you but this place is pretty dead and I don't even check in every day anymore.  And that's ok too, since I don't want this blog to turn into a chat room filled with shit like some others.  If I make comments at all, it's at Pretzel's.  Awesome crowd over there including a great Aussie guy named 'mars'.  He's very talented with the charts as are some others.  You'd absolutely be a welcome guest there my friend.  So would Greggor but he's opted not to comment there yet.  Papa Boule has.  My bad for not checking in here last night though.  My apologies.

    I'd stated many times over the past 2 years or more that if a deflationary outcome is what's in the cards we would see the USD leading higher, with the Yen and gold probably holding up well and rising with it... relative to all other currencies.  But what you're envisioning isn't all that far away from what I've proposed.

    I'd say that at least for now you're seeing the Yen being the strongest, the Dollar weakening relative to it, and the Aussie being the weakest of those three.  Meanwhile, you're quite right, all 3 pairs are headed lower and all 3 individual currencies on a standalone basis are headed lower as well.  The entire basket has been thrown off the cliff.  Gold shows what's really happening with currencies.  So as I've mentioned in the past, from the perspective of inflation or deflation we really need to compare the currencies not to each other so much, but how they line up with the price of gold and oil.  Mixed bag there, lol.

    I'd have to say we're not seeing the deflationary outcome right now, but the inflationary one.  By all rights equities should be headed off to new highs in this environment.  I'd have to think that as long as Bernanke and Draggy are going to print "whatever is needed" for "as long as is needed" then the bond markets "have to" hold up well.  Rates "have to" stay down near zero because those two lunatics promised they will.  I just don't see how it's possible to have a deflationary outcome if, and that's a big IF, they're able to pull off what they intend to do.  The biggest question in my mind is what's gonna happen if all the 'other' bond holders in the world decide to dump bonds.  Will the Fed have the resources to sop them all up?  I think the answer is "no".  But I also don't see any reason for the other bond holders to sell the bonds they currently own.  I think we can only play the markets day to day my friend and we have to stop wasting our time trying to figure out where in hell this mess is going over the long haul.  Nobody knows, not even Sarah Palin, lol.

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  60.  Thanks Greenface.No I hadn't seen that from Sal but I had noticed the doji.Its a nice chart

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  61. San is a machine. I don't know when he sleeps. He posts charts morning noon & nite.
    And it's all solid TA

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  62. Hey DK,
    Here are some support lines for the USDJPY.
    And the daily shows that DMI with a buy indicator.
    I think there are two alt counts out there ... yours (still bearish) and the 3 has started (GF's).
    I missed the reason why you think that really-big wedge is dead?

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  63. hey Grrrrrrrrrrreg
    USDJPY
    1. That presumed big (1) up we had at the start of the year was never a convincing 5 waver
    2. How many times do we say "ooh, look, a wedge!", only to find it was just missing 4&5th waves and turns out not to be? many many times
    3. The yellow triangle seems to fit perfectly so far -we are due an e wave up, so if you do get long..be aware it could be an e wave, not the promised land of big 3 up!
    GL amigo
    DK

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  64. Hola mis amigos. ¿Cómo estás?

    For what it's worth I still think the Aussie has this in mind.

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  65. DK, Thanks for explaining your thinking on the wedge-no-longer.  I am long, so thanks also for the signpost to look out for ... a target for an e wave.  Always good to have alternatives in mind.
    I suppose we'll know if it's acting strong like a big 3 up soon enough.

    Good on ya,
    Greg

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  66. USDJPY -- looking very nice here.  A good base, a possible completed big 1-2 count with a and c of 2 about the same in time (56 and 59 days).  AND the recent pull back was on very low daily volume ... a bullish volume reversal pattern has been in place for some days (higher volume on up days than down days).  Three higher levels of support have been established.

    I think it's ready to rocket.

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  67. An absolutely "must watch" video by David Halsey. http://eminiaddict.com/?p=5991

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  68. That's interesting ... they are seeing banks algos selling right after QE3 ... makes sense that QE3 is the exit plan.  And right at the top of the channel.  Vewy intewesting.

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  69. Great blog.  

    I agree with the idea of decades of credit inflation (mortgage, private debt, corporate debt and some public debt) fueled by cheap Fed interest rates produced little in the way of real productive economic growth since 2000.   The economy, especially post the 2000 tech boom/bust, has been transformed from producing products that are valued internationally into a consumption based US economy that grows by buying cheap imports on credit.  This shows in the large trade deficit and the loss of well paying manufacturing jobs to the China.  In addition, the Fed low interest rate policy has aided in the creation of assets bubbles (nasdaq, housing etc) which again does little to produce real economic wealth (rising wages and jobs) but creates artificial wealth from bubbles that ultimately collapse.  

    And now the economy is trying to deflate this artificial credit growth from asset bubbles and debt based spending on cheap imports which is unsustainable because real wages cannot cover the interest and principal payments.  And so to counter this deflation, inflation is created by governments via deficit spending and the Fed with zero interest rates and QE to further manipulate down long term interest rates and give consumer cheap credit to encourage more spending.  

    And what we have is a tug of war shown by your CRX:SPX ratio which ebbs and flows from inflationary which stalls the economic recovery by decreasing consumers disposable income to the deflationary waves that boost the discretionary income of consumers and stimulating the economy.  In effect, commodities are behaving like the Fed used interest rates to regulate an overheating economy when rates were not stuck at zero.  Personally I don't think we will see deflation or inflation but the Fed and government deficit spending will be used to regulate the economy somewhere between those important trend line shown on your CRX:SPX chart.


    Also I like your postings on the dollar.  I have a few comments
    1. The dollar is demand was stronger when the economy is healthy and the US is producing products that are desired globally (industrial revolution and tech boom are examples of this).  This was one factor why the dollar topped after 2001 as the proportion of unproductive debt based spending and asset inflation that created little in real economic growth increased.  The weak dollar is symptom of weak US economy and artificial debt induced economic growth. 
    2.  The dollar is also highly correlated to the yield spreads between US bonds and German (or other AAA bonds).  The thinking here is big institutional money flows to highest yielding and safest securities.  This is shown in the correlation of Treasuries vs German Bund ratio which I argue that interest rate spreads drive the demand and value of dollar and thereby drives commodity prices.   http://stockcharts.com/h-sc/ui?s=IEF:BUND&p=D&yr=1&mn=0&dy=0&id=p37733451543
    3. And of course the safe haven play which we say during the financial crisis, past currency crisis (asian, russian etc) and also to a lesser degree during recessions. Sorry if this was a bit long but this is how I make sense of this.  

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  70. Can you please explain your treasuries vs bund chart, I don't follow how that drives demand for dollars.

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  71. A driver for the dollar (there are at least four) is money seeking a higher return by arbitraging difference in yields offered by various central banks.  For example, if Fed lowers interest rates to 0% they encourage a "carry trade" (sell the dollar and buy foreign currency such as aussie dollar) that offers a better yield.   That is, the central bank lowers short term interest rates to stimulate their economy (by encouraging more debt based spending/investment) and as a desired by product they weaken the currency as holders of USD move funds into higher yielding currencies to arbitrage the difference in yields.    In addition, investor seek better returns by by investing in stocks, commodities, corporate and junk bonds and real estate. 

    As a note, since 2008 the short term interest rates are at zero so the Fed created new ways to manipulate the longer term rates downward.  That is, they undertook QE and by bidding up the price and buying a large supply of treasuries they lowered the long term yield. This interest rate manipulation serves to weaken the dollar against the deflationary credit destruction forces that would have the dollar appreciate and also further encourages institutional and small investors to seek higher returns.   That is they encourage investors to dump USD for other currencies in a "carry trade" and also to speculate and inflate other asset classes.  As for the dollar, the best relationship is actually the difference in the interest rate (credit spread) between a 2 year German Bond and a 2 year US treasury shown below with a correlation of 0.81.   [Stockcharts only had the price of long bonds but the ratio shows the relationship].  Now for why German Bund to US treasury spread correlate and drive the USD - the reason is that the biggest capital flows are from the large institutions (banks, institutional investors etc) that are required to hold high quality assets as collateral on their balance sheet.   They have billions of dollars of funds (which dwarf the money flows of speculators) that they need to invest in large liquid and risk free markets (and the bond market and in particular, the US treasuries and German debt (and sometimes Japanese) meet this requirement).  Effectively, they move between holding German bonds when bunds yield more than treasuries by selling USD in favour of Euro.  And when the ECB manipulates lower their interest rate, these institution sell Euro and move back into the USD and buy US treasuries. In essence, the central banks to counter deflation which has the currency strengthen, use lower interest rates to force investors into better yielding assets (and therefore devalue their currency relative to other fiat). In effect, this is a kinder gentler version of the devaluations that occurred during the great depression but the end goal is the same of having the central banks trying to balance asset inflation (via currency depreciation) versus the credit deflation (currency appreciation).   Commodities tend to do particularly well because the interest rates are below the rate of inflation and so behave as a hedge but as we know they suffer from big boom/bust of the inflation/deflation cycle. And as I wrote earlier I tend to believe the central banks will try to balance the inflation/deflation dynamic though of course a misstep could end up in hyperinflation or deflationary collapse. I don't believe anyone is smart enough to know which way yet. This is a longer term view of the yield spread vs dollar
    http://4.bp.blogspot.com/-u0t7enq5JQ0/TcndkuXP_ZI/AAAAAAAAE-M/LbgOY_g5wGQ/s1600/Spread+vs+Dollar.jpg

    I'm not sure if I clearly answered your question but basically the central banks use interest rate policy to impact the economy.  

      

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  72. Welcome Jeff.  Wow, that was a fantastic good comment.  And please... don't apologize for its length.  Man, I'd be more than happy to see comments like that any day of the week.

    I'm glad you actually took the time to read the article with the goal of trying to understand what the $CRX study is showing.  You have a real good understanding about what my charts are revealing and about what's really happening here.  In fact I'm not sure I could have described it as accurately as you did, although I 'do' understand my own ratio-type analyses pretty well, lol.  It's just that you've put your excellent thoughts down on paper very well. 

    As for the correlation between yield spreads (US vs. those of "any other economy that isn't bankrupt yet") and commodities prices, I'd say that you're probably mostly right although I'd say that particular correlation is more or less "indirect", a natural coincidence.  By "indirect" I mean that the low interest rates for the currencies used by the more sound economies is a "direct" result of insane amounts of money printing, money which is used to buy bonds and therefore hold rates down near zero.  Essentially, inflation... a massive increase in the money supply.  The primary dealers buy those bonds and then use those bonds as collateral for playing games with, games like chasing the stock markets higher and even more so the commodities sectors.  JP Morgan's criminal activities in manipulating the silver markets have been well documented.

    But let's keep in mind that there is also one very real factor that is apart from these "bond prices and bond rates" metrics, and that is the fact that there really is a dire problem developing within the food commodities sector.  And that sector forms a big part of the CRX.  We're more or less in some deep shit here if food production continues to fall behind the curve.  In fact, although you might have already watched the video with Jim Rogers in the article above, on Monday he also appeared on BNN in Canada and spoke more about commodities and the problems that sector faces.  You might find it interesting.

    Again, thanks for a great comment.

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  73. Welcome Jeff.  Wow, that was a fantastic good comment.  And please... don't apologize for its length.  Man, I'd be more than happy to see comments like that any day of the week.

    I'm glad you actually took the time to read the article with the goal of trying to understand what the $CRX study is showing.  You have a real good understanding about what my charts are revealing and about what's really happening here.  In fact I'm not sure I could have described it as accurately as you did, although I 'do' understand my own ratio-type analyses pretty well, lol.  It's just that you've put your excellent thoughts down on paper very well.  

    As for the correlation between yield spreads (US vs. those of "any other economy that isn't bankrupt yet") and commodities prices, I'd say that you're probably mostly right although I'd say that particular correlation is more or less "indirect", a natural coincidence.  By "indirect" I mean that the low interest rates for the currencies used by the more sound economies is a "direct" result of insane amounts of money printing, money which is used to buy bonds and therefore hold rates down near zero.  Essentially, inflation... a massive increase in the money supply.  The primary dealers buy those bonds and then use those bonds as collateral for playing games with, games like chasing the stock markets higher and even more so the commodities sectors.  JP Morgan's criminal activities in manipulating the silver markets have been well documented.

    But let's keep in mind that there is also one very real factor that is apart from these "bond prices and bond rates" metrics, and that is the fact that there really is a dire problem developing within the food commodities sector.  And that sector forms a big part of the CRX.  We're more or less in some deep shit here if food production continues to fall behind the curve.  In fact, although you might have already watched the video with Jim Rogers in the article above, on Monday he also appeared on BNN in Canada and spoke more about commodities and the problems that sector faces.  You might find it interesting.

    I took the liberty of including an image of your chart below.  Again, thanks for a great comment.

    ReplyDelete
  74. How does this relationship hold when the USD is recognized as a symbol and not necessarily a commodity in itself. ie, it only represents the ability to purchase gold/oil not the actual energy to obtain gold/oil. I am looking at something that isn't exactly measured in the markets (for a specific purpose) but has a tangible effect.

    Furthermore; the UST derivative complex is worth several hundred TRILLION USD. This is something which is larger than the entire UST complex, has an effect on it, but isn't directly observed... I cannot agree that it is not worth paying attention to.

    ReplyDelete
  75. The USD may not be accurately reflect the true value of hard commodities.  In that case the dollar (and other currencies) would be over valued and commodities are under valued.  And if true, in the long run  this would correct.  In the short term, the relationship between the dollar and interest rate differential has a very good correlation of 0.81.  That means 81% of the changes in interest spreads describe changes in the USD on a day to day basis. The other 20% of the USD price movement are described by other factors.  

    I look at the derivatives are a type of insurance.  Car insurers don't have the capital to cover for all car owners who get in accident on the same day.  They would go bankrupt.  But car insurers can cover  for the historical average of accidents.    Derivatives are similar in that if all the contracts need to be paid out today then the "insurers" will not have enough capital to cover. But if a few go bad here and there they can cover those bets.  

    There are two main differences
    1. There is more leverage with derivatives
    2.  Derivatives can fail in mass (like in 2008).  This would be similar to an unlikely scenario where some natural disaster destroyed all cars in mass.  Insurance companies cannot cover this type of black swan event.  That said, I expect mass destruction in derivatives is more likely than mass car destruction.  Also if derivatives do explode that would be deflationary as there would be a demand for dollars to cover these contracts. 

    It is interesting how in the two things you mention - one is inflationary for hard commodities and the other is deflationary for credit (derivatives).  I don't disagree with the end game though this is something that may take years or decades to play out but I think in the short term these risk are "ignored" by investors.  

    ReplyDelete
  76. Good call that!  QE3 at the top WAS the exit plan. 

    ReplyDelete
  77. Earnings disappoint; economic reality cannot match bullish expectations
    http://www.zerohedge.com/news/2012-10-21/q3-earnings-season-date-summary-ugly-and-getting-worse

    "Every major sector was in the red, with financials, industrials and energy stocks taking the heaviest selling. In a sign of the breadth of the selling in equities, more than 97% of S&P 500 components were to the downside. The number of trades in declining shares outpaced that in advancing shares by more than 19-to-one."
    http://www.foxbusiness.com/markets/2012/10/23/earning-worries-trigger-steep-selloff/


    Stocks Slump, Led by Materials http://www.cnbc.com/id/49517669

    Europe: stocks close "sharply lower" http://www.cnbc.com/id/49513355/

    Spain's GDP contracts faster than previous quarter http://www.cnbc.com/id/49514378/
    http://www.foxnews.com/world/2012/10/23/spain-central-bank-says-economy-shrank-04-percent-in-3rd-quarter-repeating-q2/

    As The Truth Catches Up With Spain, Will Banks Finally Be Forced To Mark To Something Near Reality?
    http://www.zerohedge.com/contributed/2012-10-23/truth-catches-spain-will-banks-finally-be-forced-mark-something-near-reality

    ReplyDelete
  78. Nice clear setup,with levels,on Ftse100 ,perhaps cleare to monitor for sell signal than Spx  http://chartramblings.blogspot.co.uk/2012/10/ftse-swing-chart.html

    ReplyDelete
  79. Hi, may I know what is the ticker of $CRX and $SPX on Bloomberg?  I assume they should be CRX Index and SPX Index, but the chart turns out to be different from yours.
    Thanks.

    Ethan

    ReplyDelete
  80. I'm sorry Ethan but I don't know what the symbols would be on Bloomberg.  I very seldom ever visit that site and I'm not familiar with their symbol system at all.  Is there any way you could show me what you're seeing?  Maybe you could supply a link and I'll see if I can figure out why the chart you're seeing is different than mine.

    ReplyDelete
  81. Thanks.  I've attached the file.  Please note that the CRX in Bloomberg is "Morgan Stanley Commodity Related Stocks Index", and SPX means S&P 500 Index.

    ReplyDelete
  82. Thanks Ethan.  Well as it turns out Bloomberg's chart is identical to mine.  It's just that mine is using candlesticks and Bloomberg's chart is a line chart, which is of course based on closing prices.  So if I just change my chart to a line chart, they end up being identical which is of course what we expect.  Here's what mine looks like when I convert the monthly chart from the article to a line chart.  Now it looks like Bloombergs.  :-)

    ReplyDelete
  83. I think the candle stick chart you use is more reasonable.  I found there were 3 lower shadows in the end of 2008 at the level around 0.4, suggesting this level is significant.  If we use close price, we ignore this level, and hence couldn't draw a lower uptrend line.

    ReplyDelete
  84. Canada GDP shrinks http://globaleconomicanalysis.blogspot.com/2012/10/canada-gdp-unexpectedly-shrinks_31.html
    and housing bubble pops http://creastats.crea.ca/natl/

    has the global recession come to Canada or can this be dismissed as a bad quarter? 

    ReplyDelete
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