Originally published by Chamber of Merchants
The big problem is that, in more ways than one, our economies and markets have borrowed from the future. Borrowing comes with a cost. The bigger problem is that what is owed from the future will need to be paid back today. Currency such as the US dollar will soon reflect this reality, when reality finally sets in.
I would like to share this Weekend Report with you so that in time to come you can say “I saw that coming…”. If you look at yourself and those around you, from your mates, family, teachers, accountants, bank managers: probably 99% of them don’t have any idea about what’s really happening on the global economic stage. And why would they?
But should they? Yes.
What’s happening globally is close to hitting home very soon. We are weeks away from a change in the type of news and articles we’re going to receive via newspapers and the internet. We’re a few weeks away from more money printing. We’re a few months more away from serious economic indicators that are going to have a lot of people worried, and it affects us all.
Doom and gloom, Merchant! You sound like a tin-foil hat conspiracy theorist.
No. Not all doom and gloom. And no, not theories at all: reality.
In fact the general western citizen is living in a theory that is being proven wrong on a daily basis. We are all just to numb and uneducated to notice. We’re like the frog in warming and then boiling water that does not realise the need to jump out of the pot. The frog adapts to the point where it simply dies.
We don’t want to be like that unlucky amphibian.
So what am I talking about?
I’m talking about what’s going to happen next year, which very few analysts seem to realise.
Right now, everyone is pretty high on Triumpium (trademark) .
It remains to be seen if this is stock market rally just an elaborate scheme by banks to exit after the Santa Rally or not…
Regardless let me offer some reality.
1. Right now, the market has borrowed from the future.
Huh?
Yes. You see…the idea of the Trump rally is that we will now experience moderate inflation, economic growth, more jobs, tax cuts etc. Some of this will take months and some of this will take years. So yes, the market has jumped the gun. Big time.
A couple of scenarios can play out:
- The market will reach even crazier valuations and then has to flatline…literally trade sideways for a long, long, long time until the value of the companies actually catch up with their share prices.
- The market will realise that it has rallied on news that will only actually occur in the future, some time, maybe and that the current euphoria was just a momentum trade that will be corrected.
The market has assumed that the good news of Trump’s plan is now…when in fact it will take a considerable period of time to get there. Even years.
Meanwhile conditions are rapidly changing that make the stock market more overvalued each minute of the trading day.
2. Rising US dollar: Bad news for the Trump rally
As the US dollar rises, it causes problems…
1. As the dollar rises, earnings of US companies from overseas become less and less. That means that come quarter 1 reporting next year, the stock market earnings will become weaker and weaker. Hence, higher stock prices just become nonsensical. Stock prices will need to go down to reflect the weaker earnings potential of companies due to the weaker dollar.
2.Donald Trump hates the highly priced US dollar. It encourages importing goods from foreign countries and discourages foreign countries from buying goods “Made in the USA” because they’re simply far more expensive relative to the production costs of overseas nations. The Donald is about to kick the US dollar in the groin because he knows it’s the best way to stimulate US production and exports. How will he do it? There are many ways… he can tweet something that is so ridiculous that other countries lose faith in the US dollar and thereby commence dumping it. He can default on the unpayable debt his government has now inherited. There are numerous scenarios…but it can easily be achieved.
Now this is the main “downer” pill for the whole scenario…and yes, I have mentioned it before. I’ll mention it again…
3. The bond market is raising interest rates faster than the Fed can say “Quantitative Easing.”
Hardly anyone is noticing: the cost of borrowing is sky rocketing. Only this week two banks have noted that further increases in bond yields will become “problematic”.
The Fed just raised rates by 1/4 percent again to be a total of 0.5% (approximately).
Who cares?! The bond market, which influences the repayment rates on mortgage, business, auto and personal debts are already as high as they were in 2011 & 2014. The problem here is that many of the people and businesses have taken out loans at near zero interest. Their budgets and profits don’t take into account higher costs of borrowing.
Sounds pretty boring. Too economic?
Plain english: Unless bond yields come down:
You will be paying higher rent.
If you are a homeowner you will be paying higher interest payments to your loving bank.
If you are a person who buys stuff, you will be paying more for anything you buy as business owners pass on higher borrowing costs to you and me. (cost push inflation).
So essentially, the bond market which is potentially “crashing” is sending yields high enough to actually act like a tax on all of us.
Tax Cuts from Trump? Who cares?! It will be too little too late if yields continue to rise. We will all already be under pressure from higher costs of living that any tax cuts or government spending programs will not make a difference.
“Not make a difference?!” “I though the stock market is rallying because Trump us going to spend money and cut taxes”.
It is. It is. It is rallying without realising that in the background the cost of borrowing is already starting to tax everyone more. This means that the rally is only based on the story of Trump’s spending and not on the reality of what is actually happening.
4. Foreign countries are selling U.S Bonds…
It looks like China has unloaded about 3 trillion dollar of U.S bonds since 2014 (correct me if I’m wrong). Japan and Europe are also offloading.
This is largely what’s driving the yield: the price of bonds are plummeting and so bond yields are rocketing.
I know some great traders that are bullish the US dollar.
However my view is this:
If the bond market remains weak, it literally means that there is a lack of demand and trust in US treasury notes, bills and bonds. How do you repay the interest on 20 trillion dollars of debt if no one wants to lend you money to repay the people you owe?
Ladies and gentleman. If the bond market remains weak then there is only one answer to the being able to afford medicare, social security, welfare, debt repayments, military spending, infrastructure spending etc…
If no one wants to loan the United States the money by buying their bonds then there is just one answer:
The Federal Reserve will need to loan the government the money… the money that the Fed itself doesn’t have. They will need to become the main bond purchaser to provide funds to the government. But remember, the Federal Reserve doesn’t have the money to buy the bonds. They need to loan it into existence. It’s like writing a cheque from a bank account that is zero but always spits notes out at the ATM.
And that is why I am not bullish on the US dollar.
However, short term it does not seem to matter to the market … and that’s the point of trading… The current trade will last as long as it has momentum, regardless of how right or wrong it is.
Okay…So you know my thoughts about the long term trend of the U.S Dollar… but what about short term… What about the precious metals portfolio right now?
While I did enter all my positions at support zones, the Gold price action has resulted in significant drawdowns, breaking through each support level so far. This retracement is significantly deeper than the pull-back last year.
Hence we need to look at further managing risk.
What we do want is for Gold to bounce from here.
What we don’t want is to ride it down all the way till $1045.
So let’s see what the probability is of a bounce around this $1130 level.
Look at the chart below. It’s the gold price long term chart.
From a pure charting perspective, we appear to have hit some strong support where a bounce is imminent, even if we don’t reach higher highs.
While this appears to be a bearish chart, it simply shows the resistance points. I am fully convinced that we will still see $1550 gold next year if the Fed starts to enter the bond market in a bigger way which will essentially be QE4.
The alternative is the bond market crashing…which will commence a general market collapse, which will still be good for gold.
Now, below is the bond market… you can see that we’re similarly to the gold chart above, reaching a point that should be a reversal point for yields, the dollar and for gold. Note: breaking higher will still be good for gold since it will pull the stock market down due to debt crisis worry.
As denoted above, we tend to run to the bank when rates are high due to fear of spiking interest rates. The banks know this.
As I have mentioned previously, instead of a bond market crash, this could be an engineered opportunity for the banks to lonk their customers in on fixed rates before the yields go down again. The banks have been complaining that profits are waning due to low interest rates. Therefore the Fed may have backed off temporarily to allow bond yields to spike before stepping in again.
US Dollar
Bad news
The US dollar powered through, in true American Style, testing it’s recent high of 99.12 on the US Dollar Index (U.S Dollar Index, an index which measures the US dollar against a basket of currencies.)
This has caused a pull-back in all commodities including the recently praised copper which has now sunk by 1.5% in a single day’s trading (go figure).
This has pressured gold and silver too to the levels we see now.
Good news
The US dollar has broken into a higher trading channel where it is likely to remain in. There is now a limited upside to the U.S Dollar, 101 on the DXY roughly being the limit of the channel. This means that the fear of a higher US dollar is now priced into commodity prices.
“But Jack, this is terrible news for gold?!”
No. It is exactly the opposite. The US dollar is rising for two reasons:
- A promise of a rate hike. Without the rate hike, the dollar will fall into the lower price channel again. Good for gold.
2. The US dollar is rising because of the promise of fiscal stimulus: Government Spending.
Enter the hero of Gold…
I’ll end off with the above chart as my back is starting to hurt and I’d like to squeeze in a Netflix (NASDAQ:NFLX) session while the family naps 
(They nap…I type…)
Above I have outlined the short term trading boxes for gold.
If gold breaks above $1146 on the gold futures market, then the recovery to $1160-$1190 is a high probability.
A break above $1146, but a failed break, closing below $1140 again is a sign that we would be heading back down to $1125 again.
A break below $1124 is stop loss time for me as this may head down to $1045.If we break lower than $1124 I will be exiting my trades and only return once we shoot above $1126 again.
Alternatively, you can see above that gold failed to break past $1144. If it tries again, but fails again, then it may be considered to be an exit signal too.
Remember, it all depends on the bond yields and the effect on the dollar.
Keep your eyes on the 2 year and 10 year yields.
Finally, why did gold bounce at the last minute? China confiscated some drone. Google (NASDAQ:GOOGL) it.
Also keep in mind that the electoral college votes tomorrow… All going well, Trump will be nominated as President. Unless we have chaos…
And most final finally, the AUD/USD has finally started to show some weakness. Crikey. About time.
If this continues while gold holds steady, we will start to get the rebound in our commodity and precious metal sectors.
Conclusion
Everything I have previously mentioned remains in play:
- Sharia Gold Standard – give it some time… We await new gold financial products to start acquiring gold. This will take some time. Remember, they also need to have access to physical gold which is the crux.
- The Fed raised rates… Yet, housing starts and permits were significantly disappointing.
- Does this seem like an economy that needs higher costs of borrowing? Believe me. The market will figure out that 3 rate hikes for 2017 are going to be a bad idea.
- From now on, any negative economic news will be bullish for gold because the price of Gold right now reflects 3 rate hikes for 2017 (remember we were meant to have 4 this year…?)
- Therefore any bad news lowers the rate hike probability and spooks the market.
I have no doubt in the reversal in gold and it’s bull market. More money printing is now necessary. Yields must come down or threaten to destabilise the free capital market in the US (lol… free……I kill me…) Once the world runs out of Trumpium, and the high is gone…the market will be left with the start and fragile reality of the market in all its frail glory.