Slope of Hope Blog Posts

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Bank Loans Gently Bottoming? (by Gary Tanashian)

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Happy New Year SOH!

http://www.biiwii.blogspot.com

NFTRH117 opened the new year with a review of a successful 2010 and a look ahead to 2011.  We reviewed the precious metals, commodities and broad markets.  Risk is quite high in the broad markets now, even as they pump higher this morning, as I write this intro.  

Stock market sponsorship is represented by the absolute dumbest money on the planet as measured by several metrics (AAII out front).  This is money that wants in on the party and wants to repair the indignities of first being fleeced in 2008, and then sitting in Treasury bonds watching the party from the outside.  

While I expect a significant correction before too long, the analysis in the 'Wrap Up' segment of #117 left me feeling a bit less bearish for the entirety of 2011.  Let's see how things develop.  Manage risk (which means manage bear instincts as well as bull ones), keep perspective, and you will do fine in 2011.

NFTRH117 Wrap Up (Bank Loans Bottoming?)

NFTRH117 intended to be brief, with bullet highlights or something to that effect. But
somehow it got to page 9, so we will wrap up here.

Upon finishing the report, I find myself feeling a bit more bullish on the immediate term
than I was before I started writing. If I had to take a guess, I would lean toward
continued bullish activity in most everything outside of the USD, which sports a chart
that does not look very good. But at some point there should be a strong reversal and
with any luck at all, we will be able to find some negative divergence somewhere to
indicate its impending arrival.

Of course, a strong candidate will be the Gold-Silver Ratio, which remains pinned in a
nose dive despite some positive MACD and RSI divergence. Junk bond to relative
quality bond ratios may provide a clue. Gold in relation to industrial metals maybe. Or
perhaps the thing will just reverse one day when most people least expect it.
Well, NFTRH will expect it no matter how high our gains go in the interim, because
NFTRH is in high risk mode and will remain so until the risk parameters clear.
Meanwhile, I guess it’s party on Wayne, party on Garth.

If Wayne and Garth are going to party well into or through 2011 however, the
inflationary policy must translate to the economy. Below is a graph from the St. Louis
Fed (updated 12/30/10) showing what could well be a bottoming out in bank loans to
businesses.

Deflationists promote the ‘velocity of money’ argument as they predict economic
implosion. While current events indicate speculative momentum and froth subject to
reversal, bank loans look to be gently bottoming into a pattern I would normally buy. We
must consider that this could be one of the diminishing returns (in relation to huge
commodity and precious metals upside) of intense inflationary policy, post-2007.

This would argue for inflation effects (price increases) to become more prominent in
2011 and for treasury yields to continue to rise, which would of course put major pressure
on the economy. An unwinding of non-governmental credit brought on the most recent
deflationary crash in 2008. The next crash might well be brought on by revulsion toward
Treasury credit.

But if the graph below is indeed bottoming, an argument could be made that any coming
near term correction of frothy markets could be a healthy resetting of excess on the way
to a more extended – albeit inflationary – recovery. As with the cycle from 2003-2007, I
would expect the real gains in said recovery to be in the most productive economies and
valuable resources.

Then again, maybe I am reading too much into a fledgling bottoming pattern on a graph.
Best to let events unfold and monitor weekly, and not impose bias on the proceedings.

Bankloansfed
Here is a long-term view of business loans. Deflationists argue that they are right in the
big picture, but as we have noted previously, they will only be right in the final deflation.
All others, since the last monetary system ties to gold were severed have just been
deflation ‘events’ along an inflationary continuum. The trend as they say, is up. So will
the tiny hitch below turn into a real bottom, signaling that money is indeed getting out
into the economy now that banks have fed at the trough of pigs for two years? If so, do
not be a deflationist.

BUSLOANS_Max_630_378

We Are Already Hyper Inflating (by Gary Tanashian)

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Excerpted from the December 19th edition of Notes From the Rabbit Hole, NFTRH115
http://www.biiwii.blogspot.com http://www.biiwii.com

We Are Already Hyper Inflating

ForEx jocks make or lose coin by guessing the direction of EUR/USD. Stock pick aces
ride the wave and look good while trends remain in place. Commodity bulls can’t miss
until the next miss is eventually driven home with a loud crash. It seems as if everybody
is clinging to a conventional way of doing things, as if the world was not radically
changed in and around 2001, and as if the old rules of the previous secular bull market
still apply. They do not; it is the age of inflate-or-die, booms and busts.

As for deflation believers, while they may be diametrically opposed to the vast bullish
apparatus that depends on ever increasing debt levels and currency depreciation, they are
right there with their bull counterparts, generally playing to convention and playing by
rules they think they know; following breadcrumbs laid out for them to follow as they
issue dire projections about credit contraction and violent asset markdowns.

Let’s quiet the noise and look at the US Treasury bond market, which is arguably the
most important market on earth, as it is intimately tied to the world’s reserve currency.

The following chart shows the T-Bill yield (IRX), the broad US market (SPX) and the
CRB commodity index as measured against the beautiful continuum that is the well
behaved yield on the 30 year Treasury Bond (grey shaded area). The continuum is of
course framed by the declining 100 month exponential moving average and the lower red
dotted trend line that parallels it.

Tyx2

As applies to the current system, convention went out the window in late 2000 as the
S&P 500 took a dive (to conclude its secular bull market) and was promptly attended by a
crashing T Bill yield as Alan Greenspan goosed the curve, launching gold’s secular bull
market in the process. After a lag, general commodities followed gold higher as did
eventually, the SPX. With T-Bills at what we thought at the time was an outrageous 1%,
the system was re-liquefied.

This was Greenspan’s willful attempt to re-inflate the economy and we all know what
eventually happened; capital was created out of nowhere, and misallocated into the most
dangerous ‘investments’, overseen by the best, brightest and most connected on Wall
Street, who of course made a killing packaging newly engineered creations. The malinvestments
eventually manifested in an epic and terminal crash. The age of inflate-or-die
goes hand in hand with moral hazards being routinely mainlined into the system.

Looking at the chart, the lower red dotted trend line and the EMA 100 form the backbone
by which all of this surreal finance has been supported since the age of inflation
onDemand began its most intense phase, in 2000. Be aware that the shaded area format
of the monthly chart shows monthly closing data, so it does not show the several times
the yield pinged the critical EMA 100 intra-month before reversing lower.

Heck, let’s review our favorite chart below, illustrating the continuum. Pre-2000, the
system ran quite well by leveraging global confidence in Uncle Sam and his Treasury, as
Greenspan himself leveraged the goodwill force fed into the system by Paul Volcker,
who did the heavy lifting in deciding that the inflation problem of the 70’s would end on
his watch, no matter the cost. Sadly, his successor at the Fed had no such resolve as he
was given the gift of goodwill. The reason we now find ourselves in a metaphorical
Wonderland is because Ben Bernanke has amped up the inflation ante even though his
predecessor left him with no seed corn, no goodwill whatsoever. Yet still he inflates.

Post-2000, with the implosion of paper asset markets that had concluded a secular bull
market, and considering the inflationary policies in response, one might have expected
long term yields to become unruly as the precious metals and then the commodity
complex began to rise, sniffing out the creation of ‘funny munny’. Instead, the long bond
yield remained well behaved within the continuum as the free enterprise dominated US
and Communist China pursued a cozy relationship of convenience, which could best be
described as a macro economic vendor financing scheme (‘we will outsource our
industry, leverage confidence and credit and become your consumer engine if you will
convert your US currency reserves to Treasury bonds, helping us stay liquid’).

Tyx

This was an epic pyramid scheme by which the US created paper (debt) and used it to
continue running its economy on the vaunted US consumer. All the while, PE ratios
were calculated, rosy projections were made and bountiful bonus seasons came and
went… all based on the lie that pretends productivity can be printed through debt.

In 2008, the continuum did something asymmetrical as the yield plunged into what
NFTRH calls Armageddon ’08. Time Magazine published a cover showing bread lines
and ‘Depression 2.0’ headlines and the conventional herd went absolutely hysterical.
This was to the benefit of the people who were able to remain calm and get bullish. The
deflation event was on and the most gullible deflation believers took the breadcrumbs.

Now a mature rebound in both asset markets and the bond’s yield brings us to a
crossroads and a question; will another red dot appear at the EMA 100 as inflation
expectations peak and the entire construct reverses into yet another deflationary episode,
or will it be different this time as the inflationary horse gets out of the barn due to a
saturation point at which the public no longer buys the deflation spook that Ben Bernanke
keeps pulling out of the closet? This would propel an equal and opposite upside reaction
to the lower channel buster that was the most recent green dot.

The script would typically call for the predictable (to contrarians) downturn into a new
deflationary episode, and that may well be in store. But we have to realize that
confidence has hit a saturation point, as outward signs of rebellion surface within
mainstream society. Meanwhile, the Fed chief and his sycophants continue full speed
ahead, scaring the crap out of most everyone with a modicum of economic acumen in the
process; but people are not afraid of deflation now. Inflation fears will break out if the
EMA 100 gives way. This would be uncharted territory for the current system.

Here are some money supply graphs for consideration. From the St. Louis Fed, M2:

M2_Max_630_378

MZM:

MZM_Max_630_378

From the excellent website Nowandfutures.com (see the description of the mechanics
involved in reconstructing M3 http://tinyurl.com/nftrh115a):

M3b

As a ‘bottom feeder’ biased chart guy, what I see in the green M3 line is a gentle, rolling
bottom. The kind of bottom I usually buy.

The US continues inflating and the bond is the confidence tool used to promote the
ongoing, systematic inflation that, other than benefiting those speculators who know how
to use the process, would stiff foreign creditors and tax the American people in a way
they are not generally yet up in arms about; the loss of purchasing power of the US
currency in which they are compensated and in which they conduct commerce.

Was the May ‘Flash Crash’ a surrogate ‘deflation’ event off of the modest peaks in MZM
and M3 (and the mere flattening of growth in M2)? This event certainly provided the
bullish fuel for the next leg up in markets, led by silver and the precious metals complex.
Was that the afterburner needed to propel the long bond’s yield into an upside channel
buster? Or will the bond be rigged in new and innovative ways as the Fed does its duty
as the buyer of last resort?

Are they the buyer of last resort? What about patriotic Americans and all that retirement
fund money just sitting there? Surely they could buy bonds as well, for the greater good.
IRA holders are in bed with Uncle Sam after all, as he sponsors these vehicles and defers
their taxes. We know one thing, somebody has got to buy enough bonds to keep the
pretense in place that things remain in control.

Summary: The ability to continue the inflation is centered on Treasury bonds.
Ironically, the ongoing inflation depends on widespread belief that deflation can happen
and must be fought. Deflation can happen all right, but it will be the FINAL deflation,
with no coming back from it, at least within the confines of the current system. So it will
be important to observe the yield’s approach of the EMA 100 and its subsequent reaction.
Will the yield turn down and continue the boom-bust continuum, or will it go channel
buster up in an inflationary signal that even the most casual observers will take note of as
a collective ‘Rut Roh!’ is emitted far and wide?

We do not have the answer yet and thus, risk is elevated for bulls and bears, inflationists
and deflationists. That is because we are once again at a flash point. Ben Bernanke is
trying like hell to keep the inflation going, and with the mind boggling trillions in still
increasing debt, there is only one politically expedient way out. That would be to keep
the scheme going as long as possible. But please do not tell me that here, on the doorstep
to 2011, sublime levels of unpayable debt in tow, we have not already hyper inflated. We
have, but the ongoing T Bond confidence scheme continues to cover it up… for now.

Now let’s proceed to the good stuff, the investment stance and vehicles used to capitalize
on this sad state of affairs…

[NFTRH then proceeds on with an extensive update of gold vs. currencies and commodities, precious metals technical analysis, portfolio structure (speculative portfolio +39% for 2010) and a sentiment view of the broad markets, which is at an extreme.]\

No Arguing the Facts (by Gary Tanashian)

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The first three pages of NFTRH105 were mostly words.  The remainder was a combination of words, charts and graphs, which gave clarity to the writer.  I always like it when I finish writing and get the feeling that I actually learned something.  That is what happens when you tune out the din and just let facts speak for themselves.

We are on a bull party, but there are risks involved.  No matter how much fun it is hanging around the punch bowl, we must be aware of these risks.  No, I do not view the static emanating from Ms. Yellen as a risk.  But at some point, building pressures may abruptly cause a power outage when enough party goers have arrived and partaken. 

No Arguing the Facts

The facts are that the HUI index of major gold stocks closed (by a hair) at new all time high territory on a weekly basis, silver has launched to new highs dating back to the post-Hunt Brothers era, and gold has been flying around in its latest patch of blue sky since early September after being the only asset to repeatedly make new highs over the last decade, as ongoing inflation is promoted against periodic impulses toward deflation.

Gold is rising like a barometer that senses increasing pressures among various nations to competitively weaken their currencies in an effort to goose their economies; none more aggressively or in grander style than the US and its Federal Reserve.  Capital is frightened and it is going global in an effort to find shelter – and some nice returns 🙂 – from the storm.

Portfolio positions were added in the gold exploration sector as well as the global emerging theme.  While I added a token short position against the euro, the balance of evidence suggests that there is not yet a compelling reason to believe markets will not continue to bull short-term, with the real excitement being in the precious metals and some emerging markets and commodities.

Desperation In Play

Of course, volatility is probably a fact of life now as desperation comes into play; desperation on the part of policy makers to pretend to be fiscally responsible (St. Louis Fed’s James Bullard played bad cop last week in thinking aloud for the media regarding additional stimulus: “maybe we should push it off a meeting or two” pending economic data) while falling all over themselves to promote asset appreciation as a means to economic revival.  Then there is the desperation on the part of market players ever more strident in their attempts to will markets toward their point of view.

In short, crosswinds are blowing all over the place and the monetary metal is right in the middle of the action.  Soros and Buffett blow horns that sound a theme of gold as the “ultimate bubble”, mainstream investment advisers are taking the metal seriously in their asset allocations, and more of the mainstream is starting to think “hmmm, I want to get in on this gold rush before the train leaves the station”.

To this point in the precious metals bull, the sector has been the home of we crackpots, malcontents and weirdos.  Well get ready for company my friends, we are going mainstream.  Faith in policy makers is seemingly being rewarded by asset appreciation and the herd may come to a point where it just can’t stand clinging to intrinsically worthless treasury bonds any longer.  Volatility in many asset markets will almost assuredly accompany this desperation, and risk of reversal will be in play as well.

Transitioning Toward Global Re-Alignment

Beyond the ‘transitional’ asset class – the precious metals – the emerging global theme (that I have been compelled to pull in from ‘long-term’) to which the transition is geared, remains on track technically with many markets continuing their breakouts and is looking for all the world like it will not stop to let wannabe riders aboard.

The US markets meanwhile, continue to respond in their underperforming way to the fact of QE1 and the anticipation of QE2.  Some areas of the economy are responding – particularly in manufacturing thanks to the weak dollar, which would get a lot weaker if policy makers have their way. 

But the leveraged macro barge known as the vaunted US economy at the turn of the 21st century did not thrive on small potatoes like making things or being productive.  It thrived on creating paper and digital instruments, marking them up and selling them to gullible people and entities in a pyramid scheme of epic proportions.  In short, it thrived on selling garbage that naive buyers believed had value.

So when I tell you that my wife and I just sat with a real estate lawyer to close a refinancing on our small remaining mortgage (4.25%, which I must thank Mr. Bernanke for because there could easily be a ‘1’ in front of that ‘4’ in my opinion) and the lawyer told me business is brisk – with refi’s, although many who want to refi cannot because their existing mortgages are under water – but new buys and new mortgages are virtually dead in the water, you see the major caveat clearly; it is just one unsustainable part of the massive ‘stimulus’ by policy.

It occurs to me that upon completion of the ‘transitional phase’ of the global macroeconomic changes now taking place, US housing will one day be a good investment.  This is one asset class of value however, that probably has much lower to go in the interim because it was a target of the previous bubble in credit and is choked with legacy mal-investment, although general market speculation currently appears rampant. 

Meanwhile, all that stimulus poured into the system by US and developed global policy panic, is currently going into things of value that are not burdened by such mal-investment.  So while authorities may yet get their hoped for asset appreciation, it will manifest first and foremost in the ‘transitional assets’ and vital global resources required to build-out the global re-alignment.

GLD & GDX Confirmation?

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{Note from Tim: What happened with GLD in the final hour today is sort of what I was hinting at with my earlier post, but here, with a different point of view, is the following………….)

Hi Slope, I just read Tim's post about the GLD breakout and the previous one that failed, so putting on my gold bug cap (modern, foil-free version made of hemp), I thought I would rebut.  The below was posted on my blog a little while ago.  Just FYI.

This is to be posted over at Tim Knight's Slope of Hope as a sort of rebuttal to this post by my favorite bear (not written sarcastically – the guy is thoughtful and fully aware of what it is to be contrarian).

In fact, being a bottom feeder, there is a part of me that is naturally anxious (and looking to take some profits, which I am mostly resisting until personal leading indicators trip up) in a way that I was not when Hulbert's HGNSI (Hulbert Gold Newsletter Sentiment Index) read only 9% bulls among gold forecasters, letter writers and gurus.  Anybody have the latest Hulbert figures?

Right now, in the heat of the momo, it is important to look at the leading indicators and divergence, and to my eye, an important negative divergence is missing as compared to the last time gold broke out, per Tim's post.

Things can reverse at any time, especially from daily breakouts.  But these are bullish Ascending Triangles which must be respected.

Gld

Pendulum Swings to ‘D’

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Anxiety is rising… I know this from the emails I am getting.  If I
have to hear the words "treasury bonds" one more time, why… :-)  But
of course we are going to hear about T Bonds… just look at the yield. 
It is now the 'in' thing and it feels okay.  Time for the big D
to hit the airwaves.  Step right up and dance everybody, just like you
used to do in the discos when that awful music compelled you to get in
line and shake yer thang.

Tyx

Back in the spring I was taunting the inflationists
with the chart that showed bullish ascending triangles and symmetrical
triangles in various treasury bond funds of varying durations (TLT, IEF
& IEI) after the long bond failed to break the "line in the sand" at
the monthly EMA 100.  The i Boys (and girls) largely took this in
stride or ignored it in favor of chasing down the dreams of rising asset
values into perpetuity.

Now, the input is about deflation, 24/7 and it generally comes from some
very smart people (I have always contended that the average d Boy is
more financially astute than the average i Boy – and I'm an i Boy!) and
cites some very smart sources.  But sorry d Boys, you will not sway me
until my own analysis sways me.  How can you sway someone who has been
awaiting your event for so long?

It still says here that your 'event' – regardless of how destructive it
may be for the US and other entities that are levered off the balance
sheet without the reserves to help compensate -is a lever in its own
right.  Your treasured T Bond is what Bernanke needs.  I did not and do
not know how he got his gun reloaded and got intellectuals and the herd
alike into the Bond, nor do I care.

Anyone who could read a chart and maintain an independent viewpoint
(from the respective I & D dogma) could see the bond was going to
rise.  Now, on cue we have the mini hysteria.  It's Prechter
time!  Personally, I have short, middle and long term plans on how to
use Prechter time, beginning with being aware of what this smart man
recommends and as I have done over the years, actually implementing some
of it.  But it does not end with that.  No, not by a long shot.

The last time I was scolded by a d Boy was over at SeekingAlpha in early
2009, as I forecast bullish on copper and oil.  They are scolding again
and while things could be very tricky and difficult in the coming
months, they are just getting cooking my friends.

Also for reference:

Suddenly Treasury Bonds Are Not So Bearish, Are They?  April 27, 2010
D Boys Coming Out to Play  May 20, 2010

And there were plenty more.  All I ask is that readers resist the
compelling urge to herd.  Whether one case or the other (i or d) is
right or wrong ultimately is not the issue so much as the proven
destructiveness of allowing one's market stance to be whipsawed around
by very smart people with very persuasive arguments.  These are the
markets, and they go to their own  beat.

Edit (1:30)  You are a stout and savvy reader of this blog and
have not yet turned me off with a contemptuous "screw you".  Therefore, I
need not put any of my own words to the inherent meaning of the MSM
blurb below:

A big beneficiary has been bond funds, which offer regular fixed interest payments.

As
investors pulled billions out of stocks, they plowed $185.31 billion
into bond mutual funds in the first seven months of this year, and total
bond fund investments for the year are on track to approach the record
set in 2009.

Charles
Biderman, chief executive of TrimTabs, a funds researcher, said it was
no wonder people were putting their money in bonds given the dismal
performance of equities over the past decade. The Dow Jones industrial
average started the decade around 11,500 but closed on Friday at
10,213. “People have lost a lot of money over the last 10 years in the
stock market, while there has been a bull market in bonds,” he said.
“In the financial markets, there is one truism: flow follows
performance.”