Weekend Report Part II- The Coming Global Liquidity Crisis…The Kick Off of the Post Bubble Contraction

We have seen how the PBC has now begun and is making itself felt around the world starting at the periphery of the global economy, next moving to the senior markets of the world and eventually being transmitted to the core of the financial system.  As of now the US markets do not reflect any impact of the PBC, however there are signs it is fast approaching.

Tesla- Canary in the coal mine

So far US markets don’t seem to care what is happening in other markets around the world.  US Markets seem impervious.  A few months ago I pointed out that as long as Tesla stays elevated the US market should remain fine.  Call Tesla the canary in the coal mine.  Tesla continues to operate for one reason only- easy money. Remove the liquidly spigot and Tesla ceases to exist.  This company is so obviously a fraud on stock holders, yet it whistles past the graveyard with each outrageous act of its “nut job” CEO.  Simply put, as long as stock holders suspend reality in Tesla they are willing to believe anything.

Well, seems the end of this game is now upon us.  Looks like Tesla has now finished the process of knocking the religious believers out of their trance.  What the professional shorts have seen for a while now (Chanos, Einhorn etc.) is now finally being acknowledged by the masses.  I regard this process as a derivative of the mass psychology of the market in general.  Once Tesla goes the market in general can’t be far behind.

The Toxic USD Phase of the PBC

This is what comes next in the PBC.  As money rushes towards safety and global debts are serviced in US dollars the US dollar strengthens.  This is the end game of a multi year slow motion process we have seen playing out.  The below chart shows the flaw of the gold bug narrative.  As the US ramped up its money printing through QE the US dollar actually began to strengthen which is the opposite of what gold investors thought would happen:

The toxic phase of the US dollar rally starts when the current rally resumes and the USD breaks out of the heavy resistance zone.  That’s when things start to blow up and the GLC intensifies.

Gold Silver Ratio– Signaling the crisis is fast approaching

The gold silver ratio depicts the spread between the two metals.  It can be referred to as the metallic credit spread.  Like interest rate spreads, it is a leading indicator of stress in the financial system.  This is because gold acts as a monetary metal while silver acts primarily as an industrial metal.  As industrial activity decreases silver usage declines.  Simultaneously as stress in the system increases gold’s monetary usage also becomes more important.  In the past the GSR has reached levels of 80-100 in a crisis.  I have stated for years that in the next crisis these levels have the chance of being vastly surpassed perhaps blowing well past 100.

Here is a close-up of today’s GSR signaling trouble ahead in the form of a liquidity squeeze:

What I believe this is signaling is a liquidity crisis beginning at the periphery of the world’s economy.  Emerging market debts will not be paid therefore the reconciliation will be made in the currencies.  We see this occurring in Turkey right now.

Eventually this dynamic will show up in the senior reserve currency the USD.  World-wide currencies will be devalued against real wealth.  What is real wealth?  Houses, land, gold, oil, copper, this is real wealth.  Ultimately their price will shoot up as currencies become devalued as debts get reconciled.  But before this happens the illiquidity crisis will have to run its course and holders of these assets will likely get crushed because they will be thrown upon the pile to be sold in a search for liquidity.

Oil in the GLC

Crude Oil is of course the king of commodities and is typically the last to peak in an up cycle.  This occurred in 2008 when oil peaked at $147 in July 2008.  The stock market had peaked in October 2007 and the crisis was well underway when oil finally put in its top.  The same sequence appears to be playing out in the GLC. Oil now appears to have put in a cyclical top.  The rally in oil over the past 2 years was simply a cyclical bull within the context of a secular bear just like all of the other commodities.

Oil is not going away as some hope it will.  Just about everything is made from oil such as plastics etc.  It will remain an irreplaceable transport fuel for the foreseeable future and its use will become even more value added in the future.  So once the upcoming bear market runs its course, oil should begin its next long term bull market where prices could go to unheard of levels as it becomes more of a value added product and less of a transport fuel. Real assets such as oil will rise as a reflection of currency reconciliation.  This is when deep water offshore companies such as RIG will come back into its glory days. Natural gas value plays should also perform.

Oil puts in its top

The daily charts can take on a different appearance than the futures charts because futures trade 24 hours a day.  So the continuous futures chart can often be more revealing than the daily chart of WTIC.  This indeed happened over the past week as oil put in a prairie dog top.  Here we see this below:

Here we see oil poking its head up like a prairie dog and pulling it right back in during the wee small hours of trading with western markets closed.  On a daily chart oil shows a different view, a slanted NL H&S followed by an initial breakdown back test/head test. It dutifully punished the new shorts (me included) but fell out of its rising wedge.  It has now had an initial bounce off of initial support at $67 and now we wait for the decline to resume.

Below we see how oil lags copper in its decline:

Gold- Making sense of it

Is gold and the gold stocks in a bull or a bear market?  I believe the answer to this is a bull market that began in Jan 2016.  Presently it is undergoing a violent shake out that feels like a bear market.  In the last report I mentioned that fresh new capital is actually flowing into the sector.  This doesn’t occur in a mature bear market.  So what explains the downside violent move?  I see it as analogous to the previous bull market in gold which lasted from 2001-2011.  In that bull market gold and the PM stocks got waylaid in the 2008 GFC, but it wasn’t the end of the bull market,  it was just an interruption.  In real time however, it appeared to be the end of the world if you held on to your gold stocks.  It seems that’s what is going on now.  We are in a bull market but it has gotten interrupted by the early stages of the GLC.  Two factors account for the decline in gold. First gold is acting as a liquidity bank to fund other short falls, Turkey being an example as it has sold most of its gold as a stop gap measure .  Second, gold underperforms as the senior economy remains in a bull market and the US market remains strong.

Gold’s decline does not appear to be over as is clearly evident through Rambus’ charts, but once the bottom is in,  the next phase of the PBC begins.

The Gold Bull Market Resumes its next leg-up

This next phase should begin when the FED ends its QT program.  The USD may continue to rise, but the message to the world’s markets will be unmistakable… that the great Keynesian experiment has failed,  as they must reinflate the system to prevent a collapse.  This is when the gold stocks will begin their advance.  Of course being a market they very well may discount this event and start to rise before this.

You have heard this before: Got to be in it to win it!

Golds Smash and Grab

We have all seen the COT numbers and the gold bugs are hanging their hat on them.  Gold has to rally since the commercials are now net long. Hasn’t happened in ages, yet gold continues to flounder.  What explains it?  Tin foil hats on please- gold is undergoing a classic smash and grab.  Stated differently there are elements of a bear raid going on here.  Don’t think for a moment that other informed big money players don’t see the things I have written about.  It is a great opportunity for big money to position itself for the upcoming bull market… a smash and grab.

Copper- The Doctor seems confused

We know that copper sniffs out economic weakness and it has clearly led the decline in worldwide commodities, but I thought the evidence is clear we have a world wide copper shortage looming on the horizon.  Exactly!, but this is the tricky part as it’s true the world will be woefully short the metal in future years once the “green” second electrical revolution gets underway.  There is no better sign of this than what happened over the past week with Zijin mining making a massive bid for Nevsun mining. The Chinese being long range strategic thinkers are attempting to grab this critical asset even though it is clear the Chinese economy is cooling.  They see the long range picture of copper being in strategic short supply in the next decade. Knights, one has to be able to think past the valley directly in front of you!

Nevsun holders if you held on you’re a hero:

Putting together a strategy

Let’s keep it simple and boil this down to a few basic concepts.  First off here is a question:

Question: Using valuation data from the past 120 years of recorded market history,  What is the projected annual rate of return over the next 10 years from investments entered at today’s current valuation levels?

ANS: 1% per year

But here is the catch, before you can arrive at that 10 year point odds are that you will have to undergo a 40% drawdown!

So why in the world would you hold on to your stocks at this time.  You would be far better off selling everything and waiting for a bear market to reenter on. Then you can look forward to average  returns of 10%+  over the next 10 years.  Honestly it’s a no brainer.

So that’s what we are going to do.  Go to cash.  Now I understand that like me,  you probably own some issues that you just don’t want to sell even though you are underwater.  That’s ok we will make a few exceptions.  But for the most part it’s time to sell and wait for the bottom to present itself.  In the mean time here is what I am doing:

1/3 cash

1/3 US Treasury bonds

1/3 the dogs I can’t sell, but feel will come back.

Everything else has got to go and the second you sell them is the second you will feel free again.

In the mean time we watch Rambus’ charts and we determine when the bottom gets put in, then we buy… pretty simple and painless actually.

 

Weekend Report- The Post Bubble Contraction comes in the form of a global liquidity crisis

This report continues the work from two weeks ago on the PBC which is now in its early stages.  It is the single model which presently explains the actions of all of the world’s markets.  By understanding the PBC we can best asses how to deploy our assets going forward.

I wish to reiterate the superb job Rambus has done in chronicling the decline in the precious metals sector.  His charts and analysis of this sector put him way out in front of anyone else in the world.  A few chartists and analysts have called for lower prices, but no one else has had a lock on the action which we have witnessed on a day to day basis here at this site.  In these reports I attempt to reveal the meaning of these historic moves and explain why its happening.  Knowing this we stand a decent chance to position ourselves for what is coming.

Let’s establish some of the tenants to the Post Bubble Contraction:

  • A PBC comes at the end of a secular 50-70 year credit cycle expansion
  • There have been 5 completed PBC’s since the beginning of the era of modern finance starting in the 1680’s in London.
  • Our current cycle began in the late 1940’s
  • A cycle begins from low debt levels and ends when the total of public and private debts are so large they become unsustainable by existing cash flows.
  • The PBC resets the cycle by ridding balance sheets of debt through outright bankruptcy, restructuring or repayment.  In the past this process normally takes 15-20 years and is very tumultuous.
  • Once the process is complete debt levels are reduced and rapid growth renews itself. (Think rapid growth rates of the 1950’s)
  • As the contraction begins stress is first felt at the periphery of the world’s economy
  • Money seeks safety and flows towards the senior currency in the financial center.
  • Since emerging market debt is mainly denominated in the senior currency (USD) it becomes more difficult to service as local currencies decline causing an EM collapse.
  • A liquidity event then gets triggered as debts fail.
  • First casualties are liquidity assets which provide a source of funds to pay debts…Gold being the ultimate liquidity asset often succumbs and declines initially.
  • As financial stress gets transmitted to the core,  senior equity and bond markets finally succumb and enter bear markets.
  • Stalling economies undercut demand for commodities and prices collapse.
  • The REAL price of gold begins to rise while simultaneously the input costs of gold mining declines. This flows through to improved balance sheets for the gold miners and gold stocks enter a bull market.

This is the process which is before us and has now begun.

What the past 10 years were all about

The PBC process actually began in 2008 as the natural end to the inflation cycle.  A bank triggered debt bust ushered in the debt purging process to reset the cycle, however the intervention of the central banks of the world led by the FED reinflated the debt bubble and prevented the process from occurring.  Let’s call the past 10 years the “Great Keynesian Science Experiment”.  The accepted narrative is that it was successful, however all it really did was extend the inflation in the form of an even larger bubble and cause even larger distortions in the economy.  These distortions are called malinvestments and still need to be corrected. The PBC that began in 2008 is now reasserting itself as the FED and other world CBs withdraw their artificial stimulus.

As QT continues and a trade war progresses the markets will reach a breaking point.  They will crack and it’s at that point the FED will respond.  The critical question then becomes will they be able to reinflate another bubble.  No one knows, however I think not for various reasons.  Chiefly, QE had become toxic in distorting the economy and causing adverse social consequences.  QE is essentially why the US citizenship elected a populist.  The FED will probably try QE again, although in a different form such as helicopter money,  but it has reached the law of diminishing returns and its future effect will be adverse. Likely it will manifest itself in a rampant inflation or a failure of the currency.

Let’s review where we are right now:

As mentioned the initial stress occurs at the periphery of the world’s economy.  We see this happening now in spades.  For the past few months emerging equity markets have entered into vicious bear markets.  In addition, their bond markets are now getting slammed PLUS there is nowhere to hide as their currencies are collapsing.  So what is one to do?  Send new money towards the USA as its the only safe haven remaining, and that’s what we see happening:

World Markets (Ex-USA) Entering a Bear Market:

The above chart combines all of the markets in the world Ex-USA and it has now declined 13%.  I am calling this the beginning of a world wide bear market.  The CNBC types like to require a 20% decline for such a declaration, however that is a very shallow criteria.  A bear market requires duration as well as extent.  The technical action around the NL and its moving averages is enough for me to give it the bear nod.  Plus it just closed at a new low. This index is made up from the charts published below and we see ongoing distributive action which we see in bear markets.

Emerging Markets now well entrenched in a Bear Market- down 21%

EEM down 21%, but it is much more that that.  We see waves of liquidation.  All rallies are being sold, they don’t last but a few days and its right back down again.

Pacific Ex-Japan- Full rollover:

Let’s look at some other Emerging Markets.  When we look at these charts you should recognized these common features:

  • Failed Rally Attempts immediately pushing to fresh new lows
  • Persistant active distribution
  • Every rally being distributed
  • No attempts to buy

South Korea

Russia

Greece– So much for Kyle Bass’ recover thesis for Greece

Brazil

Singapore

Turkey:

There are plenty more, but you get the message.

You can Run but You Can’t Hide

I mentioned virtually ALL EM Currencies are getting incinerated right now.  The India Rupee, Indonesia Rupee, Turkish Lira of course, Brazilian Real, Argentina Peso.  Its a blood bath out there.  So if one can’t go to cash how about your local bond market?

Sorry, no place to hide in bonds either:

So if you are a periphery economy you are currently experiencing a simultaneous crash in both of your equity and bond markets as well as a crash in your local currency. It is a full-on rout to the downside.  There is no safe haven, therefore money flows into the USD and the US stock market. Any money left in ones local economy is getting killed right now and at some point this will drive a global recession and contraction.

The Next Phase- Stress being transmitted to senior economies

We are now seeing this occur with senior markets in Europe and Japan now in full rollover mode.  They are clearly advertising their tops are in.  Let’s take a look using a weekly perspective:

Europe 50:

Above: waning RSI momentum as well as the PPO rolling over.  Price has now broken below a declining 30 W EMA.

Germany:

Active distribution setting up for a break lower

London: Prepare for a drop

Japan– More Distribution:

Italy– Sequential Bear Flags

Hong Kong- Financial Center 7th Largest exchange in the world:

Spain– Poised to drop

The US Markets- Can we be far behind?

We see the contraction is now transmitting itself into the senior markets of the world, but it hasn’t yet arrived to the US markets.  The US is still pushing new highs.  The question becomes with a global slowdown in its early stages when will the US markets care?

The US cannot prevent succumbing to these forces forever.  In fact many indications point towards that moment by mid October.  September has two powerful bullish forces keeping this market advancing.  Money manager window dressing before the end of the quarter pushing money into the momentum stocks and an active time window for corporate stock buy backs.  These dynamics have about 2-3 weeks remaining and then the market must face continued QT tightening and weakening foreign markets.  Once foreign economies go into recession, likely early next year, the US should also enter with a lag of 3-5 months.   The stock market should begin to discount this event months in advance.

Cracks beneath the surface

Already we are seeing cracks begin to appear.  If you have been waiting to short the FAANG stocks the time is almost at hand.  In fact the F in FAANG is ready to short now.  Facebook is the first FAANG stock to fall out of the pack.  Just like wolf’s stalking buffalo the wolf pack can now pounce on the first vulnerable FAANG to fall out of the heard.

What we see now is distributive action.  After the huge drop right off the top it has not been able to recover. The dip buyers failed to show up and instead delivered lower highs and a gap down out of its triangle consolidation.  If it back tests its breakdown that would be a safe belly entry into a short position.

Netflix may be the next to go but it hasn’t shown yet if it is being distributed or it’s just in a correction.  We will keep an eye on it.

The Year 2018- A rolling top for US markets

I have been chronicling this all year long.  The Phase III of the bull market ended in January of this year.  It had a classic blow-off overthrow top in December and January.  These types of tops often include an object of speculation. In this instance it was Bitcoin. It blew out simultaneously with the markets top.

Since the top the rest of the year has entailed various averages attempting to recover their old highs.  Some have, while some haven’t.  This is also classic rolling top action.  The tech sector and the QQQs have blown far past the old highs and have served as a Red Herring for Mr. Bear keeping the public in the market.  The small stocks in the Russell 2000 have also been standout performers.  The Dow and the NY Composite however have failed to recapture their old highs.  This has been a blatant non confirmation of the market typically seen at market tops.  Dow Theory has confirmed the same with transports reaching new highs with the DOW failing to confirm.

We have been waiting all year for the DOW to confirm the uptrend by going on to new highs.  As of yet it has not, whereas the transports have.

The below chart shows the relative performance of the popular four indexes beginning at the market high in January.  The Dow is the only index not going on to a new high

The Next Crisis- A Global Liquidity Crisis (GLC)

In 2008 the world fell into the global financial crisis.  This was centered around the banks and mortgage finance.  The next crisis will not be a bank collapse it will be a liquidity void. Markets will lock-up due to a lack of liquidity.  Massive blocks of ETF’s and Index funds will be cast upon the exchanges to be sold by computers on autopilot.  There will be huge gaps down in prices because there will be no liquidity due to no buyers.  When the tide finally turns in the US market it will go full bitcoin.

Initially there will be no safe space with the possible exception of US Government bonds. Virtually all stocks will get sold.  Even fine companies such as Cameco which appears in an early stage bull trend should get smashed as selling will provide liquidity.  Stocks such as Amazon will be gorged possibly losing 50% or more.

Corporate bonds will be smashed and foreign currencies devalued.  The roots of the GLC is a shortage of US dollars due to a breakdown of exchange systems around the world.  This has all been enabled by the ending of the Bretton Woods Monetary regime in 1971.  Since then trade has not effectively cleared and debts have been built up to monstrous levels.

Commodities in a Post Bubble Contraction

It is easy to see that commodities will initially decline as a global recession takes hold. This time a decline could be rather dramatic as China consumes upwards of 50% of many industrial commodities.  By reviewing the below charts one can get a sense that there may be an epic decline in commodity prices on the horizon.

The narrative early this year was that commodities were in a long term secular bull market with copper and oil prices to rise for years.  The charts below tell me this narrative was false and was the result of recency bias from an uptrend that has been going on for 2-3 years.

Again the above long term CRB chart raises the possibility that the past 2+ years was simply a slow motion back test of the break down below the 40 year support zone.  It is after all a rising wedge which is usually bearish.  We can see it if did break down from here there is no support all the way down to those early 1970 prices.  This type of drop seems virtually inconceivable until one understands the PBC model and the looming GLC event coming.  In fact it a collapse to 1970 levels fits it perfectly.  A flash vertical drop down to those levels would be caused by a lack of liquidity.

Let’s zero in on the past 3 years of the CRB chart and look at that bear flag close-up:

It’s pathetic.  It certainly doesn’t look like a new bull market as it can hardly get out of its own way.  If it breaks below the lower support line it would be a huge tell and would be an awesome short entry.

Now some are quick to criticize the CRB for various reasons such as its composition etc.  So lets look at other commodity indexes:

Bloomberg…. it’s already broken the lower bound and it also looks pathetic:

Below the Goldman Sachs index a bit more frisky but has not broken to the upside.

The DBC- Weak bounce struggling with the 200 EMA

What all of these commodity charts show is the action over the past 30 months was likely just a cyclical bull market within a secular down trend.

Australian Dollar– Confirming the same:

The AUD is a commodity based currency therefore it’s a great proxy for the commodity market.  What it has been saying is that the 30 month cyclical bull market was indeed just a counter trend bull market within the context of a secular bear market and the currency is leading the way down saying those commodity bull markets are now over.  This chart says look out below as the 2 year rising trend in the AUD may prove to be a half-way pattern for the down move.

 

This decline is consistent with the PBC model and could occur during a GLC.

END OF PART 1– In part II I will cover the effect of the GLC on gold and oil and offer an investment strategy to navigate this mess….to be published later today.

EDITORS NOTE

Who is Plunger ?

http://www.talkmarkets.com/contributor/Plunger#

 

Late Friday Night Charts…Some Long Term Gold and Currency Charts

Tonight I would like to update some of the PM charts we’ve been following to see how they’ve been progressing starting with the massive ten year H&S top on gold. Since the price action broke below the neckline several weeks ago it’s a week to week observation  to see how the backtest is playing out. The backtest to the neckline comes in around the 1225 area with this weeks high at 1212.70 so the backtest held for another week. What we need to see next for the current move lower to continue is to see a new weekly close below the previous weekly low.

Below is a weekly bar chart for gold that goes all the way back to the beginning of the bull market in 2000.

Next is the 50 year chart for gold which puts the ten year H&S top in perspecitive.

This next chart for gold is the weekly line chart which shows its 2011 bear market downtrend channel. Our current impulse leg down actually began in April of this year when the price action touched the top rail of the 2011 bear market downtrend channel and the top rail of the 2 1/2 year triangle. Currently the bottom rail of the 2 1/2 year triangle and the 65 week ema intersects at the 1270 area which would be maximum resistance.

Next is a short term daily chart for the GDX which shows the impulse move down from the February bearish rising wedge.

This next chart for the GDX shows three dominate chart patterns starting with the 2016 H&S top reversal pattern, the February bearish rising wedge we just looked at on the daily chart above and the 1 1/2 year triangle consolidation pattern. These three pattern are building out the 2016 downtrend channel we’ve been following. The black arrows show the 1 1/2 triangle as a halfway pattern with the first led down off the 2016 top and our current 2018 impulse leg down moving at the same angle lower so far.

It’s hard to believe its been 8 weeks already since we looked at the breakout below the bottom rail of the year and a half triangle as shown by the red circle which showed a nice clean breakout. In 2015 when the GDX bottomed it built out a double bottom reversal pattern with the double bottom hump at the 16.25 area which might come into play as initial support. The HUI is already testing its 2015 double bottom hump currently.

I wasn’t going to show you this last chart for the GDX because I don’t think the bottom rail of the 2011 bear market will ever be hit but the 2011 bear market downtrend channel is still firmly in place. The bear market began with the perfectly formed massive four year H&S top as shown by the neckline symmetry line. The breakout and backtest to the neckline was short and sweet with the infamous 2013 runaway gap showing up several weeks after the backtest was completed.

Initially we were looking at a possible bullish rising wedge that was forming on the US dollar. That pattern failed when the price action traded back down below the top rail which was disappointing, but there was still a good chance that we would see some type of rising pattern because the initial pattern was a rising wedge. The morphing process is still taking place which now looks like a possible bullish expanding rising wedge building out. Note the small H&S bottom building out at the 4th reversal point which should give the US dollar the energy it needs to at least rally back up to the top of the trading range.

Here is what the possible bullish expanding rising wedge looks like on a longer term daily chart. I know it doesn’t feel like it right now but we know that when a pattern slopes up in the direction of the uptrend it shows a stock to be very strong. If this pattern plays out it’s telling us the US dollar is going to be very strong.

If gold has been trading in a bear market downtrend channel since 2011 then there is a good chance that the US dollar has been trading in a 2011 uptrend channel which this combo chart below shows.

This last chart for tonight is a daily look at the USDU which is a more equally weighted index for the US dollar. The last time we looked at this chart the price action was building out a triangle above the neckline which was completed with a big breakout gap above the original top rail which is the black dashed line with a backtest. It now looks like the triangle is morphing into a bigger bullish rising wedge consolidation pattern. We’ll know more when the USDU trades up to the top rail and how it interacts with it. With most of the other important currencies of the world breaking down from their respective large consolidation patterns it makes perfect sense that the US dollar will have a strong impulse move to the upside. Have a great weekend and all the best…Rambus

 

 

 

BLOCKBUSTER CHARTOLOGY

Attention Members

Rambus Chartology has had a strong relationship with Catherine Austin Fits for several years. We all met in the Ozarks ad have stayed in contact ever since.

Catherine is editor  a very unique website  The Solari Report.

Catherine and her incredible story are well know to many in the Gold Community :

“My talk with Catherine Austin Fitts former assistant secretary of housing under George Bush Senior. Catherine talks about her own breakaway from the psychopathic, corrupted Government money system, and her wonderful work now at www.solari.com where she is helping people to understand our system, and move towards a more symbiotic one, based on empathy, morals, truth and co operation”

 

Rambus does a Quarterly report for Solari Report.

Catherines new website has finally gone live .

Here is the Quarterly Report from the 2nd Quarter. This nicely ties in with Rambus Wednesday Report which will be out tonite.

https://home.solari.com/2nd-quarter-2018-rambus-blockbuster-chartology/

Weekend Report-The Post Bubble Contraction Takes Form

This report looks at the market from the perspective of an Air Force U-2 at 70,000 feet.   We will look at markets from around the world and assemble the clues which they offer us as to what is happening beneath the surface. These clues point towards the world entering into a credit contraction.  Consensus opinion has formed a market narrative that is most likely wrong.  Betting against a consensus narrative opens up a huge opportunity if one is ultimately proven to be right.  We will examine the evidence which the charts are providing us and develop a conclusion and trade.   This single trade expresses all of the world’s market forces wrapped into one position.  I will also discuss the near term prospects of the US markets, uranium and finally offer an explanation of recent gold price action.

First however, I would like to comment on what we have all witnessed over the past 4 weeks here on the Rambus site.  New members may not fully realize that the product presented by Dave Tablish is simply unmatched anywhere else in the world.  Frankly, over the past 4 weeks I have sat stunned by the level of sophistication which has been presented to us all.  Dave’s charts have cut right through the false assumptions the world holds in regards to markets.  His chronicling of the breakdown of the gold price has been truly extraordinary.   Consider yourself blessed to have stumbled onto this site which only a relative few know about.  Please don’t tell Dave this, but I have always felt that there is a million dollar job waiting for him doing proprietary charts for some Greenwich Connecticut hedge fund… they just haven’t found him yet.

There is no way I can match his gift for charting, but what I can offer is a strategic interpretation of what the charts are telling us.  That’s what this report is about.

The Post Bubble Contraction (PBC)

I have written a lot about the post bubble contraction and likely put many to sleep reading about it… but it’s time to wake up as its coming right down the snot-locker right now.  Viewed from a real time perspective it often seems like a slow motion process.  That’s because it is played out over a 15-20 year period.  This process however is beginning to accelerate.

The era of modern finance began 350 years ago.  That’s when enough stocks began trading in London to make up a stock exchange and modern banking began to include mortgages and a bond market.  Credit began to expand via a fractional reserve banking system like we have today.  Since then we have had 5 complete credit cycles.  The last cycle ended in the 1930’s with the world wide contraction known as the Great Depression.  These complete credit cycles last 50-70 years.  They begin with balance sheets purged and holding little debt.   These delevered balance sheets allow for rapid growth rates in both the private and public sector.   As the cycle progresses however, debt builds up until it begins to inhibit growth.  Debt reaches a level to where it is no longer sustainable and a contraction begins.  The contraction purges debt levels through the process of default and restructuring.  Once complete the cycle begins again.  The Russian economist identified this phenomenon and named it after himself the Kondratieff Cycle.  It’s actually been around forever and was called the year of Jubilee in the Bible.

Our current cycle began in the late 1940’s once private debt levels got paid down during the war.  Since then both public and private debt has increased until it has now become unsustainable and its existence has led to anemic growth rates.  The system began to contract in 2008, but world central banks addressed the credit excess by adding more credit.  Amazingly, to the surprise of gold investors they were able to reinflate the credit bubble for another 10 years and gold got crushed.

The First Cockroach

Dan Oliver has chronicled this process better than anyone, he has recently identified Turkey as the first domino to fall in the upcoming contraction.  I highly recommend his recent essay titled “The First Cockroach” at myrmikan.com.  He explains the role of central banking in causing the PBC.    He claims the contraction has now begun and it will be different than the WFC we saw in 2008.  My view is it will appear like a mix of the 1997 Asian crisis, the 2000 dot-com bubble and the 2008 credit crisis all rolled into one.  Yes, it will prove to be much worse than the 2008 WFC.  Although the central banks of the world successfully reinflated the bubble, it will now be time to pay for it and the bill will be larger than 2008.   Why will it be worse?  Because the excesses are much larger and there is no longer a fire department to call since central bank tools are now exhausted.

A Contraction of Credit

We are now set-up for a classic world wide credit contraction.  The bubble expansion of the past 10 years has been driven by the intervention of central banks injecting credit into the world.  Recall that credit spending entails pulling future demand into the present.  If the free cash flows from that capital investment are not positive then when the future arrives that debt cannot be serviced.  That’s where the world sits right now.  Once the crisis gets rolling I believe the core of it lies in China.  For years they have been building ghost cities enabled by credit conjured from thin air.  I will offer only one chart representing the growth which is the increase of domestic credit.  Chartologists should quickly see that this is a parabola and we all know how parabolas resolve themselves.  This chart should put one on high alert.

Assembling the parts to our trade

So now observing from 70,000 feet let’s see what the world’s markets are trying to tell us.  Markets move on liquidity, it is why we should watch currency markets as the currencies tell us where the money is flowing to. The Australian dollar is a commodity based currency which is a good proxy to the state of the commodity markets.  When commodities go up money flows into them and into the AUD.  The chart below offers a 70,000 foot view of this dynamic.  Over a 40 year period we see the secular bear in commodities from 1980-2001, then we see the effects of the China build out from 2001-2011.   Since then commodities have been deflating.  In 2015 the currency broke a 15 year up-trend line and has been backtesting it until recently. These are slow glacial moves but It now appears to have begun an impulse wave down.  It is resuming its downtrend in what may prove to be a half-way pattern.  Conclusion: a contraction in commodities lies ahead.

 

Let’s review one more currency- China.  The chart below shows the Yuan since 2007.  In this chart a weaker currency is represented by the chart rising.  What we have is a very recognizable chart pattern… a Cup & Handle.  It is telling us the Chinese Yuan is about to deflate.  This means money flow exits China and credit levels decline.  This could prove to be catastrophic for China as well as the rest of the world since they have been the engine of growth for the world economy since 2009.  Keep in mind China’s financial system is fragile due to its level of financial leverage or credit to base money ratio.

The USD

In a  PBC money flows from the peripheral economies of the world back to the world’s financial centers.  It principally flows towards the senior currency which of course is the USD.  This is because it not only seeks safety and liquidity but it must service the debts originated in the financial center. These debts are denominated in US dollars so require the purchase of dollars for repayment. This is how foreign debts act as a synthetic short of the dollar.  So when the USD declined for the entire year of 2017 it seemed a conundrum.  The catcalls were heard daily that the USD was “toast” whenever the case was made for a stronger USD.  It appears now that the 2017 decline was likely just a correction of its upside move during 2011-2016.   The USD bull market, reflecting money flows towards it, now seems to have resumed.    Rambus has provided the definitive chart suggesting the path ahead is higher:

Commodities- A look ahead

As the USD strengthens commodities are likely to reflect this through a lower price in US dollars.  Our long term commodity chart offers us a glimpse into what may unfold and its nothing less than catastrophic.  I am not calling for the end of the world here, but certainly the prevailing narrative of rising commodity prices is not prepared for the outcome of commodities being priced back to early 1970’s prices.

 

In the chart above we can see there is simply no support below the existing pattern of consolidation represented by the tan bar.  A break below the 2016 low could lead to a free fall in price.  Below we see a close up of the action of the past 10 years.  The rally of the past 3 years is becoming increasingly evident that it may just be a bear flag retracement up to resistance.

Drilling down to the major commodities 

Crude Oil is of course the king of commodities so let’s take a look from 70,000 feet.  In the below 40 year chart we see three trend zones for oil.  From 1974 to 2001 it remained in a consolidation zone between $10-$40.  During this period it was consolidating its massive move from $2 to $40 which it underwent during the 1970’s.  This move did not occur due to evil oil sheiks jacking up the price it was simply pricing in the immense inflation in the USD which had occurred since the 1950’s.

Once the 30 year consolidation was complete oil then underwent a 10 year bull market from 1998-2008 driven by China buildout and hedge fund speculation. After the peak in July 2008 at $147 it then crashed which was a typical (although unexpected) resolution to a mania parabola.  It is my view that since then it has been in a secular bear market which entails several cyclical uptrends and downtrends.  The move up since 2016 has simply been the second cyclical bull market within the context of a secular bear market.  Once the move up exhausts itself we should see the next cyclical bear market which likely will lead to the end of the secular bear market.  I am not making any predictions on how far down it will go, but it has the potential to be shocking considering the CRB is made up from 40% liquid fuels and one can see the possibility of that being cut in half.

Let’s now zoom in on the past 10 years of oil market action.  Could the cyclical bull market since 2016 now be ending?  Judging by the waining PPO, the non-confirming RSI and the failure of price to reach its LT trend line it may very well be ending action.  We can’t conclude that yet as its too early, but it looks done.

Copper

Dr. Copper has been delivering a serious message for some time now.  Things are cooling off and the source of the cooling is China. The below copper chart has a lot of resemblance of the previous LT oil chart.  It surged from 2002-2011 due to China build out and its recent 2-year bull market seems now to have ended.  Long term Copper fundamentals are wildly bullish, however in the short to intermediate term markets trade off of liquidity NOT fundamentals.

The 2-Year rally ends in a distribution zone:

World Stock Markets

The US Stock market has been surging to new highs (more analysis on this later) yet markets around the world are now fading.  Again, this fits the PBC model since money flows away from the emerging markets towards the senior currency and these flows pump up the home market.  Let’s look at the entire world Ex-USA distilled into one chart the MSCI World index.  Here we see a H&S top, a violation of the NL and currently a backtest towards that NL.  It is now below a declining 30 W EMA indicating it may now be entering into a world wide bear market.

China the epicenter of the world’s credit contraction.

Back in February I posted a chart of the Shanghai index pointing out how it had just “jumped the creek” of its 150 & 200 EMA.  This was signaling a deflationary event IMO.  Here is the chart below dated back to February:

The decline was extremely violent and given the fact that this was the senior index it must be signaling something very serious… a credit deflation.  Bringing the chart up to date we see this was in fact a serious lead signal that a decline was in store:

Major capital flight has begun in China and the PBOC has responded by pumping in $1T into its banks to replace the exodus of these funds in order to stem a collapse.   Now taking a step back and again viewing the entire time history we see the markets telegraphing an unfolding potential collapse in the market.  The rally we see which began in 2016 was likely just another anemic failed bear flag, just like all of these other charts.  Yes, we are starting to see a consistent pattern here in all of these markets.  That pattern is the footprint of a world wide post bubble contraction beginning to unfold.

Time constants prevent me from presenting the full case for the PBC, but what we see so far is markets all around the world delivering the message that this is beginning to occur.  Turkey is NOT an outlier it’s just the first cockroach.  Italy is likely next up at bat.

If China has to pull in its horns think about the effect it will have on commodities.  Here is what China consumes today as a percent of total global consumption:

Cement -59%,  Nickel- 56%,  Coal-50%,  Copper-50%,  Steel-50%,  Aluminum- 47%. Pork-47%,  Cotton-33%,  Rice-31%,  Corn-23%,  Oil-14%

Wall Street Narrative- The Opportunity

We are likely about to enter the next phase of the PBC.  I will call it the toxic USD rally phase.  Once the USD breaks above its previous high of 97 we will start hearing the rivets of emerging markets begin to pop.  Their debts payable in US dollars will be much more difficult to service.  This will lead to faltering markets and currencies.  Expect the Euro to run head long into trouble dropping to perhaps below par to the USD.  It will possibly be split into two currencies the Northern and the Southern Euro.  Big Wall Street money is not positioned for any of this.  In fact they currently have record short positions in U.S. bonds and gold.  In addition, there exists a record long speculative position in crude oil.  The prevailing narrative of big money is on the opposite side of the trade from all of this.

That’s the good news because in this lies tremendous opportunity.  The way to make serious money is to bet on something that has never happened before and be right.  A PBC is not a new phenomenon, however we haven’t seen one in anyones lifetime, therefore due to recency bias most think it can’t happen.  After all, the FED has our back- right?

The Trade- Long the TLT

All of these market moves can be expressed in one single trade… go long the TLT.  We are not futures traders, so this is the most simple vehicle to use to align ourselves with the PBC at this time.  Later down the road other positions will present themselves, but for now the TLT is the #1 set-up.

Again the narrative is that rates are set to go higher which explains why there is a record short interest in the US 10 year bond which is betting rates are going higher.  These trades are based off a lack of understanding of the PBC and how money will flow towards the US Government bond.  Yes, I understand that cogent arguments can be made for a weaker bond due to the US governments massive financing needs.  This is a reality, but world wide money flows will dwarf this argument once the ball gets rolling.  Let’s take a look at what Mr. Market is signaling:

The below chart is a picture of the accepted Wall Street narrative.  Interest rates are set to go higher or said differently the TLT is about ready to break down.  We see the H&S building out right before our eyes.  But as Joe Granville used to say “what is obvious is obviously wrong!”

However a closer look shows price above a rising 30 EMA & weekly stochastics headed up.  It’s more likely just been in an upward consolidation.  Now let’s look at the inverse and review a chart of the shorter duration UST 10y interest rates and the chart simply jumps off the page.  Rates are set to drop.  They have now done all of their technical work and appear ready to drop.

Here we have all the indicators lining up for a drop in rates.  The 2-year advance in rates now appears over its time to enter the trade. Money flows into the USD will drive down rates.  One could buy the TLT outright or for more participation in the trade you may use a synthetic position buying deep in the money call options.  The time horizon may be up to 2 years, however I myself intend to trade over a 4 month interval.

A look at the 30 year yield offers us a similar view, however yields have not yet violated the NL, but just broke the trend line : Stay Tuned

ADDENDUM OCT 7 : I was too early in the TLT trade as Fed Chairman Powell had other ideas on Oct 5 ( see Part 5 for a more comprehensive explanation of the TLT trade prospect.)

The US Stock Market

I have chronicled the US Stock market all year using DOW Theory as a methodology.  The last leg up in a 10 year bull market began in November 2016 with the election of Donald Trump.  This leg unfolded as a classic Phase III blow off with a throwover top in its last 2 months which included a full blown buyers capitulation where retail investors threw caution to the wind and finally bought with both hands.  Incidentally, the weekly RSI registered over 92 which is the highest ever in the DOW’s 120 year history.  You want over bought…. well you got fully over bought!

It ended with a 13% smash within one month from its top.  This wiped out the most egregious segment of speculation, the volatility or VIX traders.  Since this time the market has been crawling back to its old highs with some sectors stronger than others. The DOW in the chart above so far appears to be undergoing an aggressive back test of its upper trend channel. The RUT and QQQ have been the standouts and the DOW has been the laggard.  I have used the below DOW Theory chart below to track it according to DOW Theory:

DOW Theory classifies the market as still in a secondary reaction, a sort of no-mans land.  Transports have gone on to a new high, but the DOW so far has not confirmed the move.  They both need to go to a new high to reconfirm the bull market.  We never got a bear market signal which would require a renewed violation of the red line by both averages.  I have labeled the rallies in both averages a bear flag, but we will see.  If the DOW goes on to a new high then they will be relabeled as bullish consolidation patterns.

But here is what I really think is happening.  IMO 2018 will prove to have been the year the top got put in.  This is complex topping action and Mr. Market has every intention to deceive and make sure the dumb money gets caught holding the bag.  But before the final top is in we are likely to have one more grand finale during the month of September and possibly into October.  Managed money needs to be positioned into what has worked this year before the September quarter is over.  They must be seen to be in these stocks for their quarterly reports, thus the FANGS are about to be bulled for one more time.  Hold on as one last upside romp is about to unfold, we will see where it takes us.  I recommend using it to exit to the sidelines and get ready to execute your PBC playbook. (more below)

Uranium- The abandoned little bull

Despite the recent washout in commodities this little sector seems oblivious to it all. Consider its already been through its own 96% bear market decline and now the little baby bull is marching to its own drummer.   Uranium is alone, abandoned, hated and in an uptrend.  Uranium investors have been so burned for so long that they simply refuse to get on board, they have seen too many false dawns.  But let’s just take an objective look here at the U.to which is the proxy for the uranium price:

Just this week we punched up through last years high price and we have established a series of higher lows since October 2017.  PPO is particularly impressive signaling higher upside momentum.  And of course the 30 EMA is now configured upward.  There is simply nothing bad about this chart.

Risk vs Reward and Fundamentals Dovetail with Technicals

I have stated before that the risk-reward proposition for uranium is the best of any I have seen in my lifetime. What we now have is the fundamentals dovetailing with the technicals.  Cameco shutting in half of its production exceeds the analog of Saudi Arabia cutting half of its oil output.  Not only that, but Cameco is now purchasing uranium in the spot market to fulfill its long term contracts for delivery.  The market will likely be back in balance in a year.

Rather than watch the ETF URA,  I prefer to just look at the stocks and the best proxy for the sector I regard is Cameco.  Below is a long term chart showing the level of devastation to this bluest of blue chip uranium stocks.

Note we are likely in the BT phase of its breakout above the H&S neckline.  It is my opinion that the high performance stocks of this bull market will initially be in the US producers.  UUUU and URG are favored domestic issues.  Keep in mind that 20% of US electricity comes from nuclear and the US supplies less than 5% of its own fuel while near 100% of Canadian production is already contracted for.

Favorite: Energy Fuels:

 

URG

 

UEC is also looking positive, however the company lives or dies on a life line provided by Sprott funding so there are risks.

Post Bubble Contraction Playbook

We have mentioned being long US Bonds for an extended period and playing the US stock market for an upcoming short term rally.  Other trades should present themselves such as shorting individual emerging markets and ultimately the US will enter a bear market opening up downside trades in US market averages. Uranium serves as a specialty although volatile trade.  Next up the oil market appears to be setting up as well.

Although still above its slightly rising 150 EMA (not shown) oil appears to be setting up for a short entry.  It is now in a back test to its H&S neck line.  Note the lack of money flow back into oil during this recent counter trend bounce as depicted by the CMF indicator.  I look for a price objective of $58-61 once the down trend resumes.  Long term however, oil should be headed lower.

The World of Gold

As mentioned at the top of the page no one in the world has chronicled the collapse of gold and the gold stocks better than Rambus.  Simply stated he saw this one coming through his charts and telegraphed it to us all.  Some other writers were aware of the possibilities of lower prices, but no one had a handle on it better than Dave.- Good show!

Rambus’ charts clearly present a path forward to much lower prices in gold and the gold stocks, I do not take issue with these projected outcomes, however I assign a lower probability that they will be completed in full.  The obvious conclusion based on Rambus’ valid & brilliant charts of the gold sector is that the bear market never ended.  The rally of 2016 was likely a corrective Elliott “B” wave within a prolonged bear market.  The implications of this of course is that prices are destined to violate the 2015 lows and that the 2016 rally was simply a pressure relief rally within a massive bear market.  That’s the message of these excellent charts.

I don’t deny this as a possibility, clearly it’s possible, however below I will make the case that we are still in a bull market that began in 2016.  The collapse of the gold stocks we have witnessed over the past month will come to be seen as a final shake out of the 2016 first leg up in a new bull market.  I will grant you that it sure doesn’t feel that way as its pretty dark out there and it seems the last bullish impulses have been eradicated and purged… but that’s kinda my point, that’s what a bottom looks like.

I vividly remember walking through a thinly attended gold show in the Vancouver Convention Center in late January 2016, 5 days after the bottom in the HUI price.  No one knew it at the time, but the bottom was then in.  Literally no one in that huge center believed gold had bottomed.  I asked everyone their opinion and 100% thought gold was headed lower.  Sure they all knew it was near a bottom, but the universal consensus was we had one more leg down to go.  They were all wrong (including me), as gold and the stocks had already begun what would become a rocket ride for the next 7 months.  The precious metals had been abandoned, investors had been wiped and cleaned out, but they were not short gold and they didn’t hate it.

Today’s environment is different as I have never seen such a universal disparaging of the metal in the 40 years I have watched it.  This week on Real TV I watched an investment presentation by a respected manager who called gold a “rock” destined to go back down to $200.  Short interest in gold by managed money is now at RECORD levels while the commercials (smart money) have closed out their shorts. JPM is now holding a record long position in silver and central banks are buying (exception Turkey).  Yes, I see the dreadful charts, but this is starting to fell like a bottoming zone.  The short gold trade has now spread to the wannabe hedge fund managers and it is now a very very crowded, illiquid trade.

2015- Major Producers Divesting

                         2018 Major Producers Acquiring 

In 2015 the big producers were thinning out their companies and selling off assets.  Barrick was panicking issuing shares to pay off debts to prevent a bankruptcy. It was a bear market and they were acting as such. They were in liquidation mode.  Today however that’s not what we see.  We see capital being deployed into the space.  The majors are actively trying to build out their reserves and projects.  They are deploying capital.  Let’s look at the record over the past year:

South 32 buys Arizona Mining for $1.2B

Lundeen Mining launches a hostile buyout for Nevsun

Newmont purchases Nova Gold’s Galore Creek project

Coeur buys Klondex then rolls up Northern Empire

Barrick invests $40 million into Midas to own a 20% interest.

This is NOT what goes on in a mature bear market for gold.  No, I think what we just saw was a violent vicious shakeout of the last die hard bull investors.

The Shape of a Bottom- The violent shakeout of 2018

This shake out did its job and it’s probably still not over.  It cleaned out the last bit of bullishness and will now lay the foundation for the next leg up… the Phase II or mark-up phase of the bull market now lies before us.  We shouldn’t expect a V bottom as the damage has been too great,  it needs to build out a sustainable bottom.  Expect some prolonged basing which could last 4-6 months IMO.  Here is a conceptualization of what a bottom formation in the GDX could look like:

This is a conceptualization based off past panic lows in the gold stocks.  No one can know for sure but judging from past panic lows this is the template that has followed. It is possible the GDX could have an undercut low in the following months which goes to lower lows, however it is not my expectation.

The Recession Ahead and Gold Stocks in a PBC

It is my forecast that within one year from now the economy will have entered into a recession.  This expansion has lasted 9 years now and is now the second longest in US history.  During this current mature expansion the US will run a $1T fiscal deficit.  Once a recession begins expect this number to mushroom to at least $2T.  This is when gold should begin to move higher.  In addition, whenever the FED announces they are halting their rise in rates, possibly as soon as December, the downtrend in the gold  price should reverse.

In a post bubble contraction the input costs of mining gold go down (oil, explosives, labor), then once debt begins to become impaired the price of gold goes up.  These favorable dynamics drive the gold stocks higher.  This moment is rapidly now approaching.  It’s not here yet but we can now see its outlines.  For now however, gold is performing its traditional role of being the source of liquidity.  Turkey has sold most of its gold to pay its bills over the past 3 months and gold underperforms the market while the stock market rises.

Conclusion

Several different trades have been presented for the year ahead.  These are based off of the message Mr. Market is delivering through the markets around the world.  It’s an ideal set-up because it is a bet opposite the prevailing narrative.

Good Luck.

 

$TNX : Curveball Update

Over the last several months or so I’ve been writing about the bond market throwing us a possible curveball. Instead of continuing rising interest rate we may see falling rates. Today the $TNX, 10 year treasury yield finally broke below the neckline we’ve been following that started to developing back in January of this year. I’ve labeled the H&S top as an unbalanced H&S top as the price action formed a second right shoulder that was a small H&S top. A backtest to the neckline would now come into play around the 28.65 area.

A longer term daily chart.

The weekly chart shows the $TNX has been rising for the last two years building out a possible bearish rising wedge with the H&S top forming at the top. That H&S top is strongly suggesting the bottom rail of the black rising wedge is going to give way to the downside. The curveball has almost reached home plate.

Below is a combo chart which has the $TYX, 30 year bond on top and the $TNX 10 year bond on the bottom.