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Something Big is building to a Climax in the Markets

Oct 14th, 2016

Something Big is building to a Climax in the Markets

Background

Tremendous pressures are building in market elements that all seem to be heading towards a significant confluence of impacts at a target trigger event which will unleash massive shifts and even cause chaos. It seems to be honing in on the forthcoming US presidential election on 8 Nov 2016, and a potential rate hike thereafter.

Bubbles have been created in the stock markets and in the bond markets during this last extended period of easing, principally due to high liquidity and low interest rates. When you consider this bubble creation alongside the unsustainable global debt levels together with the various geo-political circumstances around the world, then you realise the toxic cocktail these ingredients brew.

Markets

Global stock markets have risen into broadening top patterns stretching back 2 or 3 years, all with key support trend lines and other threatening technical analysis alert signals. These markets appear to have no upside potential anymore and key downside penetrations threaten long term decline. Bond markets worldwide have peaked and the Jul/Aug period saw yields beginning to turn up. Increasing Bond yields will of course threaten the US Federal Reserve into hiking rates, whether they want to or not. The US Fed has indicated a rate hike in Dec 2016 and this seems certain now after the presidential election, although many commentaries suggest they still cannot raise rates.

A US rate hike will cause markets to drop, as well as increasing pressure on the rest of the world to do likewise in a chosen world of zero to negative rates because of atrocious economic activity levels. Also, as interest rates rise so the cost of servicing debt rises, and as global debt is unsustainably huge so the impact of increased interest will be crippling.

Global Debt

Astrophysics is probably the best science you need to understand why the world’s economy might be approaching a cosmic conclusion. Like a massive star exploding into a supernova, debt is rising at a blistering pace. There is currently more than $230 trillion in global debt—that’s 3 times the amount of debt the world held during the 2007 Global Financial Crisis. By the way, that is written $230 000 000 000 000 (230 + 12 zeros). Central bank intervention has fuelled this explosion, including historic levels of quantitative easing, zero interest rate policies and the adoption of negative rates.

At the end of every supernova comes a black hole. Black holes have such a strong gravitational effect that nothing can escape their pull. And gravitational principles are distorted in the very centre of a black hole, also known as the gravitational singularity. We’re seeing a similar phenomenon in the investment world: The crushing weight of all this global debt is distorting some fundamental economic principles.

Global debt is now out of control and when interest rates start rising they will impact the world financial system chaotically.

 

Geo Politics

What are some of the standout features of the 4 biggest countries?

EU

  • The EU is in the process of breaking up. Brexit was the first and started the process, as similar murmurings in other countries increases;
  • The financial system is in trouble with a banking crisis in the making. German banks Deutsche Bank is on the brink with Commerzbank not far behind. The whole banking sector is not doing well and banks in Greece, Italy, Portugal, Spain, France, and some other countries, could follow;

 

China

  • Spectacular economic growth has been accompanied by even more spectacular increase in debt. China’s debt exploded from $2T in 2000 to $35T in 2016;
  • Most of that is in the shadow banking system and bad debts are estimated at 10 times higher than officially admitted;
  • Slowdown in world trade caused the collapse of the South Korean Hanjin Shipping Company this year, one of the largest in the world. Shipping rates from Asia to Europe are now down to $760, and with breakeven at $1 400 per container, shipping companies are projected to lose $20T in 2016;
  • China fell into the Western pattern of expanding credit irresponsibly and spending a major part of the money on speculative investments that will fail. The bad debt in China will lead to major defaults, money printing and the fall of the Yuan;
  • George Soros has famously predicted a ‘hard landing’ for China;

 

Japan

  • The Japanese stock market collapsed in 1990 and Japan has been suffering deflation ever since;
  • It has printed more money than any other nation;
  • It has had zero or negative interest rates;
  • It still cannot grow;
  • The Bank of Japan is holding 50% of all Japanese debt and is buying all the debt they issue which is Yen 80 trillion ($0.8T) a year;
  • This is the ultimate Ponzi scheme to issue debt at negative rates and then to buy it all yourself. The Japanese economy has to fail;

 

United States

  • Superpower until the 1960s;
  • Thereafter, wars, deficits, and debt has taken it’s toll;
  • The US$ was linked to gold at $35/ounce from 1944 until 1971;
  • This was an inconvenience especially as astute leaders like De Galle asked the US to repay debts to France in gold;
  • But the US was desperate to borrow and print more money, so President Richard Nixon simply eliminated US$ convertibility to gold in 1971 as the financial pressures became overwhelming;
  • That was the beginning of the final phase of the destruction of paper money, and with it the world financial system as we know it;
  • Since 1971 gold has increased more than 3500% devaluing the Dollar accordingly;

 

Gold and Silver

The gold price has exploded by more than 3500% since the last fixing at $35 per ounce (1944-1971), and is now set to climb to unbelievable levels of more than $10 000 in the new bull market that started in Dec 2015. The reasons for this are stated in the above narrative together with technical analysis which is partly explained below. Please also refer to the post ‘Gold Update’ 20 Sep 2016, as all the technicals still apply. The silver price is expected to perform even better, as it does in precious metal bull markets.

The new gold bull market reached a high point at $1370 in early Jul 2016, having increased strongly for 7 months (+31%), and is now completing a correction (at $1250) before renewing it’s upward trajectory. The second leg of the bull market will see gold increase significantly to test previous high-points and finally target the all-time high at $1950 at some point during the next 12 months. The precise moment of reaching the true correction bottom is near and is probably soon after the US election on 8 Nov 2016 and any rate hike by the US Fed.

The Jap Yen has a strong correlation with the gold price and this suggests the start of the second leg of the bull market will be after the Yen next falls to a cycle low and penetrates upwards through the 50 week exponential moving average (50Wema). Observe the weekly chart below.

japyensmall

Gold strength is indicated by the blue verticals with the Yen piercing upwards through the 50Wema at cycle lows to the top of the gold market in 2011 (Red box). Gold weakness is indicated by the red verticals to the bottom of the gold market in Dec 2015 (Green box). The gold correction bottom will be reached soon when the Yen next pierces upwards through the 50Wema (Blue box) at the first cycle low in 2016, which is now overdue.

Similarly, silver will outperform gold once the second leg of the bull market resumes.

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