Yellen’s Idea of a Heated Economy

EST

In testimony before Congress this week, Yellen aggressively talked the Fed’s book, asserting that the U.S. economy looks so hunky-dory these days that the rate hikes she keeps promising are absolutely, definitely, positively coming. Let’s see if she changes her tune when the housing and auto sectors turn down sharply, as appears all but certain. Substantially higher mortgage rates, coupled with rising home prices caused by tight supply, have already killed off first-time buyers and the re-fi market. More recently, some of the biggest players in commercial real estate have begun to pull back from the massive bubble they created in the residential rental market. We should not allow Yellen’s self-aggrandizing narrative to delude us into thinking a strong stock market somehow reflects real strength in the U.S. economy. What it reflects, in fact, is a shift of capital from productive assets into paper assets that seem riskless only because tree-grown money from the Fed makes no demands on savers. Meanwhile, for tens of millions of Americans, most particularly those who have left the work force, the Great Recession never ended.

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John Jay February 15, 2017, 10:47 am

Rick,
I think Demographics will outweigh every other consideration from here on out as the determining factor in any given countries standard of living.
Here are a few headlines to support that:

9,000 Army troops put on the streets of Rio as protests mount.

Venezuela leads all other countries in asylum applications to the USA.

Greece considers dumping Euro in favor of USD.

French plan to erect 8′ tall blast shield around the Eiffel Tower.

On and on it goes.
Open Borders and Population Growth anyone?
The future belongs to the countries that strictly control and monitor entry to their state.
Any arguments that declining populations mean economic doom for a country are silly.
I think the population of Mexico in 1960 was 35 million people. Now it is 120 million. If that population had held steady at 35 million, do you think Mexico would be the basket case it is today?
Or would Mexico be a world wide tourist destination with it’s not two, but four lengthy coastlines on tropical waters?
Or on a micro level, which family will have a more enjoyable life together, one with two children, or one with fifteen children?
I think just by using population it is easy to predict which countries have a future, and which ones do not.

John Jay February 15, 2017, 8:07 am

I believe we will need to see how the plans of President Trump for this economy work out. At first glance I think his big picture involves cutting a deal with big business. That deal would be cutting back on regulations and taxes for Big Business in exchange for massive job creation in the USA. For the workers, an end to Open Borders and Free Trade in exchange for everyone going back to work as he dismantles a bloated Welfare State.

As for the our huge National Debt, that depends on his capacity for ruthless action.
A good percentage of our National Debt is now owned by the Fed. Since they purchased all that debt with Magic Money created out of thin air, they could zero it all out and no one other than the handful of oligarchs that control the Fed would be worse off. The Fed could follow a suggestion to do just that, or face a RICO indictment, and lose it all to a Government takeover. Then you could keep the whole Fed work force and operations and simply hang a “Under New Ownership” on the front of all their buildings.

Anything is possible if conditions get bad enough!

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Not possible: REAL monetization in the form of a one-year moratorium on income taxes. Now THAT would be stimulus!

RA

Farmer February 15, 2017, 6:15 am

I agree without reservation with your commentary today, Rick.

Another rate hike at this juncture is not only ill-advised but may indeed be foolhardy as US recession signals have been picking up and a slowdown looms. The Federal Reserve may indeed risk tightening into a period of falling growth after an extended cyclical period of a glacially slow expansion.

It seems much more likely we will see the two prior hikes reversed this coming year rather than see another 50 basis point rise. Meanwhile, I do not put much stock in the idea that a Trump-led fiscal expansion is in the cards since the numbers being discussed are hardly worthy relative to the size of the solution demanded to offset the deflationary backdrop we already live inside.

With the dollar having already soared 12% in the past 9 months and predictions for it to rise as much as a further 20 percent more in the coming year or two, the grocery bin inflation argument is getting very thin and tattered.

Nominal annual price increases of a couple points simply pale in comparison to a currency that has already strengthened double digits in less time than the lifespan of a Grasshopper. A further 20% warns of a hard decline in oil prices and most commodities of which we shall count gold and silver among them since these rarely break ranks with the primary direction of commodity group.

To me the inflation debate crosses into the realm of stupidity as proponents simply fail to appreciate the glaring hazard a failing Europe poses to a strong dollar crisis.

We are deflating and it is going to get a lot worse. In a year’s time I doubt we will even have this discussion anymore.

Meanwhile the squads of breathless, delusional gold and silver bugs sit on the edge of their seats as they await the nirvana of an imminent push higher in precious metals. Hardly a negative word is spoken among them of the dismal technical set-up most obvious on the silver charts where as of this writing we see silver has arrived at strong channel resistance on the daily, weekly and monthly charts simultaneously.

Did I just write simultaneous? Indeed I did.

And just in case you missed it let me repeat the word again because its noteworthy to silver futures (and the speculators behind them) and for that matter to the entire industrial metals resource sector. It must be willful blindness that the arm chair experts on precious metals have overlooked those resistance levels. Either that or they don’t research beyond short term charts to see the white flags of surrender waving in the distant horizon of an angry sea.

Silver is primed for a very nasty fall.

And a beautiful megaphone pattern on the DSLV chart tells us that we have almost arrived at the moment of truth which will be warmly rewarding for those disloyal traders in the silver-short crowd. Anyone who objects to my charting with leveraged ETF’s by the way can see the almost identical pattern (in reverse) on the SLV chart.

It is ominous. And we are almost there.

If you can’t see the falling megaphone on this chart then head out to the pharmacy and get new glasses right now. Anybody who understands this pattern will appreciate its relevance instantly and know that short silver is about to be a VERY good trade.
http://finviz.com/quote.ashx?t=dslv&ty=c&ta=1&p=d

Bu the silver bugs can’t see it. Nor do they notice that silver is capped by the 200 day moving average as is that standard bearer of the silver market, Silver Wheaton (SLW). In the case of the latter there are clear signals a price breakdown may be coming as money flows decline and MACD’s and Stochastics roll over.

Could it be any clearer? And by the way silver bulls, that pattern you see on the silver daily chart for all of 2017 is nothing more than a big, old, fat, bear flag.
It is NOT, NOT, NOT bullish no matter how you slice it and dice it.

The devotees of metals surely won’t hear this though. Instead they will focus with resolve on the bullish looking weekly chart crossover of the 50 and 200 day MA’s without ever noticing that it is more often than not a lagging indicator and the expectation of a golden cross to send metals soaring may yet be defeated. Metals enthusiasts merely imagine in their wilder dreams that the bullish crossover will surely take place. But a warning people: it has not happened yet and that crossover is only talking about the sharp price rise we ALREADY saw in the opening months of 2017.

More ominous perhaps is that the silver:gold ratio has also arrived at long term resistance and threatens to once again break down below its long-term falling trend channel. You absolutely must look at his chart (linked) to see where we are at today. This aspect in itself may be the most worrying of all. So how anyone can seriously consider higher (never mind much higher) silver prices anytime soon is astonishing to me.

Gold:Silver ratio has hit MAJOR resistance and is unlikely to break through. Go ahead bugs…just buy it anyway.
https://www.investing.com/analysis/gold—silver;-testing-6-year-breakout-level-again-200175678

So I think the Trump honeymoon with markets (if we can safely use that term) has already ended.

The spectacular rise in copper prices that unfolded following his election has almost come to an end. And how do I know that? Well the copper monthly chart is a good beginning point and if you take a peek you cannot help but notice that we have arrived at a pretty reasonable top which we can determine by finding the resistance line drawn from the two peaks in 2011 which touches fairly precisely on yesterday’s spike-high price.
———-
Feeling lucky? Go ahead and get long copper right here. It looks like a perfect set up to lose a few bucks. Note that there is a nearly perfect resistance channel line from 2011 to present. (You will have to draw the line yourself since I don’t have the tools to do it for you).
http://finviz.com/futures_charts.ashx?t=HG&p=m1

Again, the top rail of the declining price channel will almost certainly cap any further upside the copper bulls might imagine. The fact that copper has created an almost perfect parallel declining channel is itself a warning to investors that this trade is exhausted and the next move will be down.

But if you still need more proof then look no further than one of the proxies on copper which is Teck Resources (TECK) and there behold one of the finer and more easily accessible short trades available in the mining space given the classic topping pattern currently in play.

Hmmmm….You might want to seriously reconsider copper/silver bullishness after seeing THIS chart.
http://finviz.com/quote.ashx?t=TECK

So the market has already sniffed out that copper (and silver) have topped and we now have an important and obvious divergence appearing between Canada’s largest mining company and the metals it mines as precious metals have continued to rally even as a premier copper miner company is giving signals it has peaked out and preparing to fall.

What all this suggests to me is a market correction may be near at hand.

How severe is anyone’s guess but both copper and silver offer us important clues about the health of equities. For market historians, you will already know a falling silver:gold ratio can be a harbinger of such an impending correction and given that the ratio may be nearing a breakdown within its long term trend channel (recall the ratio chart linked above) we had all best be prepared for silver to melt lower as stocks retreat.

Incidentally falling copper and silver prices are generally associated with the onset of recessions and we may be nearing one in the US at this time. And on that note does anyone here seriously believe it is just a coincidence that the 30 year Treasury bond is just a couple bucks away from its own decade long support line?

What that should imply is long bond prices (TLT) are nearing their bottom and could surge higher in coming weeks. It should also alarm you somewhat given the current combination of dollar strength and potentially weakening industrial metals because all of these are set up like ducks in a row for topped out equities as they prepare to fall.

For those unfamiliar, bonds rise (rates fall) whenever there is stock market turbulence. Simultaneously silver and copper will soften and the dollar and Yen are bid as flight to safety ensues. So when I see all these combinations of copper and silver at important peaks just as long bonds are at a bottom and stocks at serious highs I start to rethink my portfolio to take it all in account.

And you may want to do the same. I believe a market correction may be imminent.



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