The Morning Line

The Morning Line

Ready to Get Sucked In?

We’ve had four months to observe and analyze the bear market that began a single tick off January 4’s record high. What might be said about it so far?  Mainly that it has been far kinder and gentler than we should expect. Realize that the biggest financial bubble in U.S. history has popped. Although this is becoming increasingly obvious, you can be certain investors are waiting to jump back in at the subtlest sign of a bottom. Their brokers and financial advisors will be the first to spot this bottom, along with a dozen more as the broad averages work their way toward the deepest bottom imaginable

In the meantime, the little guys reportedly have been shifting their capital into money market funds, although not at a pace that has spiked redemptions at Vanguard, Black Rock, State Street and a few other biggies that for 13 years made the bull market seem unstoppable. At some point the Leviathans will necessarily turn seller as their customers dive out of shares. It is impossible to say when this climactic phase of the bear market will begin or how long it will take to run its course. Much sooner than we might expect, and with blitzkrieg speed, are two possibilities for which we must be prepared. What is certain in any event is that when Vanguard, Berkshire, Fidelity, Black Rock et al. are forced to dump their crown jewel AAPL, the little guys will not be stepping in to support it at $100, or $80, or $60, or even $20. In the extremely unlikely event they are in a buying mood as the Mother of All Dips seeks a bottom, their ammo will be gone, deflated into hyperspace by ruinous asset deflation.

The Lomcevak

More immediately, however, we should view last week’s sharp reversal as the beginning of a powerful short-squeeze rally equal to or greater than April’s barnburner. This is implied by technical action in a few bellwethers. On Thursday, several were sitting precisely on Hidden Pivot targets disseminated to subscribers a while back. On Friday, most of them demolished their respective ‘hidden’ supports, implying another killer wave will follow when the squeeze sputters out like a Lomcevak. In the case of the tech-heavy NASDAQ, which has been pounded particularly heavily and was down 30% at the recent low, the turn came precisely from the 11,654 target shown in the chart. Although a relapse is possible, the pattern looks too compelling to suggest a retest would be anything more than a foot-fake. If this bear rally is going to prove worthy of the name, it should leave even your editor wondering at its apex whether new all-time highs might be coming as the U.S. sinks deeper into recession.

How High, Interest Rates?

Last week’s commentary asked how high the dollar can climb before it snuffs inflation and the increasingly shrill hysteria that has accompanied it. Inflation is supposed to cheapen the dollar, but that is not what has been happening. Instead, it has been climbing steeply relative to all other currencies. The experts have not been able to explain this, nor why the rally began well before the Fed was even thinking about tightening. It is simple, though, if you understand deflation and its chief symptom, a rise in the real burden of debt. The dollar has been climbing because it “knows” there are more debts than can ever be repaid. This can only result in massive waves of bankruptcies that are going to make us nostalgic for the consumer inflation that is today’s headline news.

Sure, the Fed could print enough money to pay off everyone’s debts, including its own: student loans, our collective liabilities for Social Security, Medicare and private pensions, etcetera – but also car loans, mortgages and credit card balances that have ballooned. The resulting hyperinflation would solve nothing, however, even as it destroyed lenders as a class and all institutional conduits of borrowing. The megabanks would be ruined, leaving no one to lend to you, me or anyone else. It could take a generation or longer for credit to sprout roots again. Do we really want to go down that path?

More Tightening Unneeded

This week’s question is related to the one about the dollar: How high can interest rates climb before they snuff inflation and the increasingly shrill hysteria that has accompanied it? Economists and pundits seem to think the Fed has only begun to tighten. More likely is that interest rates are already high enough to have tripped the U.S. and global economies into deep recession. It was going to happen anyway because of all those unpayable debts, but the Fed’s hawkishness has unleashed market forces that have already mooted the need to tighten any further.

My long-term forecast has called for a 3.24% top in the U.S. Ten-Year Note. On Friday the rate hit 3.13%, just an inch from the target. The rally has been so ferocious that I double-checked my math to determine whether an overshoot might occur. I’ll stick with the target for now, but even if it’s exceeded, rates for home buyers in particular have reached levels that froze the economy and crushed real estate in 2007. If you’ve been a scale buyer of long-term Treasurys in order to implement the Gold-versus-T-Bonds ‘barbell’ hedging strategy I’ve advised for the last couple of years, it’s time to move more aggressively into the bond side of the hedge.

Rampant Dollar About to Undo the Fed’s Best Plans

A lone deflationist on the lunatic fringe of economics 30 years ago, I wrote in Barron’s and the San Francisco Sunday Examiner that an out-of-control dollar eventually would do us in. Specifically, I asserted that a short squeeze on dollars would send their value soaring, making it difficult or impossible for anyone who owed dollars to repay them. I’d already run this idea past a few Ivy finance professors, who all had the same reaction: “What have you been smoking??”  Not Professors Ivor Pearce and W.P. Hogan, however. It was their 1984 book, The Incredible Eurodollar, that had awakened me to the potential disaster brewing in a dollar market vastly larger than all of the others put together, including stocks and Treasury paper. Could a tradeable asset available in theoretically unlimited quantities from the central bank ever be in dangerously short supply? “An interesting question,” Prof. Pearce allowed in a phone conversation we had at that time.

The possibility had fascinated me since my days as a floor trader on the Pacific Stock Exchange. It was not uncommon to see a stock soar simply because too many traders had bet against it. These panic-driven melt-ups blithely ignored poor ‘fundamentals’ to generate rallies that tended to enrich the reckless and stupid at the expense of the well-informed. The latter invariably suffered pain an even financial ruin, although many of them were very smart guys who could do the math. In one particularly memorable instance, they calculated that a certain airline stock trading for around $80 was not worth half that. After the stock ultimately climbed above $200, standing quants on their heads and wrecking some financially promising young lives, the quaintly stupid notion of ‘valuations’ would never be the same for them. Or for me.

Short Up the Old Wazoo

This is precisely where the biggest players in the global financial system are now: short dollars up the wazoo and confident that the math is on their side. That’s because it has been so easy for them to make absurd sums of money by lending dollars promiscuously against any kind of debt instrument a team of MBAs could dream up. This explains why the primary venue for leveraging dollars, a virtual pleasure dome of finance loosely known as the derivatives market, has grown to more than $2 quadrillion in size. Every penny of it represents offsetting bets for and against the dollar, with borrowers effectively on the short side. Even the little guy has gotten in on the action, borrowing dollars to buy homes and cars whether affordable or not. A dollar cheapened by inflation will make it easier for them to repay what they owe. In practice, however, and unfortunately for the over-housed and over-vehicled, the dollar’s value has been soaring lately relative to all other currencies and even gold. As a result, the dawning recognition of the economic harm this is certain to cause is starting to make investors nervous.

With stocks falling hard last week, the Dollar Index broke out to a 103.93 high that exceeded no fewer than three prior peaks created since early 2017.  It took enormous buying power to get past these impediments, implying that short-squeeze nitromethane is now fueling the dollar’s rise.  The trend looks all but certain to continue, and we can therefore use the small but technically important peak shown in the chart at 109.24 as a minimum upside target for now. No one in officialdom knows about 109.24, but its decisive breach would put the Fed’s ostentatious ‘tightening’ regimen in mortal jeopardy. Powell & Co. are supposed to be managing our inflation expectations, but as the dollar continues to rise, it will become increasingly clear that  the charlatans who run the central bank are out of cheap tricks to fool us into thinking they know what they are doing.

Are You on This List? 

Look for a further squeeze on the dollar to push the price of oil beyond the reach of consumers outside of the U.S. It will also weigh increasingly on mortgage borrowers, popping the housing bubble and reversing the near-vertical run-up in car prices. It will price U.S. multinationals’ products and services beyond the reach of global customers, eventually crushing corporate earnings. It will also put the yen, pound and euro under enormous pressure. Putin pegged Russia’s currency to gold to prevent it from sinking toward worthlessness. This is a stop-gap measure at best, since it relies on robust sales of natural gas to keep the Russian economy from flatlining.  But it is no solution for most other countries, since they lack sufficient gold inventories to make a peg to bullion work.

While investors may not understand the implications of a short-squeeze on the dollar, the stock market has reacted intuitively with disturbing signs that a bear market has begun. But the 10% decline in shares so far is not even a warm-up for what’s coming. Wait till the financial whales realize that their all-in bet on inflation is dead wrong.  It could take them a while, so there is still time for wary investors to batten the hatches. If you  Google ‘dollar short squeeze’, you’ll find that virtually all commentary on the subject pertains to a squeeze driven mainly by professional traders. This is a far cry from the short squeeze I’ve been writing about all these years. That squeeze — the one that is actually coming —  will be global and affect everyone, not just the trading desks of big banks. Inflation fears are about to slam into the far bigger, deflationary  reality of a strengthening dollar. The benighted hacks who invent the news ought to ask their supposed experts how much more inflation the U.S. is likely to have with the dollar rising sharply.  Prefer straight talk to boring mainstream blather? Click here for my recent interview with Howe Street‘s Jim Goddard.

What If Crude Has Topped?

If you’re a permabear, it might be refreshing to view Friday’s thousand-point Dow avalanche as the start of a wholesome new trend. My gut feeling, however, is that the plunge will reverse before midweek, ideally at Hidden Pivot targets featured in the latest list of ‘touts’ on the Rick’s Picks home page. I’ll keep an open mind about this if the targets get smashed, but I’m not convinced the stock market has begun the punitive reset it has needed so badly for years.

Arguably more interesting and consequential is the steep ascent of yields on the 10-Year Note to within inches of a 3.24% target that I’ve been drum-rolling for months. What will happen when we get there?  My gut feeling is that rates will level off for at least a few months, then head lower for a long, long time as the U.S. and global economies slide into a deflationary bog. Lower rates unfortunately will bring no relief for debtors, however, since the value of assets that they’ve hocked up to their eyeballs as collateral will be falling as well.

Snuffing Inflation

From a technical standpoint, the 3.24% target looks too clear and compelling not to halt the rise in long-term rates at least temporarily. From a fundamental standpoint, the reason I doubt the rally will blow past 3.24% is that at that level the total burden of all debts will be sufficient to snuff inflation of every sort, turning the real estate bubble, for one, into a black hole of deflation. This will happen irrespective of what the wizards at the central bank intend or expect. Some are saying the Fed wants the stock market lower. Although that sounds plausible, we shouldn’t trust that they know how to do this without collapsing an already shaky global economy. The equally clueless economists at Goldman Sachs recently quoted recession odds of 15% in the next 12 months and 35% within the next 24 months. I’ll take the odds, since I trust the assessment of paid-up subscriber Matt Barnes, who says the recession has already begun.  Matt is in the shipping-pallet business, so he would know.

The Bet Has Changed

If he’s right, then the crude oil chart displayed above tells a logical story. I myself had been expecting another strong bull leg when the ostensible consolidation begun in early March ends. This scenario has never seemed quite right, however, since the global economy appears to be cratering.  A key marker in steep decline is China’s manufacturing sector, which drives world oil prices at the margin. The chart would seem to agree, suggesting that the feverish peak in rates that occurred in early March will stand as a major top. For the June contract, the high was $121.17 per barrel. The corresponding high for the continuous monthly chart above was 130.26, just 12 cents from a compelling rally target derived from the ‘reverse’ ABC pattern shown. Although it’s possible the futures will exceed the high after correcting for a while, this no longer looks like and odds-on bet.  The implication is that a severe global economic slowdown is about to overwhelm the offset of tight supplies that have pushed prices higher.

Musk Should Conserve His Ammo

For many of us, as pleasurable as it might be to picture Twitter in the hands of Elon Musk, and to imagine a despairing Jack Dorsey committing seppuku, Musk should save his billions for more useful purposes. He could start by building a competitive platform for a hundredth of what he’s offered to pay for Twitter. He could also buy an existing platform such as the up-and-coming TruthSocial for a relative pittance. What is Twitter’s value, after all? The company has been losing steady money offering a place for ‘progressive’ extremists to set up sniper positions online. But would allowing the rest of us to post there improve the bottom line? There are reason to doubt this, for in fact the resulting free-for-all could wind up driving subscribers and advertisers away.

Musk says he simply wants to promote free speech. While it is true that nearly any conceivable change in Twitter’s content would bring improvement, one suspects that his main goal is to punish the platform’s narrow-minded managers for being the crypto-Stalinist apparatchiks they are. That being the case, and assuming Musk’s offer is successful, we should look for him to relocate Twitter from San Francisco to a red-state stronghold. Enid in Oklahoma comes to mind. Or perhaps Bristol, Tennessee. Or Bullhead City, Arizona.

Woke-ism Under Attack

Regardless of whether the deal flies — and there are good reasons to doubt that it will — Musk has provoked a healthy discussion of the impact on America of Twitter’s heavy-handed censorship. Woke-ism is on the run, under attack lately not just from political conservatives, but from centrists and others who have tired of living under wacky rules designed to benefit the few at the expense of the many. Most of us would be content to live and let live. November’s mid-term election promises to strengthen and accelerate beneficial changes in this direction and to restore common sense to political discourse.

The Wizards Cannot Hold Down the Dollar

For more than a year, I’ve recommended what my friend Doug Behnfield calls the ‘barbell strategy’ to secure one’s nest egg against the deflationary hard times that lie ahead.  As formulated by Doug, a wealth-management advisor based in Boulder, the barbell portfolio is constructed with gold and bonds as offsets. Try to imagine the worst of times and you may have difficulty concocting a scenario in which T-Bonds and munis on one hand, and gold on the other, would fall together. However, it is relatively easy to imagine circumstances in which either or even both sides of the hedge would rise in times of extreme economic adversity.

I had suggested holding off on the T-Bond portion of the hedge until interest rates peak. That day is coming, probably sooner than most ‘experts’ think, but we are not quite there yet. Yields on the Ten-Year Note ended last week at 2.71%, but my forecast calls for a top, or at least a lengthy leveling off, at exactly 3.24%. This is somewhat higher than the 3.02% rate I’d projected  for the 30-Year T-Bond, the difference lying in the way their respective rallies have unfolded. For purposes of optimizing the barbell hedge, however, I’d suggest using the 3.24% rate indicated in the chart above.

No More Volckers

A top at that level would be a far cry from the 20% peak in June 1981 that followed two years of tightening by Paul Volcker. As a result, inflation remained subdued for more than 30 years. The effects of tightening this time around could not conceivably turn out to be as benign as before because the debt sums affected are exponentially larger. To cite one particularly menacing example, Third World debts amounted to perhaps $1.5 trillion in the mid-1980s. This sum was deemed sufficient to topple the global banking system if something were not done about it. In the end, nothing was done about it. The debts were simply papered over, providing a fresh foundation for untold heights of indebtedness that currently total more than $2 quadrillion. That number includes the notional value of the world’s chief instrumentality for borrowing — i.e., a financial-derivatives market that has supplanted trade in actual goods and services as the planet’s main line of business.

If you’re worried that Powell & Co. will keep raising rates higher and higher until inflation has been ‘tamed,’ the good news is that these charlatans will never get the chance. The bad news is that a bear market in stocks will intervene well before then, not only quelling inflation, but setting in motion a deflationary implosion that will cause even 2%-3% rates to asphyxiate all who have borrowed in dollars. The list implicitly includes virtually everyone on the short-dollar side of the derivatives market.

Oil Just a ‘Warm-Up’

The rise in oil prices is a warm-up for this catastrophe, since the world is having to pay for energy with increasingly valuable dollars. The wizards who have effortlessly inflated asset values across- the-board over the last two decades are about to discover they are powerless to contain a deflation that will ultimately feed off a strengthening dollar and a corresponding increase in the real burden of debt. The size of the dollar market dwarfs even bonds, repos and swaps put together, a Frankenstein monster energized by lighting bolts that policy tinkering cannot divert.

Demographics Is Destiny In More Ways Than One

[Counting on the Fed to ride to the rescue when the bubble finally pops?  You had better have a Plan B, and for good measure a Plan C, since America could be in for something far worse than mere recession when the asset boom ends.  In the commentary below, my friend Charles Hugh-Smith spells out the reasons this is likely with greater clarity and concision than I have. I am grateful for his permission to reprint the essay, an installment of the ‘Musings’ emails that go out to subscribers every Saturday. Discover his extraordinary blog, books and deeply original reflections at OfTwoMinds.com by clicking here.   RA ]

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By Charles Hugh Smith

The saying “demographics is destiny” encapsulates the reality than demographics–rising or falling trends of births and deaths–boost or constrain economies and societies regardless of other conditions.

Demographics are long-term trends, but the trends can change relatively rapidly, with momentous future consequences.

As this article below mentions, extrapolating the high birth rates and falling death rates of the 1960s led to predictions of global famine.

As death rates declined and women’s educational and economics prospects brightened, birth rates fell, a trend that now encompasses most of the world.

As a result of the Green Revolution (hybrid seeds and hydrocarbon-based fertilizers), the Earth supports more than twice as many humans as were alive in the 1960s (3.5 billion then, 7.9 billion now).

Now the problem is a shrinking working-age population that will be unable to support the financial and healthcare promises made to the retired generations.

Birth rates in developed nations have fallen below replacement rates, which means populations are shrinking and

populations are aging rapidly, i.e. the average age of the populace is rising..

One side effect discussed in this article is the decline of the cohort of young males and the rise in the average age reduces the likelihood of conflict: Children of Men’ is really happening–Why Russia can’t afford to spare its young soldiers anymore.

I remember reading similar research in the mid-1970s that identified a strong correlation between the relative size of the cohort of young males and the likelihood of war.

If the cohort was above a specific percentage of the total population, war was likely. One example was Germany in the 1930, which had a large cohort of young males under the age of 25.

This may partially explain the increasing reliance on economic war (sanctions) and cyberwarfare–nations no longer have large enough cohorts of young males to field armies where high casualties are a reality.

(A longtime reader who has been in China traveling on business for months pointed out that due to the single-child policy–only recently lifted–Chinese families have only one son, and they are averse to that one son coming home in a body-bag as a casualty of a “war of choice” or indeed, any war.)

What the article mentions in passing–the demographic impact of social values and political power–is worth exploring.

In broad brush, several trends are visible in many nations and cultures.

One is that having children has gone from being an economic necessity or benefit to a tremendous financial liability in the developed world.

A Danish friend once commented that only wealthy families could afford to have three children now in Northern European countries.  The same can be said of the U.S. and many other countries, once we consider the higher demands now placed on parents.

Where in the good old days of previous generations, parents were deemed adequate if they provided a roof over the kids’ heads, basic meals and clothing.  Education was left up to the public schools, and public college was low-cost, should the child want to continue their education.

(The University of Hawaii tuition was $89 and student fees were $27, for a grand total of $117 per semester from 1971 to 1975, $780 in today’s dollars. I was able to support myself, pay all my university expenses and carry a full class load on a part-time job–in one of the two most expensive cities in the nation, Honolulu.)

In a fully globalized “winner take most” economy, parents with aspirations for a top 20% career and lifestyle for their children have a much more demanding burden.

Parents seeking to give their children a leg up must provide costly enrichment lessons and juggle complicated schedules of after-school classes.  Prestigious universities now expect more than mere academic excellence; applicants must show evidence of leadership, civic engagement, etc., and even public universities are outrageously expensive.

Another trend is the cultural bias of favoring the elderly in terms of government support.

As workers increasingly lived long enough to actually retire, social and political values supported government funded pensions and healthcare for retirees.

In the high birth rates 1940, 50s and 60s, governments greatly increased benefits for the elderly / retired, as everyone assumed there would always be 4 or 5 workers for every retiree. Relatively few people lived to age 80 or older.

The steady decline in birth rates and the steady increase in longevity have dropped that ratio to less than 2 workers for every retiree. In the US, there are 127 million fulltime workers and 69 million Social Security beneficiaries (including disabled). That is less than 2 fulltime workers for every beneficiary.

In a recession, Boomers will continue retiring en masse while the workforce will shrink.  A ratio of 1.5 workers to every beneficiary isn’t that far away. 

Is there any doubt this ratio is unsustainable financially? No.

These two trends are a double-whammy on those young adults having children: the costs of raising kids is much higher, the expectations are much higher while the government support is heavily weighted to the elderly populace, which is exploding as people now live into their 80s and 90s. (My Mom is 93, my Mom-in-law who we care for here at home is 91, our neighbor’s Mom is 99, and so on.)

We have some elderly friends who retired from federal government jobs at age 55 after 30 years of service and have collected 40 years of retirement. Is this financially sustainable? No.

The actuarial foundations of Social Security and Medicare were based on 4 or 5 workers per beneficiary and average lifespans around 70. Retirees were expected to collect benefits for 5 to 7 years, not 25 to 30 years.

These systems are fundamentally unsustainable at current retirement ages (55 for many government workers, 62 for “early retirement” Social Security and 67 for full benefits and Medicare at 65), current longevity trends and less than 2 workers per retiree.

The only way to reverse these demographic trends would be for government support for retirees taking a back seat to government support of children and young parents, greatly reducing the financial burden of having children.

The only way an economy can support a massive population of elderly is if there are enough young workers entering the workforce to keep the society and economy functioning.

Forward-looking populations would realize supporting parents and children is the only way to support future retirees.

But humans aren’t very forwarding-looking; we want all the good stuff now. So the elderly support politicians who promise their benefits are sacrosanct and untouchable–except to increase them.

Almost all elderly people vote while a much lower percentage of young people vote. So the government continues supporting the elderly even as the population of elderly explodes and the means to provide this support are in free-fall.

Retirement ages have barely budged, increasing a mere two years in 40 years from 65 to 67, while lifespans have greatly advanced and the worker-retiree ratio has collapsed.

Open-ended healthcare expenses are an invitation for profiteering, fraud and unnecessary or even harmful medications and procedures. By some estimates, 40% of the $1.5 trillion dollars spent on Medicare and Medicaid annually is paper-shuffling, fraud and needless medications and procedures.

A third trend is female workers wanting a fulfilling career and children, too. 

With childcare costing $25,000 or more annually, one parent may essentially be working just to pay the childcare costs for two children.

A fourth trend is relying on high birth rate immigrants to substitute for native-born workers is no longer viable, as birth rates have plummeted in nations that provide immigrants.

As the saying has it, something’s gotta give. Doing nothing will lead to the collapse of the programs benefiting the elderly while the birth rate continues declining.

All these values and programs assumed high birth rates, high worker-retiree ratios and modest costs for raising children were forever. They weren’t.

Now we need a new set of values that reduce or eliminate the financial burdens on parents raising children. It would be nice if we could afford to pay for everything we want but printing money to do so just collapses the entire system.

Personally, I would raise retirement ages to match the rise in lifespans, limit publicly funded extraordinary healthcare measures for people over the average lifespan, tax revenues rather than labor, and pay all childcare and after-school programs expenses currently paid by parents, plus a set sum per child that can only be spent on after-school enrichment classes and programs.

That seems common-sense to me, but I’m open to other permutations of hard choices.

Hard choices lead to better outcomes than collapse, but few have any stomach for hard choices. Politicians who make hard choices that require sacrifices of powerful lobbies and voting blocks lose elections.

The fantasy that we can “print our way out of any problem” is strong because it’s so convenient and apparently so successful–at first.

Whether we admit it or not, collapse is the default “solution.” That destiny has already written by demographics.

Another Setback for Permabears

Last week’s commentary was skeptical that the short squeeze begun two weeks ago in the broad averages would prove to be just a bear rally.  Based on the latest technical evidence, it now seems likely that stocks are headed to new all-time highs. This is despite the fact that the world is going to hell in a handbasket, Biden’s wrecking-ball presidency has a thousand days to go, China and Russia have joined forces to hobble the U.S. however they can, and there is even talk that America could be in for its first-ever food shortage. This comes on top of soaring prices for gas, groceries and nearly everything else, as well as a looming earnings recession. Throw in Fed tightening to the horizon line and you have quite a list of things about which Wall Street evidently cares little if at all.

As always, we need look no further than Apple’s chart to understand exactly where the market is headed. AAPL is a perfect proxy for institutional mindset, a one-decision stock since 2009 that has made erstwhile chimpanzees look like geniuses. DaBoyz have hung together on AAPL for 13 years, selling almost none of it from their portfolios, and buying every dip. A 4-for-1 stock split back in August 2020 allowed the rubes and riff-raff to join in the fun — an opportunity to play AAPL stock and options with relatively small change. It became the biggest-cap stock in the world as a result and is likely to grow even fatter on perpetually spun news that, this time, it’s teaming up with Porsche to have yet another vague but promotable go at the car business.

 

Sunny and Mild: Ugh!

 

The chart shows that buyers shredded their way past a ‘midpoint Hidden Pivot’ at 167.80 last week. This all but clinched the subsequent 5% rally and minimum upside to the pink line, a ‘secondary’ pivot at 176.65.  That is a place where bull moves can stall fatally, and the possibility cannot be ruled out. However, permabears shouldn’t get their hopes too high, since the impalement of p=167.80 was inversely akin to the groundhog seeing his shadow. He did, and it will likely spell at least six more weeks of sunny and mild weather to be endured by pessimists who think a correction worthy of the name is years overdue. If the move easily surpasses 176.50, you can count on more upside to at least 185.50, or even to 193.78.  That would pull the stock market higher, postponing Papa Bear’s arrival yet again, as well as a day of reckoning for investors who long ago jettisoned the concept  of value.

Just a Bear Rally?

With the supposed bear rally about to enter its fifth week, I am reminded of Gideon Drew, “the thing that wouldn’t die” in the 1958 horror movie of that name. Like Drew, the stock market has become a disembodied monster, able to command loyalty and teacherous obedience with just a creepy movement of the eye. The fictional Drew was beheaded for devil-worship by Sir Francis Drake, but the evil-thinking piece of him came back to life when the crate in which it was buried got dug up by some hapless D-list actors.  They are akin to today’s investors, who for 13 years have been mesmerized by a stock-market bull that long ago decoupled from the corpus of reality. The bull will eventually send them over a cliff, as all bull markets inevitably do. But until that happens, the delusional herd will remain transfixed by the incantations of greedy Wall Street hucksters who can spin alluring dreams from even the scariest headlines.

Cocksure, Sort of… 

And scary they are — so much so that the potentially world-shaking geopolitical disaster in Ukraine ranked only seventh on one well publicized list of Americans’ biggest concerns. With such a formidable catalogue of troubles, it seemed more than a little plausible that the powerful selloff of stocks that began on January 4 was the start of a bear market. That is still what many, including some of my most astute guru colleagues, seem to believe. We were pretty cocksure about this when the S&P 500 dove 600 points, or 12%, in the first three weeks of the year. When a powerful bear rally intervened in late January/early February, most of us stood our ground; and then we doubled down on costless certitude when stocks began to plummet anew at the end of February. Now they are thrusting sharply higher again, pushed by intense short-covering that reeks of stupidity. And yet, if the stupidity continues for just a few more days, stocks will reach a threshold at which bearish certitude — or at least mine — will begin to wither. Here’s a chart that shows the E-Mini S&Ps bound for at least 4584.25. If that Hidden Pivot is reached, the move would surpass two ‘external’ peaks, revitalizing the bullish energy of the chart. At that point new record-highs would become, if not certain, then at least likely. Caveat venditor!  Let the short seller beware!

A Precise Forecast for the Coming Blowoff in Crude Oil

Considering the size of the crude-oil market and its geopolitical importance, the rally begun two years from $6.50/bbl amidst fears of a Covid-caused Depression ranks as one of the most spectacular and consequential in history. Consumers are coping at the moment with speculative excesses brought on by the curtailment of Russian petrofuels, and by disruptions, real or feared, in the global distribution network for energy. Pump prices have doubled since the pandemic began, piling crushing weight on a U.S. economy that was already close to buckling from steep increases in the cost of nearly everything. How much higher can prices go? The headlines suggest there is no relief in sight. But an end to the cost spiral is surely coming, since the parabolic rallies in many commodities, particularly oil, grains and metals, are too steep to sustain.

When the wilding spree ends and prices fall as precipitously as they have risen, the result will be a deflationary bust that will send the global economy into deepest recession or even Depression.  Oil cannot but lead the way down, since its collapse will be exacerbated by the vast swath of the energy patch that has been hocked to financiers in order to propagate growth in derivatives markets that are much larger, even, than the oil sector.  I referred to this effect as a ‘double whammy’ in my last commentary, which was titled Inflation’s Last Fling.

Here’s the Trade…

So where might crude’s rally reverse, popping an asset bubble that has been building for more more than three decades? The chart above makes a persuasive case for a bull-market top at $141. That would represent an 8% gain over this month’s so-far peak at 130.50, and a 33% gain over the current $106.  The May contract shown may need to correct for a few weeks or longer  before the blow-off rally can begin, but there can be little doubt that it will reach a minimum 141. Under the rules of the Hidden Pivot Method, this can be inferred from the ease with which buyers blew past the red line, a ‘midpoint resistance’ at 101 that is often useful, if not to say infallible, in determining trend strength. The chart also suggests that a pullback to the green line ($82) would offer an extraordinary opportunity for bulls to get aboard ‘mechanically’ for one last, spectacular ride.

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