Introductory Remarks by PT

We have discussed the proprietary Incrementum Inflation Indicator in these pages on previous occasions, but want to quickly summarize its salient features again. It is a purely market-based indicator, this is to say, its calculation is based exclusively on market prices and price ratios derived from market prices.

However, contrary to most measures of inflation expectations, the Incrementum Inflation Signal is not primarily focused on yield differentials, such as is e.g. the case with 5-year breakeven inflation rates.

 

The 5-year breakeven inflation rate is derived from the differential between 5-year treasury note yields and 5-year TIPS yields. Interestingly, it has recently begun to tick up as well after declining sharply for several months.

 

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Intermarket Correlation Dance

Monday was Martin Luther King Day in the US. The price of gold dropped six bucks last week. The price of silver fell 26 cents, a greater percentage.

The price of gold can sometimes correlate well with the price of stocks. For example, from April 2009 – July 2011. The price of gold went from $892 to $1,626, while in the same time period the S&P went from 841 to 1,289. The percentages are different — gold’s was 82% and the S&P’s 53% — but they moved together. And now, they seem to be inversely correlated.

 

In the short term, the gold-SPX correlation has clearly turned negative (in fact, a negative correlation is generally thought of as “normal”). Over the short to medium-term, the correlation is cyclical, but it is indeed negative over the long term. The forces driving the cyclical element of the short-term moves are an agglomeration of contingent circumstances, time leads and lags and perceptions. The latter include the choices of market participants regarding which of the macroeconomic gold price drivers to particularly focus on. [PT]

 

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One Great Big Difference

On a beautiful midsummer day, roughly six months ago, two distinguished men, of distinguished stature, crossed paths under precarious circumstances.  They are very much alike, these two distinguished men.

 

Let’s confuse him…  [PT]

 

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Commodities as an Alternative

Our readers are presumably following commodity prices. Commodities often provide an alternative to investing in stocks – and they have clearly discernible seasonal characteristics. Thus heating oil tends to be cheaper in the summer than during the heating season in winter, and wheat is typically more expensive before the harvest then thereafter.

 

Silver: 1,000 ounce good delivery bars [PT]

 

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Something Odd is Happening

The price of gold went up two bucks, while that of silver fell ten pennies. Something’s odd about how the metals have traded. Back when the market thought that the Fed was tightening, the prices of gold and silver were rising. Silver is now about a buck higher than its Oct-Nov trading range.

 

A timeline of brief bubble trouble followed by bubble restoration via Hedgeye. It starts in early December (upper left corner) when Santa refuses to provide rising stock prices… Collective Wall Street yammering soon ensues and the socialist central planning agency at the center of our so-called market economy is begged to intervene… After consulting its crystal ball, it decides to make a “coo” sound in late December (lower right corner), and presto – everything is fixed! Oddly enough, gold seemed to like the less accommodative Mr. Powell better. This does actually make sense on one level, but one would normally expect gold to like the prospect of a retreat from a tightening cycle even better. We do have some ideas on that topic, which we plan to discuss in an upcoming Acting Man gold update. [PT]

 

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Almost Predictable

One of the more enticing things about financial markets is not that they’re predictable.  Or that they’re not predictable.  It’s that they’re almost predictable… or at least they seem they should be.

 

For a long time people believed – and from what we read and hear, many still do – that economic cycles move in easily predictable, regular time periods. All you had to do was create a chart of the up and down waves of your favorite cycle model and extrapolate it into the future, and presto, your prediction was ready to be sold. But it turns out it is not that simple. The chart above was published by the “Inflation Survival Letter” in the late 1970s and purported to show the future trend of the so-called Kondratiev Wave, a cycle invented by Soviet economist Nikolai Kondratiev (who was eventually deported to the GULAG and killed by the Stalin regime, after a fellow American economics professor denounced him to the communists in Moscow as a “counter-revolutionary”). Interestingly, their forecast of the trend in wholesale prices turned out to be correct, but everything else they predicted in this context was incorrect. According to the K-Wave theory, the year 2000 was supposed to have been the trough of a major economic depression, with extremely high unemployment, a plunging stock market and all the other symptoms associated with a giant bust. In reality, the year 2000 was the peak of a major boom, with unemployment almost reaching a record low and stock prices soaring to unprecedented valuations. There was a time when the seeming elegance and simplicity of models like Kondratiev’s had our attention as well. There are ways of rationalizing such models. For instance, one could argue that it takes a few generations to “forget the lessons of a depression” and end the risk aversion and penchant for saving it inculcates in the public. There are certainly kernels of truth in this, but the fact remains that the future is unknowable. Kondratiev e.g. didn’t know that the communist empire would crumble in 1990 and that half the world would join the hampered market economy of the nominally capitalist West. This was undoubtedly one of the factors helping to extend the economic boom well into the 1990s (precisely because it kept prices low, which in turn enabled central banks to implement loose monetary policies). [PT]

 

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Fundamental Developments – Silver Looking Frisky

The price of gold went up four bucks, and the price of silver rose 32 cents. Silver has been going up in gold terms since the middle of last week, when the gold-silver ratio peaked at just under 87. It closed this week at just under 82 (a lower ratio means silver is more valuable).

 

Silver: more valuable since last week, both in absolute and relative terms. Just avoid dropping it on your toes – it’s still just as heavy as it always was. [PT]

 

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Unexpected Inflection Points

High inflection points in life, like high inflection points in the stock market, are both humbling and instructive.  One moment you think you’ve got the world by the tail.  The next moment the rug’s yanked right out from under you.

 

The yanked rug… [PT]

 

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Drain, drain, drain…

 

“Master!”, cried the punters,

“we urgently need rain!

We can no longer bear

this unprecedented pain!”

“I’m sorry my dear children,

you beg for rain in vain.

It is I who is in charge now

and mine’s the put-less reign.

The bubble dragon shall be slain,

by me, the bubble bane.

That rustling sound? That’s me…

as I drain and drain and drain.”

[ed note: cue evil laughter with lots of giant cave reverb]

 

a public service message by the Fed chieftain, rendered in rhyme by yours truly

 

Money from thin air going back whence it came from – circling the drain of a ‘no reinvestment’ black hole strategically placed in its way by the dollar-sucking vampire bat Ptenochirus Iagori Powelli.

 

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Has a Bear Market in Stocks Begun?

The stock market correction into late December was of approximately the same size as the mid 2015/early 2016 twin downturns, so this is not an idle question. Moreover, many bears seem quite confident lately from an anecdotal perspective, which may invite a continuation of the recent upward correction. That said, there is not much confirmation of said confidence in data that can be quantified.

 

Our proposed bearish wave count for the S&P 500 Index, which could easily be completely wrong, so take with a big grain of salt. Let us just note here that this chart looks bearish regardless of the wave labels. The latter are mainly meant to serve as an orientation aid (i.e., if something very different from the expected fractal shape develops, we would know that this interpretation is wrong; on the other hand, if the expected shape does develop, we could be reasonably confident of where short term turning points are likely to occur and would have further confirmation that a large scale bear market has begun).

 

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Fundamental Developments: Physical Gold Scarcity Increases

Last week, the price of gold rose $25, and that of silver $0.60. Is it our turn? Is now when gold begins to go up? To outperform stocks?

Something has changed in the supply and demand picture. Let’s look at that picture. But, first, here is the chart of the prices of gold and silver.

 

Gold and silver priced in USD – the final week of the year was good to the precious metals. As an aside: January is the seasonally strongest month for silver. [PT]

 

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The Recline and Flail of Western Civilization and Other 2019 Predictions

 

“I think it’s a tremendous opportunity to buy.  Really a great opportunity to buy.” – President Donald Trump, Christmas Day 2018

 

Darts in a Blizzard

Today, as we prepare to close out the old, we offer a vast array of tidings.  We  bring words of doom and despair.  We bring words of contemplation and reflection.  And we also bring words of hope and sunshine.

 

Famous stock market investment adviser Field Marshal D. Trump [PT]

 

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