Canaries Dying in a Hellish “Coal Mine” Created by Wall Street

I’m drawing in part from two favorite radio show guests for my market/economic commentary this week. There are many favorite guests but two that help me the most in making sense of an increasingly upside down world are John Rubino and J. Michael Oliver. So at a time when down is defined as “up” and up is defined as “down” to serve the propaganda interests of the establishment, these two favorites of mine are helping me make sense of where the markets are really heading. I’m drawing on their insights this week, as I fear we are nearing an economic and social Armageddon.

First, let me talk about an article that John Rubino put out, which I urge you to read at www.dollarcollapse.com. The article is titled “Big Names Bailing.” As John noted, “the list of heavy hitters who are saying bad things about this world and its financial markets—while acting aggressively on their pessimism—is growing to alarming proportions.” The examples noted in John’s essay were Stan Druckenmiller, George Soros, Carl Icahn, and Sam Zell.

  • Stan Druckenmiller says the bull market is exhausted; move to gold. He worries that growing debt thanks to easy money is leading to mal investment and stimulation of stock prices as corporate executives put debt onto the balance sheets to buy back their stock so they can exercise their warrants. Quite correctly he also worries that China is making a huge mistake by over stimulation of their monetary system, which he believes will exacerbate over capacity and continue to drown the world in debt not serviceable by a dwindling global decline in cash flow.
  • George Soros has been selling stocks and buying gold as well. He worries about China and its depletion of foreign currency reserves and he also thinks there is a chance the European Union may collapse. He believes the chances are growing with increased likelihood that Britain will vote for BREXIT. Soros has recently purchased over 19 million shares of Barrick Gold Corp. in the first quarter and also bought a large number of Silver Wheaton shares.
  • Carl Icahn has made it known that he has taken a net short position of 149% against stocks in the first quarter of 2016. A spokesperson for the 80-year-old legendary investor has said that they are much more worried about stocks declining by 20% than gaining 20%.
  • Sam Zell is selling real estate again. The last time he did that was in 2006 when the real estate bubble was still expanding. We all know how that turned out. Now he is doing it again. Last fall he unloaded ¼ rental buildings that total something like 23,000 apartments to Starwood Capital Group for more than $5 billion. Then he sold off office buildings in South Florida and Denver with complexes in Phoenix, Boston, and other metro areas expected to be sold before the end of the year.

Of course, none of these heavy hitter investors are saying with certainty that the stock market and real estate markets are going to crash. But their sense is that there is growing danger in those markets and most of them make good sense in their arguments even if they are lacking in a complete understanding of Austrian economic theory. Druckenmiller for sure hits on the theme of mal investment even if he doesn’t realize it is an Austrian concept.

There are of course many more people who are deathly concerned about the upside down economic policies by destroying capitalism and endorsing a form of economic fascism. It just stands to reason that capitalism cannot survive if the life blood of capitalism—namely, capital—is not permitted price discovery by the rigging of interest rates by central banks. You can’t help but misallocate capital so that the debt from which money is created grows much, much more rapidly than income from which to service that debt.

Michael Oliver Displays the Real Canary in the Coal Mine

If Sam Zell is starting to sell his real estate even as interest rates are continuing to decline, it may be very much like his sale of real estate in 2006. Most good investors both buy and sell “too early.” What I found extremely interesting was Michael Oliver’s missive on Friday in which he has started to ring the bell, to very, very closely watch U.S. T-Bonds. He noted in his missive that both gold and T-Bonds have been moving together. Both just finished a sideways correction as stock had another run higher. But now both gold and T-Bonds are starting to rally once again even as stocks have declined over the past couple of days. What is worrisome is that this warning along with his technical work that indicates a major bear market for stocks is aligned with the views of the big name investors that John Rubino wrote about. Here are Michael’s comments about the T-Bonds.

T-Bond Futures Update: Drama Ahead?

T-BondIntermediate?trend charts were sent June 2nd. I identified 167 1/4 as a positive momentum trigger, thereby ending the congestion in this market since February’s surge. That level was closed above on June 3rd. And no surprise, gold is moving up along with T?Bonds. After all, gold and T?Bonds exploded simultaneously from January to mid?February peaks while the S&P500 collapsed. And following that surge both gold and T?Bonds went into a mostly horizontal correction phase through the end of May. Too coincidental to ignore.

The S&P500 used that pullback in those inverse markets as an open door to enjoy a bear market rally (MSA’s label, based on that index’s massively violated annual momentum). Now T?Bonds and gold have reasserted themselves to the upside after having teased the bears and scared the longs in both markets in the last few months.

Where might T?Bonds be headed? I will focus on T?Bond futures and you can peg your favorite U.S. government debt ETF to that analysis. Over the past two and a half years annual momentum has developed what I call a trend structure from hell waiting below the current action. The red uptrend. Meaning, expect a downside collapse in this market when that line comes out (probably later this year). But for now, that momentum trend line is safely below the current market.

What about upside levels? Going back to 2003 (a good year to begin as it produced a significant peak) we have quite a bit of information. Momentum peaks have reached 17% over the zero line (price reached 17% above the 36?mo. avg.) a half dozen times, noted by the horizontal black line. One spike reached 26% in early 2009, inverse to the stock market making its final panic lows in early 2009. But that was an unusual time (and don’t forget: there could always be another “unusual” time).

Meanwhile, lows in annual momentum have always been shallow at around 5% below the zero line. Shallow lows with high highs. A momentum range that translates into a price chart that is rising. Sharp drops that never get out of hand (they halt around 5% below the 36?mo. avg.). Meanwhile, upside trends are solid and stout. But no trend is eternal.

These comments are conditional, but not baseless. They are founded on the idea that this market is headed for its final hurrah (as are other “safe” government debt markets such as Bunds and JGBs). Negative rates, or near?zero rates, are beyond the pale, but then unreality can persist longer than most think. I recall those who declared a tech bubble in 1999 but were a year early, or those sage few who declared a housing collapse— but in 2006! Timing is more important than generally “being right.”

The sane know that negative or near?zero rates are not natural market pricings. They are due to government/central bank policies, not free exchange in the debt markets. And many now recognize that those pricings are generating and accumulating massive real world distortions (read: time bomb). But sometimes in order to get absurdity to unravel requires taking it to a level beyond the absurd—in technical terms. Called a blow?off.

Referencing the U.S. T?Bond market, how can it enter such a phase? What are the definable technical factors? Momentum is pressing upside for a third time in the past year at the “normal” ceiling. Maybe it wants to explore the other side of that upper black horizontal. And in particular, price is nudging through a channel top that traces back many years. Prior hits along the top of that parallel channel were brief and taken down quickly. This one behaves differently. Two and now three hits on channel top in the past year. I think that’s a “tell.” Intent to accelerate. As to what levels on the upside, that’s always difficult to predict in blow?off situations due to the exaggerated nature of those events. But if momentum merely went back to the panic high levels it registered in early 2009 at 26% over the zero line, then that would convert to the 186 area in the next few months (that price?equivalent level adjusts each month along with the rise in the 36?mo. avg.).

Any monthly close at 170 or higher should signal that price acceleration. So far the high this month has been just above 170. Any blow?off is likely to last only a few or several months. And I strongly suspect that if it occurs other key markets won’t be sunning themselves on the beach. There will be coincident and inverse relationships occurring. MSA has identified many such upside accelerations in the past couple decades and they were all glorious while they lasted, but they ended in flames. This one will be no different—if it pushes into an acceleration phase. Once the acceleration surge is spent, usually in a matter of a few months, then any abort (monthly close) back below the primary channel top is highly likely to produce an “efficient” drop to channel bottom. Meaning with speed. That price chart abort action will in turn cause momentum to break its structure from hell, and my bet would be that if that structure (red uptrend) comes out, then a rapid test on the all?too?shallow lows at around 5% below the 36?mo. avg. will be challenged (lower black horizontal). And that annual momentum structure has held far too long at too shallow of a level.

Professional and wealthy investors may consider subscribing to Michael’s excellent newsletter, “Momentum Structural Analysis.” Go to www.OliverMSA.com to learn more.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.