Markets Too Complex for Mere Mortals

Commodities were strong and rates rose amidst whiffs of inflationary talk among the European bankers, who are suggesting perhaps they should “allow” inflation to rise above their previously 2% allowable ceiling. Going against that notion this week was a flat gold price and significantly lower silver price.

Yet ours is not to reason why, because markets are way too complex to allow any mere mortal to know with certainty what is driving the markets. That’s why I love the very reliable work of Michael Oliver, who on December 5, released weekly price and momentum charts for oil. His work suggested that we need to see WTI closed above $59.80 this week to set off a breakthrough to the upside for oil. That didn’t happen. January WTI closed at $59.20 but Michael’s work has him turning increasingly bullish on the entire commodity complex and increasingly bearish on the dollar. His view is that a declining dollar is likely to coincide with rising commodity prices and inflation that will then drive interest rates higher. Michael watches the Bloomberg Commodity Index as his proxy on the commodity complex. Michael noted on Thursday, Dec. 5 that the Bloomberg Commodity Index is once again firming, now one point below its pending quarterly momentum breakout (a monthly close for December above 79.35). It is already above the downtrend structure, but to be safe, he would rather see the close above a key horizontal structure on his momentum chart.

One market that really does appear to be defying gravity is that of the equity markets. The chart on your left shows that from about 2015 until the end of 2017, stocks and GDP appeared to be correlated.

Why is there such a disconnection now? My theory is that from 2017 until quantitative tightening started to slow the economy down in Q4 of 2018, happy talk from Trump and a lag between market activity and GDP reports account for the beginning of this delinking. When liquidity draining met the threshold of lethality, the equity market scared the Fed out of its wits, leading to the Powell Pivot. There can be no doubt that the economy is slowing. Not only did Powell pivot at the start of this year, but more recently, massive liquidity is being pumped into the system in the repo markets. That money is designed to do what the Fed’s purpose in life is—namely, to save the banking system. And with so much leverage in the system, the banking system depends on an elevated stock market. But eventually the laws of nature will prevail and equities will fall back to earth, causing investors to consider other places to put their money. At least until the system itself requires a major remodeling, most of the proceeds from stock sales will head toward Treasuries. If Michael’s work is right and massive credit creation drives commodities, inflation, and interest rates higher even as the Fed issues more and more credit faster and faster, a new day is likely to dawn for gold as investors seek a true safe haven. With Treasury rates rising, how will the masses not seek gold?

I sold some stocks that I like in my own portfolio, so that I might be able to buy some others and perhaps I would have done well to keep some of those, because I still believe in them. Yet I am pleased overall with my personal portfolio as it is up 41.25% so far this year. The worst thing to do, I think, is to sit passively by in quest of profits.

About Jay Taylor