Tectonic Shift Update: Bond Bears Threaten All Central Bank Reserves

I received a call from Bob Hoye earlier today to make sure I had read his June 11 weekly “Pivotal Events” missive because he, like Michael Oliver, Dr. Robert McHugh, and David Jensen thinks we are nearing a major tectonic shift in the major markets.

You can most certainly add my name to that list, which is why I will be making some portfolio changes this week, as discussed below.

Points from Bob Hoye
• Bearish on Sovereign Debt Markets – All central banks have been trying to print their way out of trouble since the 2008-09 financial crisis and they have all been congratulating themselves for avoiding another Great Depression like that of the 1930s, dubbing it instead, “The Great Recession.” As a result, central bank balance sheets are loaded with massive amounts of extremely overvalued sovereign debt. This is a problem because:

o The markets are taking control, selling off their holdings of sovereign debt, most significant of which has been German debt, which has risen from 0.059% to 0.96%, representing a huge price drop.
o With the value of this massive central bank asset falling so significantly, it seems likely that ALL major central banks around the globe will soon have underwater balance sheets. As Bob observed, it’s one thing to have a regional smaller bank like the Bank of Thailand going belly up. But what happens when ALL central banks are broke? Do you think there may be a fiat money confidence problem in the not-too-distant future, if the bond vigilantes continue to sell down all this fraudulent government paper?

• Bearish on Equity Markets – In Roman times, Cicero observed that financial troubles in outer regions would afflict financial markets in Rome.

o Hoye’s work showed two upside exhaustions in the “South China Sea” on June 20 and June 28. He notes that it took three such extravaganzas to complete the Shanghai blow-off on October 16, 2007. It is uncertain whether a third will be required this time.
o The European STOXX is also in a pattern similar to 2007.
o The Hong Kong (FXI) had been ranging between a high of 53 and a low of 49. It bounced between those two extremes since April but last week it fell through support, hitting 48, falling below the 50-day moving average.
o A CNBC headline read, “Stock Craze Sweeps Rural China,” and the story included a villager observing that it was “easier to make money in the stock market than in farming.” Well, well, what do you know? I guess the Chinese are now learning American culture. Work less and get paid more! (What happens when we succeed in teaching the whole world what we have learned in America from our government and central bankers? You can have something for nothing!) But that notion may soon change with a major collapse in global stock markets.
o Regarding the NYSE, a whole host of positives that have been supporting higher stock prices are now breaking down, such as the following:

? The yield curve is no longer flattening. In other words, longer-term borrowings are becoming much more expensive.
? The Advance/Decline line is no longer positive since April. It had been positive since October of 2014.
? All NYSE stocks had a maximum sentiment high in June 2014. Since then, stocks in general have gone nowhere. The NYA, which measures all NYSE stocks, rose from 11,108 to 11,254. Now it has taken out the 50-day moving average at the end of May to a low of 10,882 this past Tuesday. In other words, we are seeing a major topping process in motion.

• The Credit Markets

o In January, Hoye’s work registered an upside exhaustion for long-dated U.S. Treasuries, as measured by TLT (20- to 30-year U.S. Treasuries). At that time Hoye made a call that the long bull market in U.S. Treasuries was over. He reiterated it this past week.
o The reason rates are heading higher is not because central bankers are becoming more sober, but because of illiquidity in the global bond markets. All this debt was created by central banks in order to escape another Great Depression. But by that kind of “kicking the can down the road,” all the central banks have done is guarantee that the next decline will be much worse than that of 2008-09 because crisis because there is much more debt to equity leverage in the system than there was there then!
o As insolvency grows in the economy, real interest rates rise, which causes a chain reaction across the economy. With a growing liquidity crunch, real rates have risen from a low of 1.25% in 2013 to over 3% now. This should start to constrain reckless spending that has been set in motion by reckless central bankers who now are themselves facing insolvency. Rising nominal rates along with plunging commodity prices combine to lead to rising levels of insolvency, which leads to higher real rates, which lead to still more defaults in a vicious circle that corrects needless excesses created by Keynesian central bankers.

• Precious Metals – Here the short term news is not what your editor wants to hear, but it is what it is and I can’t disagree with Bob, at least over the next month or two. Two ratios have caused Hoye to see no reason to own gold shares in the short term:

o Gold Shares to gold have turned negative.
o Silver to gold has again turned negative.
o Deteriorating credit conditions would put pressure on gold and gold shares.

Jay’s Comment

Regarding Bob’s views on bonds and equities I am in 100% agreement. Regarding gold shares in the short term, I also think he is likely right. Keep in mind that two other analysts who I have a very high regard for, namely J. Michael Oliver and Dr. Robert McHugh, who agree with Hoye on the debt and equity markets and I don’t think they are against his views on the gold markets either short term. But clearly both McHugh and Oliver see gold itself in a bottoming out phase and getting set for a major rise higher. Both men think we could see $20 to $40 on the downside yet for gold, but then both turn positive. Bob Hoye on the other hand, tends to take a shorter term view of markets.

goldDr. McHugh on Gold – Gold rose Wednesday, June 10th, and it is possible that Gold has finished wave {c} down of {2} down. Wave {2} down looks to be a 3-3-5 flat corrective decline. Wave {3} up may have started. Big picture, Gold looks to have finished a Declining Wedge since May 2013. These patterns are termination bottom patterns, and it means Gold is headed much higher during the last 8 months of 2015, headed toward a minimum of 1,425ish by year end. It means that Gold could see a 15 to 20 percent additional rise this year. This means large degree wave (3) up has started.

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.