Weekend Update 9/23

Ok, you heard it here first…sometime after the US election and likely early next year we will start to hear chatter about a Fed QE exit strategy…Do I think there will really be a QE exit? No. However I think that by then it will be clear that an open ended commitment has numerous unintended consequences and those consequences (mainly asset inflation) will need to be reined in, if only through open mouth operations.

 

Now that indefinite QE has been loose in the wild for 10 days or so, I have yet to hear even a theoretical argument (let alone actual evidence) of how this particular brand of QE will stoke actual sustainable economic growth…So, for those looking for a reflation trade it is worth noting that all the QE in Europe and the US is likely to do ( and even the “stimulus” in China ) is to potentially slow or stop the ongoing gradual  decline in economic activity, rather than inciting an actual reversal and creating “growth”. I put growth in quotes since any growth will only be the false growth that comes from more debt or money-printing…true growth net of debt is nowhere on the horizon outside of a few select industries such as portions of the energy industry, the smart-phone ecosystem and other niche areas.

It is worth remembering, as Acting-Man recently discussed, that markets are often lagging indicators and tend to ignore deterioration and dangers signals until there is no choice, at which point the sudden collapse mode is triggered. It feels like the slow but steady deterioration of economic indicators globally is setting the stage for a severe correction in US equity prices, but with several key differences from 2007. Markets are nowhere near as overextended now as they were then, and businesses have streamlined significantly, which makes any pullback much more likely to end up looking more like a correction than a collapse. The problem with corrections in a market and economy built on weak underlying fundamentals ( a reliance on printed money being one such weak fundamental) however is that such a correction is only “just a correction” in hindsight. The depth of any pullback will be unclear during the pullback, especially with so much money waiting to jump in on the short side looking for the next coming of a “big short”. However, I have seen no price action so far that suggests a near term severe pull-back is imminent in just about anything.  

And a final word on the “slow but steady deterioration of economic indicators”…the deterioration in the US so far seems to be within the range of a slow-down than can be addressed without drastic action (such as major new downsizing by busnesses), so it has not advanced to the point of being a macro-level self-reinforcing slow-down. However it seems that the odds of the slow-down progressing to the self-reinforcing trend-state are more likely than a sustainable pick-up in economic activity, but there is no reason to speculate pre-maturely…markets and data should reveal the next trend fairly soon.

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Eclectic Wealth is intended to educate and entertain, however the information contained, while believed to be accurate, is not gauranteeed and Eclectic Wealth is not responsible for any investment decisions of any kind.

Weekend Update

The potential for counter-intuitive moves in both the market and economy is very high with the advent of QE forever. .. This is a situation where waiting to see how the trends adjust is especially prudent.  The desire to predict is a natural tendency but it is usually better to let the market tell us what it wants to do and this is especially true now.  I can see bullish and bearish scenarios for almost every asset class with one exception…I find it hard to see a significantly bearish scenario for Gold.

That said, I think the highest likelihood move here is a fairly sideways market in US equities  until 1) the next earnings season 2) a fundamental breakdown of can-kicking in Europe or 3) a major geopolitical event (likely negative) although a reduction in Iran-related tensions (an unexpected positive) would likely knock 20 dollars or so off of oil prices.

It is good to remember here that the base case for markets in the absence of fundamental news is a slow steady grind higher since the most active market players, be they man or machine will have a trend- following bias and the trend is up, so that is the other back-drop.

…However, the margin of safety here will now get dramatically lower without a dramatic improvement in fundamentals (i.e. earning streams) and it is hard to see where that could come from outside of the housing-related space in the US, and that is likely to be fairly narrow in impact…This will set up more CMG/PCLN-like implosions somewhere down the road, so start planning to capitalize now, especially since the one area currently in a non-stop risk-on uptrend is the momentum favorites such as those two..

Charts of the week…take a look at the long-term charts of ONN and OFF…When these first appeared, I dismissed them as yet another short-term trading vehicle with a lot of potential for counter-productive results…I was wrong.  The eerily perfect wave pattern (so  far) makes them an interesting vehicle for trend-following and it will be interesting to see if the wave pattern continues once the risk-on trend reverses.

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Eclectic Wealth is intended to educate and entertain, however the information contained, while beleived to be accurate is not gauranteeed and Eclectic Wealth is not responsible for any investment decisions of any kind. The Philosopher King may hold postions in referenced securities.

A Reminder From the Recent Gold and Silver Action

The week just passed provided a vivid reminder of a concept every investor who includes technical patterns in their analysis should bear in mind: support and resistance levels only matter in an orderly market. I often hear commentary expressing surprise at the lack of expected buying or selling at key technical levels, however time-and-again we see that these levels really only matter when normal volumes are present, and reaction to major news is not in play. The kind of stop-running, self-reinforcing near panic short covering (similar to the opposite action in Silver several months ago) that we saw this week in Gold and Silver (likely exacerbated by major players caught off-side) is especially key for option sellers to bear in mind since these levels will provide decent signals most of the time, but by no means all of the time and in my experience tend don’t tend to reassert themselves with the prior strength they had in calmer markets.