Readers who purchased Dr. Strangemarket's "Gold Boom 2016" in December or January and bought the recommended stocks have made a lot of money this year. But now it is time to take profits and sell or reduce your position in one of the stocks, Silver Wheaton (SLW).
Don't get me wrong, Silver Wheaton is a good company with an excellent reputation in the precious metals industry. The stock price has boomed from $12.42 at the start of this year to $23.39 as I write. An 86% profit in 6 months ain't bad!
But right now Dr. Strangemarket sees gold outperforming silver at least for the rest of this year. Gold will perform well either as a pure safe haven during economic, financial, political, or market crises, OR as a store of value when expectations of inflation rise and the value of the US dollar weakens. Silver on the other hand only performs best as an inflation play, when other natural resource and commodity prices are rising in general.
From April until now, silver has rallied along with the commodity sector in general. But the risk of a broad global economic slowdown is still present -- the risk was there even before the Brexit vote, and now after Brexit it is all the more serious. If evidence of global recession accumulates, gold can still do very well, but silver will struggle to keep up.
So Dr. Strangemarket now recommends focusing your precious metal investments primarily on gold, not silver. Eventually silver will have its boom, but that may happen in an economic recovery after a recession. In the meantime, I expect silver to lag behind gold. The gold/silver ratio may even rise as high as 100:1. In the ensuing recovery the ratio will fall again: a return to 50:1 would be normal. But for now, I expect gold and gold mining investments to outperform silver investments such as Silver Wheaton.
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I'm Geoffrey Caveney, the author of the Dr. Strangemarket blog that's been featured on MarketWatch and other popular financial websites.
I analyze current and historical trends in the global economy, and these trends are telling me now is the time to buy gold and precious metals - their prices are set to skyrocket in 2016 and beyond!
Only the strong dollar and the appearance of an economic recovery have kept the price of gold down, and they are both very temporary conditions.
For this brief moment, the illusion prevails that the Fed can raise interest rates for the first time since the 2008-2009 Great Recession and the economy is strong enough to handle it. When reality proves otherwise, the economy, the dollar, and the stock market will all decline, and the price of gold will soar again.
For those who are paying attention, the danger signs of new cracks in the global economy have been noticeably increasing for the past year and a half:
The slowdown of China's economic growth rate is an alarming development, because the Chinese industrial and manufacturing boom has been propping up the world economy for over a decade.
The dramatic crash in the price of oil, copper, iron ore, natural gas, and just about every other commodity is a reflection of the steep drop in industrial activity and global demand.
It is delusional to think the U.S. economy can keep chugging along in the face of all this, given the interconnected globalized economy we have today. When the economy stalls out and goes into recession in 2016, investors around the world will flock to gold as the ultimate safe haven asset to own.
There's more: An understanding of the history of the gold price and technical analysis of its trend confirm the expectation of a rising gold price in 2016 based on the economic fundamentals. In particular, I like to watch the price of gold in Swiss francs as well as U.S. dollars.
The Swiss National Bank as well as the Swiss people have more appreciation for and understanding of the value of gold than most Americans -- present company excepted, of course! -- so it behooves the gold market analyst to pay careful attention to this currency in particular. The Swiss franc is also a very strong and stable currency, so gold price movements in francs are meaningful.
And in fact, the price of gold in Swiss francs has been quite stable and steady over the past 2 years, after falling in 2013 from the highs of 2011-2012. Through 2014 and 2015 gold has mostly stayed in a range from 1050 to 1200 Swiss francs. The famous de-linking of the franc from the euro in January 2015 simply served to keep the gold price in francs within the range:
As an illustration of the connection of the Swiss franc to the gold price, take a look at the price action on December 3 and 4, 2015:
On Dec. 3 the dollar weakened dramatically against both the franc and the euro, when the European Central Bank's monetary easing policies did not go as far as investors had expected. The gold price in dollars did not immediately react, so with the franc stronger, the gold price in francs fell dramatically too.
But the next day on Dec. 4 we saw a big upward move in the gold price in all currencies ($1,061/oz to $1,086/oz in dollars). Why?
Because the gold price was correcting to its previous level in Swiss francs.
The consistent long-term trend of the gold price in Swiss francs is clear: it holds steady for a period, then the gold price rises very dramatically (such as in the 1970s-1980, and again in 2005-2011/2012), then there is a correction, it holds steady again, and repeats the process. The past 2 years have been the steady period; the next move will be another dramatic rise in the gold price.
Note that the periods get shorter, and the moves happen faster and faster, over time. The correction from the 1980 level occurred all through the 1980s and took a decade to get down to the steady 1990s level. The correction in 2013 only took a year. Likewise the current stable period will be much, much shorter than previous stable periods - which is why you must buy gold and precious metals stocks NOW before you miss out on the breakout of the next sudden leg up!
As for the Swiss franc and the U.S. dollar, the consistent long-term trend here is equally clear: the dollar gets weaker over time and the Swiss franc gets stronger over time. The dollar strength of the past year and a half is only a correction in the strong trend in the direction of a weaker dollar and stronger franc:
In summary, the price of gold in Swiss francs is due to rise dramatically higher again as its next big move, and the Swiss franc will keep getting stronger against the U.S. dollar. Combine those two trends together, and you will have a massive increase in the price of gold in U.S. dollars.
So what steps can you take to protect yourself, and also to profit from seeing these trends in advance?
Of course you should own gold to protect and grow your wealth, and you should be buying more right now, while the price of gold is low, because it won't stay that way for very long.
But if you want to take full advantage of getting in on the ground floor of the boom in gold and precious metals that's coming in 2016, if you want to maximize the profit potential of seeing this trend in advance, you need to do more than just buy gold.
You need to invest in the stocks of the companies that will benefit the most from the gold boom in 2016 and the years ahead.
Many companies in the gold and precious metals business have leverage to the price of gold, so that when the price rises, their profits and their stock prices will rise many times more.
They also decline more when the price of gold falls, which means that their stock prices have become very, extremely cheap right now as the gold price has bottomed out after falling from its highs of 2011.
This situation has created the perfect opportunity to buy some of these stocks right now, after they have crashed to extremely cheap levels, and right before they are positioned to boom even more than gold itself will.
But you can't just buy any old gold or precious metals stock, or a generic index, and expect to maximize your profits.
Short-term traders buy and sell options on the price of GDX, the standard gold miners index fund, to bet on short-term movements in the gold price. You will hear the traders on CNBC's Fast Money recommend such plays: "Get in, get your 20%, and get out."
But we can aim for much bigger gains than that, because we understand the economic fundamentals behind the bullish case for gold in 2016, which is far more than just a temporary short-term bet.
At the same time, you don't want to limit yourself with an index like GDX, because not all gold mining companies are created equal. Mining is a brutal business, and gold mining in particular attracts some good businessmen, some shady characters, and some wild-eyed fools.
Many gold mining companies that weren't prepared for the downturn of the past few years are now loaded down with mountains of debt, so they won't be in the best position to profit even when the gold price rises again in 2016.
Other companies have foolishly focused their mining operations in areas of the world that will not be the most stable in the turbulent times that lie ahead of us. You can't profit from the high price of gold in times of crisis, if the crisis also makes it difficult for you to operate your gold mine!
In fact, only one of the 3 must-own gold stocks for 2016 is actually a gold mining company.
It is the one gold miner that has controlled its debt levels and avoided operations in unstable areas of the world.
The second company invests in the gold and precious metals industry by using the favorite strategy of Shark Tank's "Mr. Wonderful" Kevin O'Leary: royalties!
Forget about a percentage equity stake in a risky mining operation - this company wants a royalty!
But not all royalty companies are equal either, and one is in the very best position to deliver outsized gains to shareholders in 2016 and beyond.
The third company is the one that will profit the very most when a crisis strikes the "paper gold" market.
The most popular way to invest in "gold" in the financial markets today is the "GLD" fund. Many gold investors warn of the danger of the GLD fund as "paper gold".
Even though the funds in GLD are backed by physical gold in the custody of HSBC Bank in London, investors do not have the right to redeem GLD shares for physical gold. But there are even bigger risks connected with private bank custody of the gold backing GLD.
The biggest risk to any gold investment is the risk that investors will not be able to realize its value in a crisis, when gold is most valuable.
And this is precisely the biggest problem with GLD - the Custodian of its gold, HSBC Bank, is exactly the kind of large private financial institution that is most likely to be at risk of failure in the kind of economic and financial crisis when gold will skyrocket in value the most.
Now technically, even if HSBC goes bankrupt, GLD retains the title to the physical gold backing it. But the GLD Prospectus states: "In the event of the insolvency of the Custodian, a liquidator may seek to freeze access to the gold held in all of the accounts held by the Custodian, including the Trust Allocated Account. Although the Trust would retain legal title to the allocated gold bars, the Trust could incur expenses in connection with obtaining control of the allocated gold bars, and the assertion of a claim by such liquidator for unpaid fees could delay creations and redemptions of Baskets."
Such events alone would likely destroy investors' confidence in GLD. Furthermore, the GLD Prospectus states that the Trust will be terminated and liquidated if, among other events, "The Custodian resigns and no successor custodian is appointed within 60 days".
In the event of termination and liquidation of GLD, investors will get their money back "within a reasonable time", but only at the cash price of gold, minus expenses and fees, at the time of liquidation. In the middle of such a crisis, the price of gold is likely to rise dramatically in between the time of liquidation and the time investors get their money back, and they will miss out on all the profits from the rising gold price during that time.
For these reasons and more, there is likely to be a crisis of confidence in "paper gold", and in the GLD fund in particular, during a financial crisis when the price of gold is rising rapidly.
Investors will suddenly and desperately be looking for alternative ways to invest in gold.
One company is better placed than any other to benefit from such a situation. It is the third must-own stock in my special report.
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So no one who has purchased my Special Report will ever be "stranded" not knowing when it is time to sell a stock you have bought that I recommended in my Report.
November 21, 2015
Dr. Strangemarket is well aware that all market forecasts and predictions are subject to a great deal of uncertainty. (The best evidence that time travel is impossible, is that if it were possible, the time traveler could quickly and easily amass many trillions of dollars of wealth by buying and selling precise and accurate options and derivatives on every stock and every asset in the world.)
That said, nevertheless Dr. Strangemarket now has a strong conviction that the time has come to make a specific market forecast. So many indicators are coming together right now that I feel an obligation to say something publicly about it:
The August market decline was a clear signal that the 6 1/2 year bull market run was over. A big drop from the highs of 2015 after a year and a half of a shaky market -- this is a far more serious thing than the big drop in 2011 when the stock market had been rising steadily and still was not so overvalued at all.
The October rally made many market watchers, both bulls and bears, wonder if August was just a correction after all, and many expected a full recovery and new highs from there.
But the severe drop on Thursday and Friday, November 12-13, was another big warning sign that the August decline, not the October rally, marks the new predominant market trend, downward into a bear market. Yes, the market recovered in the week of November 16-20, but many technical analysts at least are still far more cautious now than they were just two weeks ago after the November 6 close.
The looming major market catalyst now is the Fed meeting and interest rate decision on December 16. Market expectations of a rate hike have now built up to the point where the Fed will feel almost obligated to do the rate hike to preserve its credibility -- unless economic and financial market events in the meantime give the Fed a strong reason not to raise rates.
Dr. Strangemarket's strong gut feeling is that something will indeed happen in the market to give the Fed the reason it needs to hold off on the rate hike yet again in December. That will almost certainly entail another major market decline such as the one we witnessed in August.
Furthermore, after the August decline and late September near re-test of the August low, yet another big drop in that direction will make many more investors and traders cautious and concerned that 1867 was not the lowest low the S&P 500 will reach. As many different technical analysis methods have been pointing out since August, the next major support level below 1867 and 1820 is all the way down at 1670-1695.
Bottom line: Dr. Strangemarket expects to see the S&P 500 below 1700 by Friday, December 11, or Monday-Tuesday, December 14-15.
Then Dr. Strangemarket expects to see a bounce, based on a combination of short covering at the 1670-1695 support level and actions and assurances by the Fed to shore up the market. Such a bounce will quickly bring the S&P 500 back up to the 1820-1920 range between December 15 and December 31.
Dr. Strangemarket repeats: all market forecasts and predictions are subject to a great deal of uncertainty. Protect yourself at all times. Good luck and be careful.
November 2, 2015 Update:
Dr. Strangemarket remains extremely bearish on the market both short-term and long-term. Yes, the October rally was a surprise, but that's why I recommended in my previous update "to maintain a large cash holding at the same time, which is always a wise idea in times of turbulent markets," and "As always, only pay premiums [on put options] that you can afford to lose in case the market unexpectedly turns in the opposite direction."
I don't believe this rally will hold, and I believe those who buy put options on SPY (the S&P 500 index fund) while the S&P 500 is temporarily back in the old trading range above 2,040 will make some amazing gains. Of course, my previous cautionary notes above still apply.
My analysis of the S&P 500/US Dollar Index ratio as a current bearish indicator appears on the Wolf Street website.
Readers can also find more of my articles on the Seeking Alpha website.
To contact me, please use this form:
Good luck and be careful,
September 28, 2015 Update:
As you surely know, financial markets finally took a downturn in late August. Now technical charts and global macro economic trends both point to the likelihood of further market declines this fall.
In this environment, the Treasury bond market which is promoted on this page should continue to do well. However, at this stage we have reached the point where shorting the stock market, whether via short selling, put options, or inverse ETFs, is likely to earn much greater profits than buying bonds. Treasury bonds have performed well in the recent market turmoil, but frankly not as well as one might expect during a stock market downturn.
Bottom line: For the medium and long term, Dr. Strangemarket still stands by the advice presented on this page and this site. But in the immediate short term -- the rest of this year and especially this next month of October -- Dr. Strangemarket now sees shorts and put options on stock indexes as the best bet. Put options are an especially attractive choice for the frugal investor, because one only has to risk a relatively small amount on the initial premium to get the potential of large gains. (Of course, it is always possible to lose the entire amount of the initial premium, and investors must be prepared for this possibility.) This allows the investor to maintain a large cash holding at the same time, which is always a wise idea in times of turbulent markets.
What to short? Frankly, pretty much everything except gold and gold mining stocks are likely to decline over the rest of this fall. Do your research and buy put options on whichever index, sector, or stock you believe is the most overvalued. As always, only pay premiums that you can afford to lose in case the market unexpectedly turns in the opposite direction.
Good luck and be careful,
Dear Wise Investor,
You know the stock market is shaky. The S&P 500 has had a great six-year run, but stock prices have gotten disconnected from the fundamentals of company balance sheets and the U.S. and global economy. You've seen the Shiller P/E ratio charts and all that, and you know the problem: too much P and too little E.
You can see that the stock market looks overdue for a severe correction, an outright bear market, or even God forbid another 2008-style crash. You know the smart move is to reduce your stock holdings and move more funds into cash, bonds, and a little gold.
So far so good. But as an ambitious investor, you want to do more. You understand the market and the economy better than the average investor, and even than the average Wall Street analyst. It's only fair that you want to find a way to profit from your insight.
You know the logical move to make in an overvalued market is to short it. But how?
The problem is, the normal ways to short the market may not work in Dr. Strangemarket's post-2008 financial world. Stock prices in this bull market have responded more to the actions of the Fed, and to the expectations of Fed actions, than they have to earnings, economic fundamentals, or anything else. Everyone and everything is stuck in a strange guessing game: The Fed is trying to guess where the economy is going, the market is trying to guess what the Fed will do, and you are trying to guess what the market will do.
All of this makes shorting stocks a complicated game that's too risky. Instead, you need a market strategy that will pay off in multiple scenarios:
A strategy that will work if the stock market falls, and also will work in numerous scenarios where stock prices don't drop.
You will learn this strategy when you Subscribe to the Dr. Strangemarket newsletter
Act now, and you will also receive a copy of the Special Report:
Yes, bonds! You know the basic rule of the market that bond prices go up when stock prices go down. That's why traditional safe portfolios hold both stocks and bonds for protection. But in the Dr. Strangemarket post-2008 financial world, bond prices also go up at the same time stocks go up! That's because both are responding to the Fed's monetary policy of keeping interest rates low and other forms of financial easing of the money supply.
Even better, U.S. Treasury bonds are a safe haven asset that investors around the world flock to in times of heightened uncertainty, risk, or crisis. Almost any major financial crisis or political crisis, anywhere in the world, will drive Treasury bond prices higher.
So, by positioning your portfolio to gain from rising bond prices, you can make big profits whether stocks go up, down, or sideways!
Most investors don't even think about Treasury bonds as an asset for making aggressive big profit moves. Treasury bonds are usually seen as safe assets that yield small but steady fixed-income payments. But in fact, that conventional view creates an opportunity for you to make big profits from bond market moves that other investors aren't expecting or even considering -- if you know the right strategy to use.
You will find the details in the Special Report: Dr. Strangemarket's #1 Winning Strategy for 2015 or: How to Stop Worrying and Love the Bonds.
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It's also true that many financial analysts believe interest rates and bond yields are due to go up, which would mean bond prices go down. They are called the "bond bears", and they are all over Wall Street. The problem with their view is, prominent bond bears have been saying "yields are too low, they have to go up" every year since 2008, and every year they are wrong. They have an outdated pre-2008 market view in a post-2008 Dr. Strangemarket world. Lower interest rates and higher bond prices are the new normal, the basis of the post-2008 U.S. financial system, and a growing global trend.
The widespread acceptance of the bond bear view also creates an opportunity for you to make big profits betting against them! Again, you just need to know the right strategy to use.
You may wonder about the volatility of the bond market these days. Yes, it's volatile, even Treasury bonds, and there are ups and downs. But Dr. Strangemarket's strategy is specifically designed to maximize your profit from the upside volatility, while minimizing the loss from the occasional downside volatility.
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November 29, 2015
More and more market analysts and commentators are observing that December may well prove to be a make-or-break month for the market. The S&P 500 has almost ground to a halt as we finish November, spending the last six trading days in the extremely tight range of 2080-2090. But this coming week we have the European Central Bank meeting, the OPEC meeting, and the November jobs report, all of which sets the table for the highly anticipated Fed decision on interest rates on December 16. One way or another, investors in the sideways market of 2015 will have big decisions to make over the course of the next 30 days.
As is clear from all of the material on this blog, Dr. Strangemarket believes the US economy is in much, much weaker shape than the prevailing mainstream opinion on Wall Street believes. So the expectation here is that negative economic data, whether in the jobs report, weak holiday retail sales, or something else, will sour investor sentiment and drive the stock market significantly downward in December, probably before the Fed decision.
December is not a month that is usually associated with stock market crashes. Almost all of the most famous stock market crashes have happened in October: in 2008, 1987, 1929, and even 1907. December is traditionally a good month for stocks on average, and it is often associated with a feel-good "Santa Claus rally" leading into the holiday period at the end of the month.
So Dr. Strangemarket would like to give readers an overview of the last time a big crash shook up the stock market in December: 1899.
The Economy in the Late 1890s
The financial markets of the 19th century get little attention today. It has become common to compare the financial crisis of 2008 to the stock market crash of 1929, the Panic of 1907 is a fairly well-known historical example among knowledgeable investors and traders, and many long-term historical charts go back to 1900. But it's not so easy to find charts, examples, and comparisons that go back before 1900.
Sure, people have heard of the Panics of 1873 and 1893, and may know some of the history around them, but how much did the stock market crash in those years? Indices like the Dow Jones Industrial Average didn't even exist in the 1870s, and from 1885 to 1896 there was just the "Dow Jones Average". You won't find many stock market charts that go back to 1893.
And yet, the end of the 1890s and the turn of the 20th century is a period that has a number of similarities to financial conditions today, and it may hold valuable lessons that help explain what is going on in the economy and the market in 2015 and going forward.
Above all, the end of the 1890s represented the culmination and conclusion of a prolonged period of deflation and falling interest rates that had lasted decades since the end of the American Civil War in 1865. Compared to 1865 prices in the United States, prices were 33% lower in 1875, 41% lower in 1885, and 48% lower in 1895. This deflation bottomed out in 1897-1899 at 49% lower prices than 1865.
The falling yield on the 10-year US treasury bond from the 1860s through the 1890s confirmed this long deflationary trend:
Notice that the yield below 3% in the late 1890s and early 1900s was by far the lowest in history at the time. In those circumstances, the search for yield drove investors into new assets and speculative securities:
"As interest yields fell on high-quality bonds...traders produced new assets for investors who were searching for higher returns....[S]pecialized securities appeared in each exchange. Financial crises often, but not always, fell most heavily on the newest, most speculative securities." -from summary of "Deflation, the Financial Crises of the 1890s, and Stock Exchange Responses in London, New York, Paris, and Berlin" by Lance Davis, Larry Neal and Eugene White, in Deflation: Current and Historical Perspectives.
Doesn't this situation sound awfully familiar today? Of course we no longer have nominal wage and price deflation in recent times, because governments and corporations figured out that workers will not tolerate nominal and visible wage cuts. So instead we have stagnant wages, falling in real terms, and very low inflation rather than outright deflation. But the falling Treasury bond yields show us that the effect is very similar.
The US Treasury's 1899 Version of Quantitative Easing
In fact, in the fall of 1899 the US Treasury was engaged in the purchase of bonds to boost the money supply and prop up credit and stock prices, a kind of late 19th century version of the Fed's quantitative easing of recent years. Although the $25 million bond purchase on November 15, 1899 pales in comparison to the trillions of dollars of QE today, it was quite significant for its time and attracted enough attention and controversy to prompt this political cartoon to appear in the New York Herald on November 19, 1899:
In early December 1899, bills in Congress promised an additional $100 million to $500 million increase in the money supply. The bills were designed to assure bankers that credit would hold up for at least another 10-12 months. Again it sounds an awful lot like the way the markets reacted to the Fed's QE, bidding up stock prices with the confidence that the Fed had their back at least long enough to earn short-term gains, and not worrying about what will happen after that.
But the stock speculators' luck ran out after December 2, 1899. Over the next two weeks, the stock market began to decline steeply, the Dow Jones Industrial Average falling from 55.44 on December 2 to 46.77 on December 16. The downturn culminated in a panic and crash on Monday, December 18, 1899, when the Dow Jones fell all the way to 42.69.
The Stock Market Crash of December 18, 1899
If you look at a list of the largest one-day percentage declines in the history of the Dow Jones Industrial Average, after the famous October 1987 and October 1929 crashes, you will find the -11.99% crash on Monday, December 18, 1899. Yet the event is almost entirely forgotten by history. You will not find "The Panic of 1899" or a "Black Monday" of December 1899 in the history books. History records a mild recession from June 1899 to December 1900, but it receives little attention compared to the Panic of 1893, the Panic of 1907, or even the Panics of 1896 and 1901. Charles Kindleberger's classic book Manias, Panics, and Crashes: A History of Financial Crises cites 37 financial crises before 1929 in its detailed appendix, from 1618 to 1920-1921, but the list does not include the crash of December 1899.
Yet on Wall Street, December 18, 1899 was actually the biggest one-day crash in history until 1929.
And it followed dramatic all-time highs of the Dow Jones earlier in 1899: The average had previously peaked around 45 in 1890, fallen below 30 in the Panics of 1893 and 1896, but in 1899 it soared all the way to 56.61 on April 25 and 56.85 on September 5.
It is worth noting that in the middle of 1899, the Dow Jones dropped about -12.5% from its late April high down to 49.46 on May 31, made a small bounce and near re-test of the low at 50.43 on June 22, then rallied through July and August back to the level of the April high in early September. This pattern of market movement is strikingly similar to what we have seen in 2015 with the August decline of about -12.5%, a small bounce and near re-test of the August low in late September, and the strong October and early November rally almost back to the level of the previous high.
Any one similarity in market patterns can be a coincidence of course, but given the similar background of decades of deflation/disinflation, falling yields, and the search for yield driving investors into riskier assets, I argue there is a case that this is not just a coincidence. The all-time highs of the spring and fall of 1899 reflect investors rushing into the stock market to chase returns no longer available from bond yields.
The crash of December 18, 1899 was specifically precipitated by the failure of the Produce Exchange Trust Company. The New York Times article of the following day explains the situation well: <http://query.nytimes.com/mem/archive-free/pdf?res=9F0CE0DF103DE633A2575AC1A9649D94689ED7CF>. The article outlines some of the history of this trust company, which is well worth reviewing. It only came into existence in March 1898, founded by members of the New York Produce Exchange. But the company's first President, Dr. J. H. Parker, the ex-President of the United States National Bank, left the company in January 1899 because he "found his methods encroached on by the junior element in the company," according to the article, which quotes Parker:
"I did not like the new people or their ways. They wanted to do business that in my opinion was inconsistent with the capital and resources of the company. They wanted to make loans that in my opinion were too large. I thought the concern was going too rapidly, and that ultra conservatism was its best policy."
In September 1899 the Produce Exchange Trust Company withdrew from bank Clearing House privileges in order to avoid new rules about check collections. The company instead attempted to do its own nationwide check collecting. This effort to avoid Clearing House fees may be seen as a symptom of the chase for yield in a low-rate environment.
The New York Times article explains that the new rules were first adopted by the New York Clearing House Committee in April 1899 and that the initial reaction of bankers in the rest of the United States was negative. Presumably the Produce Exchange Trust Company felt this sentiment gave them an opening to avoid the new rules. But in November 1899 a committee of Clearing House officers outside of New York endorsed the new rules, and this placed a large obstacle in the way of the company's scheme to do its own nationwide check collection outside of the Clearing House rules.
When the Produce Exchange Trust Company failed on December 18, 1899, stock prices of commodity and industrial companies in particular crashed: American Sugar, American Tobacco, Continental Tobacco, Tennessee Coal & Iron, Federal Steel, Consolidated Gas, People's Gas, and railroad stocks such as Baltimore & Ohio, Great Northern, New York Central, Southern Pacific, and St. Paul.
The Aftermath: Turn from Deflation to Inflation and Extreme Market Volatility 1899-1907
Examining the long-term historical trends of prices and bond yields, December 1899 proved to represent a major turning point. From 1865-1899 deflation and falling yields predominated. Only a single year in that period, 1880, saw inflation in the US, but that was an isolated occurrence that happened after many years of much more significant deflation.
But in 1900, 2% inflation occurred, and this was the beginning of a new long-term trend. Inflation and rising bond yields now became the predominant trend from 1900-1920. There were a couple years of modest deflation in 1908-1909 in the wake of the Panic of 1907, but now they were the isolated occurrences within the dominant inflationary trend.
Along with the turn from deflation to inflation came extreme growth in market volatility. The previous chart of 1885-1899 showed how the market in 1899 was far more volatile than it was at any time in the preceding period. But a look at the chart of the Dow Jones Industrial Average in the period 1899-1907 shows how the market volatility to follow dwarfed even that of 1899:
We see lower lows in 1900 as the recession continued, a rally and crash in 1901, a far deeper crash in 1903 (a year of 4% inflation, the greatest to date at the time), followed by a stunning market rally in 1904-1905 that reached previously unheard of highs in early 1906. All of this set the stage for the famous crash in the Panic of 1907.
No one can predict the future, least of all in the financial markets, but given the striking similarities in the macroeconomic features as well as in the financial market trends between 1899 and 2015, Dr. Strangemarket would not be surprised to see the coming 5-10 year period unfold along similar lines to the 1899-1907 period.
November 25, 2015
First things first: Dr. Strangemarket is not a gold bug or a conspiracy theorist. Above all, the goal of this website is to provide realistic and practical commentary about the markets. And quite simply, financial markets have now reached the point where gold offers a combination of low risk and high reward that seems almost impossible to find in any other major financial asset right now.
So many assets appear wildly overvalued right now. Think about it this way: Is the US or world economy really in better shape right now than it appeared to be say 10 years ago, before the Financial Crisis? Of course not! Anyone with a little bit of common sense can tell you that. So why are stock prices higher than they were 10 years ago? Apparently because of faith in central bankers keeping interest rates low, keeping debt cheap to prop up companies in a weak or shaky financial position. Um, you may fairly ask, why should anyone have more faith in bankers now than before the Financial Crisis? Good question! Again, anyone with a little bit of common sense can tell you it doesn't make sense.
That in a nutshell is the great danger of owning stocks as your main investment for retirement or anything else. They could hold their value, or go higher as they have in the past, but they could just as well lose 90% of their value in a crisis, and next time they may never recover the way they did after 2008. There is no guarantee, legally or otherwise, that you will ever get that investment back. Even though every stock fund prospectus formally states these risks and warnings in the fine print, and classifies stocks as a higher risk investment asset, the extent of these risks is rarely emphasized and far too few everyday investors are as aware of the risks as they should be.
Bottom line: Stocks are a high risk investment, and right now the risks appear greater than ever.
Real estate is a much better long-term investment than stocks: land has a real lasting value that a share of stock in a company that may or may not survive simply does not have. But right now, real estate has become overvalued again, so in the short-term and medium-term, it is also a high risk investment. Take a look at the most popular real estate fund for investors today, Vanguard's Real Estate Investment Trust (REIT) fund with the ticker symbol VNQ. Its market value in 2015 has returned to the same range that it was back in late 2006 and early 2007, before the subprime mortgage housing crisis broke out. Housing and real estate probably won't be the center of the next crisis, but at the current high values there is once again plenty of room for prices to fall dramatically.
So for now, real estate is a high risk asset, especially if it's in the form of a REIT fund traded on the market rather than actual physical land.
US Treasury bonds are a much safer investment. Dr. Strangemarket is bullish on Treasury bonds: that's why this blog is named after them. But bonds cannot be considered a high reward investment, because Treasury bond prices have already increased so much, as yields have fallen, over the past 34 years.
Many "value investors" have eagerly gone bargain hunting in energy stocks and commodities over the past year, since the price of oil and other commodities collapsed in the fall of 2014. It looked like the perfect combination of low risk and high reward. The problem is, no stock price or commodity price is ever so low that it can't go another 50% lower. Oil, energy, and commodities looked like bargains a year ago, but they have gone even lower since then, much lower. Have they bottomed out now? Probably not yet, since financial markets have not yet fully realized and priced in the extent of the weakness of the global and especially of the US economy. So as low as their prices already are, they still must be considered high risk assets.
Gold appears distinctly superior to all of these assets right now, for the combination of low risk and high reward that it offers.
The advantage of gold is that its price can rise along with commodities in bull markets or in inflationary periods, but its price does not fall nearly as much as commodities in bear markets or in deflationary periods, because of its status as a safe haven investment and a long-term store of value. As such, if you have the opportunity to buy gold at or near a low price point in the depths of a deflationary commodity bear market, you can gain the potential to reap the high rewards of the next upturn for what is very likely a relatively small downside risk. This strongly appears to be the point we are at right now.
The price of gold has fallen into the $1065-$1080/ounce range for the past week. $1000/ounce represents a huge technical and psychological support level for the gold price. In fact, in a certain way the transition of the gold price from under $1000/ounce to over $1000/ounce represented the shift from the pre-2008 to the post-2008 reality of the state of the world economy: Before the Financial Crisis, the gold price peaked at $983/ounce in March 2008, in the immediate wake of the crisis it reached $988 in February 2009, it touched $979 in May 2009...and finally in September 2009 the gold price blasted over $1000/ounce, went straight up to $1174 in November, and has never gone back to $1000 or lower since.
Dr. Strangemarket believes that this is very likely a permanent reflection of the post-2008 economic order. If the price ever fell below $1000/ounce into the 3 digits again, it's hard to believe that the price would not attract a great deal of interest from buyers around the world. So at the current price, the likely downside risk is limited to about 7% of your investment.
And on the upside, any number of financial, economic, or political events or crises could send the price of gold soaring again. In 2011 the $2000/ounce level acted as a limit on the gold price, and it peaked slightly under that level. In the next crisis, or in its aftermath, gold could easily test this price level again. And if it broke through $2000, there's no telling how high the gold price could go. $4000-$5000/ounce would become a realistic possibility.
Again, Dr. Strangemarket is not a gold bug. This is not a prediction or a guarantee or a recommendation that you put all or most of your wealth into gold. It is simply an observation about the current state of markets and assets and the likely risks and rewards of things as they stand right now.
Finally, Dr. Strangemarket does not want to tell you how to buy or invest in gold. Do your own research and decide for yourself. But I will mention one suggestion that you may wish to consider: the Sprott Physical Gold Trust, which trades on the market with the ticker symbol PHYS. It offers the convenience of an exchange-traded trust in a standard brokerage account, but unlike the popular GLD fund, PHYS shareholders own a claim to actual physical gold that is held in the Royal Canadian Mint. Again, this is just one of many options to consider, but I suggest you include it among the options in your research.
Good luck and be careful,
Global Markets Roll Over At 200-Day Moving Average
November 10, 2015
The 200-day moving average is the most widely used technical indicator to indicate the basic ongoing trend in the price of a stock or other asset: If the price is above its 200-day moving average, it is in an uptrend; if the price is below its 200-day moving average, it is in a downtrend. It is a reliable maxim of many traders, both bullish and bearish: "Don't fight the trend" and "The trend is your friend."
By this standard, global markets reached a critical moment last week. Basically all markets had been in a long uptrend from 2012 until the August 2015 downturn, with a brief indecisive period from Oct-2014 to Jan-2015. This August of course markets plunged far below their 200-day trend line by 10% or more. Then the October rally took markets back very close to the trend line again.
So the next move carries a great deal of weight, because it will say a lot about whether we are resuming the long uptrend of 2012-2015, or whether the August market drop was the beginning of a new longer-term downtrend.
So far, global market action last week and this week is telling us we are staying in a new post-August downtrend, because markets around the world have been consistently rolling over and moving back downward as soon as they have approached the 200-day trend line.
This trend has been partially obscured in the United States because the benchmark S&P 500 index rose as high as 2.25% above its trend line at its peak last week, and it has spent more than two weeks above its 200-day line. But it's no secret that the US market has been the global leader in recent years, so it's not a surprise that the US would outperform other global markets in the recent rally as well. However, the big picture is that the US market has been moving together with global markets since the October rally, and simply peaked slightly higher -- the US has not been moving independently or in a different direction from other markets.
Let's look at the biggest overall picture of global market performance: VT, the Vanguard Total World Stock ETF.
We see in the chart that the entire world stock market exactly touched its 200-day trend line at its intraday peak last Tuesday, November 3, and promptly rolled over and began moving downward again. This behavior is precisely what we would expect from a market in a new ongoing downtrend, periodically approaching its trend line but staying below it.
When we look at a variety of specific markets around the world, we find they all acted in rather similar fashion. Of course some peaked slightly below their trend line, just as the S&P 500 peaked above its trend line, but the overall pattern is quite similar for all of the world's major markets.
The German DAX index has stalled out right at its 200-day trend line:
The FTSE EuroTop 100 Index fell a bit short of its trend line and rolled over:
The picture in Asia is mixed, with Japan's market slightly above its trend line and other markets below their trend lines, but the Vanguard FTSE Developed Asia Pacific Index ETF gives us a composite view of the overall trend:
Finally, the Vanguard Total Stock Market ETF (VTI) gives us a composite view of all US stocks:
Of course, it remains possible that US stocks and the S&P 500 will hold the line above their 200-day moving average. But I don't expect it, because it would go against the overall trend we are seeing all around the world, and US stocks have been moving quite in line with global markets for the past year.
It is also interesting to note that the price of WTI oil and of gold both touched their 200-day moving averages earlier in October and then rolled over, well in advance of the end of the October stock rally:
Oil, gold, and stocks all in downtrends: This is a clear indication of a global deflationary trend, as indeed the broad commodity price crash has indicated since last year.
Market Reaction to Jobs Report Confirms S&P 500/US Dollar Index Ratio Downtrend
On the surface, the US stock market's reaction to Friday's strong jobs report appeared neutral on balance by the end of the day. With expectations of the Fed raising interest rates in December higher than ever, real estate, utilities, oil, commodities, consumer staples and retail were down a lot, but financials were up a lot and technology was up a little, and in the end the S&P 500 only moved down by a single point.
But the bearish long-term trend of the S&P 500 underperforming the US Dollar Index, which I pointed to last week, was confirmed and underlined by the market reaction to the jobs report. The dollar soared on the expectations of a December rate hike, with the US Dollar Index rising +1.19%. So the S&P 500/US Dollar Index ratio made a sharp move downward, breaking well below its 200-day moving average after spending a few days this week above it:
In fact, this ratio did almost the exact same thing on the two previous occasions that it briefly broke above its 200-day moving average earlier this year, at the market peak in May and again in June:
Three days seems to be about the limit for the S&P 500/US Dollar Index ratio to flirt with a break above its trend line, before it reverts to its long-term downtrend:
The trillion dollar question, of course, is how this trend will affect the market itself going forward. After all, this downtrend has lasted over 16 months now, but the S&P 500 itself remains less than 2% off its all-time high. Ironically, even as the surging strong dollar has hurt the competitiveness of US-based multinational corporations exporting goods overseas, in a way the strong dollar seems to have propped up the stock market: The dollar has been so strong that the market has been able to follow the trend of steadily underperforming the dollar and still not fall significantly.
We now face a situation where the Fed appears to be almost compelled, by market expectations and by its own statements of its intentions for the past year and a half, to raise rates in December to preserve its own credibility -- unless something drastically negative happens to the world economy or financial markets between now and then.
Personally, my gut feeling is something drastically negative will happen in November or December, something like a repeat of the August global financial market volatility or worse. Things have been playing out almost too good for the Fed lately, too good to believe that they will last. The October market rally and the strong October jobs report have created apparently Goldilocks conditions for the Fed, where it looks like it will be able to raise rates without the move coming as a nasty surprise to the market, and without the expectation of the move sparking a big market sell-off.
A perfect situation for the Fed! Now all they need is for nothing to go wrong for six weeks. So, my gut tells me, something probably will go wrong. As I wrote last week, the S&P 500/US Dollar Index ratio stalled out about a year in advance of the market crashes of 2000 and 2008. It stalled out again last year. Was the August market correction really the worst that is going to happen in 2015?
Of course it is also possible that the next six weeks will be quiet, the Fed will raise rates, and only in 2016 will the negative effects of the rate hike play themselves out and cause severe problems in the economy and in financial markets. The strong dollar is one aspect of a massive global deflationary trend, seen most clearly in the collapse of the price of oil, copper, and other commodities in the past 16 months. A Fed rate hike will only exacerbate this already very troubling global trend. This cannot end well.
The question of whether bad things will happen in the market in 2015 or 2016 is a big deal if you are shorting the market and trying to time your shorts to maximize your gains. (I am trying to do this, to a modest extent; I may or may not succeed, even if all of my analysis is correct.) But for the vast majority of people, an economic downturn in 2015 or 2016 is bad news either way. We may have a happier holiday season if the financial reckoning of the global deflationary trend is put off until 2016 or even 2017, but we may come to regret our holiday spending if the chickens come home to roost in the new year.
Dear Wise Investor,
You may have come to this page for the answer to the market crash trivia question:
What percentage did the S&P 500 crash in the first week after Lehman Brothers collapsed in September 2008?
Answer: It didn't drop at all!! Lehman Brothers collapsed on the morning of Monday, September 15, 2008. The prior Friday, Sept. 12, the S&P 500 had closed at 1,251.69. And by the end of the week, Friday, Sept. 19, it closed a few points higher, at 1,255.07!
Even the next week was only moderately bad: The S&P fell 3.3% to 1,213.27. Only in the following two weeks did the stock market really crash: down 9.4% to 1,099.23 on Oct. 3 and down another 18.2% to 899.22 on Oct. 10.
The surprising conclusion is that investors had a whole TWO WEEKS after the collapse of Lehman Brothers to get out of the stock market relatively unharmed in the crash of 2008-2009!
But clearly most investors failed to do so. The point is, they didn't realize what was coming, even after Lehman Brothers.
Things will likely be different in the next crash. In 2008 investors were slow to react because they hadn't seen anything like such a crash in their lifetimes. The collapse of the dot-com bubble in 2000 and the bear market after it were bad, but not 2008 bad. It truly was the worst U.S. stock market crash since 1929.
But if a crash occurs this year, next year, or any time in the rest of this decade, it will happen to investors who have the memory of 2008 still vivid in their minds. If there is a negative shock like Lehman Brothers now, this time the reaction won't be so slow. The impact will be much more immediate and dramatic: a severe "flash crash". You won't have so much time, if any time, to get out.
We've never seen a double-whammy of two massive stock market crashes within a decade of each other in the United States. Well, there was a pretty bad crash in 1937, eight years after the Crash of 1929. But circumstances now are very, very different than they were in 1937. People in our society right now don't believe we're in a Depression. Times are very tough for an awful lot of people in America right now, a lot more than most market analysts care to admit most of the time. But in the 1930s there was a cultural feeling that came with the Great Depression, and that cultural feeling doesn't exist in our society today. So a second market crash would be much more of a SHOCK today than it was in 1937.
Further, the type of people investing in the stock market today are very different from the investors of 1937. The Crash of 1929 shook all the amateur investors out of the stock market for a generation or more. They weren't around in 1937 or a long, long time after that. The stock market didn't become "cool" again until the mid-1980s! Since then, and especially since the mid-1990s with the internet, online investing, and the dot-com boom, "retail investors" poured back into the market. The crashes of 2000 and 2008 shook people out, but unlike after 1929, today the retail investors have returned to the stock market in droves.
So now we have an army of "average investors" back in the market, but with the memory of the 2008 crash still fresh in their minds. This is an unprecedented situation in the history of the American stock market. And it is a very, very dangerous combination.
The volume of amateur investors promises a mass exodus from the market when it turns sour. And even worse, the memory of 2008 means the mass exodus will happen more immediately, more quickly, and more severely.
Wanna bet on a financial crash in 2015?
Buy cheap put options on JPMorgan Chase and Bank of America stock.
Disclaimer: If you do this, it is a bet, a gamble, a guess, a bit of speculation. Don't do this if you are in debt. Only gamble with money you can afford to lose.
No one can predict the timing of financial crashes. It might happen while I'm writing this post, it might happen tomorrow morning...but it might not happen in 2015 at all. It might happen in 2016, or it might not.
But if you see the world the way Dr. Strangemarket does, you agree that the problems that caused the 2008 financial crash have not been solved, and sooner or later there will be another crash.
So if you make a bet on a financial crash, you want to risk a little for the chance to gain a lot. You need to get very good odds for your bet, to maximize your payoff. That way, you can keep making the bet every year, and when it pays off, it will more than make up for the bets you lost, many times over.
That's why Dr. Strangemarket likes cheap put options on JPMorgan Chase and Bank of America stock.
Why JPMorgan Chase? Because it's the biggest bank in the United States. Because it's heavily invested in the kinds of derivatives and other financial products that will be most at risk in the event of a financial crisis and crash.
Because in the 2008-2009 crash, even though it was not hit as hard as Lehman Brothers or AIG, JPMorgan Chase stock still plummeted from $48.24/share on September 26, 2008 to $22.72/share on November 21, 2008 and all the way down to $15.93/share on March 6, 2009. That's an over 50% drop in two months and an over 66% drop in six months.
If that happens again, JPMorgan Chase stock could fall from its current price around $65/share down to $32.50/share or as low as $21.66/share. If JPMorgan Chase is the central focus of the next financial crisis (the new AIG), its stock could get hit even harder than that.
And today, you can buy a $40/share put option on JPMorgan Chase stock (JPM), good till January 15, 2016, for a premium of just $0.30 or less per share, or $30 or less per contract (100 shares). That means, for every dollar per share that the stock falls below $40 before next January, you make $100 when you sell your option. If the stock falls 50% to $32.50, your $40 put option is worth $750. That would be a payoff of 25 times the premium you paid or more.
And Bank of America put options may offer even bigger payoffs.
Bank of America was one of the worst hit banks in the 2008 crisis and crash, but once again it is one of the biggest players in the derivatives trading market. If its stock loses half its value in a crash this year, it could drop from over $16/share down to $8/share, and a 66% drop would take it down to $5.50/share.
But today you can buy a $10/share put option on Bank of America (BAC) stock, good till January 15, 2016, for a premium of only 5 cents a share, or $5 per contract of 100 shares! Now it's true at such a price you have to account more for the per-contract fee your broker will charge, in addition to the standard fee for the whole trade. But even with, say, a 65 cent per-contract fee making your cost $5.65 per contract, your payoffs in the event of a crash will still be sky-high: with the stock at $8/share your payoff will be 35 times the premium you paid, and with the stock at $5.50/share your payoff will be 80 times the premium you paid!
With payoffs like these, you can make these bets every year, and eventually you will make a gain much greater than all the premiums you paid put together.
Disclosure: Dr. Strangemarket has bought some of these JPM and BAC put options, and if you're the gambling type, you might want to grab some yourself.
We're not alone. Almost 15,000 contracts ("open interest") of the JPM January 2016 $40 put option have been bought, controlling almost 1.5 million shares of the stock with a market value of almost $100 million, and almost 59,000 contracts of the BAC January 2016 $10 put option have been bought, controlling almost 6 million shares of stock worth another $100 million. A few big-time traders could actually make a billion dollars off options like these if they pay off as described above. We can't make out that well, but at least we can get a piece of the action.
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Market observers are well aware that we have been stuck in a "sideways market" for quite a while, without a major move up or down since the S&P 500 fell into the low-mid 1800s in mid-October. That means the sideways market has lasted over six months now: From the November 6, 2014 close of 2031, the index has not moved more than +4.6% above (2125) or -2.9% below (1972) that level since then.
Such periods were common enough in the slow-moving phase of the bull market from early 2004 to mid-2006, but they have been exceedingly rare since then -- the last time the Fed raised interest rates, by the way. In fact, Dr. Strangemarket can find only one six month period since then with such small market moves in either direction:
This chart shows the movement of the S&P 500 from February 1 to August 1, 2011. At the beginning of February the index stood at 1307, and for the next six months it moved barely 4% in either direction.
Then suddenly at the beginning of August 2011, in just a single week the market plunged 13%.
Now Dr. Strangemarket is not predicting a 13% drop in the stock market next week. The point is to note that the current prolonged sideways market is very rare in the past decade, and it can end suddenly.
So the April jobs report came out this morning. The headline number was "good": over 220,000 jobs added. Wonderful! But oh by the way, last month's bad jobs report was even worse than the government said at the time, and the March number was revised downwards from 126,000 to 85,000.
Now if those 40,000+ lost jobs had been subtracted from the April number, the headline would be 180,000 jobs, far below expectations, below the key 200,000 level, and the reaction would have been increasing worries about slowing economic growth. But instead let's hide those 40,000 missing jobs in the March number, which is "old news" and which was already bad anyway, and hardly anybody seems to notice!
Even more striking is the market's reaction to the "good" April jobs report. Ok, stocks went up, that makes sense. But bonds and even gold went up too! Overall, the market reacted like a Fed rate hike had been put off, and everyone will enjoy loose monetary policy and low rates a little while longer.
Wait, doesn't a good jobs report mean the Fed should be more likely to raise rates sooner? Ah, not quite: The jobs report wasn't that good, so the Fed is unlikely to raise rates in June. That will wait at least until September.
But wait, didn't the market already believe a June rate hike was unlikely? In fact, didn't Treasury yield futures already indicate the market doesn't expect a rate increase until December? Guess what, doesn't matter. Today the market is even MORE certain there won't be a JUNE rate hike, and today that is all that matters.
The market reaction is so incredibly short-sighted, Dr. Strangemarket calls it "Die Another Quarter". Right now everyone is chasing this quarter's returns and this quarter's returns only. So the market is only looking at June. Wait, wouldn't a September rate hike reverse all of this quarter's gains and more? Doesn't matter to this market. Squeeze out a few more percentage points this quarter, and worry about September later. Sell stocks and take profits when the May, June, July and August jobs reports indicate the rate hike is finally about to hit.
But is everyone is thinking that same thing, who will buy when everyone decides it's time to sell? This is what market crashes are made of. Dr. Strangemarket reminds you: your stop-losses will not save you if no buyer can be found at your stop-loss price during a rapid market decline. Ask forex traders who were short the Swiss franc in January how their stop-losses worked out for them when Switzerland de-linked the franc from the euro.
Finally, in light of today's market moves, Dr. Strangemarket has an idea for an extreme contrarian bet: What if the Fed decides the best way to begin raising rates is to surprise everyone and make the first move in June now that almost nobody is expecting it? Yellen just warned that the stock market appears overvalued, after all. The Fed doves will be alarmed, but if Yellen lines up with the Fed hawks...I'm just sayin'.
The way to play a bet on this move is to wait until the week before or the day before the June Fed meeting, and buy up some dirt-cheap S&P 500 (SPY) June put options, which expire two days after the Fed meeting. With so little time on them, and so little expectation of a rate hike, those options will be VERY cheap. The mainstream discussion will just be about what kind of guidance or hints the Fed will give about September and beyond. An actual June hike will roil the stock market, and those puts could produce a very big payoff in a very short amount of time.
Hey, it's just an idea. You even have a month to think about it. Do your own research and decide for yourself. Don't risk too much money on an outside shot like this one. An option is like a bet. Only bet what you can afford to lose. Stay safe out there.
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