a Different perspecitve on Capital markets

I know that doomsday scenarios are very unpopular among the capital markets community. but it is my “duty” to say what i see coming ahead even if it’s not exactly what people want to think. We are approaching a big crash that will start during this week as a downtrend and will end in the short-term at the end of the month, with a big 1-2 day crash.

this is only MY opinion and my forecast and you should remember that. what you do with your own money – is your decision, and i do not recommend to buy/sell anything.

But still what i see ahead is very bearish, very harsh.

My forecast also falls on the date around where the US debt limit is hit, so probably that will be the trigger for the big crash im looking for.

Markets fundamentals are not supporting the current over-valued prices, QE is slowly tapering, interest rates rising, and economic problems werent solved. quite the opposite.Emerging markets FX are crashing , unemployment worldwide is not going down, and earnings are now turning around to the bad side.

The market should devalue its prices, and that’s what i expect soon, very soon.

watching the latest developments in the capital markets, a lot of journalists and bloggers remind us the imaginary lines between today’s capital market and 1929, 1987 and other years of big crashes. Usually they are wrong, and markets keep climbing on the wall of worry. But now things look different, because markets look different.

Some Emerging markets currencies already crashed (India,Hungary,Turkey) , the australian dollar forgot its peak at 1 USD.

the biggest sign that a big crash is approaching is the panic move by the Turkish central bank to raise interest rates by 4(!!) percent overnight.

The funny thing about how markets look today, is that from the looks of it, markets can do now the exact opposite of most expectations from the “end game”, the day after QE and money printing ends. instead of the “crash of the dollar” it seems like we are getting a crash – in all other currencies. why? because interest rates on the USD are rising, while others are still very low. but unlike the dollar, the turkish lira is not the global reserve currency, which means that these kinds of FX are now suffering the real crash of a ZIRP agenda.

Looking at FX,commodities,equities, not only from a technical point of view, draws a very dark picture ahead of us. the markets are going to crash. and the USD is going to be king again. This can work greatly in favor of conspiracy theorists who claim the “global currency” is coming. after all if most of the currencies will fall vs the USD, why not bring up the idea that the whole world will use it? who knows, maybe QE was the secret plan to crash global currencies once it ends?

anyway, a crash is coming, Brace yourself.

While equity markets have risen for the past 4 years interest rates have dropped. as long as that correlation worked there was practically no reason to sell your stocks. interest rates falling are a good support for asset prices, no matter what asset.

But since mid 2012 interest rates are not falling. in fact they bottomed. the 10 year bond (tnx) has bottomed at  a very low rate of 1.4% and again bottomed at 1.6% in 2013.

Since those bottoms interest rates have risen to a high of 3% which is double the bottom and currently trade at 2.75%

This matters because pricing of assets in dollars is a function of the interest rate in the market. the lower the interest rate, the higher the price etc

So why be bearish today? only for 1 reason. that reason is a rise in interest rates globally. we have already seen the EU cut rates in a panic move after seeing prices slowing down and credit activity freezing in european countries. that isn’t happening in the US yet. but if interest rates will rise further, and i believe they will, assets pricing will be lower, which means stocks and others have to come down.

Have you noticed the slow but steady decline in Crude oil? how about Gold and Silver? these assets already hint for something. they are already pricing some rise in the  interest. not necessarily a rate increase by the fed themselves but a market driven rise in the 10year and 2year debt will force different pricing.

So at the end if there is 1 reason to be bearish these days, that reason is Mainly interest rates. higher rates mean lower pricing and some kind of deflation.

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Long term 0% rates, Money printing, Bond purchases

All of the above are making central banks Useless in the race of controling markets and rates.

The crash in the japanese stock market just yesterday was a BIG warning sign to money printers all over:  if you continue in this way yields and interest rates will rise and hit the financial system in its most sensitive spot – Credit

QE 3 and 4 as explained by me some months ago, has somewhat succeeded in proping up the real-estate market. but at this point, with stocks in new all time highs, with high commodity prices, and real-estate coming back close to 2006 highs, these are prices that can hardly be influenced by more and more QE , which most of it doesnt even go into markets and assets.

 

Even the TNX – 10 year yield on us bonds is now rising, and i expect it to continue rising forward. Markets are now scared and that is justified. they understand what can happen if yields actually rise – no matter how much QE is running in the system.

The big fear is not an inflationary burst, but Deflationary spiral that will evolve from rising interest rates.

So what now?

Rising yields will have a devastating effect on the leveraged economies. i recommend watching TNX and jGB closley in the next few weeks and months, as they will call the shots, not the central banks, and not the mainstream media.

 

Good luck with your investments

Tomer

Lately, some assets have been falling. Gold which i already wrote about, Oil, Stocks around the world

Actually if you have a global view – you could have seen this decline coming, as a lot of indeces already made a “peak” before the US stock market. the german DAX, the Hang Seng, even Russell 2000 made a high and couldnt break it up again while S&P500 and the dow  make new all-time highs.

The question is – WHY

as i wrote about Gold  – the markets are now starting to price in some kind of rise in interest rates. that rise will probably come in the shape of slowing down QE or even halting it. even though japan is now printing money in huge amounts, the major money market still remains the US, where expectations of some kind of “less easing of monetary policy” is now building

Should we believe the markets? should we really start preparing for some kind of QE slowdown or halt?  I believe we do.

Watching the huge Gold decline in 2 days to $1322, it seems obvious that some major players in the market are  certain – that “real” interest rates will rise.

What are REAL interest rates?

Real interest rates are not the ones the central bank decides, but the ones markets work on. it is true that after the 2008 crash the markets lost any ability to control rates, as the FED dropped their funds rate to 0% , they started performing QE which practically lowers the real interest rate below zero to levels which are inflationary, because zero interest rates were not enough. so now  any change in that policy – especially when the markets are at “bubble prices” as the s&p already hit 1597 – an all time new high, gold was at 1900 (now 1400) and oil ran back to 110, it seems that any rise in “real” interest rates – meaning slowing or stopping the QE will have a major impact on asset prices, including stocks.

What comes next

I expect an upside-sideways move in the next week or two, some kind of halt in the drop of stocks, and after that a big drop – bigger than the one we already seen from 1597 to 1535. If indeed the fed is preparing to slow down or stop QE, the markets will re-align before the fed announces it.

Good luck with your investments

Tomer

Since the weekend – these last few days have all been about one thing , and that is the Cyprus Bailout

Since saturday we have heard about the ugly new blackmail of the small island – taxing ALL of the public’s bank deposits up to 10%

Normally this idea won’t work in big system centralized economies, quite the opposite.

the EU has already bailed out a lot of banks and the US has their FDIC that insures bank deposits.

It seems that this time – the EU have tried to make a new precedent to firm their grip on the weak countries in the union

The Sopranos

Watching Germany’s Merkel speaking about this new tax and not even blinking , it seems that now Germany has become the “Tony Soprano” of the EU, some kind of lender that you don’t want to owe to, because the price is just too high.

Germany has profited from the crisis in the EU in many ways, mostly by great Inflows of funds from the weak countries to it.

The evidence for that is the German Bund (government bond) which currently trades at 1.38% yield for 10 years , lower than the US

also the big difference in unemployment and GDP growth says it all.

David and Goliath

But now germany is a big SLOW machine, trying to “save” another small country, and funny enough, this country doesn’t want this deal.

Greeks,italians,spanish and others all confirmed austerity and sometimes haircuts to be bailed-out and now look at Cyprus as a sign of hope.

it’s a big cliché  – but it does remind the battle between the small (redhead) David against the monstrous Goliath, and surprisingly enough this David says NO.

Very Bad Timing

politically – this event happened at the worst timing Ever possible. Italy has just elected Anti-Euro parties, the UK is looking for ways to leave the union, even Germany now has a new party – running on the anti-Euro platform.

An event like this gives a lot of leverage and firepower to these political powers that want to convince the people how bad the EU is, and that it’s time to leave it.

Especially with the Cypriots saying NO – the people of Europe will now feel safer to say NO themselves.

No to new treaties , No to bailouts, No to the EU

Can cyprus leave the EU ?

Now – that the little country is in an Economic and Political deadlock – it seems like it’s possible. How would the world react after the first country leaves the euro zone ? if there is a “domino effect” it will happen only because the timing was right.

Half a year ago, if Cyprus quit no one would care, but now with the Anti-Euro winds blowing across the continent, every move, every change is crucial.

 

Read my previous post on “Euro crisis round #2” for more Euro-zone Analysis

Good luck with your investments

Tomer

P.s – Big thanks to OD for some of the ideas in this post

 

 

 

I tend to see a lot of investors and investment firms call themselves “contrarian” as some kind of a sophisticated way to say “I’m better than the average”

But, are they?

A Contrarian is supposedly an investor that goes AGAINST the crowd as saying – “others are wrong , but I’m smart and I’m right”.

The truth is – going against the herd is not always a really good idea. After all the herd is the reason prices of assets go up or down, and not a minority contrarian who thinks otherwise.

It’s true that there are some cases when so-called “contrarians” were right – and saw a big crash or a big rally coming, but overall their track record is not keeping up the pace, with that one successful prediction.

I believe the reason for that is the idea of being a contrarian to the “crowd” (by the way, how DO YOU determine what the crowd thinks?) sounds good , sounds like a strategy, but it lacks another spice and that spice is being a contrarian to YOURSELF.

Although they might think they have all the cards . and they know EXACTLY how things are going to turn out, it is healthier to have a strong DOUBT system inside  – so they can actually criticize their own position and ideas.

The reason to having a mindset of doubting yourself is not coming from lack of confidence. It is coming from the true will to Understand the ideas you are based on. After all , all of us doubt ideas of others – but count on our own and stick to them for so long,  ignoring the “radical” idea that we might be mistaken.

I have seen a lot of money lost in the markets – when people “suicide” on a certain position ignoring others and never second guessing themselves.

Also , arguing with others for most people – is a way to strengthen their own argument, not to hear the other person’s opinion.

That , especially when dealing with capital markets , can be a very dangerous way of thinking.

Remember – don’t only be a contrarian , be also a contrarian to Your Own Ideas.  You might find it more useful then a lot of other data some times

Good luck with your investments

Tomer

Gold has been weak For a few months, and now it has almost broken $1600

What is that REALLY saying? not only that gold prices are somewhat a bubble, but a bubble that was propped up by central banks with zero interest rates and money printing.

Gold is now telling us that the party is about to be over.

GOLD

Gold is falling for 3 months now

the G7 has released a statement this week, claiming they don’t want any more Forex intervention, and no more currency wars

Some members of the ECB also stated that the central bank “has done enough” for the Debt Crisis.

That actually says , as i interpret it , “we are out of ammunition” , or “we cannot lower the rates any more”

But if rates are at their lows, and can’t go lower, how will the debt-loaded markets grow? they won’t.

Gold is protection against a rise in the money supply. but when you are drowning in debt, and rates stay the same, the practical effect is economic and monetary contraction.  Credit will shrink as debt is payed or erased, and prices will go down.

Maybe Wal-Mart’s executive Email about “disastrous Sales figures” is stating the beginning of this

The first asset to react – or predict – this kind of behaviour is indeed GOLD and Silver

Since they are REAL assets, unlike paper money, but on the other hand have no interest on them, they predict the business cycle in the Fastest way.

We have already seen over the weekend the bad data coming out from europe – which i already expected in my post Euro crisis round 2.

That , Together with the G7 statement and the weakness in Gold suggests we are going to have a rough time on our hands, with low rates, and contraction.

Good luck with your investments

Tomer

The European crisis has been “forgotten” in the eyes of the investment community. in the last few months, the Euro has been rising significantly, Stock markets in Spain and Italy have risen dramatically as well.

IBEX - the spanish stock market index - staging an impressive rally

IBEX – the spanish stock market index – staging an impressive rally

In the Davos convention – economists from all over the world have declared “the end of the Euro crisis” , Public servants as well

But if that is so, now is the time to DOUBT that recovery, and focus mainly on the core countries.

we already know that Spain unemployment is HUGE, official number is 26%, and who knows what the real number is. we also know Italy has huge debt problems, and Greece will probably never pay its debt, even after the “haircut” done to its creditors.

Now we should pay more attention to what’s happening in the core countries , where the positives and the economic powers are at

UK

The United Kingdom has been through a rough path in the last few years as it’s been printing money (QE) for a long time and results are not apparent, even in the CPI. the last quarter of 2012 printed negative GDP of 0.3% although the interest rate is practically negative and billions of pounds are injected to the market through the whole year

GERMANY

The real power house of europe – Germany, has also shown signs of weakness. GDP growth has also contracted there 0.5% and also CPI numbers were very low compared to the numbers expected. that is with extremely low-interest rates and an ECB printing money to bail out failing countries and buying their government bonds.

FRANCE

The only country showing better  results in official numbers, has other problems. The new president is a socialist, who is pushing to raise taxes on the wealthy and by that driving them away. surveys show a majority of the public in france think their country is broke.

France government bonds yields have dropped in the last few months in the “Euro area is recovering” era, and as we can see the  behavior of those bonds is more similar to Spain and Italy, the dangerous ones, than to Germany, US and UK the “safer” ones.

US yields go up during the rally while french yields are pressured Down as risky assets

US yields go up during the rally while french yields are pressured Down as risky assets.
Green is US yields and orange is French yields
Source : Bloomberg

As it seems, at least to me, france is becoming a peripheral country in the eyes of the markets, and with yields climbing in Spain and Italy there will be no mercy for France.

Peripheral Countries

in Spain, nothing dramatic has improved. unemployment is still high, debt is still big, and GDP is contracting. the same goes for italy, that probably has less problems but not smaller problems.

the Greek stock market made a comeback, but now seems dangerous again, as Fascists start rallying the country, and no real economic improvement has been seen in this country for the past 3 years.

Overall

An interesting data point is RETAIL SALES for the whole Euro zone, fell 3.4% Y/Y, a lot more than expected.

So it seems , that the European problems are now spreading to the core countries, as deflation, contraction and general weakness become the new best description for the present state.

This era of weakness in the core will be a lot harder to counter and deal with, especially after all of the money spent on peripherals

Good luck in your investments

Tomer

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