Bet the Farm Against Inflation or On Monetary Collapse

Gold/copper is getting to the point where it says bet on deflationary or stagflationary collapse. Economic activity is going bye-bye if this breaks out.

Copper Miners

Copper Miner-Gold Miner Ratio

This one makes me a little more confident that gold-copper will resolve in gold's favor.

Commodity Ratio Charts

Island Reversal on Copper Miner ETF

What do MSTR and COPX have in common?

The Most Important Breakout from Last Week, Maybe

Copper. The base isn't complete yet, but it broke resistance. $3.30 is the next resistance, and then the big one at $3.47, call it $3.50. Once that is gone, the all-time high is in play. I bought jr copper miners/exploers on Friday based on the breakout. However, big warning here: until copper goes through $3.50, it's very possible this move is a repeat of the 2015-2018 move. The global economy is in bad shape. A lot of inflation has been assumed, the dollar bear market has been assumed.

The broader market is experiencing extreme positive sentiment while failing at long-term resitance. I went short utilities last week and my Nasdaq short is still positive, still below the November 8 overnight high in the futures market. It's also hasn't exceeded the September all-time high.

What I'm not sure of today is whether a top in the market will be inflation driven or deflation driven. If inflation, it's possible short Nasdaq and long copper miners will produce two winners. If deflation, copper miners will reverse. If the "goldilocks" of Fed printing amid a depression keeps working, copper works and bearish trades fail.

On the fundamentals, inflation arguments have failed for 9 years. It has been a bear market for commodities. The death of dollar has been happening for the past 20 years. I've always maintained those arguments will be proven correct eventually, but there are only hints of it happening right now, not reality. Almost all the people arguing for inflation are making the same argument they've made before, while the real economy is stuck in the same trap. Credit growth is not rising outside of government. Supply disruptions are not inflationary in the long-term unless there is money creation backing it up. Without money creation "monetizing" the price increase, it causes deflation. The potential change is politics. If the governments of the world continue running up fiscal deficits that are monetized via the central bank, then there may be inflation moving forward. Private credit growth will turn higher with inflation or governments will run ever rising deficits as the economy collapses amid currency devaluation. Forecasters of high inflation are putting the cart before the horse though. In the U.S., the Republican Senate is back on an austerity kick now that deficits aren't funding defense and tax cuts. Any negative hit from "austerity" will hurt Biden and because voters tend to vote straight tickets more than before, if voters want to punish Biden in 2022, they'll give control of the House back to the GOP.

The other piece of the puzzle is the most important chart in the world, the U.S. dollar. A breakdown in the greenback will fuel price increases whether they're fundamentally warranted or not.

Interest Rates and Credit Aren't Behaving Normally

I threw copper in the middle because the market thinks inflation is coming. I don't see it in interest rates or credit growth yet. Macro economc data says the stimulus burst is over. TOTLL is behaving as if the recession is ongoing, the spread between Baa and prime interest rates should have surged instead of breaking lower. Ten-year TIPS price remains well withing its downtrend, the bounce thus far still leaves it far from resistance.

Copper Miner Reversal Or Doom

If the copper miner ETF fell out of the triangle pattern again, a termination of the move after a loss of about 10 to 15 percent would opent the door to another inverse H&S pattern similar to the one in 2016. However, the broader mining ETF is threatening a move more on the order of 40 percent if it can't retake the horizontal.

Socionomics Alert: Change in Energy

Mike Cernovich: The Energy has Shifted

Several high consciousness people I’ve spoken to independently told me they felt a shift in energy. Something is going on. This feeling happened 2-3 weeks ago, and it wasn’t about politics or elections. The feeling is much bigger. There has been an energy shift.

Whenever you talk about Energy, haters appear. “It’s woo-woo,” but this only shows they are morons. You see Energy measured every day, though it’s wrapped up in terms like consumer confidence, inflation, and bubbles.

Keynes called this Energy the “animal spirits,” or animating force of human behavior. We all know Energy when we see it.

What could he be talking about? People are talking about this post online (such as the Buzzfeed editor-in-chief), indicating they know what he's talking about even if they don't really "know."

At the start of the year I posted: 2018: The Pivot Year and after the first crack on February 5 I posted: 2018 Pivot Year: Here Comes the Pivot

On the other side, Chinese growth is slowing and they recently eliminated tariffs on steel exports. Tensions in North Korea aren't improving U.S.-China relations. One way or another, I expect action on trade in 2018.

Finally, the overall trend in social mood remains negative. I believe this is a higher order decline as in the 1930s, and thus dollar positive (deflation) rather than a correction and inflationary (1970s).

As I said above, I could be wrong. And the best case for my being wrong is still the commodities markets. Several funds such as steel, copper and coal (and related emerging market countries reliant on natural resource exports) are on the verge of breakouts. I expect China to slow, but FXI recently broke out above its resistance again and opened up 3 percent on Tuesday.

The big questions are still interest rates, inflation expectations, credit growth, China and commodities. There are some signs of an uptick in lending (see TOTLL and BUSLOANS at Fred), but still well growth rates in 2016, let alone during the pre-2008 expansion. The strongest argument for stagflation is the traders who are seeing a bearish move in bonds, not in the economic data. The commodities impulse appears to be ending. Tariffs and sacntions are bumping prices up, but it won't lead to a price spiral without rising credit growth or a decline in the dollar, both of which can accompany a recession/depression.

Some charts below have broken out, others are on the cusp or threatening reversals. A couple charts at the bottom show how technology looks stretched and do for some relative mean reversion, one way or another.

I'll post a lot of charts below, but for the short-term I want to show the BofA high-yield option adjusted spread. The collapse in the spread over the past three weeks was extremely fast, at least in high-yield credit investors quickly returned to total complacency.

What follows are a lot of charts that I posted earlier this year. The stock market topping chart I posted on February 3: End of Rally or End of Bull: Is It 1987, 1994, 1997, 1998, 2000, 2007 or 2014? If you believe the stock market is topping and you expect interest rates will breakout to the upside, then the decline in stocks will be far larger than a normal bear market. If the 30-year yield rises to around 4 percent and the Dow Industrials/30-year Treasury falls to 130, the Dow would be at 15,600, 37 percent below today's price. A move to 5 percent on the 30-year would give a downside target of 50 percent for the DJIA.

2018: The Pivot Year

Coming into 2017, I expected USDCNY would dip to around 6.60 and then resume its rise. Instead, it got as low as 6.48 and closed the year at 6.51. Overall, this remains a dollar story, but there's two possible paths for the greenback.

I still lean towards a finally rally in the U.S. dollar as the next economic crisis/global recession comes into focus. The dollar is above the long-term resistance line.

However, the analog to prior bull market advance is in limbo. I think a compelling case can be made for a dollar top being in:

There are two potential analogs then. We could be at June 2002 and already past the first drop in the greenback. Or we're still somewhere in 1999, consolidating before the next advance.

I lean towards one more surge in the dollar during the next recession as dollar credits default or are repaid. There's no sign yet of credit growth, indicators such as consumer confidence and unemployment are coincident with the peak of an economic expansion, not the middle. Things could get much better considering growth was below trend for a decade, but there's little sign yet of a breakout.

Politically, Trump was unable to push his agenda because the Russia-collusion story derailed his administration for the first six months or so. This delayed action on trade reform/tariffs. I expected these actions to spark instability in financial markets. Instead, volatility went to new lows. It looks like the Russia-collusion narrative is doing a rope-a-dope now. If this dossier was the main piece of evidence for FISA warrants, this is already a bigger scandal than Watergate. Not only will the investigation go away for Trump, but he could have several high ranking Democrats under investigation by a special counsel in addition to having a free hand to clear the decks at Justice and the FBI. At worst, Trump's political capital recovers (he loses the weight of the investigation). At best, his enemies are under severe threat of prosecution or the stink of using the defense-intelligence apparatus to spy on a domestic political opponent.

On the other side, Chinese growth is slowing and they recently eliminated tariffs on steel exports. Tensions in North Korea aren't improving U.S.-China relations. One way or another, I expect action on trade in 2018.

Finally, the overall trend in social mood remains negative. I believe this is a higher order decline as in the 1930s, and thus dollar positive (deflation) rather than a correction and inflationary (1970s).

As I said above, I could be wrong. And the best case for my being wrong is still the commodities markets. Several funds such as steel, copper and coal (and related emerging market countries reliant on natural resource exports) are on the verge of breakouts. I expect China to slow, but FXI recently broke out above its resistance again and opened up 3 percent on Tuesday.

Smaller commodity ETFs such as rare earths (REMX) and Lithium (LIT) have the strongest momentum in the market now, along with crude oil (BNO, DBO). I remain bullish on the USD, but hedged with high volatility commodity plays.