2018/2019 Bear Market

[Arado]

I would argue that with all of the QE and QT that it should be almost impossible for the yield curve to invert. The fact that it has shows just how little demand there is for more money, indicating that central banks pumping up the economy has come to an end and there is nothing they can do about it.

At this point the central banks can't raise interest rates since all of their governments have all kinds of debt and that would make it too expensive for them. As a result, governments will continue to run deficits and the extra money will cause inflation which will cause gold/silver to rise in price and assets/stocks to fall.

I did think about trying to play this trend on shorting overvalued companies, I think the better play is mining companies, since as gold/silver rise in price they will do better and, in theory, there is no limit as to how well they can do; where as if one shorts a company the best you can do is if it drops to zero for a 100% return.

Agreed, though you are late to the trade - miner ETF GDX is up 50% from a few months ago since people saw the writing on the wall that the Central Banks have no option but to lower rates eventually. There is probably more to grow but not much until more dramatic rate cuts and QE4.

Curious to see what happens if we go negative in the US. There isn't that much research to predict what happens next other than metals being the best bet. Long term, it means that governments have given up trying to stimulate growth in favor of keeping zombie companies afloat through growing debt.

 

[Swordfish1010]

2y-10y yields inverted - the most accurate recession predictor. Dow down 800 points today. Some argue that QE and QT have distorted the bond market so the yield curve is no longer applicable. Hard to say. There may very well be extra growth that can be squeezed out of this market but may not be worth it. Other yield spreads have been negative for a longer time (3m-10y inverted in March).

ZH link.

It's official: after 12 years - and the longest central-bank propped expansion on record - the business cycle is once again officially in its death throes when this morning the 2s10s Treasury yield curve inverted for the first time since May 2007.

Why is the market freaking out?

Because of all economic indicators, this one is without doubt the most foreboding and ominous. Consider that 2s-10s yield curve inversions have preceded the last seven recessions and nine out of the last 12 recessions. In fact, as Bank of America points out, there was one yield curve inversion in the mid 1960s that did not precede a recession and the yield curve did not invert ahead of the three recessions between the mid 1940s and early 1950s. However, in the past 5 decades, a 2s10s inversion has been a guaranteed signal that a recession is imminent.

Speaking to Bloomberg, Canaccord's Tony Dwyer said that “it’s a great recession indicator. It just happens to work with a lag" and in an attempt to prevent a panic, added that "acting on it now is inappropriate."

Is he right? In other words, when should one expect the recession to arrive? Going back to 1956 it has taken between eight (1959) and 24 months (1967) for a US recession to start after a yield curve inversion. The average and median length of time from inversion to the start of a recession are 15.1 and 16.3 months, respectively. It took a year or more for a recession to begin after six out the ten inversions (1956, 1967, 1978, 1989, 2000, and 2005).
...
On an average basis, the S&P 500 tends to peak 7.3 months (average) or 2.6 months (median) after a 2s10s yield curve inversion. The range of S&P 500 peaks is from 1.6 months (1973) to 21.6 months (2005) after the inversion – a wide range.

In short, as BofA gloomily summarizes, the US equity market is on borrowed time after the yield curve inverts. There is a silver lining: after an initial post-inversion dip, the S&P 500 can rally meaningfully prior to a bigger US recession related drawdown. Think of it as the market's "last gasp" rally.

I would argue that with all of the QE and QT that it should be almost impossible for the yield curve to invert. The fact that it has shows just how little demand there is for more money, indicating that central banks pumping up the economy has come to an end and there is nothing they can do about it.

At this point the central banks can't raise interest rates since all of their governments have all kinds of debt and that would make it too expensive for them. As a result, governments will continue to run deficits and the extra money will cause inflation which will cause gold/silver to rise in price and assets/stocks to fall.

I did think about trying to play this trend on shorting overvalued companies, I think the better play is mining companies, since as gold/silver rise in price they will do better and, in theory, there is no limit as to how well they can do; where as if one shorts a company the best you can do is if it drops to zero for a 100% return.

It’s certainly not good for the short term.

 

[jeffreyjerpp]

I think the better play is mining companies, since as gold/silver rise in price they will do better and, in theory, there is no limit as to how well they can do; where as if one shorts a company the best you can do is if it drops to zero for a 100% return.

Agreed, though you are late to the trade - miner ETF GDX is up 50% from a few months ago since people saw the writing on the wall that the Central Banks have no option but to lower rates eventually. There is probably more to grow but not much until more dramatic rate cuts and QE4.

What's your ultimate price target for GDX?

I DCA'd in around $25/share....

Theoretically, gold at $1900/oz should cause GDX to challenge it's old all time highs around $60. However, I see gold surpassing that, and ending up around $2500 by the end of 2022 (this may be a VERY conservative estimate).

I would imagine GDX would be roughly $150 or so at that point. What do you think?

 

[Arado]

I think the better play is mining companies, since as gold/silver rise in price they will do better and, in theory, there is no limit as to how well they can do; where as if one shorts a company the best you can do is if it drops to zero for a 100% return.

Agreed, though you are late to the trade - miner ETF GDX is up 50% from a few months ago since people saw the writing on the wall that the Central Banks have no option but to lower rates eventually. There is probably more to grow but not much until more dramatic rate cuts and QE4.

What's your ultimate price target for GDX?

I DCA'd in around $25/share....

Theoretically, gold at $1900/oz should cause GDX to challenge it's old all time highs around $60. However, I see gold surpassing that, and ending up around $2500 by the end of 2022 (this may be a VERY conservative estimate).

I would imagine GDX would be roughly $150 or so at that point. What do you think?

You got in at a decent price. I think 100's is a fair long term (2020's) price target - most of the retail investors still have no clue about gold - their investments are savings in the bank or inflated assets and they have no idea that negative interest rates are coming. Only when the average person realizes what is going on, then gold can go to the moon. At that point the miners will skyrocket as well, at least as high as in 2011 prices. But hard to predict timing, it can still be a couple years off depending on market psychology and how aggressive the Fed will try to prop up the economy. Need to be patient and be ready for short term pullbacks as well.

Overall it's a weird market situation. Central Banks out of ammo on the eve of recession and record levels of debt with negative yields....this is unprecedented, not something you can find in traditional textbooks.

If governments solely stick to traditional monetary policy then it will take a long time to recover from the recession, so at the very least QE4 is coming. I'm not sure the degree to which QE4 will filter down into consumer goods and cause inflation panic.

Beyond QE4, if governments ever start with Modern Monetary Theory(MMT) helicopter money, then undeniable inflation will set in, ALL bets are off and that's really when gold will go nuts and the miners as well.

 

[Kid Twist]

What are your feelings about the FED policy in the next 6 months as far as rates are concerned? The market currently has it priced in that they go another 50 bp down, do you think by mid next year it'll be towards zero?

I'm torn, most people think this is a given, I would make a futures play on it but if it stays even it might hurt a lot, as opposed to just buying BTC or another fiat hedge like gold.

 

[Swordfish1010]

Bitcoin futures are going to be physically settled in bitcoin soon. Bakkt got approved.

 

[Lithuanian10]

Ping pong till 2020, after summer 2500 and back to ATH till new year , so..

 

[Lithuanian10]

However Gold started bull run till 2.0 , mostly green days are coming till target. So..

 

[Arado]

What are your feelings about the FED policy in the next 6 months as far as rates are concerned? The market currently has it priced in that they go another 50 bp down, do you think by mid next year it'll be towards zero?

I'm torn, most people think this is a given, I would make a futures play on it but if it stays even it might hurt a lot, as opposed to just buying BTC or another fiat hedge like gold.

I'm pretty sure they will be at zero within a year, but it depends how fast the economy is slowing, perhaps a trade deal or some other stimulus can extend the cycle a bit longer. Europe and Japan have already exhausted their monetary ammo.

200 basis point cut won't do much, the key question is when they will restart QE and its magnitude and what type of assets the Fed will purchase.

 

[Kid Twist]

Totally agree, even 0% rates won't do anything. Negative for the Fed is unprecedented; what's more interesting is that there are Fed papers from 2011 and earlier that state that not only will they not work, people will hoard money if they go to negative rates.

Did you know that it is ILLEGAL for the Fed in the current Reserve Act to buy corporate bonds, equities or REITs?

Super interesting times ahead.

 

[EvanWilson]

I think the better play is mining companies, since as gold/silver rise in price they will do better and, in theory, there is no limit as to how well they can do; where as if one shorts a company the best you can do is if it drops to zero for a 100% return.

Agreed, though you are late to the trade - miner ETF GDX is up 50% from a few months ago since people saw the writing on the wall that the Central Banks have no option but to lower rates eventually. There is probably more to grow but not much until more dramatic rate cuts and QE4.

What's your ultimate price target for GDX?

I DCA'd in around $25/share....

Theoretically, gold at $1900/oz should cause GDX to challenge it's old all time highs around $60. However, I see gold surpassing that, and ending up around $2500 by the end of 2022 (this may be a VERY conservative estimate).

I would imagine GDX would be roughly $150 or so at that point. What do you think?

I think there will be two stages to the coming inflation.

The first stage will see some emergency money pumped into the system, and gold go to $1,800 to $2,000 with interest rates staying low but inflation all over the place.

The next stage will be deficits of over $1.5 trillion and maybe as high as $2 to $3 trillion. At that point gold and silver will start ramping up against all currencies and purchasing power will start declining like mad as governments out and out right just print money to keep things going, and inflate away their debt. I do NOT expect the typical hyperinflation in the US, but more of a typical reported rate of inflation of over 10% every year as governments simply refuse to balance their budgets, can't raise interest rates, and just print money to keep spending.

Taking a quick look at GDX, I think once things 'start going', GDX will hit a new all time high and be over $50. Right now it is at $27.93. Long term I expect GDX will simply march 'up and to the right' indefinitely as money is printed.

As long as the mining companies do not mess this opportunity up, they could become the new 'blue chip' stocks with solid dividends. The idea is there product, gold and silver, goes up in price, while the debt they accumulated to buy their mining rights, all gets inflated away.

The other thing I like about many of the mining companies is that they are outside of the United States, for the most part, so if there is some kind of political instability they would not be effected. While I would not want to see that happen, if it did the dividends from a mining company could provide the base for a reasonable standard of living in the US in such times, or give one the financial reserves to move elsewhere.

 

[jeffreyjerpp]

Totally agree, even 0% rates won't do anything. Negative for the Fed is unprecedented; what's more interesting is that there are Fed papers from 2011 and earlier that state that not only will they not work, people will hoard money if they go to negative rates.

Ultimately, the current situation will be resolved in one, and only one, way: a widespread loss of confidence in the ability of governments to manage economies and their own finances. Fiat currencies will be devalued sharply lower, which in turn tanks the value of any and all bonds denominated in those currencies.

Of course, the bond market is TEN times larger than the stock market. We’re talking about massive real losses in wealth for anyone stuck holding fiat denominated bonds. Pension funds, for example, will get destroyed.

There are endless variations of how we get there, or in what order each particular domino falls. But it doesn’t matter, really. The herd will eventually get spooked by something, and stampede out of fiat and into any real asset available.

The big winner will probably be gold, followed by stocks, real estate, and rare collectibles. Bitcoin is a toss up- the last recession ended before BTC actually existed, so it could go over $100k or it could tank to nothing.

Just move your assets into real things now (not financial advice, DYOR) and you should be OK or possibly even profit when things start getting interesting.

 

[Oaks]

Gold ETFs, good idea?
IAU has a lower fee of 0.25%

 

[jeffreyjerpp]

Must read for people following this thread:

"There is ABSOLUTELY no historical evidence that negative interest rates will ever stimulate the economy no less are they even viable. This wipes out pension funds where many around the world are obligated by law to buy government paper. Social Security in the USA is 100% in government bonds. It is beyond comprehension where all these people cheer negative rates as if this is a good thing. The US share market declined with the rate cut, it did not rally.

People are convinced that an INVERTED YIELD CURVE foretells of a recession. They have no idea about capital inflows. Even in Thailand, which has benefited greatly from the China-US Trade War shows that its currency has been the RARE exception rallying against the dollar. That may change now if the dollar closes above the July high here at the end of August.

I am in Asia right now. The greatest fear is that China will send in troops to squash the protests in Hong Kong. Many fear this will be another Tiananmen Square. I would not go that far. The solution would be a political one and to repeal the extradition order. People do not fear that a wanted Chinese will flee to Hong Kong and be protected, but that they could be extradited to Beijing and put on trial for things they did or said in Hong Kong.

This is sending capital to the USA and the same capital flows from Europe and doing the same thing. That capital is now incentified to buy US debt looking for more rate cuts and their bonds will appreciate. It takes a sublime idiot not to see this trade. They are punting – not actually buying negative yields for the long-term. This seems to be coming to an end in 2020.

As I have stated many times, DO NOT EXPECT the official rates to rise outside the USA. All other central banks are trapped. They cannot afford to allow rates to rise and blow up government budgets. This will widen the gap between public and private debt. Back in the ’30s, as governments defaulted, smart money fled to private AAA corporate bonds. We will see the same trend here again, but at the same time, banks will look to the future with tremendous uncertainty and will NOT be lending so easily. Expect rates to rise on credit cards where they make their money and long-term mortgages. If the banks cannot resell the long-term debt mortgages, rates will rise widening the gap with the government.

Chairman Powell is not is a nice place. He cut rates NOT for the USA, but because the rest of the world is imploding and Europe shows no signs of reversing their policy. If Powell lowers the rates 50 or 100 bp, domestically people will be taking this as confirmation a recession is coming and the stock market will continue its decline.

Powell is in a no-win situation. This is the FIRST time in history the Fed cut rates at the top of a market and instigated a decline rather than cutting rates in response to a decline. This only proves the Fed’s actions are concerned NOT for the domestic economy, but primarily for Europe and Asia second.

This going to make for a HIGHLY unusual WEC this year. We are breaking historical ground. There no way for this to end but VERY badly. They do not want people to read this blog. They want to keep people accepting the government narrative."

armstrongeconomics.com/markets-by-sector/interest-rates/the-feds-real-crisis-to-cut-or-not-to-cut/

 

[Arado]

Totally agree, even 0% rates won't do anything. Negative for the Fed is unprecedented; what's more interesting is that there are Fed papers from 2011 and earlier that state that not only will they not work, people will hoard money if they go to negative rates.

Ultimately, the current situation will be resolved in one, and only one, way: a widespread loss of confidence in the ability of governments to manage economies and their own finances. Fiat currencies will be devalued sharply lower, which in turn tanks the value of any and all bonds denominated in those currencies.

Of course, the bond market is TEN times larger than the stock market. We’re talking about massive real losses in wealth for anyone stuck holding fiat denominated bonds. Pension funds, for example, will get destroyed.

There are endless variations of how we get there, or in what order each particular domino falls. But it doesn’t matter, really. The herd will eventually get spooked by something, and stampede out of fiat and into any real asset available.

The big winner will probably be gold, followed by stocks, real estate, and rare collectibles. Bitcoin is a toss up- the last recession ended before BTC actually existed, so it could go over $100k or it could tank to nothing.

Just move your assets into real things now (not financial advice, DYOR) and you should be OK or possibly even profit when things start getting interesting.

This seems pretty accurate, though the timing is difficult. Based on the amount of debt out there, money printing is inevitable, but when you look at the bond market, it appears most investors are expecting deflation. Obviously that is because of speculators hoping that the bonds will increase in value (despite having negative yield) and they can sell it to the next fool, but that dynamic has to end eventually.

At some point things are going to flip and inflation panic will set in as currencies get devalued, but it's hard to know what, exactly - negative rates on even more debt, QE4, Central Banks purchasing other assets outside of treasuries, massive bailouts, helicopter money, currency war? Hard assets seem the way to go though, but in the short term there may be a big crash in asset prices as debt deflation sets in.

Must read for people following this thread:

There are a bunch of ideas in this blog post - is his main point that Powell is forced to cut rates due to what is happening abroad, and that the inverted yield curve is solely due to capital inflows from abroad seeking safety?

I'm pretty sure that same argument was used in previous yield curve inversions to calm investors worried about a recession. Given the above debt issue it's not the smartest trade anyway for the international smart money.

 

[Kid Twist]

At some point things are going to flip and inflation panic will set in as currencies get devalued, but it's hard to know what, exactly - negative rates on even more debt, QE4, Central Banks purchasing other assets outside of treasuries, massive bailouts, helicopter money, currency war? Hard assets seem the way to go though, but in the short term there may be a big crash in asset prices as debt deflation sets in.

This is why it will still be put off for at least 2 years. We need to first exhaust our 2.25% of final Fed interest rate cushion to zero, which is beginning right now, but won't probably hit as early as March 2020 as Raoul Pal thinks. Then, the question will be QE here, and more with possibly more negative ECB and BOJ rates, with more monetization of broke assets for those people as well.

The dollar will continue to get stronger, world supply chains and all economies based on exports will get hurt big time, and at that point the entirety of fiat will start to crumble due to the world reality that fiat, and the way it is managed, is totally untrustworthy. I still think this can be put off until mid next decade, as I have predicted, +-1 year around 2025.

The thing about 2025 is that it is so perfect for the demographic bomb, the Democrat Socialist idiot elected to lose confidence post Trump, the health care problems continuing to boil up, the full swing of pending and complete destruction of pension systems (2022 it will already be clearly here) ... the boomers will be in ripe mood to elect Mr. or Mrs. Freebie.

The question is, what do we do. I am not a gold bug, but I think it's smart to own it, but what kind? I am a big BTC guy too, but if it rocks and rolls to 50k by next June, do I sell out at that point? What do I do with that fiat? Get real estate or farm land?

Good thread, keep it up my friends.

 

[jeffreyjerpp]

This seems pretty accurate, though the timing is difficult. Based on the amount of debt out there, money printing is inevitable, but when you look at the bond market, it appears most investors are expecting deflation. Obviously that is because of speculators hoping that the bonds will increase in value (despite having negative yield) and they can sell it to the next fool, but that dynamic has to end eventually.

At some point things are going to flip and inflation panic will set in as currencies get devalued, but it's hard to know what, exactly - negative rates on even more debt, QE4, Central Banks purchasing other assets outside of treasuries, massive bailouts, helicopter money, currency war? Hard assets seem the way to go though, but in the short term there may be a big crash in asset prices as debt deflation sets in.

Must read for people following this thread:

There are a bunch of ideas in this blog post - is his main point that Powell is forced to cut rates due to what is happening abroad, and that the inverted yield curve is solely due to capital inflows from abroad seeking safety?

I'm pretty sure that same argument was used in previous yield curve inversions to calm investors worried about a recession. Given the above debt issue it's not the smartest trade anyway for the international smart money.

The point is that, because the dollar is so heavily used outside the USA, Jerome Powell will tank the entire world economy if he raises rates. Tons of foreign corporations took out dollar denominated loans in the last few years, which is problematic because now the value of those debts is growing while their local currency (the one they earn money in) is shrining. The US Federal Reserve has become the worlds central bank, which obviously doesn't work. The Fed cannot respond to the USA economy, where it should be raising rates.

You're simultaneously seeing:

1) Investors flee for safety in US bonds
2) Gold entering into a bull market
3) USA stocks at or near all time highs
4) The dollar going up in value

The market is scared and confused. Everyone knows something is wrong, but how things will shake out, is impossible to guess. So people are grasping for any kind of safety and certainty they can find. The US gov't will probably pay you back, so bonds go up. Wal mart will likely still exist a decade from now, stocks go up. Gold has always been valuable, hence gold goes up. And so on.

But guess what? Our elites have a new trick up their sleeves. A global, digital currency:

 

[Jaydublin]

 

[Foolsgo1d]

Tomorrow the market is going to be very interesting as it will have more reaction to Trumps tweets and the lunatic policies he is following from his two advisers.

> Gold will become a better option as the months go by.
> Negative rates are here to stay and more will come
> China and the US are passing the costs onto exporters/importers who are passing it onto consumers, further deepening the consumer problems. If the EU slaps tarriffs on the US it will get really juicy
> More financial stimulus, aka fake money that goes to the 1%
> The dollar will be de-valued
> This leads to currency wars
> Its a race to the bottom

Only way out will be a death spiral and reset.

 

[Arado]

Tomorrow the market is going to be very interesting as it will have more reaction to Trumps tweets and the lunatic policies he is following from his two advisers.

> Gold will become a better option as the months go by.
> Negative rates are here to stay and more will come
> China and the US are passing the costs onto exporters/importers who are passing it onto consumers, further deepening the consumer problems. If the EU slaps tarriffs on the US it will get really juicy
> More financial stimulus, aka fake money that goes to the 1%
> The dollar will be de-valued
> This leads to currency wars
> Its a race to the bottom

Only way out will be a death spiral and reset.

Trump backtracked and made a vague mention about his team exchanging calls with the Chinese, causing a rally on Monday and slight reversal today. The above possibilities still in play. Central Bankers are going to pursue some extreme policies to prevent this thing from crashing.