Armstrong & Downs from Capitol Hill
Market Talk – August 20, 2015
Another very poor performance from Asian equity markets rolled over into Europe and the U.S. All Asian markets lost between 1% – 3.5%. In Europe, FTSE was the best of a poor bunch, only losing 0.6%, whilst the DAX and CAC were both down over 2%. The U.S. fared no better with the DOW and S&P, which were both off 1.3% (at the time of writing) with the NASDAQ down 2%. The Asian futures markets trading in the U.S. are lower from their close by an additional 1.5% (Nikkei and China). Tomorrow could be an interesting day.
The bounce in gold continues (last seen +$24 at 1152 +1.85%) providing much needed support for the miners. Silver and copper both following the rally and bouncing 2% on the day. Gold has rallied to our first target resistance level between 1140 and 1155.
The bond markets were again the main benefactor in what many are describing as a perplexing yield curve play. The front end (2yr notes) were down (+1bp at 0.6625%), whilst 5’s managed just 2bp performance last seen 1.48%. The star performers were the 10’s and long bond (30yr), which were both down by 5.5bp to yield 2.068% for 10’s and 2.758% for 30’s.
In Europe, the rumors are, “More elections in Greece!” Mr. Tsipras has allegedly decided to call a snap election for September 20 — so is the word on the street. As a result, the Greek 2yr note traded lower +135bp to yield 12.79%. Greek 10yr paper was last quoted 25bp higher at 9.58%. Other peripherals were also weaker on this uncertainty with Portugal, Spain, Italy, and Turkey all lower on the day to the core. TY/RX spread was last seen +148bp.
In the currency market, the DXY (US$ Index) was a little lower at 96.05 (-0.3%) with EM currencies still under pressure with INR down 0.55% and the Russian Rouble falling by another 1% today to close 67.10.
Oil did flirt briefly with the $40 (TWI) but in late trade is seeing a healthy bounce into the close; currently up +1.25%. The spread between TWI and Brent is slightly narrower this evening at $5.80 (TWI 41.30 V’S Brent $47.10).
The World of Currencies
QUESTION: Mr. Armstrong, the pegs are breaking everywhere. It appears that what you have warned about is unfolding right on time. The emerging markets seem to have a choice. If they do not float they will end up with the same crisis as in 1997. China seems to react quickly to their numbers showing their economy is slowing down by more than 8%. Will they too eventually float?
ANSWER: Kazakhstan’s national currency, the tenge, dropped 23% on Thursday following the government’s decision to allow a freely floating exchange rate. We are seeing the Russian rouble and Mexican peso take a hit as well. Fixing currencies means the government must take on all sellers. That is a guaranteed trade. They always fail.
China will eventually have to allow the reminbi to float. There is no choice in that matter if they (1) want to avoid accusations of engaging in a currency war, and (2) they want to make the renminbi a world currency. That is the end game.
This is pushing the dollar higher. So why is gold rising? They are attributing this to the dovish Federal Reserve minutes and sliding global stock markets that increased the metal’s safe-haven appeal. But that is all nonsense. This is what I mean about fundamentals. They select what they need to fit the move. Why is gold rising with a rising dollar? Eventually, when the cycle shifts, gold will rise with stocks and with the dollar. It is not much of a short-term safe-haven when it pays no interest. The only thing that will create inflation is rising interest rates for that will decouple the world economy. The Fed is totally trapped and we have a massive pension fund crisis on the horizon. Gold is doing what our model projected and it is a short-cover rally for the near-term. When we elected the monthly bearish reversal of 1155 by some $60+ away, you typically rally back to retest that number before proceeding. I have stated countless times that is just the way markets move. At the movie showing on August 1, I answered questions about how it was good news to see articles calling gold the “pet rock” from the WSJ and the computer issuing a buy signal. That was perfect timing.
Programming – The Challenge
QUESTION:
Hello Marty You state in your article today “The coding of the actual AI trading and structure of analysis is done ONLY by myself.” Please explain what if something unexpectedly happens to you, then who would know what to do to carry on? Would society lose all that you have achieved and learned?
Sincerely
B
ANSWER: Coding is extremely difficult. Yes, you can have teams of programmers who are excellent at writing code, but you have to understand the subject matter to write the code. What I have been able to do that nobody else has ever accomplished began with my training in computer engineering. I later decided trading was more fun, but then I realized I could use a computer to do things far more efficiently. Our staff codes the delivery, voice, and all that. To code the actual model is too risky for them and would take years of training. Even then, we would still be looking at probably 5 to 10 years before reaching an end result.
I will train people on the code after it is complete. I do not have the time to train someone now while trying to get everything ready. What I am doing is PORTING code I have written over my life. This is far easier for me to do than to train someone else to do something they would not understand without market trading comprehension. It is more than writing code. It is trading design and comprehending how markets function. Merging that with computer science is the key. If someone stole the code, they would be perhaps even a decade trying to understand it. This is not just grab it a ah ha. There are two versions – the flat model and then the real Socrates. That code I do not even keep on a laptop.
Most big programming projects have teams all over and each is responsible for just a piece of the big picture. That would take way too long to accomplish. I wrote the code over the course of my adult life. It is in my head. It is like this picture above. I have to visualize so many components I have written, where to bring that code in, and how it will interact with other aspects. It is like watching 24 TV stations in your mind simultaneously. It requires getting into the focused zone and tuning out just about everything else around you. Guess that’s why I’m not married.
Note: In software, JAR (Java Archive) is a package file format typically used to aggregate many Java class files and associated metadata and resources (text, images, etc.) into one file to distribute application software or libraries on the Java platform.
Then again, someone asked Socrates (not me) whether he should get married or not, and received the reply:
“Do as you please, since whatever you do you will regret it.”
The Mad Max Event
QUESTION:
Martin,
Can you explain more fully why you are expecting the market to rally post 2015.75 while at the same time the economy turns down? Is it merely capital flows domestically as the international economy worsens further, which will ultimately wash up on the shores of the US? At that point should we expect to see more sovereign defaults and a move to a global currency?
Thanks for the service you are providing!
J
ANSWER: That is certainly part of the crisis. The dominoes begin to fall from the outside inward, so the dollar will be pushed higher as more and more governments hunt cash and move into default. Deflation expands as the economic demand declines and taxes rise contracting net disposable income. China was consuming almost 50% of all commodities so the contraction there is pushing the emerging markets off the cliff where we have $9 trillion worth of new debt created since 2007 in dollars. They assumed the trend would never end and then borrowed in dollars since rate were artificially low. It was like someone winning the lottery and most end up broken within a few years.
We have problems with many pension funds who bought emerging market debt at higher yields in local currency to try to offset losses domestically. That will not work out very well. And then we have the shift from public to private. It seems whatever can go wrong is going wrong from many angles. This part is how even hyperinflation takes place within a single domestic economy. It is the shift in confidence from the government to the private. Tangible assets making the transition to what comes after the crash and meltdown.
The gold promoters are at it again claiming everything will crash and go to zero and gold will soar in just weeks. That has never happened even once in history. It is a sales pitch with no basis in historical fact. The new currency in Germany after the end of the hyperinflation was still paper and it was backed by real estate, not gold. ALL assets made the transition from real estate, stock, commodities, and foreign currency along with foreign bonds. This time, the flight to quality will be initially to the USA. With Hillary or Bush in office in 2016, can you really see avoiding this mess?
Only during a decline under extreme circumstances when the system moves to a Mad Max event or Dark Age do we get the full blown control-alt-delete. This has happened many times throughout history and the recovery is consistent – 600 years for both Europe and Asia although different periods. At such points, all that is left is food. Property and even gold have no value for there is no commerce. Society breakup into small tribes or groups as national government vanish. This was serfdom. In Japan, the government lost all confidence and no coinage was issued for 600 years with bags of rice becoming money for barter.
In the case of Rome, this is why people simply walked away from their properties. The rise in taxes led to people just abandoning their homes and what we call the “suburbs” was a Latin term for abandoning cities – suburbium.
Hopefully, if enough people begin to understand the process, we just may be the check against going too far to a Mad Max event. If we can just for once learn from the past, perhaps we can make one step forward.
I am considering that this is important enough to accomplish that perhaps we will take in partners who understand the mission and are willing to chip in from a work perspective not just money. A number of companies have approached. It is a question of finding the right match. Time is not on our side.
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