Market Talk – July 16, 2015
Yesterday, dealers spent most of the day waiting for the Greek vote and then, later in the day, Janet Yellen’s semi-annual HH (Humphrey Hawkins) testimony in front of the House Financial Services Committee. The Greek vote was rather well publicized throughout the day and confirmation that the measures would be accepted should be no huge surprise. With around 30% of Mr. Tsipras’s own party failing to back the vote, after a day of emotional debate, we should expect to see a reshuffle very soon. 2yr GGB (Greek Govt. Bond) last saw 26.5%.
The euro did trade well in early session, but by early afternoon trading the sellers were in and once through 1.1000 it never really looked back. Janet Yellen’s speech did nothing to halt the euro’s slide as she reiterated that the Fed remains on track to raise rates this year, with the one caveat being, “as long as the economy evolves as expected” the pressure increased upon the euro.
The U.S. Treasury market did not see the kind of aggressive sell-off one might expect after such rate comments, but we did see some weakness across the curve. All the way along the yield curve from 2’s (2yr notes) out to 30’s yields were 2-4bp higher after a day where we had seen some positive gains in bonds. The US$ is still seen as the safe-haven bid, which is one explanation why both bonds and stocks held-in!
Gold suffered from mid-day London, trading down over $8 at one stage to 1143. Rate talks are leaning on the precious metal at the moment, and given its recent performance, does not look to have many friends to talk it up just yet.
China saw a solid 7% growth (just out) and is reflected in most Asian Stock Exchanges. Nothing really to write home about but a positive day all around at present.
The Dow & the Two Paths To Chaos
We have a Daily Bullish Reversal in the Dow at 18105.00. A closing above that will warn of a retest of the May high of 18421.13. We still do not see a major crash unfolding and the next three months will remain choppy.
We have a serious risk of two patterns. Do we get the correction into the ECM, or do we get an initial high with the ECM? The first would be the more normal pattern. However, we do not live in normal times. If we penetrate the May high, expect a rally into the ECM with the traditional crash. The talking heads will proclaim their infallibility once again. But such a pattern would more likely that not be short-lived and then blast to a new high, a Phase Transition will most likely follow.
Keep in mind either way we must get that False Move, which sends the majority to one side and creates the energy like a pendulum to rapidly swinging back in the opposite direction. We are not swinging to new highs in a dramatic fashion, so this does not appear to be the False Move taking the market to new highs for a major crash. That would be more akin to a doubling in the price within the last year, which has not taken place. Therefore, the steady hold of higher price levels implies the False Move will be to the downside and not the upside.
Now you can see why we made the World Economic Conference AFTER the ECM for this will be the beginning of a move – not the end.
Gold is Becoming a Dirty Word
In 2011, Louisiana became the first state to wage war on CASH, enacting a law called R.S. 37:1866. Politicians made it illegal to purchase anything from a secondhand dealer with cash. Therefore, even going to a garage sale to make a purchase with cash became illegal.
A secondhand dealer shall not enter into any cash transactions in payment for the purchase of junk or used or secondhand property. Payment shall be made in the form of check, electronic transfers, or money order issued to the seller of the junk or used or secondhand property and made payable to the name and address of the seller.
All payments made by check, electronic transfers, or money order shall be reported separately in the daily reports required by R.S. 37:1866.(Article III, Section 2(A)(4)(b)(i) of the Constitution of Louisiana)
The law defines secondhand dealers as:
Every person in this state engaged in the business of buying, selling, 5 trading in, or otherwise acquiring or disposing of junk or used or secondhand 6 property, including but not limited to jewelry, silverware, diamonds, precious metals, 7 ferrous materials, catalytic converters, auto hulks, copper, copper wire, copper alloy, 8 bronze, zinc, aluminum other than in the form of cans, stainless steel, nickel alloys, 9 or brass, whether in the form of bars, cable, ingots, rods, tubing, wire, wire scraps, 10 clamps or connectors, railroad track materials, water utility materials, furniture, 11 pictures, objects of art, clothing, mechanic’s tools, carpenter’s tools, automobile 12 hubcaps, automotive batteries, automotive sound equipment such as radios, CB 13 radios, stereos, speakers, cassettes, compact disc players, and similar automotive 14 audio supplies, used building components, and items defined as cemetery artifacts 15 is a secondhand dealer. Anyone, other than a nonprofit entity, who buys,sells, trades 16 in, or otherwise acquires or disposes of junk or used or secondhand property more 17 frequently than once per month from any other person, other than a nonprofit entity, 18 shall be deemed as being engaged in the business of a secondhand dealer. (Article III, Section 2(A)(4)(b)(i) of the Constitution of Louisiana)
They used the excuse that selling used goods for cash enabled criminals to sell what they stole. This would have been true since Biblical days. The politicians also made it illegal to exchange cash dollars for gold or any precious metals. This, of course, is exactly what France has done. I reported on my trip to Spain that I could not find anyone selling gold coins publicly because of required regulations – no cash accepted.
The war on cash includes the war on gold. You can no longer hop on a plane with a suitcase full of gold. This is the hunt for taxes; the drive to eliminate cash is also to eliminate gold transactions in cash. You may not be able to conduct business in gold in a cashless society, and they will make it illegal to use things like Bitcoin as well. In fact, France is already looking at regulating that. This is the coming Winter of Economics – the age of authoritarianism – a world I really do not want to live in.
Sorry if our forecasting is boring, nothing has changed. Still looking for the break below $1,000 and for timing, that also remains unchanged. The two benchmark targets remain the focus; it may be the second target rather than the first.
The Long Depression – the First Great Depression
What actually constitutes the Long Depression has been debatable, for at first it was called the Great Depression, and then that title was transferred to the 1930s. Consequently, some limit the term Long Depression to the worldwide price recession beginning in 1873 and running through the spring of 1879. Six years is not exactly a “long” depression, that in our analysis is 26 years – the typical maximum period which Japan entered following 1989.95. Europe appears to be completing a 13 year depression from 2007 into 2020 thanks to austerity – deliberate deflation to support bondholders.
Domestic analysis of the Long Depression event of the 19th century USA centered on the Panic of 1873, which the inflationists/Silver Democrats dubbed this financial crisis the Crime of 1873. Of course, this view ignored the global economy and this set the tone for a 26-year economic depression plagued by numerous financial panics that finally culminated in the Panic of 1893, which were devastating to say the least and the Panic of 1899 with the peak in US interest rates reaching nearly 200% in a situation similar to Greece today.
Unfortunately, as always, analysts try to reduce everything to a single cause and effect plus they wear blinders like a horse only looking at this six-year period 1873-1879 with exclusive domestic analysis. Much of this contraction of this period was traditionally attributed to a monetary contraction leading to the resumption of specie payments in 1879. This was an extremely narrow view for this had the impact of introducing austerity, but that was at the end of the period. The bubble going into the event peaked with the Panic of 1869 and the birth of the Transcontinental Railroad on May 10, 1869, and of course the Gold Panic where Jim Fisk attempted to corner the market forcing gold up in price. The scheme was that when the USA would return to a gold standard they would have to accept the market price. You can watch the old black & white film Toast of New York on this event which inspired me as a kid to explore financial history.
The Transcontinental Railroad spawned a wave of innovation that unfolded as creative destruction. Mail order companies began to develop. Previously in 1845, Tiffany’s Blue Book (the jeweler) was the first mail order catalogue in the United States. However, after the development of the Transcontinental Railroad, what emerged was the internet of the 19th century whereas trains now opened the continent as a market. By 1872, Aaron Montgomery Ward of Chicago, produced a mail order catalogue for his Montgomery Ward mail order business. Like Amazon today, Montgomery Ward began selling over 20,000 items in a 540-page catalogue directly to customers reducing prices and eliminating local stores, exactly as Amazon has eliminated local bookstores.
In 1986 in Toronto, Irish immigrant Timothy Eaton founded T. Eaton Co. The first Eaton’s catalogue was a 34-page booklet issued in 1884. However, it was Richard Sears who began a business selling watches through mail order catalogs in Redwood Falls, Minnesota in 1888. By 1894, the Sears catalog had grown to 322 pages, offering sewing machines, bicycles, sporting goods, and even automobiles that produced from 1905–1915 by Lincoln Motor Car Works of Chicago.
The period of the Transcontinental Railroad lead to creative destruction event similar to the internet today whereas on one level the economic numbers looked good, yet unemployment was gradually rising. The price deflation was caused by innovation, as well as a decline in demand, laid the seeds for Marxism that people supported for they did not understand what was happening. They blamed industry and this fueled the development of unions as well in addition to working conditions. Hence, it was this period of a Long Depression that ignited social change insofar as it was a shift in employment to from agriculture to industrialization. Employment within agriculture was 70% in 1850, which declined to 40% by 1900, and would ultimately crash to 3% by 1980 all because of innovation from fertilizers to the combustion engine.
This economic evolution of the real Long Depression (1873-1899) created a “depression” for many as unemployment rose yet monopolies grew as did corporate profits for many in the right field. It wiped out Philadelphia as the financial capitol of the United States and J.P. Morgan would move that to New York City with his innovation. From this highly volatile period, as we are entering today, what emerged of socialism/Marxism that burst to the surface producing Coxley’s Army which marched upon Washington following the Panic of 1893. It was this march that led to the idea of socialism for FDR took most of the demands first argued by Coxley that government should create jobs for the unemployed. This led to the Antitrust Legislation and the Progressive Movement of Teddy Roosevelt.
Coxley’s March became the subject of Lyman Baum’s Wizard of Oz – We’re off to see the wizard the wonderful wizard of Oz (Congress) following the Yellow Brick Road (gold standard & austerity). This economic event created serious change.
So those who argue that there was great expansion, yet ignore the social and global impact of the Long Depression, became commonplace. Today, the drive once again for austerity risks tearing Europe apart at the seams. This is what Brussels is dangerously doing and the surrender of Greece exactly opposite of their election and referendum mandate threatens to create civil war for this policy of austerity will once again destroy the social fabric of Europe.
Yes, there was an extraordinarily large expansion of industry, railroads, and physical output during the Long Depression fueled at the same time as a wave of creative destruction, but at the price of shifting trends within employment as we are seeing today with the internet. People lacking new skills to make the transition will be left behind and will blame something other than the trend which is typically corporations. So we once again have people looking at corporate profits and excess cash levels, yet there is rising unemployment, not to mention politicians demanding to raise minimum wages, and the introduction of Obamacare that provide the incentive to replace such workers with robots or client automation – “Press 3 to speak to…” etc.
The Long Depression was a conflict between innovation and the clash between Silver Democrats funded by silver miners to inflate for their benefit that caused silver to be overvalued leading to silver imports and gold exports. The Silver Democrats thought they could force the price of silver higher to 16:1 to gold and Europe would have to accept the higher prices but the reverse unfolded. They sent silver to the USA and exchanged it for gold which to them was undervalued. By 1896, J.P. Morgan had to organize a gold loan to prevent the USA from going bankrupt. This led to the famous speech of President Grover Cleveland who could see the world in a connected manner. He observed that capital could flee the nation or hoard and refuse to invest as we are witnessing today. But labor, he warned, could neither flee nor hoard itself. Therein lies the danger we face today for social change.
Grover Cleveland also said of taxes that it was unjust for a government to tax the people beyond what was necessary for it becomes “ruthless extortion and a violation of the fundamental principles of a free government.” Hillary Clinton’s economic plan, force corporations to raise wages – not reform government and reduce payroll taxes which is in the hands of politicians. Wages are not. We are plagued by people who want to rule the world yet are clueless about how it functions.
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