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PM Daily Market Commentary – 8/14/2018

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  • Wed, Aug 15, 2018 - 12:36am

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    davefairtex

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    PM Daily Market Commentary – 8/14/2018

Gold moved up +0.71 [+0.06%] to 1201.91 on moderate volume, while silver climbed +0.05 [+0.43%] to 15.05 on moderate volume. The buck rose +0.36% – mostly because of an -0.58% drop in the Euro, which continues to suffer from capital flight because of the situation in Turkey. 

Here’s something I’ve noticed about these crises and how they function. First a major problem gets created. It bubbles for a while, steadily getting worse. Presumably, those in power hope the problem fixes itself, but of course, that doesn’t happen. Then at one point, something triggers an explosion. This causes the central planners to tell everyone they’re going to fix it (but often, they don’t say how – or the fix just amounts to rearranging the deck chairs as the Titanic settles lower in the water), and the market reacts positively (causing the shorts to cover in a panic) but then things don’t really get fixed, the market figures this out, and then prices take another leg down.

So today the Turkish central bank cut reserve requirements, thus providing liquidity to the Turkish banks. Turkey’s central bank pledged to provide “all the liquidity the banks need”. It added: “[We] will closely monitor the market depth and price formations, and take all necessary measures to maintain financial stability, if deemed necessary.” And there were talks about Erdogan moving closer to Russia.  And other stuff too.  https://www.theguardian.com/world/2018/aug/13/turkey-financial-crisis-lira-plunges-again-amid-contagion-fears

So of course the Lira bounced back – but not the Euro, which continued plunging today. The Euro is cleanly through 115 support to 113.44, and there is quite a bit of air between 115 and the previous low of 104.

Can anything “fix” Turkey? Well, “more liquidity to Turkish banks” is not going to do it. Over the past 3 years, inflation in Turkey was ranging from 10-15% per year. During that time, the central bank kept rates at 7.25%, far below the rate of inflation.  So if you can borrow at 7.25%, and inflation is 10-15%…everyone borrows as much as they can, because its a guaranteed rate of return. Duh. Its not a mystery where the problem came from: Erdogan wanted to pump his economy prior to the election using ultra-low rates.  It worked, and he won, but now he has a currency crisis. After 3 years of ultra low rates, inflation is at 16%. And this is government-measured inflation.  If the central bank raises rates high enough to really stop inflation (a la Volcker in 1980) it will cause a massive recession, which Erdogan gets to own since he’s been in power for 15 years.

What’s more, the price charts suggest its too late anyway. Confidence has already snapped. So Erdogan is forced to make this about a plot by the West to undermine his government. Maybe there is such a plan but its also a massive, self-inflicted wound due to an irresponsibly loose monetary policy over the last 3 years. Imagine if the Fed kept rates at 0%, when inflation ranged from 3-10% per year? That’s what Erdogan did in Turkey for three full years.  The resulting spurt of inflation got him elected, but now he’s paying the price.

And now we get to see how Turkey’s collapse ends up affecting Europe.  Syrian migrants?  Turkish migrants fleeing hyperinflation (see Venezuela)?  Capital controls?  Defaults on external debt?  Western banks hosed by the various games Erdogan will play trying to make everyone else pay for the troubles he himself caused?  What happens to Incirlik air base?  Will Erdogan arrest US soldiers and airmen, constructing an external enemy to distract from his domestic economic crisis?  Will China jump in?  (Can they, given their weakening economy?). How about Russia?  Does Russia have enough spare cash?  I predict: things will just get more and more interesting.  There will be lots and lots of actions taken in the hopes it will be enough.  But ultimately I am reminded of a fish-out-of-water: there is a whole lot of flopping around for a surprising amount of time, but the end state is pretty much guaranteed.

Supposedly there is a fix: a “currency board” – the solution proposed by a guy who…might just be looking for a consultant position establishing such a board in Turkey.  But that means Erdogan must relinquish his ability to pull the economic and monetary levers in his economy – and it guarantees that recession, just like the US had in 1980.  If you were Erdogan, why on earth would you choose to do that, when you can continue to blame everyone else and attempt to make all of them pay for it while you remain in power?  https://www.cnbc.com/2018/08/14/turkey-annual-inflation-rate-is-running-at-an-estimated-101-percent.html

Gold basically chopped sideways today, managing to resist falling even though the Euro fell fairly hard. The doji candle was not rated – it was an inside day – and trading range was narrow. Gold forecaster fell -0.11 to -0.38, which suggests the downtrend is getting a bit more intense. If one day you see a big plunge, and the next day, the bounce is anemic to nonexistent, that’s not a good sign. Gold remains in a downtrend in all 3 timeframes, while gold/Euros is in an uptrend in the daily and weekly timeframe. Given the Euro’s plunge, they are having to work overtime to keep gold from rallying too strongly across the pond.

COMEX GC open interest rose 2,211 contracts. No big increase in shorts = no move lower in price.

Rate rise chances (September 2018) remains at 96%.

Silver bounced back slightly – it managed to avoid following copper downhill as the dip-buyers appeared. Trading range was narrow; the short white candle was unrated as it was an inside day. Forecaster was unchanged, but still in a strong downtrend. How long can silver avoid the pull of falling copper prices? Silver remains in a downtrend in all 3 timeframes.  Today’s bounce did not suggest any real dip-buying, which looks a bit bearish to me.

COMEX SI open interest fell -1,242 contracts. Interesting. A slight reduction in OI, and silver rallies.

The gold/silver ratio fell -0.30 to 79.86. That’s somewhat bullish.

Miners rallied briefly in the morning, and then sold off for the rest of the day. GDX fell -1.05% on moderate volume, while GDXJ dropped -0.74% on moderate volume also. XAU dropped -1.30%, worse than both ETFs. New lows all around, all the candle prints were bearish continuations, forecaster remains in a strong downtrend. Miners appear to be in free-fall right now.

The GDXJ:GDX ratio rose +0.31%, while the GDX:$GOLD ratio fell -1.11%. That’s bearish.

Platinum fell -0.22%, palladium rose +0.67%, while copper dropped -1.85%, heading for a re-test of the lows set back in July. The move lower in copper was about China, of course; China’s economy is slowing down, and copper always pays the price. So even with the palladium rally today, we have palladium: downtrend, platinum: downtrend, copper: downtrend. How silver managed to avoid selling off given copper’s move down is anyone’s guess.  How long can it do this?  I think: not very long.

Crude fell -0.76 [-1.14%] to 65.79, with most of the damage happening after the API report (crude: 3.7m, gasoline: -1.6m, distillates: +1.9m) came in unexpectedly bearish. The plunge was enough to flip the forecaster back into a sell (-0.61 to -0.34); it looks like the Goldman-promised “tight oil market” has yet to materialize. Surprise, surprise. Oil has now moved into downtrend in all 3 timeframes; today’s drop was enough to cause the monthly to issue a sell signal – assuming we close the month at these prices.

SPX rose +18.03 [+0.64%] to 2839.96. This caused SPX to move back to just under its 9 MA. Cyclicals did best (XLY:+0.97%) along with financials (XLF:+0.94%) while utilities did worst (XLU:-0.21%). It was a reasonably bullish sector map.

VIX fell -1.47 to 13.31.

TLT fell -0.22%, selling off slowly for most of the day. TY also fell, losing -0.12%, printing a weak-looking swing high (38% bearish reversal). TY forecaster remains in an uptrend, however. It looks as though bonds are taking a bit of rest after bouncing hard last week. The 10-year treasury yield rose +1.8 bp to 2.90.

JNK rallied +0.14%, managing to recover some of the recent losses, but JNK remains in a downtrend, at least for now.

CRB rose +0.07%, with 3 of 5 sectors moving higher, led by agriculture (+1.10%). Industrial metals did worst (-1.36%); that’s China again.

So now to add to the Turkey issue, there is an apparent slowdown happening in China. If its not one thing, its another. I don’t think Turkey gets fixed; any rate increase from the Turkish central bank will come too late, since the bankers are not in control – Erdogan is, and for him to stay in power, he can’t possibly shoulder the blame for the follow-on recession that is a necessary consequence of the horribly loose monetary policy he put in place to get himself re-elected.   So instead of taking responsibility, he is going to blame whomever he can. The US, Russia, Europe, Syria. Whomever. Rate policy will stay loose to avoid that recession, and instead his policy will be to arrest people who post any disloyal “lira is falling” tweets, and he’ll try to get his supporters to sell their inflation hedges so he can remain in power. Man. Gotta love sociopathy: shoot any potential messengers, and sacrifice your supporters savings on the altar of remaining in power.

I’m going to close with an interesting, short video from Martin Armstrong.  He said something in this that I haven’t heard before.  He said: “when you buy bonds, your are basically deciding you want to be long the currency.  When you buy assets, you are basically shorting the currency.  That’s your choice.”  This, from the perspective of overseas investors.  A mix of stocks and bonds presumably means you are neutral.

That’s why, during hyperinflation (or Turkey’s leading-to-hyperinflation), you want to be long assets, and short the currency.  Get out of bonds, and buy equities.  Assuming those are your two choices, of course.  Its also the reason why Fed money printing leads to an equity market rally.  Money moves from currency to assets.  It’s not about PE ratios, or value – its just about where to park the money.

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