‘EXIT’ Signals: Fed Ex Is Sending A Signal to “Exit” The Markets, “Twilight Zone” Pattern Is Taking Place, Russell 2000 ’s Relative Momentum Has Peaked Out’, Longtime “Deflationist” Is Now Sounding The Alarm On Inflation… Marc Faber: “Be Prepared To Lose 20 to 30 Percent… I Think You’re Lucky If You Don’t Lose Your Life…”
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Federal Express has been a good leading indicator for the S&P 500 over the past 10 YEARS! Back in 2002, FDX created higher lows and the SPY followed. In 2006/2007 FDX created lower highs and the SPY followed it down.
Now Fed Ex could be sending an “EXIT” signal for the markets/SPY as it hit the top of its rising channel and has been breaking down of late!
Fed Ex has been a good leading indicator at bottoms and tops. Will it be different this time???
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Anyone out there old enough to remember the theme song from “Twilight Zone?” (play theme song here)
Back in 2000, the high for the S&P 500 took place on March 24th (1,553), near the first day of spring, a couple of days after a full moon. Last week was the first day of spring and a full moon took place, with the S&P 500 up against key resistance in the chart above, reaching 1,570 as a high on March 27th.
A further breakdown in Copper doesn’t send a message about the global economy! APRIL FOOLS!
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Russell 2000 broke to all-time highs a few weeks ago. Now this key index’s relative momentum is reaching levels that has caused this index to at least take a pause over the past 7 years.
History indicates that contagions start small. What is worrisome about Cyprus is the complacency that markets are showing, based on the assumption that it is a little, one-off, insignificant event. Here is a little refresher on contagion, and then we will go back to Cyprus.
1. Russian ruble collapse. Remember 1997 and 1998. The sequential problems in worldwide currency-trading exchanges ended with the collapse of the Russian ruble and the demise of the Long Term Capital Management (LTCM) hedge fund. It did not start with the LTCM collapse; that was the final market shock, which triggered a large government intervention. That brought in Alan Greenspan and the US Federal Reserve. The collapse actually started with a single-currency failure in Thailand. Panicked trading in the Thai baht started as what looked like a small, one-off, insignificant event. The contagion from that event took about 18 months to play out.
2. Zimbabwe inflation. The earliest signs of inflation, confiscation of wealth and appropriation of property, and oppression of the populace in Zimbabwe appeared many years before hyperinflation, full destruction of the currency, and suppression of the productive facilities of the country. The collapse was in the incipient stage long before it became evident that the government’s policies were going to accelerate, rather than prevent it. I saw this one coming firsthand.
As chair of the Global Interdependence Center’s central banking series, I recall meeting with representatives of Zimbabwe and its central bank. We discussed the risks they were taking in the early stages of aggressive monetary expansion as an attempted solution to their problems. We warned them about appropriation of wealth. They were emphatic that they were controlling capital and monitoring the inflationary effects of what was then a very early-stage policy. Those of us who sat in that meeting listened to the representatives for an hour and a half and then spent the next hour and a half attempting to persuade them that their policy would lead to the demise of wealth and investment in their country. A few years later, the outcome became apparent to the world.
3. Weimar Republic hyperinflation. When the Weimar Republic attempted to meet international flow requirements under the Treaty of Versailles, it did not immediately cause hyperinflation. The process started with currency expansion and banking manipulation in an attempt to manage foreign-exchange flows. It ended with hyperinflation, the demise of the government, and the rise of Nazism in Europe. Thus, the European contagion did not begin with the fall of the government and rise of Hitler in the 1930s; it started years earlier.
In a marvelous piece of research, economist Madeline Schnapp documented this history in monetary terms. When Germany went to war in 1914, an egg cost 2 pfennigs and a loaf of bread was 10 pfennigs. In 1919, after the war ended and at the birth of Weimar, the egg was 20 pfennigs and the loaf was 1 mark. By April 1922, the egg was 4 marks, by September 9 marks, and by November 22 marks. In February 1923, the egg cost 45 marks, by May it was 800 marks, in July 1923 it cost 20,000 marks, and by August it was ten times that much: 200,000 marks. At the end of 1923 one needed billions of marks to purchase an egg, and a 1 trillion marks to buy a loaf of bread.
4. The US financial crisis of 2007-09. Thinking back on the recent crisis in the US, we saw the first signs of weakness in the financial sector in mid-2007. There were some pricing anomalies in May that were visible but not explained.
Marc Faber: “Be prepared to lose 20 to 30 percent… I think you’re lucky if you don’t lose your life…”
The banking catastrophe in Cyprus could be repeated in the United States and elsewhere, according to Marc Faber, the editor and publisher of the Gloom Boom & Doom Report.
“It can happen anywhere in the world, in Western democracies, because you have more people that vote for a living than people that work for a living,” Faber told CNBC.
Therefore, the wealthy in the United States should “be prepared to lose 20 to 30 percent. I think you’re lucky if you don’t lose your life,” he noted.
“If you look at what happened in Cyprus … people with money, they will lose part of their wealth either through expropriation or higher taxation.”
Despite equity markets reaching all-time highs, Faber is “very cautious” about the U.S. market.
“What concerns me really is that…
Will Fed scale back asset purchases soon? Longtime “deflationist” David Rosenberg is now sounding the alarm on inflation
Over the past four years one of the dominant “deflationists” has been Gluskin Sheff’s David Rosenberg.
And, for the most part, his corresponding thesis — long bonds — has been a correct and lucrative one, if not so much for any inherent deflation in the system but because of the Fed’s actual control of the entire bond curve and Bernanke’s monetization of the primary deflationary signal the 10 and certainly the 30-year bond.
The endless purchases of these two security classes, coupled with periodic flights to safety into the bond complex have validated his call. Until now.
In his latest letter, the Gluskin Sheff strategist appears to be on the verge of a “tectonic shift” in his outlook and appears on the verge of transitioning to an inflationary view. The catalyst?
The same one we have been highlighting for the past year — the central-planning induced breach of one of the most fundamental economic principles in the face of Okun’s law, which traditionally has been the basis for the Fed’s belief that based on current reads of output and GDP, the amount of slack in the system is still a very recessionary 6%, and that with further relentless monetization this output gap may be closed further resulting in a drop in the unemployment rate to the Open-Ended QE’s target of mid-6%.
However, as we also pointed out previously, this does not jive with the recent surge in labor costs and drop in productivity, both of which are indicative of far less slack in the system and a far smaller output gap, than the Fed believes is present.
Naturally, the logical conclusion is that with the Fed injecting $85 billion in deferred inflation into the system and with the output gap substantially less than forecast, the reflationary inflection point is certainly closer than many have feared.
Certainly closer than a great deflationist such as Rosenberg has feared. From his latest letter:
What if the Fed is operating under a false presumption that the CBO’s estimate of the output gap is accurate at 6%? And what if the pace of job creation of the past three months is the new normal and that the average pace of the cycle to date is yesterday’s story?
Well, that would mean…
Today, Nomura’s Lewis Alexander says the same:
Our Q1 GDP estimate is currently tracking 3.3%, with an increase in final sales of 2.0%, and a contribution from inventory accumulation of 1.2 percentage points. Recent economic data, however, have suggested a slowdown in activity as we approach Q2. This lends support to our forecast that there will be a slowdown in growth in Q2 from slower government spending, delayed household adjustment to higher tax burdens, and a smaller increase in inventories. We estimate that US real GDP will grow at an annual rate of 1.4% in Q2, with an increase of 1.2% in final sales.
Alexander posts this chart of the Nomura Economic Surprise Index (which measures economic data against projections) to show that there’s been a slowdown.