MARKET VOICES

 What do you do when worse case is another, even deeper recession and best case is muddle through with some losses? Keep on muddling?

Not long ago, David Kotok firmly believed that the S&P 500 index could climb 50% over the next four years, taking it to 3,000 by 2020. Recently however, the founder of money manager Cumberland Advisors has become less optimistic.

Global markets, Kotok believes, face many headwinds, from rising U.S. interest rates to slowing growth in China to bad debt on European bank balance sheets. The terror attacks in Paris, in his view, could be a glimpse of global instability ahead, and the recent collapse of the high-yield bond market might be an early warning sign. 

For 2016, Kotok sees the best risk/return trade-off in U.S. stocks, particularly the technology, utilities and health-care sectors, and tax-free municipal bonds. He has inched back into the energy sector. Kotok uses exchange-traded funds, rather than individual equities, for their tax-efficiency and diversification. 

Kotok founded his Sarasota, Fla.-based firm in 1973 and manages about $2.4 billion. Thanks to what is known as Camp Kotok, however, he punches above his AUM. Every August the money manager hosts an invitation-only gathering for financial luminaries at a fishing lodge in Maine. Attendees include top economists, former Federal Reserve officials and money managers – it’s been described as a mini Davos with fishing rods instead of skis.

Barrons.com recently caught up with Kotok to discuss his outlook for stocks, Fed policy, oil prices and why he sees the unloved natural gas industry as a bargain. Excerpts from our conversation are below. More:

.barrons.com/articles/top-etf-picks-for-2016-according-to-david-kotok.

OUR VIEW

A recent blurb in the WSJ stated that ECB Chief Mario Dragi in 2012 "effectively stopped the eurozone debt crisis in its tracks; quantitative easing has tamed the bond market such that last year's Greek crisis and messy  politics in Spain and Portugal only had a fleeting effect."

The implied point here is rest easy investors these things have been solved, not just swept under the huge QE rug.

"But like other central banks," the blurb goes on, "it's finding boosting inflation a tricky task." In short, Oh where, oh where has inflation gone? The author then states, after figuring in all the wacky ways they figure inflation, ways fathomed only by magicians and landlords, it was flat for the EU in 2015. And that's the tragedy. No inflation.

The benchmark for inflation is some meaningless 2 percent target that came no doubt from inside the statistical bowels of a government basement. Why, you ask, 2 percent and not 3 or 4 percent? And why are nearly all major central banks hewing to this same one-size-fits all number? Is this part of the globalization meme too? Like Dumas' Three Musketers, all for one and one for all?

 Once this magical number is reached or some close facsimile all will be be wonderful again and the previous charade will continue on its merry way. Greece, Portugal, Spain and all those sickly Italian banks will sudden fall into economic cadence and the refugees of the world rejoice.

But this is an artificially enforced form of price dicovery that will end badly.

That's our view. We hope you know yours.

LOOKING AHEAD

If there's anyone still around who doesn't know 2015 was a terrible year for commodities he's probably a contractor in the troglodyte business.

A business associate of ours is in the scap metal business, much of which he sells overseas. Over the past 12 or so months he's had to cut his business so thin if he could bottle it it would be a top seller on a late night infomercial for weight loss.

You know there's big trouble in paradise when the current downturn is the longest since they started keeping records. But wait. There may be light at the end of that tunnel after all.

Guess what, it’s official: 2015 was a terrible year for commodities. Analysis is starting to flow into inboxes of those involved in the business, and all appear to confirm that 2015 was a crushing year for commodities, with little joy forecast for this year.

The Bloomberg Commodity Index (BCOM), a measure of investor returns in raw materials, tumbled 25% in 2015, a fifth straight annual loss and the longest slide since the data began in 1991.

Cotton was the only gainer out of 22 individual commodity indices for the year. Crude oil was the worst performer, tumbling 45% on a supply glut.

Copper, aluminum, zinc, and nickel capped annual losses, with nickel dropping 43%, the worst performer in the Bloomberg Industrial Metals Index (BCOMIN).

Citi strategist David Wilson said that a “significant proportion” of refined nickel drawn into China throughout 2015 could have been used to meet growing financing demand for nickel, rather than real end-use demand.

In the year to November, China imported around 258,000 mt of refined nickel and 626,000 mt (gross tonnes) of ferronickel, volumes being up 108% and 146% on the year, respectively, “levels not consistent with the negative stainless melt rate growth trends seen within China last year.” Nickel is a key alloy in stainless steel.

The first day of trading in 2016 saw nickel prices fall by around $300/mt, continuing the price downtrend seen through Q4 2015. The three-months nickel price closed the London Metal Exchange kerb session Monday at $8,505/mt. The metal started 2015 around $15,500/mt. More:

blogs.platts.com/2016/01/06/all-eyes-on-2017-metals

OVERNIGHT

 As one market watcher recently put China's current dilemma, China has only one way out: depreciate the yuan. That's becoming a big trade in the eyes of many as we enter 2016.

Asian stocks were down again overnight, Reuters reports, as "Beijing continued guiding the yuan lower and a survey pointed to weakness in the Chinese service sector, while the Japanese yen drew  support from risk aversion." The one exception was China's Shanghai Composite Index, up 0.3% where shares rallied for the first time in a week.  Hong Kong’s Hang Seng Index and Australian shares closed down as did Japan.

North Korea's announcement that they had successfully tested a hydrogen bomb at an underground testing site and was quoted as saying it had "elevated the country's nuclear power to the next level" hardly soothed investor nerves as the sell off of the won and the KOSPI both dropped around 0.6 percent.

In the currencies markets it appeared money was moving to the yen and the dollar owing to China's weakness. Though the dollar was down overnight there 0.4 percent, China's weakness may lend strength to the dollar unless or until the U. S. stock market, as many think, tanks in a move long over due in their eyes. China's weakness helped move the dollar higher against the euro while pushing it lower against the yen.

Soft stock prices and falling U.S. bond yields can push the yen higher. The euro  fell to its lowest level against the dollar in a month. Meanwhile, gold closed down 0.3%.

The WSJ noted: China’s central bank fixed the yuan at a fresh five-year low against the U.S. dollar, at 6.5314 compared with 6.5169 Tuesday. The onshore yuan, which can trade 2% above or below the fix, last traded at 6.5339 against the dollar, slightly weaker than 6.5157 on Tuesday but stronger than Monday.

The offshore yuan, which trades freely, reached 6.6639 to one U.S. dollar, its weakest level since 2011, compared with 6.6430 Tuesday.

TELL IT LIKE IT IS

Tell it like it is, something we rarely get from government bureaucrats. Make what you want of it. But there has been many others, non-bureaucrats, saying this for some time. Now we will all have to wait and see. This was posted on globaleconomicanalysis.blogspot.com.

In that regard, former Dallas Fed governor Robert Fisher admits "We frontloaded a tremendous market rally to create a wealth effect ... The Federal Reserve is a giant weapon that has no ammunition left."


The embedded video will not play in-line, but you can view it on You-Tube by clicking a second time on the notice.

Partial Transcript

Fisher: What the Fed did, and I was part of that group, we frontloaded  a tremendous market rally starting in march of 2009. It was sort of a reverse Wimpy factor. Give me two hamburgers today for one tomorrow. We had a tremendous rally and I think there's a great digestive period that's likely to take place now. And it may continue. Once again, we frontloaded, at the federal reserve, an enormous rally in order to accomplish a wealth effect. I would not blame this [the 2016 selloff] on China. We are always looking for excuses. China is going through a transition that will take a while to correct itself. But what's news there? There's no news there.

Squawk Box: I guess the question Richard is: How ugly will it get? If you do see this big unwind of Fed Policy which fueled a 6 and one-half year bull market, what does it look like on the way down?

Fisher: Well, I was warning my colleagues, don't go [inaudible] if we have a 10-20% correction at some point. ... These markets are heavily priced. They are trading at 19 and a half time earnings without having top line growth you would like to have. We are late in the cycle. These are richly priced. They are not cheap. .... I could see a significant downside. I could also see a flat market for quite some time, digesting that enormous return the Fed engineered for six years.

Squawk Box: Richard, this digestive period, does it usher in an era where assets can't perform in the absence of accommodation?

Fisher: Well, first of all, I don't think there can be much more accommodation. The Federal Reserve is a giant weapon that has no ammunition left. What I do worry about is: It was the Fed, the Fed, the Fed, the Fed for half of my tenure there, which is a decade. Everybody was looking for the Fed to float all boats. In my opinion, they got lazy. Now we go back to fundamental analysis, the kind of work that used to be done, analyzing whether or not a company truly on its own, going to grow its bottom line and be priced accordingly, not expect the Fed tide to lift all boats. When the tide recedes we're going to see who's wearing a bathing suit and who's not. We are beginning to see that. You saw that in junk last year. You also saw it even in the midcaps, and the S&P stripped of its dividends. The only asset that really returned anything last year, again if you take away dividends, believe it or not, was cash at 0.1%. That's a very unusual circumstance.

Squawk Box: Richard. This has been an absolutely extraordinary interview. For you to come on here and say "I was one of the central bankers who engineered the frontloading of the banks, we did it to create a wealth effect" and then you go on and tell us, with a big smile on your face that we are overpriced, which is the word that you used, and there would be some digestive problems,  are you going to take the rap is there is a serious correction in this market? Will you equally come on and say "I'm really sorry we overinflated the market", which is a logical conclusion from what you've said so far in this interview.

Fisher: First of all I wouldn't say that. I voted against QE3. But there's a reason for doing this. Let's be fair to the central banks. We had a horrible crisis. We had to pull it out. All of us unanimously supported that initial move under Ben Bernanke. But in my opinion we went  one step too far, which is QE3. By March 2009 we had already bought a trillion dollars of securities and the market turned that week. To me, personally, as a member of the FOMC, that was sufficient. We had launched a rocket.  And yet we piled on with QE3, but the majority understandably worried we might slide backwards. I think you have to be careful here and frank about what drove the markets. Look at all the interviews over the last many years since we started the QE program. It was the Fed, the Fed, the Fed, the European central bank, the Japanese central bank, and what are the Chinese doing?  All quantitative easing driven by central bank activity. That's not the way markets should be working.  They should be working on their own animal spirits, but they were juiced up by the central banks, including the federal reserve,  even as some of us would not support QE3.
Mish Comments

Finally, but too late, we have a frank admission by a Fed governor explicitly stating some things that needed to be said.

• The markets are seriously overvalued 
• The Fed purposely sponsored bubbles, specifically for the wealth effect

So here we are, back with another enormous bubble,  on purpose, with the economy clearly weakening again.

The wealth effect primarily benefited the already wealthy, at the expense of everyone else. In the process, corporations are more debt-leveraged than ever before, and houses are not affordable for those most in need of buying them.

The process was entirely counterproductive, especially from QE3 on.

Mike "Mish" Shedlock

A BULLISH CASE

Too much oil siting around waiting to make its way to the market has been a major problem since the decline in energy prices caught most investors off guard. That's a supply problem. So when is demand going to pick up and cause a change in things?

No one knows for sure, but here is one opinion. It's a mystery, a conundrum nearly as opaque as the black gold itself. To paraphrase Sir Aurthur Conan Doyle's famous fictional crime solver, Sherlock Holmes, and something he might say: "A bullish case, my dear Watson. A bullish case!"

The plummeting prices of oil and gas roiled markets and affected businesses, investors and drivers in 2015. Whether prices rebound or not is bound to have a similar impact this year.
 
Prices shot up briefly on Monday as investors worried about a potential supply disruption as a result of heightened tensions between oil producers Saudi Arabia and Iran, but weak economic data from China erased the gains.

So which direction will prices go from here? Will concerns about demand from China and other weakened economies combine with an ongoing supply glut to further drive down crude futures?

Phil Flynn, senior energy analyst at The PRICE Futures Group, lays out a bullish case — and it doesn’t just rest on crisis in the Middle East.

His argument that prices will rise after two down years starts with reasons that the global oil glut might be curtailed. For one thing, producers are pulling back in response to lower prices. “The Wall Street Journal is reporting that Tudor, Pickering & Holt, an energy-focused investment bank, has tallied 150 projects that have been delayed, resulting in an estimated 13 million barrels a day of oil production deferred indefinitely,” Flynn wrote to clients on Thursday, noting that the crude that isn’t flowing represents 15 percent of total global output.  

“Capital spending cuts as well as the normal rate of production decline is hitting the market,” the analyst says. And the added supply expected from Iran might not materialize, he adds. The U.S. is now considering imposing more sanctions on Iran, which could spell trouble for the return of Iran’s oil to the market — though tensions with Saudi Arabia could also mean that the two countries won’t work in concert to limit production. 

Flynn argues that, when Iran does eventually re-enter the market, there will be questions as to how much oil it can produce consistently given a lack of investment in its oil fields. On top of that, he doesn’t believe that Saudi Arabia is going to produce much more oil next year than it has this year. “They say they’ll add more, but how much more can they? How much more could they add?” Flynn says. 

Also, production from other OPEC countries might fall. Producers in Venezuela, Mexico, Algeria and Nigeria are postponing projects that are necessary to reverse the natural depletion of oil fields and even though production is improving in Libya, Flynn questions how sustainable it is due to the volatile political situation there.

On the other side of the supply/demand equation, the consumption of gasoline in the U.S. is rising sharply. Demand for gas grew at the highest rate in 30 years, Flynn says, while global demand growth was the strongest in over a decade.

“We’ve priced in weaker demand than we think [exists],” Flynn says.

Flynn predicts that next year will see an even greater jump in demand and it’ll become the driving force that pushes gas prices up from their current average of $2 a gallon to around $2.25 by April. 

Flynn likens the current situation to the last time oil had back-to-back losing years, which was in 1997 and 1998, when prices fell over 30 percent. The following year saw a colossal rebound as oil prices more than doubled. “History could repeat itself,” Flynn says, as “crude oil is getting ready to party like its 1999.”

 businessinsider.com/oil-prices-are-going-to-rebound-in-2016-2016

OVERNIGHT

From the looks of it overnight those circuit breakers broke down themselves as The Shanghai Composite Index dropped again even after official injected some monetary Valium into the markets on Monday to settled frayed investor nerves.

After falling nearly 7% on Monday, its worst start on record, the benchmark bounced up and down like a yo-yo between 1% and 3.2%, according to the WSJ. Reuters reported that officials were "reviewing whether to regulate share sales by major shareholders and executives of listed companies, hinting that it may restrict the proportion of shares they can sell during a given period of time."

Earlier in the day the PBOC poured 130 billion yuan in short-term funds into the system and also intervened in the foreign the exchange market to put a net under the weakening yuan, sources said.

In other markets, Australia, Hong Kong and Japan were all down.

 From down under, Business Insider Australia, we get this:

After rattling financial markets for large swathes of last year, it didn’t take China’s economy long to resume that role in 2016. In just one session – less if you count China’s stock market having to close early to prevent even greater losses – the second largest economy in the world wrought havoc, rattling markets around the world. It was certainly not the start to the trading year that many had expected.While the volatility in Chinese markets has ebbed today, not everyone believes the relative calm in China will last. 

According to David Cui, Tracy Tian and Katherine Tai, China equity strategists at Bank of America-Merrill Lynch, financial system instability in China is likely to be the rule, rather than the exception, in the year ahead. 
The crux behind their call is China’s ballooning private sector debt. Here’s BAML:

China’s private debt to GDP ratio rose by 75 percentage points between 2009 and 2014, by far the highest among the 40 economies with data (together with HK). At the peak speed, over the 4 years from 2009 to 2012, the ratio in China rose by 49 percentage points. Historically, any country that grew debt this fast inevitably ran into financial system problems, including currency devaluation, banking recap, and high inflation, and we do not expect China to be an exception. We believe that the government had maintained system stability over the past few years by allowing various implicit guarantees to get firmly entrenched, which has made the financial system fragile. This is a classic case of short term stability breeding long term instability, in our view.

This chart from BAML shows the growth in private sector debt in the five years between 2009 to 2014, expressed as a percentage of GDP. Clearly there were two standout performers who racked up debt at a breakneck pace over the selected time period.


Cui, Tian and Tai believe investors have become complacent about the potential for increased instability, and have been lulled into a false sense of security as a result of various short-term solutions introduced by the government to stymie volatility.

Avoiding a sharp slowdown in GDP growth by running pro-growth macro policies. Allowing the renminbi to gradually appreciate against the US dollar, at least until recently. Continued support for the nation’s stock and property markets. Avoiding a major debt default, shielding those who were unable or unwilling to effectively price risk appropriately to escape with their capital intact. More:

businessinsider.com/why-one-bank-thinks-chinas-markets-could-unravel-2016 

THE UNWANTED COMPETITION

A post we came across earlier today talked about gold being one of the few things that went up after the near global market slaughter Monday before the Chinese government pumped some liquidity into the system.

We posted our own gold bit before the government intervened, financialspuds.blogspot.com Magic Is As Magic Does, to present a somewhat different picture from all the MSM memes making the rounds going into 2016. One thing you know for sure Congress and the Federal Reserve never take responsibility for any of their mishaps.

During the subprime frenzy many in Congress insisted every American should own a home. At the time they didn't seem to care how or why. And we don't know how that sat with the country's landlords, but when that bubble burst, we heard the usual refrain from these people: "Don't look at us." Now if you look at the rise of rents since the subprime disaster a cynic might say those landlord's must of dumped a lot of money in those politicians pockets.

Former Fed Chairman Greenspan helped create the TMT bubble, his successor, Bernanke, the subprime mess and of late Yellen's Fed the fracking bubble and what many believe a bubble yet to go snap, crackle and pop, the bond market.

So what does all this have to with gold. Well, first off you have to sully gold's attractiveness to compete with these other entities. One of the raps against gold, a lot like savings and checking accounts these past several years, to mention just a few, is it pays no interest.

Gold also competes with fiat money. You remember it, the stuff that gets printed out of thin air. So here's a recent interview about the yellow metal you might find interesting. Note that the gentleman being interviewed is mining guy. Just try to suspend your judgement, not much different from an equity's guy talking equities.

TGR: Now that the Federal Reserve has increased the key interest rate slightly, the expectation is that the value of the dollar will increase relative to other currencies. How could that be the sign of a bottom for gold?

RR: I cut my teeth in the gold business in the 1970s when the prime interest rate in the U.S. increased from 4% to 15%, and the gold price went from $35/ounce ($35/oz) to $850/oz. I also remember that the gold price increased in 2002 in a climate of increasing U.S. interest rates.

The question is more about the reason that interest rates get raised than it is about the simple fact that interest rates go up. If interest rates go up because there is an anticipation of the deterioration in the price of the dollar and, as a consequence, savers deserve more compensation for lending credit, that sort of ethos is supportive to the gold price. If, by contrast, Janet Yellen can make not just the first 25 basis point interest rate rise succeed but subsequent interest rates rise, too, in other words if she can get a positive real interest rate on the U.S. 10-year treasury that exceeds the depreciation in the purchasing power of the currency, then I think we'll see renewed dollar strength. I don't believe she's going to be able to do that, but the market will determine that.

TGR: Back in the 1970s, the international currency situation was different. Today, the euro and the yuan are part of a currency basket competing with the dollar. If gold is priced in U.S. dollars but now we have competitive currencies, is the logic used in the 1970s relevant anymore?

RR: Although we are in a multicurrency world, the dollar hegemony relative to other currencies has stayed intact. If you owned gold in almost any currency in the world in the last 18 months, gold performed its role as a store of value relative to the depreciation in currencies. It was only the strength of the U.S. dollar relative to all other media of exchange, including gold, that caused gold to perform poorly in U.S. dollar terms. To the extent that the U.S. dollar hegemony in world trade begins to be compromised in favor of other currencies, that weakening would be beneficial to the gold price.

You see, any time the denominator declines, the numerator becomes less important. That means if the dollar buys less of everything, it buys less gold, ergo, the gold price goes up at least nominally. Probably more importantly, however, the response that we've seen in the last 10 years to financial uncertainty has been an attraction for international investors into U.S. Treasuries as a store of value. If the purchasing power obtained from the real interest rate on U.S. Treasuries comes to be seen globally as negative, the attractiveness of U.S. Treasuries generally, relative to gold, will decline.

What traditionally has happened in periods of uncertainty is that investors have chosen to store some portion of their wealth in gold. The U.S. Treasuries have replaced gold to some degree over the last 10 or 15 years. My suspicion is that gold will regain some of the market share it has lost to the U.S. Treasuries as a consequence of a reduction in confidence in the U.S. dollar and U.S. Treasuries. At current interest rates, with the ongoing deterioration in the purchasing power of the dollar, U.S. Treasuries are a very flawed instrument despite their popularity.

TGR: Why are they popular?

RR: I think they are popular because people have an intrinsic sense that losing 1 or 2% a year in purchasing power beats losing 30% a year in the equities markets. People are genuinely afraid of the direction in the economy. They're afraid of a replay of 2008.

Super investor George Soros once said that you make large amounts of money by finding a popularly held public precept that's wrong and betting against it. I just last night watched the movieThe Big Short, and I was reminded that it's not uncommon to have the financial services industry, the government and the populace believe something to be true that is categorically false. I'm not suggesting that the U.S. 10-year Treasuries are as stupidly overpriced as the U.S. housing market and mortgage-related securities were in the last part of the last decade, but I do suspect that we are in a bond bubble, in particular a sovereign bond bubble. I suspect that a 30-year bull market in bonds is fairly close to being over. Raising rates is very difficult for the principal value of bonds. I think we're closer to the end of the bond bull market than we are to the beginning and that's very good for gold.

TGR: In terms of resources, are there some widely held popular beliefs that you believe are not true?

RR: I do. Sadly, as an American, I think the hegemony of the U.S. economy relative to the rest of the world economy is a widely held precept that's untrue. Remember in 2011, the pro-gold narrative revolved around on-balance sheet liabilities of the U.S. government—just the federal government, not the state and local governments—of $16 trillion ($16T). That was considered unserviceable in an economy that generated new private savings of $500 billion a year. If $16T was unserviceable in 2011, how can $19T be serviceable today? Was $55T in off-balance sheet liabilities—Medicare, Medicaid and Social Security—in 2011 less serviceable than $90T in off-balance sheet liabilities today? More:

http://mining.com/web/veteran-investor-rick-rule-reveals-a-unique-arbitrage-opportunity


.

IT IS SO

We spend a lot of time over the years discussing market myths. We have an upcoming post about it, More of the Same.

These myths are much like the half-truths one learns in academia.You don't find out they're half-truths until you spend some time in the real world. Like a friend use to say: The only time most of these academics spend anytime in the real world is driving to their jobs a few times a week. Isn't that the working definition of academics, teach a few classes a few days a week?

Here's another example of market myths, the belief that there is one foolproof, alway-correct indicator. Like the Chicago Black Sox and the World Series a lot of people like to tell you it ain't so. Foolproof single indicators exist.

Here's read on the subject for you. http://globaleconomicanalysis.blogspot.com/2016/01/flattening-of-yield-curve-in-pictures. As we always say, read it, digest it and decode for your lonely self.

Curve watchers Anonymous has an eye on the yield curve. Here is a snapshot of year-end-closing values from 1998-12-31 through 2015-12-31.

Yield Curve Year End Closing Values 1998-2015 

Unlike 1999-2000 and again 2007-2007, no portions of the yield curve are inverted today (shorter-term rates higher than longer-term rates).

Inversion is the traditional harbinger of recessions, but with the low end of the curve still very close to zero despite the first Fed hike, inversions are unlikely.

Yield Curve Differentials: 3-Month to Longer Durations



Yield Curve Differentials: 1-year to Longer Durations



Yield Curve Differentials: 2-year to Longer Durations


In general, albeit with some volatility, the yield curve has been flattening and spreads shrinking since 2013.

If the economy was truly strengthening, one would expect the yield curve to steepen, with rates rising faster at the long end of the curve rather than the short end of the curve. But that's certainly not happening.

Is an Inversion Necessary to Signal a Recession? 

Many believe no recession is on the horizon because the yield curve is not inverted.

Peter Tenbebrarum at the Acting Man blog dispels that myth in A Dangerous Misconception.

One popular theme gets reprinted in variations over and over again. Here is a recent example from Business Insider, which breathlessly informs us of the infallibility of the yield curve as a forecasting tool: “This Market Measure Has A Perfect Track Record For Predicting US Recessions” the headline informs us – and we dimly remember having seen variants of this article on the same site at least three times by now:

There are very few market indicators that can predict recessions without sending out false positives. The yield curve is one of them. At a breakfast earlier today, LPL Financial's Jeffrey Kleintop noted that the yield curve inverted just prior to every U.S. recession in the past 50 years. "That is seven out of seven times — a perfect forecasting track record," he reiterated.

This is it! The holy grail of forecasting, Jeffrey Kleintop has discovered it. You'll never have to worry about actual earnings reports, a massive bubble in junk debt, the sluggishness of the economy, new record levels in sentiment measures and margin debt, record low mutual fund cash reserves, the pace of money supply growth, or anything else again. Just watch the yield curve!

When Perfect Indicators Fail

The so-called “perfect track record” Mr. Kleintop emphasizes is pretty much worthless once the central bank enforces ZIRP on the short end and has already begun implementing massive debt monetization programs. Here is a chart showing the relationship between 3-month and 10 year Japanese interest rates since 1989, with all six recessions since then indicated:



Over the past 25 years, the “perfect forecasting record” has worked exactly 1 out of 6 times in Japan – and that was in 1989.

There is no “holy grail” indicator that can be used to make perfect economic and market forecasts. It is true that if there is a yield curve inversion, it definitely indicates trouble is on the horizon. Alas, we don't remember hearing many real time warnings (in fact, we don't remember any) from Wall Street analysts when such inversions actually occurred in the past (such as e.g. in 1999/2000 and 2006/2007), which makes this new preoccupation especially funny. Obviously, the only time to pay attention to this indicator is when it suggests that a bubble can keep growing!

There is only one thing that is certain: things will continually change. There is no indicator that is fool-proof.

I captured the charts at the beginning of this post on December 31. With the 2016 opening equity carnage today, the curve will be flatter at the end of the day.

The yield curve does not believe the economy is strengthening, and neither do I.

Mike "Mish" Shedlock

MAGIC IS AS MAGIC DOES

Is it zero or three or six or just what?

That's the guessing game investors started 2016 playing with the Janet Yellen-led Fed about interest rate hikes going into the new year. Given the sudden China invoked carnage, investors will be nervous to see if it's more than just the blip that sent markets suddenly south last spring. Correlation, like karma, can be a beach.

You can also bet it will keep the worry-laden Fed members watchful and start the rumors about another recession floating around for a while. You can expect a lot of those we-told-you-so articles one usually sees in retrospect. You will also most likely see a raft of upgrade-to-quality-now pieces.

Gold finished 2016 down for the third consecutive year. Like the Donald, gold has it's enemies, those who love the status quo. Gold is a store of value. Forget that and you forget a fundamental tenet of  history and Investing 101.

Gold is not about getting rich, albeit it could be. It's about survival, preserving some facsimile of what you already have. It might even prove a  decent chest protector against chaos. And like the Donald, gold appreciating strikes fear in the entrenched. Change is the bet noir of many, but the entrenched despise it most. A news item over night in California noted Sacramento expects to take in roughly $3.2 billion more this year over last, so they will now ramp up previously cut welfare programs.

If that doesn't restore your faith that politicians always do the wrong thing at just the correct time, you're probably getting your wacky tobacco from a state sponsored store, too. Maybe even that is where some of the windfall revenue is coming from. Wacky tobacco proves something we've been saying for years and politicans have been exploiting since the beginning of humans, if it moves tax it.

The pot market has been pretty hot by our calculations for a long time. There's a not so subtle correlation many miss: If it's legal it's taxed. Some might call that a paradox. We don't know what you call it. But it sounds like a fine formula for wasting more money.

Magic is as magic does. And central banks around the globe chasing some phantasmagoria labeled 2% inflation should set you searching your medicine cabinet for the diazapines. And while you're at it, think anout picking up a little gold.

Just make sure you store it some place other than the medicine cabinet.