June 19, 2020
Courtesy of Zerohedge.com
The Fed has now tapered liquidity injections to $80 billion per month in U.S. treasury bonds compared to rapidly rising government deficits and debt and the massive increase in the supply of bonds as a result. This is a significant drop in liquidity from the run-rate since March and clearly insufficient to cover the amount of bond issuance going forward. Simply put, the supply of treasury bonds relative to demand is falling unless other actors step up, such as foreign central banks who have been net sellers recently. Consequently, there is a growing risk of higher yields ahead.
The impact on stocks has been obvious. They peaked the day after the Fed’s announcement and have been weaker ever since. The announcement that they would be increasing the purchases of Corporate Bonds has caused a brief bounce, but stocks remain below their recent highs. The risk-reward has turned to the downside, in my opinion, until Fed turns on the hose of liquidity full blast again. I believe they will. It’s only a question of how low they allow stocks to go or how high bond yields. Then up we go to new all-time-highs.
This is just further proof that the stock market cannot survive without ever-increasing liquidity and that the Fed is the primary driver of stock prices. Just look at the economy, corporate sales, earnings, and PE ratios. PE ratios are at record levels. All that matters is the Fed.
I expect the decline in stocks to last until September or October before turning up again ahead of the November elections and taking off thereafter. The trigger will be the Fed breaking the liquidity dam, making the past three months look like a drop in the bucket, imho.
There are two scenarios that I am tracking:
- Risk of a negatively divergent higher high, then down to 2600-2700; OR
- Peak is in place already and this is just a wave B bounce before lower to 2600-2700.
Either way, the risk is lower, signaled by the Fed tapering its liquidity at a time when multiple authorities are warning of a wave 2 of coronavirus and renewed lockdowns.
Why is this relevant to precious metals and miners?
We’re very much a two-way market now. The scenarios above for stocks are the same for the precious metals and miners: a higher high then down or straight down. The Fed’s liquidity taper increases the risk of a 2008-like spike in real yields in the next few weeks and months. But should this play out, it will be the last buy-the-dip opportunity ahead of the Fed trigger, when they flood the markets with obscene amounts of dollars printed out of thin air, imho. This will include capping bond yields on the upside, creating the asymmetric risk to the downside in real yields and upside in metals and miners.
Short-term, Gold is "still" stuck in its wedge. A break upwards signals a higher high before lower, whereas a break down says we’ve already peaked and are heading lower. The support zone on the downside is 1666-1680.
Silver has held the key support level at 17, also the 200-day moving average, and will make a decision one way or the other imminently. The same scenarios apply to Silver, either a higher high then down or straight down, imho. The clear level of support is now 17.
However, the weekly chart above reinforces my expectation for lower prices ahead, imho. Momentum has clearly left the building, thanks to lower highs in the RSI. My preference is for the MACD Line to correct back down to its signal (in red), setting us up for a massive rally to follow.
GDX has continued to hold critical support at ~31.20 and, like Silver, could go either way in the short-term with the risk of a bigger drop to follow. A break of 31.20 would be the catalyst for such a drop. Until then, a higher high first is clearly possible.
As forecast in advance, SILJ ran into a brick wall at 12.67, and we now have a bona fide double top in place. The bigger picture weekly chart has the same profile as Silver, and therefore I have the same preference for the MACD Line to drop to its signal before the next rally takes hold, which should be truly spectacular.
Short-term, momentum has turned to the downside with a possible head and shoulders pattern on the chart. Support and resistance are clearly defined at 12.67 and 10.20-30 respectively. There is a perfect set-up for a negatively divergent higher high here, but a break of support signals we’re going straight down, with support at 9, 8.45, and 6.50 below.
If we do head lower, all of this is just another long squeeze, imho, aided by potentially higher real yields before metals and miners truly explode higher thereafter. We just have to wait for the bottom, with the Fed being the likely trigger and then up, up we go.
Real yields, like nominal bond yields, have been going sideways since April. Look for a break one way or the other soon, imho. Risk is to the upside in the ST, but look out below thereafter once the Fed wakes up again and formally caps yields up on the upside, imho.
Beyond the next few weeks and months, I’m only looking up, given the hyperstagflation I see beginning towards the end of the year. Think the 1970s on steroids when Gold rose 24x and Silver 36x in just six years. Everyone should own some physical precious metals, imho. They are the new TINA.
What I mean by hyperstagflation is the combination of an economy sliding into Depression at the same time that we’re seeing hyperinflation in the goods and services that most people rely upon, such as food and energy.
All of this is due to the government’s fiscal policies (spend, spend, spend) and the Fed’s printing presses operating on steroids.
This is my key theme once this final deflationary drop in stocks plays out, aided by renewed lockdowns globally. Beijing is already implementing lockdowns again for wave 2 of the coronavirus.
The economy is already in recession and is heading into the Greatest Depression following the ‘Everything’ Bubble, imho. Hence the “stag” in hyperstagflation.
Then when the Fed turns on the spigots full blast again, hyperstagflation begins as inflation starts to take hold. This is my primary expectation given a number of factors:
- Truly massive amounts of dollar printing that boggles the mind; the Fed buying literally everything.
- More and more stimulus going to the 99% to get spending going again, i.e., currency going into circulation. UBI, or Universal Basic Income, to be expanded dramatically, especially with the elections coming in November.
- Dollar to fall, imho. Import prices head north.
- Trade war escalates further, with either more tariffs or the U.S. cuts off China altogether. U.S. consumers lose cheap Chinese products and have to replace them with more expensive alternatives. Inflation rises.
- Supply chain shocks to goods and services become permanent and more pervasive.
- Wave of bankruptcies sees small and medium sized businesses close for good as the next lockdown is rolled out = Less supply.
- Loss of Chinese goods = Less supply.
- China controls a substantial amount of businesses in the U.S. and can force them to close in retaliation, e.g., meat processing plants = Less supply.
- Wave 2 of COVID 19 used as justification for widespread closure of factories from meat plants to Tesla factories and beyond = Less supply. A recent headline just reinforces this point:
“COVID Spreads To 60 Plants, Sparks Fear Of US Food Shortages As 2nd Wave Strikes”
This is all while dollars are being printed into oblivion and more of it going to consumers. The result is that the supply of goods and services falls faster than demand, which means inflation and likely hyperinflation given the amount of dollar printing while the economy continues to deteriorate.
I expect hyperstagflation to begin in earnest once the Fed floors the gas pedal of liquidity again and stocks bottom and head higher, i.e., towards the end of this year.
In conclusion, even if we get higher highs in stocks, precious metals, and miners, there is an increasing risk of further downside in the next few months. However, I consider this the final great buying opportunity for the rallies to follow once the Fed presses down on the gas pedal of liquidity again ahead of the elections in November. Given the enormity of the amounts likely to be printed, the rallies that follow are likely to be spectacular, especially in the precious metals and miners.