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Pater Tenebrarum

About the Author Pater Tenebrarum

I'm an independent analyst and have been involved with financial markets for 31 years. I write economic and market analyses for independent research organizations and a European hedge fund consultancy. I'm the main author of the blog 'Acting Man', which presents articles on the markets and the economy, a mixture of commentary on current events as well as economic theory and history from an Austrian school of economics viewpoint.

Buckle Up! Accidents Ahead…


A Moment of Pause

We don’t know whether US stock prices are going up or down. They usually go up and down. But we suspect they are going up and down even more. From Bloomberg:

Equities trading has become more volatile amid signs that the plunging price of crude and a stronger dollar are eroding corporate profits.

The S&P 500 dropped 1.4% Wednesday, bringing its slide this month to 2.8%, the most since January 2014. The Chicago Board Options Exchange Volatility Index jumped 32% in the previous two days, its biggest gain in almost seven weeks.

The Fed is no longer buying bonds to prop up financial assets. It doesn’t have to. The Europeans and Japanese are on the case. Between them, they’re set to pump the equivalent of $1.5 trillion into financial markets in 2015.

Why? Never mind. It’s all nonsense. But it is not without real-world consequences – some foreseeable and others not. And here a moment of pause is appropriate. We take our cap off to Mr. Market and salute him. There must be 100,000 full-time economic and financial analysts in the world. They are all watching, studying and forecasting. But how many saw the price of oil falling below $50?

Almost none. It was just unthinkable. Three years ago, industry analysts proclaimed we would “never see $50 oil again in our lifetimes.” Here at theDiary, we believed them. And here it is: sub-$50 oil.

And here’s another one: Who saw the ECB picking up the Fed’s QE burden? Well, quite a few people, probably… even we saw that part of it. But as you’ll recall, the Fed telegraphed its “taper.” Gradually it would take its monthly buying of bonds to zero. This would remove about $1 trillion in buying power from the bond market.

Many members of the commentariat predicted trouble – including us. How could you take the largest bidder out of a market and not expect prices to fall? Even if the ECB did come in with its big wallet, it wouldn’t replace the mighty Fed. But bond prices did not fall. Or at least they haven’t fallen yet. Those nice Italians, Dutch and Portuguese began a buying program of their own – of €60 billion ($67 billion) a month.

Crude oil: after going down with nary a bounce for 7 months running, it may finally be time for a sizable rebound. Note the MACD buy signal and the RSI/price divergence.

What Else Is Coming?

That alone probably didn’t make so much difference. They are not buying US assets directly. And they just began. But the dollar went up more than anyone expected. European and Japanese currency debasement has seen to that.

So, the European investor looks around and asks himself: Which would I rather have, a French 10-year note with a 0.5% yield… in a currency that is losing value… or a 10-year Treasury note yielding 1.8% in a currency that is gaining ground?

No wonder the bull market in Treasuries is alive and well. And no wonder US assets don’t crash. Who knew? Who warned you? Last October, Chris gave youfive reasons why an end of the bull market in bonds could be a lot further off than most people expected.

But almost no one saw the ECB program, along with the lower price of oil, and the rising dollar exerting such a downdraft on bond yields. It makes us wonder. What else is coming that we don’t see?

As we reported at the time, in early 2014, 100% of economists in a Bloomberg survey were predicting rising yields, and the bearish consensus on bonds in the Barron’s “smart money” poll reached an unprecedented 92%. At the same time, speculators held a record net short position in 10 T-note futures. In other words, there was only one way for bond prices to go: up. Now the market is overbought, as can be seen in this chart of TLT (20 yr.+ T-bond ETF), but remarkably little has actually changed in the market structure, although bearish sentiment has undoubtedly been dented by now.

Unforeseen Events

Obviously, we don’t have an answer to that. If we did, the question wouldn’t make sense. But one thing we can predict with fair reliability – with so much intervention going on… so much new liquidity added to the world’s financial markets… and so many other strange financial phenomena … there are bound to be more unforeseen events coming.

And some of them are bound to be pretty exciting. Maybe in the nearly $1 trillion of sub-prime auto loans? Or in the more than $1 trillion in student loans? Or the $4.6 trillion parked in negatively yielding government bonds (mostly in the euro zone’s “periphery” states)? Or how about a US stock market trading at 27 times Shiller’s CAPE?

It may be impossible to tell where and when… but with so many drunks on the highway, there are sure to be more accidents. Buckle up.