Crossfire: What Happens When Rising Bond Yields Meet Weakening Macroeconomic Data?
Source: Michael Ballanger
January 26, 2022 (Investorideas.com Newswire) Michael Ballanger discusses whether gold and silver (and their equities) will decouple from correlation with the broad stock market.
Tooth for tooth, eye for an eye
Sell your soul just to buy, buy, buy
Beggin' a dollar, stealin' a dime
Come on, can't you see that I
I am stranded
Caught in the crossfire
I am stranded
Caught in the crossfire
(Stevie Ray Vaughan)
The last two missives I have penned were entitled "Crossroads" and "Crosshairs" so I deem it only appropriate to name this one "Crossfire" because up until this week, we did not have the actual financial upheaval that I have been predicting since mid-December actually occurring. We had the GGMA 2022 Forecast Issue telling the world that the fantasy of equities climbing for eternity into the ionosphere of valuation was going to slam directly into the overhead carbonite ceiling created by unmanageable debt levels. One week ago, I told you all that anyone that did not doubt the resolve of the central banking fraternity (cartel) in placing inflation into the sightlines of its weaponry was ignoring the probability that stocks were going to get in the line of fire. This past week, we all saw what happens when investors and speculators get caught in a crossfire of rising bond yields and weakening macroeconomic data - the point where market fantasy meets debt reality - resulting in a bloodbath.
The bullish narrative we have all been spoon-fed since the Fed bailed out the banks back in 2008 has been shattered into microscopic shards of illusory hope.
Being heavily invested in both gold and silver (physical and equities), I am a card-carrying member of "those Boomer chumps" that ignored crypto and cannabis leaving millions of dollars on the table while attempting to launch an advisory service covering a sector that none of my children or grandchildren care about. In fact, I was astounded today when, driving home from the provincially regulated "Liquor Control Board of Ontario," when I heard one of the CNBC anchors read off a list of weekly advancers and they included only one group - precious metals.
Last week I advised subscribers that I was taking profits on my SLV calls that expired today but that I was NOT replacing them with a later-dated series and the reason was that I am DONE! No more losses at the hands of the bullion banks! Then, as if the silver gods were reading my mind, silver began a spectacular advance and posted a weekly advance of just under 5% for the week in which Netflix lost 23.4%. I will not reverse my stance on silver because it is easier for me to trade a market that I know and love and that is the gold market which, while totally dominated by bullion bank criminality, at least allows me some degree of solace in trading beside them, as opposed to against them.
I sent out an Email Alert to subscribers this morning reciting my recollections of the two trading days that preceded the "Crash of 87" and in the following forty-eight hours, I have been inundated with fellow "senile Boomers" offering their vivid recollections of that event. We all remember the Kennedy assassination and the Challenger Disaster and 9/11 but unless one was in the stock market in October '87, there is no other point of commonality in the discussion.
This might be a repeat of the days that preceded that seminal event some thirty-five years ago but I strongly doubt it, largely because we no longer have "free markets" in the sense that government will actually allow markets to battle it out and let unencumbered supply/demand dictate pricing.
The big question remains: Will gold and silver (and the equities) decouple from correlation with the broad stock market? While I suspect not, this time it might actually be a one-off, once-in-a-lifetime "inverse correlation" trade that will actually work. What if all forms of non-fiat become the modicum for "preventive medicine" against the plague of infectious financial panic?
The portfolio I constructed back in 2019 was designed to withstand the possibility of a market meltdown but on the assumption that markets would be normalized by 2020. I wrote about the silliness of the "Powell Pivot" in late 2019 and about the threat of the pandemic emanating from Wuhan in early 2020 and here we are in 2022 and the portfolio has not yet suffered more than a 15% drawdown in that entire period and is now ahead over 350% in three years. Now, it was up over 400% in September before the uranium names decided to crash but copper and gold have held strong throughout this correction with silver now beginning to resurrect.
This evening's missive is going to be brief due to the lateness of the hour and the stress of the week but also because of the intensity of the reversals that have suddenly become front-and-center in the current narrative.
In sounding like the proverbial "broken record" (an ancient phenomenon where the needle on a phonograph kept bouncing back from a flaw in the surface of vinyl disc causing the same part of the recording to play repeatedly), what we saw this week was the result of a confluence of weak technicals, weaker fundamentals, overvaluation, and a hostile central bank. The euphoria created by US$1 trillion in Fed stimulus compounded by US$1.5 trillion in Treasury stimulus has now been exhausted through heavy expenditures in stocks and housing. Like the coyote from the epic "Bugs Bunny and Roadrunner Show" from the 1960s, investors have suddenly found themselves suspended off the edge of the cliff staring down at the canyon floor with nothing to grasp.
A wonderful subscriber that sends me great information offered a Seeking Alpha link that carried the following remark from the youthful author: ""I have been writing for Seeking Alpha for over a decade now, and I have also been running a service for investors for over a decade as well. And, I think I have seen it all." Any time a young person with a ten-year duration of trading experience says that they have "seen it all" is a person soon to be found on the scrapheaps of blogospheric wreckage and irrelevancy. I have been writing a blog (of sorts) since 1985 and I am the first to profess that I have not "seen it all" nor will I ever have say that I have "seen it all" no matter how many market events remain a part of my revisionist memory.
I end this missive with the notion that since nothing in the stock market moves in a straight line, observe the chart shown here of the NASDAQ 100. While it has clearly broken its uptrend line from the March 2020 lows, MACD is now heavily oversold with RSI modestly oversold. This suggests that stocks could see downside follow-through early next week but are ready to mount a relief rally. It will not be "THE" bottom because there has not been enough pain yet inflicted. Furthermore, I am using oil prices as the Fed's inflation barometer and until oil gets back under USD $60/bbl., I see no dovish pivots by Chairman Powell $ Co.
One final story to warm everyone up: On the afternoon of Monday, October 19, 1987, with the Dow in full "crash" mode showing a 22% loss for the day, I received a phone call from a fellow broker friend from Vancouver whose only business was derived from the penny stocks that dominated the old Vancouver Stock Exchange back in the day. He proceeded to point out that the five top traders on the Vancouver Exchange were all "flat-to-up" on the day while the TSE 300 was getting obliterated. Gloating with irritating condescension, he admonished me for putting clients into those "overpriced blue-chips" and suggested that I focus purely on "his little VSE jewels" at which point I hurled an "expletive deleted" at him and slammed the phone down, thoroughly ticked off at such brazen grave-dancing.
Well, four days went by and as I was preoccupied with dealing with clients and their gold miners that decided to crash along with the other TSE names despite a $75 advance in gold bullion prices (another painful lesson falling into the "so right but so wrong" category), I got a call from yet another broker friend who said, "Are you seeing what's going on with the VSE?" I pulled up a list of the same stocks that were "flat-to-up" four days earlier during that very infuriating call and lo-and-behold, they were all down over 85% on massive volume. I learned later that they were carrying floor traders out of the pit on stretchers as mass hysteria ruled the latter part of the week. Sensing an opportunity to return a favor, I rang my broker friend, hoping beyond all hope that he would answer so I could bust his chops in fit of thoroughly immature vengeance but all I got was a "Ah-ga-ga-ga-ga-acck!!!" after which the line went dead. Within a month, he was out of the business and had moved to a cabin in northern B.C.
I do not expect that the junior developers will have the same fate in 2022 because back in 1987, most of the retail speculation was in junior oil and miners while today's markets are dominated by crypto and meme stocks with call option activity on the Big Five that dominate the indices breaking records in December. For most of late 2020 and all of 2021, junior gold and silver names have been treated like delinquent teenagers with Senior and Intermediate Producers treated like toxic waste so there is very little speculative excess in either sector and therefore not a lot of profit to be harvested. Again, this is the primary rationale for being overweight; the stark undervaluation of the gold and silver sector may allow them "safe haven" status as markets go through this corrective process.
Make it so...
Originally published Jan. 21, 2022.
Follow Michael Ballanger on Twitter @MiningJunkie. He is the Editor and Publisher of The GGM Advisory Service and can be contacted at firstname.lastname@example.org for subscription information.
Originally trained during the inflationary 1970s, Michael Ballanger is a graduate of Saint Louis University where he earned a Bachelor of Science in finance and a Bachelor of Art in marketing before completing post-graduate work at the Wharton School of Finance. With more than 30 years of experience as a junior mining and exploration specialist, as well as a solid background in corporate finance, Ballanger's adherence to the concept of "Hard Assets" allows him to focus the practice on selecting opportunities in the global resource sector with emphasis on the precious metals exploration and development sector. Ballanger takes great pleasure in visiting mineral properties around the globe in the never-ending hunt for early-stage opportunities.
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