Monday, January 2, 2012

The CRX Beginning to Rumble: Suggests Deflationary Forces Building

In this article we're going to revisit the topic of the S&P 500 as it would appear relative to a basket of commodities stocks (the CRX).  Last May I presented the first article on this study, which I'm happy to report garnered a rather surprising degree of interest.  After the passage of 7 months, it's definitely time to take another look at the charts since a whole lot has developed, and pretty much as suspected.

First, let me brush the dust of the old thesis and summarize what the theory is here.  But before we go any further, even though I am quite aware that lengthy articles are generally speaking darned near a nuisance, I find that I just cannot get this study much shorter and still provide the explanations that I think are necessary.  For those of you who might be annoyed by a relatively long article, I can simply extend my apologies and offer this happy alternative.  For those who elect to continue with a relatively lengthy but revealing study, we carry on...

Most readers have probably seen studies where the analyst takes a look at the equities markets as they would appear priced in gold, oil, or any one of several other meaningful relaters, such as a different commodity, foreign currency or domestic bond, or perhaps an index such as the VIX.  The resulting charts can often be a real eye opener, revealing some rather interesting if not downright frightening realities.  Unfortunately, in many cases no sooner is that article released than the debunkers parade forth declaring something akin to "Yeah but it means nothing.  Gold is irrelevant.  It has no intrinsic value.  Goldbugs are a bunch of fools."  It's a big mistake to totally discount those types of studies and to make such outrageous claims, but to a degree the protesters have a point.  In the case of using gold as the benchmark for example, the debunkers are flat out correct.  The reason being that the price of gold has been manipulated and suppressed for so long by the central planners who dare not allow it to rise as it should, out of fear that the unwashed masses might notice the astonishing effect inflation has had on their lives.  That type of price manipulation by the dark overseers is insidious, far reaching, and ongoing.  Not to mention that it can really mess up an otherwise valuable and revealing study.  And let there be no debate, spin and price manipulation will surely continue unabated until the regulators themselves are given a friendly demonstration on how a guillotine works.  Until that day arrives though, we're going to have to find other methods of getting at the truth.


So pricing equities in gold is not going to reveal the facts with the honesty and accuracy we're demanding.  How about this one?  Gold priced in oil.  Well, oil too is a manipulated market but at least it would provide a more realistic representation of the health of the entire global economy than gold does.  So shortly after the $CRX article was published, I investigated the relationship between oil and equities and published the results in an article entitled "Oil Confirms the S&P 500 Lost Decade".  And as suspected, that study too betrayed the fact that although decades of money creation had indeed driven the price of just about everything higher, including equities AND commodities, a major dichotomy began in 1999.  From that year forward the equities markets began to languish, to fall behind as the
commodities markets became the focus of investment.  In oil's case, over the next dozen years West Texas had risen an astonishing 8 times as much as the price of equities.  To be more precise, between the year 1999 and May 2011, the price of oil had risen 787% as much as the value of the S&P 500 had (in percentage terms).  To borrow one of my own sentences from a precious article, "No folks, when the equities markets are soaring, you are not getting your money's worth."  But remember, inflation doesn't exist.  By the way, does anybody have any idea why food and energy are not included in the CPI data?  I do.

So now we come to the crux of this study.  Since it isn't even debatable that something major occurred in 1999 that caused prior decades worth of money and credit creation to begin to flow into commodities, would there be a way to detect whether or not that phenomenon has affected equities, by looking within the S&P 500 itself?  The answer fortunately is yes!  By isolating a basket of commodities only related stocks and pricing that basket in terms of the entire S&P 500, a remarkable relationship is revealed.  By creating a ratio between the two ($CRX:$SPX), an incredible long-term uptrend immediately becomes apparent, a trend line that has been not only rising but accelerating for over a dozen years.  Of course this same type of rising trend line is also apparent when we price oil, gold or copper in terms of the equities markets, just as we've done here.  But the $CRX is the only one of these vehicles that participates directly inside the NYSE itself.  Since it is a basket of stocks, it's pretty difficult to get a comparison that's any more direct.

This particular ratio provides not only an astonishing picture of the face of inflation in commodities since 1999, but a method by which we are able to measure whether or not those inflationary forces might enter into a secular change of direction... as measured from within the stock market itself.  In other words, the ratio should be able to detect a deflationary event in the equities markets with a degree of magnification.  And as can clearly be seen, the effect of the crash in prices in the summer of 2008 was immediately reflected in the ratio... in such glaring fashion that its usefulness as a measure of the battle between the titans of inflation and deflation is made starkly apparent.  What follows are the results of this study.

But first, in order to transition from what has (up until this point in this article) really just been an 'overview', it would probably be helpful to revisit one key chart from the initial study.  The monthly chart below shows the relationship between the $CRX and the S&P 500 as it appeared in May of 2011.

MONTHLY chart as it appeared in May, 2011.  Right click the chart for a larger image.

In the chart above, we see the remarkable rise in the value of commodities only related stocks that began abruptly in late 2000 and which accelerated at an ever-steeping rate until the equities crash of 2008.  The effect that equities crash had on the ratio is abundantly apparent.


Who doesn't remember the horrifying situation the entire world found itself in with the collapse of Lehman Bros, and the ensuing panic which led to an emergency funding program as announced by the FED on Nov. 28th, 2008? That's what we're talking about here.  The first collapse in the ratio seen in the chart above reflects the fear that all of us were feeling during those scary, scary days.  If not for that emergency funding and all the subsequent QE interferences and money creation that have occurred since, the ratio on that chart would have collapsed so far it would now be lying on the floor somewhere underneath the desk your monitor is sitting on.  And that folks, is what a brief glimpse at deflation looks like.  That episode was plenty scary enough for me and I certainly don't want to experience that again.  But do you know what?  The odds are very high that I'm going to have little choice in the matter.  We're all going to have to go through it.  No wonder the FED is so horrified to see the cork slowly rising out of the top of that deflation bottle.  Because contained within is one powerful genie, one which the FED has no control over once it has truly escaped.  The focus of this analysis is on that very cork.

But thanks to literally trillions in emergency funding, not only did the cork get hammered back into the old bunghole just in the nick of time, causing the ratio to reverse its downward course and turn back higher, but the ratio immediately accelerated higher at a even faster rate than at any time in the past.  Truly incredible.  A rate so steep that I thought it impossible to maintain.  A rate so steep that it begged the questions, "Why are QE funds flowing at such an incredible rate into commodities only related stocks?    Why are commodities themselves rising at 8 and 10 times as fast as equities are?  Is that what QE was designed to do?"

No, that was not the intention of quantitative easing but it was certainly a consequence nonetheless!  It was a signature of the effect of bankers and hedge funds playing with free money.  It was a sign of their opinion that 'real goods' were to become far more valuable than equities.  It was a sign of their "expectations of inflation", a role that at one time was reserved for gold.  The near vertical rise in the ratio was the unmistakable hallmark of the investing attitude popularly known as "risk on".  Sure, the stock markets exploded higher with the issuance of QE, but once again, in less than 3 full years, the $CRX exploded at literally double the pace.  When all was said and done, between 1999 and May of 2011, commodities only related stocks had risen 64 times as far as the S&P 500 had.  You read that right!  6400%.

And here is where this update really begins -

What has happened since the monthly chart above was first published in May?  Plenty!  As suspected, the ever steepening trend line in the ratio was indeed unsustainable.  In spite of all the quantitative easing and funding that has been made available since Nov., 2008 via the FED, the ECB and the entire global shadow banking system (regardless of how it works), in the past 4 months the ratio between the $CRX and the S&P has suddenly collapsed for only the second time in over a dozen years.  This is a very serious development because even though we all realize that equities have been struggling since the peak on May 2 of this year, how many investors are aware that money has begun to flow out of the commodities stocks at an even faster rate?  How many realize that this sudden phenomenon is a very serious warning that total global re-funding efforts appear to be insufficient?  How many realize that this potentially represents the great unwinding of decades worth of credit expansion?  How many realize that the spectre of deflation is emerging once again, in spite of massive, historically unprecedented amounts of fresh liquidity?

In the monthly chart below we see that a second abrupt downturn in the ratio has occurred, in spite of 3 full years of an unprecedented amount of added liquidity.  The latest and steepest of the yellow uptrend lines has suddenly been broken and then retested, the intermediate trend line has been broken handily and the entire 12-13 year trend line has been revisited.  The long term trend line did hold.  However, realists should not expect it to provide support on the next revisit... which logic would lead rational observers to conclude is inevitable:


MONTHLY percentage style as it appeared on Dec. 23, 2011.  Click  here for an enlarged version.  Alternatively you can click this link to the live and updating chart although non-subscribers to Stockcharts may not be able to see the annotations.
At this point, generally speaking the gist of this article has been established.  Some readers might just prefer to skip to the conclusion at the end of this article and that would be perfectly acceptable.  By now the main observations pointing to the potential for a sea change in the balance between deflationary and inflationary forces have been delivered.   For those readers who might be interested in diving in for a closer look at the most recent action focusing on the recent sudden drop in the ratio, we dial into the weekly charts next...

At this point of course, we don't honestly know with any certainty whether or not the ratio is indeed going to turn lower for a revisit to the long term trend line, let alone whether or not that trend line will be penetrated.  But logic would strongly suggest that since the ratio is currently headed lower for the second time in only 3 years, that trend line is almost certainly the target, at the very least.  As we did in the May article, we'll now dive a little closer to the action to see what's transpiring in the weekly perspective.  As a refresher, we first look at the weekly chart as it existed back in May, complete with the annotations and observations at that time:

WEEKLY - As it appeared in May, 2011.  Right click chart for a larger image.
At the time the chart above was published, it was apparent that upward momentum was waning, suggesting that the upward trend in the ratio might be on the verge of breaking down.  As you now know, break down it did.  In the chart below we see the situation as it exists today, complete with a few recent observations.

WEEKLY - As it appeared Dec. 23, 2011.  Click here for a live and updated version
Although I have a good understanding of Elliott Wave Theory as put forth by Ralph Elliott and have read a couple of Robert Prechter's books, I am the first person to admit that EWT is not for me.  I am not good at wave counting and have been deked out by EWT more times than by the last alley cat I tried to catch for dinner.  Having said that though, I do recognize chart patterns and have a very thorough understanding of all of the standard momentum indicators used in chart analysis, and then some.  And the message I'm getting from the chart above is that the downward action in the ratio that we see from red candles at the July peak is far from finished.  In fact, not only are the stochastics, RSI and MACD not even close to being oversold, they're actually hanging around in neutral territory with a long, long way to go before we would even begin to see any oversold conditions that would suggest a bounce might be on the horizon.  Further, I wouldn't expect to see a bounce in the ratio until after we've seen some sort of positive divergence in at least one of these indicators.  Such an event seems quite far off indeed. 

At that point, I also fully expect that any bounce would take on a 3-wave form as opposed to the 5-wave structure that we currently see developing to the downside.  Admittedly, at this stage of the game that's about as much speculation as this study should entertain.  There's no point in trying to see too far into the future when we have perfectly good charts that are telling the story pretty much as expected they would.  Further, I suspect these charts will continue to behave with rare honesty since it would be rather difficult for the orcs to be able to manipulate and alter what's really happening on a scale as large as this, and while using a comparison as direct as this... unless they decided to target the basket of stocks within the $CRX itself for the sole purpose of messing up this thesis.   They'd have to tackle the entire commodities complex in order to accomplish that.  Such a notion is the least of my concerns.


And finally, without discussion, I'll offer this link to the daily chart of the $CRX:$SPX ratio for the diehard practitioners of technical analysis.  The annotations on the chart should be sufficient to express my own opinions about where the ratio is headed.  Even though it is possible to drill down even further with this particular analysis and look at it on a 30 minute time frame for example, I am quite satisfied to examine this phenomenon from 20,000 feet using the weekly chart.  At certain times I do refer to the daily chart but for all intents and purposes, it is the stunning 12-13 year trend that we really want to examine.

Conclusion:

After nearly a 13 year uptrend, with acceleration all the way, the ratio of the commodities only related stocks and the S&P 500 is finally showing signs of stress.  The pattern is looking very tired.  In July of this year, the ratio broke down and began to head sharply lower for the second time in only 3 years.  This had never happened once in the 10 years previous.  If the ratio should close below the  long-term trend line representing the entire 13 years, we are most likely looking at facing a deflationary cycle the likes of which the world has never even dreamed of, let alone experienced.  And it would be perfectly within reason to expect the deflationary phase to last a Fibonacci 38.2% of the time involved in the entire uptrend.  So far that uptrend has not conclusively been broken, but when (and if) it is, it would have lasted a minimum duration of 13 years.  Therefore, based on that time span, we should be anticipating a major deflationary phase to last a minimum of 5 years, suggesting a bottom occurring perhaps some time in 2017.

Consider this:  Between 1999 and today, the S&P 500 has risen a grand total of 2.92% in nominal terms.  Commodities stocks have risen 377% in the same time span.  In other words, today the $CRX is still perched in the situation where it has risen 129 times as far as equities have over the past 13 years (12,900%).  Is this sustainable?  Absolutely not!  Economies will be crushed with the price of commodities rising unabated like that.  People will literally starve to death in their millions if food prices continue much higher, let alone at this astonishing rate of acceleration.

I hope readers can grasp the severe implications that these facts carry should a great unwinding of this phenomenon develop.  An unraveling of this magnitude would represent a credit contraction (money destruction) of near-biblical proportions.  I believe it is inevitable... but I also admit I could be wrong.  It is entirely possible that the ratio could just continue to burst higher from here and credit expansion continues for a few more years to come, at unbearable cost to us all.  I highly doubt it can continue.  But that's why I study it.  I want to know... and so should you.

I will continue to monitor this situation but don't plan on writing about it any further until I see clear evidence that the major trend line has either been broken or is at least coming into play in a big way.  If that article ever does become necessary, it will appear right here.

List of the stocks included in the $CRX

Until next time...



45 comments:

  1. I am getting a report that the link below the second chart (the chart just below the worried lady) is not working. Is anybody having a problem with that link? Or better yet, can anybody report that "yes, it does work correctly"?

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  2. Just wanted to let you know the charts loaded properly for me. Very interesting article!
    Thanks

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  3. That's the link to the live & updated version? For me it goes to the daily chart minus annotations

    http://oi41.tinypic.com/105uvxf.jpg

    Although I'm not a stockcharts.com subscriber.

    What do think happens to the CRX if war breaks out in the Persian Gulf? Seems like it would be bearish for stocks, but oil & gold would skyrocket.

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  4. Thanks for that message greenface. Dayum, that's exactly what happens for John Lounsbury as well. It's a mystery now. For others it works fine. I don't know what the problem is now. I'm trying to fix a problem when I can't see a problem to fix.

    Ok, you're 'not' a StockCharts subscriber. Do any of the other links to charts open properly so you can see the annotations on them?

    I'll chat with you about the 'war' thing in a bit.

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  5. Anonymous... I missed your message. Afterall, there were so many comments on this thread at the time you left it (1) that I totally overlooked it, lol.

    Thank you so much... I need feedback and your feedback was exactly what I was hoping for. I have a bit of a mystery on my hands it seems though, because a few people (2 so far) are having the problem that greenface described.

    Thanks for helping out.

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  6. The link to the weekly and daily charts look OK. Both come up with annotations and today's ridiculous green candle

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  7. Ok thanks greener. That's what is supposed to happen, lol. But you're still having trouble with the link that's under the chart that's below the worried lady?

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  8. Ya, the monthly chart doesn't come up

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  9. Ok greener... this is the same link. Does it open for you from here?

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  10. No it's still the daily with no annotations

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  11. WTF? I added a sentence below that chart. Would you mind seeing if 'that one' will work, lol.

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  12. Still nothing.
    I noticed that in the "Periods" menu at the top, the only options are Daily and Weekly. Maybe a subscription is required to view the Monthly?

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  13. Seriously? So you can click the drop-down menu for periods and that's all you see, daily and weekly? Maybe that 'is' the problem. Holy shyte... you might have nailed it. For non-StockCharts users I know they can't see annotations on any chart smaller than daily. And perhaps the monthly charts aren't available to them either. I think you're onto something. I guess I have to search StockCharts and find out if maybe that's it.

    Thanks again greener.

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  14. Wow! StockCharts support has already clicked on this article. They're looking into it. Gotta hand it to 'em, their support has always been stellar.

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  15. You're the man greenface... you nailed the problem. StockCharts visited this article and got back to me with confirmation that your suspicion was dead on the money. Thanks very much for your assistance. If not for your keen observation I would probably still be stumped a week from now.

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  16. Well written article and excellent analysis - appreciate your posts.

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  17. Thanks KB3, I'm glad you can see some merit to it. To tell you the truth though, sometimes it's more trouble to deal with these damned chart issues than I'm willing to put up with. I don't know why I even bother to do this sometimes, especially considering that there's nothing in it for me. It's kind of like:

    Why do I bother doing this? Because I'm an idiot.
    Why did stocks rise today? Because the market was open.

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  18. thanks for this great analysis! I love posts that make me think. In that vein, a couple questions:
    1. Do you think that the price of the commodity stocks have increased so dramatically because they are finite and therefore perceived to eventually face supply shortages? This could also make these prices susceptible to speculation and market manipulation.
    2. On the non-commodity stock side, do you think the prices have been constrained by the great increase in global competition?
    3. Do you think these factors explain a lot of the divergence you have pointed out?
    Now to figure out how to profit from this information .... thanks again for a well written and provocative analysis!

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  19. Thanks for the kind words joela. I don't feel like such an idiot over silly chart issues when someone asks great questions like these. By the way, I'm happy to report that I was able to fix that one link that wasn't working earlier today. Damn, I don't even know how I did it but it was some sort of a convoluted operation that shouldn't be necessary. I'm not sure if it should be 'shame on Blogger' OR 'shame on me'.

    Before I tackle your questions, please keep in mind that I'm just a normal dude... just an average guy who is willing to dig a little bit. I'm no expert but I 'do' understand logic real, real well. Unfortunately, Goldman Sachs, the monsters who run the world, purchased the rights to logic and have temporarily suspended it. Sooner or later 2+2 will once again be allowed to equal 4.

    1. No, I don't believe so. Naturally the commodity stocks will react positively when the price of the underlying commodity rises, but I think the underlying commodities have been the major beneficiaries of the POMO and QE money. In fact the chart proves that. So I think you hit the nail on the head when you ventured into the realm of the possibility of 'manipulation' of commodities prices. In fairness, I think it is more related to "speculation" than manipulation. Yes, I believe with a great deal of confidence that the incredible rise in the value of the commodities only related stocks is a direct effect of speculation in the extreme. "Risk on" attitude on steroids.

    This is exactly why I'm 100% confident that any reversal in this 13 year long orgy of risk taking will immediately be reflected in the ratio we're studying here. In other words, if deflation starts to overcome all the money printing the banks can muster, the commodities only related stocks will be the first to fall and they will fall haaaaaaard.

    2. I haven't even really thought about that. Suffice it to say, they certainly weren't viewed as very good investments compared to these commodity related suckers that were rising like rockets, lol.

    3. My apologies joela but I don't quite understand that 3rd question. I'm not certain which divergence you're referring to.

    Thanks again for the kind words. I was starting to feel a bit defeated tonight by something so damned mundane that an 8 year old computer geek could probably have handled better and much faster than I did. But anyway, I finally got 'er done. So now I can spend the rest of the night picking up my hair off the floor and trying to glue it back in place on the old noggin.

    All the best :-)

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  20. Hey AR, thanks for the birthday present ... excellent article! I woke up at 2 am for some reason, came down and read your masterpiece. Now I will go back to sleep and my subconscious will have something to assimilate. Those trend lines look very ominous ... two broken with a third in the scope! Thanks again! You've definitely isolated a key recipient of QE money. Which will have to be sold now that it's going down (big banks can't afford to lose any more money, eh?). Anyway, thanks for sharing your research findings. Tis a pleasure to read ... much appreciated. Cheers.

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  21. Cheers buddy. Now go back to bed. Dream of large women.

    Thanks for the kind words Greg. I'm glad you can at least see what I'm getting at. Unless the banksters unleash something heretofore not even dreamed of by we the unwashed masses, it all has to collapse. But if they 'do' spring some sort of miracle on us that causes the commodities stocks to just keep on trucking higher, we'd be looking at $35 for a loaf of bread and $700 for a barrel of oil. I just don't see how we're going to get out of this mess that the Rothschild cabal has purposely led us into for their own greedy benefit.

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  22. Thanks for the time you put into this Albertarocks. It is a great article.

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  23. YW Bill. Thanks for taking the time to read it. So did you get Rick Roll'd? lol.

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  24. AR -
    I probably used the wrong word (divergence) sorry. I was referring to the index being only up a percent or 2 while a subset of the index (commodities stocks) being up an astronomical number. Your response was also insightful. The housing bubble was caused by the government playing around with mortgage qualification rules, now this is a bubble caused by a different sort of government intervention. If that is the case, Haaaaaard is the right word. there are no slow bursting bubbles!
    BTW, I reread the article - it was not written by an ordinary guy - ordinary people do not possess your gift of logical thought.
    Best regards, I look forward to your next post!
    joela

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  25. AR; GREAT story! amazing, never seen the likes. Here's my $0.02 for explaining why the SPX is lying: FED, ECB intervention. Remember Nov 30 and Dec 20? Over almost a trillion dollars are available for banks to do with it what they want. We all know this will only buy them a few months, but it's what it is.

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  26. Thanks again Joela. I'm wondering if you're in the "be kind to a stranger" mode this week. lol You're very generous.

    Looking back at your third question, I think it all boils down to the fact that so much money was printed (on the backs of the American taxpayer) and gifted to the scum of the earth banking mafia just to save their oily hides, followed by hundreds of billions of dollars worth of play money they were given to toy with via the POMO and QE operations, that we're now living is a world so convoluted and messed up by government and banker interferences and distortions that it's going to take some serious pain to put things right.

    I don't see how it's possible to "fix" this mess. I'm afraid we're going to have to go through some unthinkable times, pain that few people living today have experienced. There are distortions of just stunning proportions throughout the major developed countries of the world. They may soon return to undeveloped status. Imagine a city where certain districts are cut off from police service, ambulance service, bus service, street lights at night... and all because the city can't afford those essential services any more. Unbelievably, it's already happening.

    You mentioned the housing bubble. That's another terrific example of the effects of the meddling. That bubble was created deliberately, absolutely on purpose, just so that the illusion of prosperity could continue a while longer. Since the people's credit cards were full up, why not just create another type of credit card... a bigger one, and disguise it as the peoples' homes. Geez, don't get me going on bankers. They have been the ruin of every civilization that ever existed. They destroyed Rome and it's destroying us.

    I think I'm starting to go on a bit of a rant now. I just got in, it's getting late, I'm a bit tired and I think maybe I'd better stop typing right about here, or else I'll be up until 3:00 a.m. lol

    But thanks again for the kind words and I'm honoured that you're willing to hang around to see what I've got cookin' next. I'm not sure where I'll go next but I'm confident that with all the shenanigans going on in the world I'll come up with something. The world of currencies is pretty darned juicy. But who knows, I might wake up tomorrow morning and decide to finally start that novel I've been thinking about for twenty five years.

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  27. Arnie... thanks for taking the time to read it. I realize it was a bit of a long article to read, but I also think it would have been a mistake to try to tell that story in a 'clipped' form just in order to make it more brief. My philosophy regarding this article was to either explain it properly or it won't explained it at all. It was a "take the readers on a journey and show them" sort of thing.

    You betcha Arnie... the only progress we're making these days is on more and more borrowed money. That is not growth. It's a curtain call.

    Thanks again for the kind comment. All the best for 2012.

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  28. AR
    Market ready to fall
    http://markethighsandlows.wordpress.com/

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  29. Very interesting article on debt destroying Rome. I never knew that. Guess society has been here before. It's all cycles.

    "Debts that can't be repaid ... won't."

    I still don't get why people say the bankers have done all this credit expansion on purposes and will win this war ... it seems like they will end up with a bunch of overprice forclosed homes, and will themselves go bankrupt. Or maybe They swoop in and buy everything at firesale prices?

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  30. AR, perhaps you take requests on this pristine ;) blog of yours?

    The other day I stumbled on a comment made on Binve's blog about the "FAGIX:VUSTX" ratio. It made me curious, because it was said this ratio would prevent getting whipsawed into ground beef! The 89ema works like some sort of confirmation and triggerline. The function of the 233ema leaves me clueless, though I notice both are Fibonacci numbers. I tried to do some background research, but no sigar.

    Since you did some great postings on several ratio's (here, but also on Columbia1's), I hope I can persuade you to write a treatise on this "FAGIX:VUSTX" ratio as well?
    What is it? What does it tell us? Is it tradable?

    TrendXplorer

    Sources:
    ratio: http://http://stockcharts.com/h-sc/ui?s=FAGIX:VUSTX&p=D&yr=1&mn=0&dy=0&id=p45545342106
    Binve: http://marketthoughtsandanalysis.blogspot.com/2011/11/nov-23-thanksgiving.html#comment-370986056

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  31. Hi TX. I just caught your comment right as the market was closing and I have to head out now. But when I get a chance this weekend I'll see what that ratio is all about. At the moment I have no idea whether or not I'd agree that it has any merit. It very well could have, I just don't know at the moment and don't have time to even look at it right now.

    Thanks again for the kind words about the writings I did on EW Trends and Charts. Very few of my followers know about that. I like Michael Eckert and consider him as a good friend. It was just a real unfortunate thing that caused me to stop writing there. I just can't stand arrogance... I mean I just won't put up with it. Roosters who stand atop a pedestal of their own making in order to attack somebody else's work just don't cut it in my world. I'm not talking about Mike, but somebody else. Mike is way cool.

    But I have just been unable to get his site to work on my blog roll for some reason. I can get it there, but when somebody clicks it, it comes up as a dead link. I just haven't been able to figure it out. But I see that same link works from Chartrambler's site. If anybody knows the answer to that riddle please let me know.

    Have a great weekend TX and thanks again for the chat we had on your blog. You really taught me a valuable thing or two.

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  32. Excellent article....glad that you kept it full length. It all seems crystal clear.

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  33. Thanks WFTD. And thanks for taking the time to read it. So I can safely assume you didn't get Rick Roll'd? :-)

    There sure are a lot of different types of comparisons or ratios out there to consider. Surprisingly, there are some that would seem to make perfectly good sense to me that they should correlate really well with equities, but I find out that they don't. At least not directly enough that they would offer any guidance about when a top or bottom in the equities markets might occur. Some of them are just terrific though.

    This particular analysis using the CRX isn't really geared toward that either. But it's sure a good method of pointing out where money that was created out of thin air has headed for the past 13 years. And more importantly, a terrific way of identifying that that entire 13 year long trend seems to be in the process of reversing.

    Just this weekend, another comparison was brought to my attention and I was asked if I might take a look at it and perhaps write something about it. Naturally, I don't have time to do special requests, especially since a lot of work goes into putting together an article in a way that it's easy to follow and hopefully interesting. In either case, it "will" be informative... otherwise I wouldn't even write it up. But this one that I was told about this weekend is really good. It's totally focused on the bond markets. In the past I've looked at several different pairs to compare (within the bond markets) but this particular one, at first glance, seems to hold a lot of promise as perhaps the best one I've ever seen.

    Once I've found the time to analyze it a bit deeper, I'd say the odds are high that I'll write an article on it. The goal will be to use a comparison within the bond markets as an 'indicator' which would help us identify where equities are likely to be headed going forward.

    So please check in every once in a while WFTD. There's more coming :-)

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  34. Wikipedia notes bactrian camels are critically endangered...

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  35. Haha. You're priceless Zimmer... that was a pretty good teaser if I've ever seen one. Nice chart by the way and some really interesting thought went into your notes. Thanks for your insights. Yeah, bactrians, dodos... what's the difference, lol.

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  36. Hi AR,

    RE: credit contraction of near-biblical proportion

    That seems to say I should re-fi my house ASAP at record low rates, right?

    -DD

    ReplyDelete
  37. Well my daughter phoned me about 4 days ago and asked the same question. Actually her questions was more about "should I lock in a rate at 3.49% or should I go with a variable rate mortgage?" She has no choice, her mortgage is due for renewal and her question was simply about "which type" to take.

    Even though we don't know for certain what will happen with the bond market, one thing we "do" know for sure is that the risk of holding a variable rate mortgage is way too high, even though rates would not likely surge in a deflationary environment. But say you lock in a mortgage for 5 years at 3.5%. The amount of interest you're actually paying with each payment is very small. To wait in hopes of getting a lower rate, say 3% wouldn't make much sense because when rates are this low, the savings gained by getting a mortgage a half a percent lower might be $15 a month. Peanuts. On the other hand, if something happened that suddenly caused the bond market to crumble and rates to soar, then you're already safe by having locked in.

    So I would say "yes, absolutely re-fi your house at record low rates". Even if they were to fall further and you miss out on another half a percent or so, you still would have lost very, very little. And you're at "no risk" just in case rates were to rise. Plus you'll be able to sleep much, much better knowing that you don't have to worry about that particular aspect of your life.

    Normally I don't give advice. But in my opinion this one was easy to answer because I know with 100% certainty that what I've advised here will not hurt you. Hope it helps :-)

    ReplyDelete
  38. AR, Thanks for the exact and practical reply to the re-fi question.

    I guess my other lurking question was your line of thinking that concludes a severe credit crunch if commodity prices collapse.

    The way I reason it, a commodity collapse would only happen if the world goes into a real depression. Entities like municipalities would then face severe budget issues and will have to sell more bonds at scarey rates. But does that mean retail banks will stop lending to home buyers so as to chase muni bonds though? I mean, these might be distressed munis and the risk is high. However, I'm probably answering my own question: the banks would very likely expect a higher return from every lending category, if only to have them line up to some degree.

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  39. @AR.. And you just said so yourself, to your daughter, rates would not likely surge in a deflationary environment. Just trying to wrap my head around this expectation versus the idea of a credit crunch of near-biblical proportion!

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    Replies
    1. Geezus... I just spent 15 minutes trying to explain why I advised my daughter to lock in... and it all vanished when I hit the wrong button, lol. So here's the short version:

      I "do" expect the deflationary nightmare to unfold. In fact, I expect my daughter's home to lose at least another 30% of its value before all is said and done. But that's beside the point because it's her "home", her "castle" and she has no other place to live unless she wants to put herself under the control of a different homeowner, by renting. So she's not going to sell.

      If I am right, and the deflationary scenario unfolds, the 10 year treasury should soar even higher. If treasuries were to rise 25% higher from here, the rate on them would drop from today's 1.91% all the way down to 1.4%. How much do you think that would save a homeowner in terms of his monthly payment? Almost nothing. Maybe $50. But the opposite is not true. What if I'm wrong? What if deflationists are dead wrong and the bond vigilantes of the world decide that US bonds (and Canadian bonds) are junk? What if China decides bonds are junk and continues to dump them at ever increasing rates? The cost to that homeowner who took a risk today would be devastating. Believe me I know... I lived through the late 70s when mortgage rates topped out at 19.75%. By time all was said and done, a person who thought they'd purchased a $300k home was actually paying $1 million for it thanks to murderous rates.

      By advising my daughter to lock in, I'm protecting her from that potential risk, in the event I'm wrong. If I'm right, she's lost very, very little by missing out on that last half a percentage point of potential mortgage savings. It's all about risk/reward. And right now, the reward is very small and the risk is very high to "not" lock in a mortgage at these historically low rates. It's a golden opportunity to eliminate one very big "what if" from our lives. Life is difficult enough as it is.

      I hope that clears up what might have sounded like a contradictory piece of guidance. I guess that's why I said I don't usually offer advice ;-)

      Reward = equivalent to one meal at a fine restaurant per month.
      Risk = horrifying

      Delete
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