$CRX:$SPX Ratio May Have Hit Bottom. Uh Oh!

This is the third in a series of articles dedicated to the $CRX and its relationship with the S&P 500.  The original installment was first published May 12, 2011 and as reported by Mr. John Lounsbury, that particular piece became the #1 most read article on Global Economic Intersection over the following 2 quarters.  For a completely inexperienced writer that was a rather surprising but welcome development because not only did it act as a vote of confidence that perhaps I should consider continuing to write the occasional article, it definitely indicated that readers were seeing merit in the revelations that particular study contained.  A follow up article was published on Jan. 2 of this year once it became apparent that significant changes were occurring in the ratio and that it was indeed behaving as predicted.  More specifically, as suggested would likely happen, the ratio began to reveal the fact that deflationary forces were showing up in the $CRX long before they would become readily visible to the naked eye by most other measures.

Ultimately the original goal of this study was to determine firstly whether or not the commodities only related stocks had been behaving differently than the stock markets in general over the past dozen years and secondly, to determine whether or not the results of the study could be used as reliable evidence that might assist in determining the future direction of the overall stock markets.  The answers to the first question was "yes they have and in jaw dropping fashion".  And the answer to the second question was "most likely, since the ratio is very sensitive to the inflows and outflows of funds as a direct result of inflationary or deflationary forces".

In this installment we're going to zero in on a very recent development that seems to be pointing to the real possibility that after a year and a half of watching the commodities related stocks seriously under-perform the S&P 500 [for the first time in a dozen years], somebody has apparently lit a match to the bed of kindling otherwise known as the entire global commodities sector.  I say that a bit facetiously because it's more than obvious that a good deal of the history of the flight of capital into the commodities markets certainly wouldn't have occurred had the central banks of the world not provided oodles of liquidity in the first place.  But on the demand side there's no question about it, in certain sectors of the commodities industry there currently exist very real shortages that in itself would absolutely drive commodities prices higher... whether the world was flooded with new liquidity every week or not.  In some cases that is definitely what's suddenly happening right now.

For example, although off the recent highs, the price of corn has exploded higher by 52% just since the end of May.  Soybeans have risen from $1100 to $1780 in the space of just 9 months.  That represents a whopping increase of (oh my, the Elliotticians are going to love this one) 61.8%.  And the most frightening one of all... in the span of one month from mid June to mid July the price of wheat on the world markets popped a stunning 55%.  Not all of these increases can be attributed directly to the generosity of Mr. Bernanke.  A good deal of it is without a doubt weather related although let me be the first to theorize that any time the corn belt suffers a drought, that too is most likely Bernanke's fault.  Regardless of the reasons why grains are exploding in value, the net result is that in the past few weeks, ironically since QEternity was officially announced (or perhaps not ironically), the US dollar, the $CRX, the $SPX, and the $CRX:$SPX ratio itself have all broken significant trend lines.  In doing so, each and every one of them is signalling that the world may once again suddenly be in the process of blasting off in a new round of inflation, perhaps crushing inflation.  These are serious trend lines, months in the making.

If history is to be considered a reliable guide we should trust that any time we see the $CRX rising and it's ratio with the S&P 500 rising, the stock markets in general have risen as well... every single time.  So ultimately what we want to know is whether or not the ratio has indeed recently turned higher with conviction... and whether or not it is likely to be a sustained assault.  So we begin with the monthly chart below which covers the entire duration of this study going back to late 1999: 

$CRX:$XPX ratio Monthly:  Click here for a live and updating version.  If I'm not mistaken, non-subscribers to Stockcharts won't see the annotations.  If that's you, you can click here for a "print" version which will show them.

The first thing that just jumps off the chart, the very reason for this article, is the fact that for 4 weeks now the ratio has been putting in an effort to find a bottom.  True enough, it is entirely possible that it could be nothing more than a standard re-test of the yellow 13 year long rising trend line.  However, fundamentally I think there are numerous reasons to doubt that's the case.  For one thing, the central banks of the world have made it very clear, they are all going to print their own currencies in an effort to reflate the entire world.  It's essentially an admitted no holds barred race to the bottom for the currencies.  The second reason is that the overall food supply for all of humanity is deep, deep under water.  And no I'm not talking about the fish supply because that's the only food source that should be deep under water... and it's not there.  The food supply for all of mankind is in trouble and possibly irreversibly so.  In other words we may never catch up from here, especially with the population of the planet continuing to grow relentlessly while the sources of food diminish every single day.  It's a head on train wreck happening in slow motion right before our very eyes.  Jim Rogers is no stranger to the scary implications these trends carry.  I'd like to be able to claim that Mr. Rogers and I had a lengthy telephone conversation about the situation last evening but unfortunately I cannot.  It seems that every time he calls me I'm busy putting a new roof on the igloo or something.  In any case, here's Jim Rogers' take on the worsening food commodities story:

So we definitely want to drill down to a weekly chart in order to better investigate what's really happening "on the local scene" as it were... time-wise.  Admittedly this is a big chart, but it provides a beautiful "one stop shopping experience" in that we can see all 4 components of this entire study and how they relate to each other, in one glance:

$CRX:$XPX ratio Weekly:  Click here for a live and updating version. 

It appears that what we're witnessing is that funds are beginning to flow back into the commodities only related stocks after 5 straight quarters of having fled that sector.  Or at least seriously threatening to.  As the original study showed, the ratio itself revealed that for over a decade liquidity had been more than abundant as witnessed by the fact that between 1999 and May of 2011 the commodities only stocks gained 6400% of the amount the S&P did.  In other words over those 12 years the $CRX rose 64 times as much as the S&P did.  How remarkable is that?  After the recent 12-15 month correction in the ratio, we find that the commodities only related stocks are now only sporting 21 times the gains of the S&P 500.  That really is a significant correction.

The bottom line was that although the Fed had been supplying liquidity for decades in order to prop up the bond markets, not to mention supplying a crack addicted, sick leaderless government spearheaded by a totally inept and corrupt congress, a huge percentage of those funds were being channeled through the central banks where it was immediately converted to "fun money" for their own use in the higher risk casinos of the world.  Commodities markets are one such casino.   And although that casino appeared to have gone out of business when the ratio peaked in the spring of 2011, it seems the high rollers may indeed recently have stepped back up to the tables. 
 
The most obvious recent development seen in the weekly chart above is that all 4 components of this study broke a major weekly trend line during the week of September 3rd.  Note  the number of "UH OH"s on the chart.  In the case of the S&P 500 though, the break is not yet impressive.  In fact it looks more like a relatively weak overthrow at this stage.  Nonetheless, 10 days later, to borrow a sentence as reported here,  "A third round of quantitative easing, a set of asset purchases designed to increase the money supply, has been announced by the Federal Reserve. It said it would keep easing until job growth accelerates, and continue a "highly accommodative" monetary policy "for a considerable time after the economic recovery strengthens."
 "FOR A CONSIDERABLE TIME AFTER THE ECONOMIC RECOVERY STRENGTHENS".
Friends, that's a long, long way off.

What Mr. Bernanke is promising the world is that the Fed is going to hold rates down to zero pretty much at any cost under the guise of trying to save the world.  The truth is that they're not "saving" but "enslaving" the world.  In order to print they need something to buy.  The debate seems to be about whether or not there's enough junk out there in the world for the Fed to purchase on an unending basis.  Personally I don't think that's the only important question.  I think the real question is "when is the world going to sit up and realize that the real goal is that they want to do just that, purchase every single debt in the world so that they have complete and total ownership of it.  Of us.  That is their ultimate goal, world domination by enslaving every debtor on the planet for eternity.  At that point, who cares if the entire world defaults?  Certainly not the central bankers, not as long as they have title to all things saddled with debt, which by the way includes most real estate on the planet and half the governments of the world.  And of course, the governments are the people.  And after all the smoke has cleared the bankers will be standing there holding title!   This is exactly how they're carrying that objective right before our very eyes.  We are currently in the end game no matter which direction the markets finally decide to travel.


Ok, in summary here's what has happened over the past 20 months.  Early in 2011 we got the first signs of a top in the ratio.  That signaled a major turning point in the business of "inflation".  From that point forward it was starting to become abundantly clear that deflationary forces had indeed been creeping out of the bottle all over the globe,  Over the ensuing 12-15 months it appeared that the great deflationary cycle had begun.  I was certain that the great deflationary collapse was upon us.  Tonight that no longer seems the case.  It truly looks like the deflationary phase might over although another week or two will likely be required before we can be more comfortable that we know what lies in store for perhaps years to come.  At minimum, the ratio is currently trying to bottom and is at least 'threatening' to rise back above that incredible 13 year old trend line.  If successful, the implications are that the world has reverted right back to the old standard,13 year theme of "print, print and print some more.  Deflation must be defeated at any cost".  The implications would be very, very inflationary, especially if the banks even 'dare' to issue loans in big numbers.  Stock markets don't tank in such a scenario.  At least they haven't in the past.  Which leads to one more horrible possibility.

THE WORST POSSIBLE OUTCOME:  It is possible that in spite of their every effort, the central banks of the world might not be able to contain a bond market sell-off.  In that case they would surely just crank up the printing presses even faster in an ever-failing effort to hold rates down.  That would just feed into the inflationary theme, at least as pertains to the CRX.  However, rising rates would be devastating for the bond markets and for the economies of the world.  And if funds were to flow out of the bond markets, well... you know where they end up.  At the end of the day if the bankers were to lose the bond battle the result would almost assuredly be an inflationary depression in many aspects of our lives, like in the cost of things we need but don't have such as food and fuel.  Those items would soar.  But deflationary in things we already have but don't necessarily need... like a piece of land to park our trailers on.  The value of real estate would crumble.  In either case, whether the central banks are ultimately successful or not, the outcome would probably be best described as stagflation.  Which would ultimately lead to a depression of the most horrid kind.  Because if the world economies are sputtering while rates are at zero, with unemployment already as high as 25% in some countries (Spain) imagine what would happen to them with rates at 4%, 6%, 8% and higher.  I dare say that's one scary scenario we'd rather not walk into.  Ultimately we may not have a choice.  As of this moment though, thankfully that outcome is no more than just a mere 'possibility'.

So at this early stage of what 'could be' a major inflection point, we have to consider the inevitable question; "Is the ratio just back-testing the 13 year long rising trend line?".  I dare say the answer is; "No, that prospect is exceedingly unlikely.  The ratio is likely to break up through that trend line with inflation resuming yet again.  Bernanke as much as promised that outcome."   Nevertheless we need to respect that all options are still open and that the central bankers of the world might indeed fail in their quest.  We have no choice but to simply monitor these charts in the weeks ahead.  One thing we know with 100% certainty... they will not lie to us.

To that end, I've included a daily chart below so that we can watch these critically important developments over the coming days and weeks.  Feel free to bookmark this chart as it will update in real time.  What we're watching for is whether or not the ratio climbs back up above the rising 13 year old trend line.  Beyond question the Fed's goal, if successful, would ensure that outcome.  All that remains to be seen is whether or not they succeed.

$CRX:$XPX ratio Daily:  Click here for a live and updating version.

From the Elliott Wave perspective, one important aspect seen on the daily chart above is that the current rise in the ratio could still just be a 4th wave higher which would imply that there would be at least one more thrust lower.  But I have a rather difficult time accepting that as the likely outcome since it would also imply that equities would be falling fairly hard over the next few weeks.  Right in front of a US presidential election that is only 6 weeks away?  I don't think so!  But stranger things have happened I guess.  For example, as a teenager I had a friend who had a big wood screw in his belly button.  I asked him what it was for.  He claimed he didn't know so I suggested he take it out.  So he unscrewed it and his ass fell off.  But I digress.

So there we have it.  We're absolutely at a critical inflection point.  Either the $CRX:$SPX ratio is going to explode higher from here which would be the logical outcome if the Fed's policy succeeds - OR - the ratio is going to plunge in a 5th wave lower (at least) and the deflation genie will officially be out of the bottle.  More than likely this ratio and this study are going to provide a concrete answer earlier than most other indicators out there.  At least that's the goal.

On a final note, what kind of a father would I be if I didn't take this opportunity to wish my son a great day on this, his birthday.  Happy birthday big guy.  Can't wait until we can finally get together again and try out your sail boat.  Love ya!

Thanks to all for reading and until next time... smooth sailing!

......

Currencies' Relative Performance Since The USD Low

Yesterday I was talking with a friend who was telling me that it was his dad's 63rd birthday on Sunday.  Craig went golfing with his dad that day on a beautiful long Labour Day weekend.  [I'd better also spell it 'Labor Day' for our American friends or they won't have a clue what I'm talking about.  Just a courtesy to our pals south of the border who are still the only country in the English speaking world who can't handle 'u's where they 'think' they don't belong, lol.]

Anyway, Craig informed me that he'd also bought his dad a birthday present, a nice big juicy beef roast.  The price? $64.00.  Apparently my friend also had plans on dining at his dad's house after putting in 18 holes and shooting a score of 82.  But all this reminded me of one vision I remember from my youth, back in the days when I was an 11 year baseball star.  At least I thought I was a star.  My team mates thought I was the designated base stealer.  In any case the image came back to me as vividly as if it had been only yesterday.  I don't know why I have such a sharp memory for what seems like every day of my childhood, but whether that be a good thing or a bad thing... I do.  I remember incidents and conversations between adults when I was 2 years old and even younger.  I remember their names and faces... even as my mother was holding me in her arms while shopping for some sort of cloth.  Mrs. Reach was commenting on my eyes.  I remember riding my little bicycle as fast as I could on the sidewalk one day, turning the corner sharply only to slam into Mr. Eckmeyer's big belly as he came walking around that same corner.  Needless to say it wasn't Mr. Eckmeyer who got bounced 30 feet.  I've always been thankful that his big belly was soft or I'd still be picking my teeth out of the back of my skull to this day.  What a face plant that was!  Probably a record breaker but I digress...

My younger brother and I had piled into our dad's old '52 Chevy on a bright and sunny Saturday morning with our parents and we headed off to the local shopping center to hit up the old food mart.  No we didn't rob it, my folks had a few dollars.  Yes we were poor and the green Chevy was an old car even for back then.  But we had enough money for groceries.

About an hour and a half after leaving the house, my brother and I found ourselves sitting in the back seat of the car once again with grocery bags piled up so high between us that we couldn't even see each other, grocery bags between our feet and grocery bags in our laps.  The trunk was so full of groceries that when my dad finally coaxed it shut the watermelon exploded.  Our mom was sitting in the passenger's seat with grocery bags piled up between her and our dad, groceries on the floor between her feet and groceries in her lap.  My dad had a bag of groceries on his lap and a 10 lb. bag of potatoes hanging from his face, the bag clenched firmly between his teeth.  Yup, we'd gone grocery shopping alright.

Once we got home and started to help unpack all the goodies, I remember my mom saying to my dad, "Good Lord Eddie, can you believe the price of groceries these days?  Imagine that, $50 for just a car full."  And people wonder why, when every time I walk past the meat counter at the local supermarket, I tend to puke on the floor.  I realize that might be a disgusting habit but it's not because I don't love meat, it's because I have an incredible memory for visions from my youth.  And $50 for a boat load of food is one of my more cherished ones.  $64 for a single beef roast isn't.

So is it any wonder then that so many of us have this little quirk of wanting to know what our currency is doing relative not only to food items, but relative to all the other major currencies in the world?  Here in Canada we want our currency to be relatively stable and to remain relatively close to parity (or a bit lower if possible) with the American dollar.  So far so good.  It's an amazingly well managed pair and considering that those two currencies represent the largest single trading block between any two countries on the planet, it's critical that it remain well managed to the best extent possible.  Because god only knows, the last thing the Americans need is for their currency to suddenly tank and the Loonie to suddenly surge.  Imagine if we woke up one morning and realized that the Canadian dollar had quietly but steadily climbed until it became worth twice what the US dollar is.  The cost of Canadian crude to the USA would have doubled just that fast.  And the cost of all other Canadian exports would be so expensive we'd have a hard time selling them at all.  Nope... none of us want that... we want stability and relative parity if possible.

Other currencies and other pairings have relationships with each other that are just as important.  The Australian dollar and the Yuan have their own unique relationship.  The Australian dollar is also unique for another reason... its use in the currency carry trade casino.  It's for that reason that the Aussie:Yen pair is so very important as a measure of the appetite for risk.  Because when bankers can borrow Yen at next to zero interest and re-invest those Yen into relatively high paying Aussie dollars and bonds, they can just sit back and listen to the old cash register ring up profits day in and day out by investing money that they never even had in the first place.  They're using money they don't even have, and lots of it, to churn profits almost out of thin air.  It's a great gig when it's going their way.

But what happens when something goes wrong?  What happens when something that they weren't counting on suddenly almost scares the crap out of them, or at the very least causes their O-ring to tighten up just a little bit?  What happens when they get the sudden and undeniable urge to take a dump dump some of their holdings in order to reduce their exposure to risk?  The first thing they do, every damned time, is to unwind that risky currency trade they've got going with the Australian dollar.  They have to sell those Aussie dollars in a hurry, and at just about any cost, in order to pay back those Yen they borrowed... and in doing so, reduce their overall exposure to a very risky currency play.  It's a practice that will happen every time the biggest players get a scare.  And when they get a scare all of us had better pay attention.

About this time last year, the American dollar suddenly and inexplicably seemed to put in what appears to have been a meaningful bottom.  It remains to be seen whether or not the uptrend in the USD is going to continue but one would have to think that with 3 or 4 rounds of quantitative easing already in the books and another one being threatened, the dollar should have fallen right off the table by now.  Why hasn't it?  Because the evidence that deflationary forces are at work are becoming quite apparent if we look in the right places.  I've written several studies that provide overwhelming evidence that deflationary forces are indeed at work and have been since year 2000.  But that's not the topic of this conversation and I won't take that aspect any further today.

So since the American dollar put in what appears to be a meaningful bottom last summer, where does it stand relative to all the other key currencies in the world?  What have they been doing and where do they stand relative to each other?  In this simple chart we go back to the time of the low in the USD,  the beginning of May, 2011 and start from there.  On that day, every currency on the chart below begins with zero % fluctuation.  It's the starting point and from that day forward we map out the direction each currency has taken and the percentage move each has traversed since the first day on the chart.

Major Global Currencies Performance Style Since the USD Low of Last Summer.  Click here for a live and updating version.

It's pretty easy to see that late last month an inflection point seems to have been reached in several of the currencies.  The USD started to pull back.  Was that the top in the dollar?  Not likely... not likely by a long shot.  At least according to the evidence provided by several studies.that show deflationary forces bubbling and boiling just below the surface.  The $CRX story is the most amazing one I've come across to date.  So as could be expected, the other major currencies that do a lot of dealing with the American economy have gone the opposite direction that the USD has.  The Pound turned higher, the Swissie and the Euro did the same.  The Yen has remained relatively flat but the Australian dollar... what's up with the Australian dollar?  It's the only global player that is dropping along with the American dollar.  And why is that?  There can only be two reasons, a softening in the Chinese economy and/or currency carry unwind caused by credit contraction.  It's both.

Without presenting any analysis on the Aussie:Yen currency pair and without really presenting any analysis here at all, I just wanted to provide this 'overall' picture of what the major global currencies have been up to since the day the US dollar put in what could conceivably have been a multi-year low.  I'm not making that claim at this time because I don't know for sure and I haven't done any serious currency studies for quite some time.  Suffice it to say, one glance at the currencies in the chart above and two stand out like a sore thumb.  The US dollar and the Australian dollar.  Personally I expect every currency on the chart above to reverse direction except one... the Aussie.  I expect the US dollar and the Yen to remain above the zero line, the others to remain below it and the dollar to outperform the Yen slightly in the months and perhaps years ahead.

Thanks for reading this far, and just a polite heads up.. if you don't particularly care for shopping stories please don't bother reading any further.  You can save yourself a bit of time that way.

All the best and until next time... keep smilin'.

================  End of article.  Additional entries below. ====================

Who said animals don't have a sense of humor?  This guy obviously does.  For me the funniest part is in the first 1/50th of a second of the video when "the plan" is hatched in the kangaroo's head.  He's thinking: "Ok, I'm gonna get this little pecker.  Watch this guys!"

Chart and chART courtesy of Papa Boule