A Macro-Storm Brewing
...investors are doing the same thing as foreign officialdom is doing, increasingly seeking safety from a storm that is brewing...
I'll start by spotlighting comments by Florida Governor Charlie Crist, made at a Homebuilders conference last week in Orlando: "Have you been to Miami lately? It looks like we have a new state bird: the Building Crane."
Indeed, Crist was referring to the fact that despite the inability of sellers to unload the existing inventory of 22,924 condos that are currently for sale in Miami-Dade County, builders are presently working on no less than 37 new high-rise condo buildings.
Subsequently, there will be an increase in the inventory of unsold units that exceeds 20,000 over the next few months (according to the Florida Association of Realtors).
Yes, despite the fact that sales of condos in Florida have collapsed by more than (-)50% y/y as of the May sales data, builders are unabashedly increasing supply by nearly 100%.
How do you spell "insane", I ask?
Maybe the chart below spells "insanity", with the number of completed new homes for sale in the U.S. exploding to a new record high, and then some.
Click here to enlarge.
Then I note comments made last week by St. Louis Federal Reserve Bank President William Poole, speaking to a real-estate conference: "There is probably a ways to go, but unless the pressure becomes much more severe, the problems (in housing) will not impact consumer spending or credit quality more generally."
Say what? Me, worry?
Then I rewind to comments made Thursday by Fed Chairman Ben 'Boom-Boom' Bernanke: "The credit losses associated with subprime have come to light, and they are fairly significant. Some estimates are in the order of between $50 bln and $100 bln of losses."
And, at the bottom-bottom line, the single-most important macro-factor remains the ability of the U.S. consumer to continue expanding final goods offtake. With that in mind, losses in the subprime space that exacerbates a tightening in credit conditions become highly problematic.
Note more of Boom-Boom's commentary:
"While the most reliable indicators show U.S. home prices have not declined nationally, and that the housing slump has, so far, not led U.S. consumers to cut back spending … if prices did drop, consumers might trim spending by as much as 9 cents for each dollar of wealth lost."
Indeed, when I dissect the FOMC Meeting Minutes released last Thursday, covering the June-27-28 pow-wow, I become very interested in the increasing use of words and commentary that would be associated with a central bank becoming pre-disposed towards dovish action rather than hawkish.
I shine the spotlight on the following passages specifically related to the U.S. consumer, amid the suggestion that they might already be "trimming" spending as a result of the eroding housing market: "Consumer spending appeared to have slowed. The deceleration primarily reflected a flattening out of outlays for goods," and "Personal consumption expenditures appeared to be rising more slowly in recent months."
This sounds pretty specific and quite simple.
On the other hand, more subtly I note that inventories on the rise: "Manufacturers restrained production to cope with a build up in inventories." And perhaps most telling is the mention of imports of goods are slowing: "The recent narrowing (in U.S. trade deficit) reflected a steep decline in many categories of imported goods."
Indeed, the FOMC Minutes went so far as to shine the spotlight on the fact that Japanese and German export growth is slowing: "In the euro area, export growth slowed." And "in Japan, recent data suggested that growth in the second quarter had moderated, with net exports a likely source of weakness."
No wonder then that I hear the Fed talk soft on the U.S. Dollar amid intensifying concern that the U.S. consumer will "trim" spending, as is already being manifest within the trade picture!
Note the commentary from St. Louis Fed President Poole on the subject: "The weaker dollar has pressures in the direction of raising inflation, but by no means is it a decisive influence." Green light!
Another all-important "sign" for the Fed is the labor market.
I have been screaming of late about the underlying weakness in the labor market that has been evidenced in each of the last three payroll reports. I have broken down the statistics to show how the growth in jobs is failing to fill the need for job growth, as defined by the increasing number of workers past the point of being "discouraged", and the growth in the population/labor-force.
Note more of the FOMC June Minutes: "The average monthly increase in payroll employment was below that of the first quarter."
Of specific interest in the context of slowing consumer outlays for goods: "Retail sectors continued to shed jobs."
And, more importantly: "The 12-month change in average hourly earnings of production or nonsupervisory workers edged lower in recent months."
Further, given the following FOMC observation-- "The household wealth-to-income ratio ticked down in the first quarter." --I might conclude that, with both wealth and income disinflating, with wealth leading the way, that the fear factor at the Fed is on the rise.
Indeed, note the FOMC's own words, as relates to their own fear:
"Participants noted a risk that the saving rate could rise more than currently foreseen, particularly if household wealth were depressed by a further softening in house prices, or a less buoyant equity market, that might accompany a potential slowing in the growth of corporate earnings. Several participants noted that higher interest rates and a potential tightening in credit availability might also be factors that contribute to a rise in the personal saving rate."
With that in mind, I also note the release of the Philadelphia Fed Survey of Business Conditions for July, and the following data-dissected details:
The Inventory Index is plus +0.8, the first positive reading of the year, implying a build in inventories, and a huge rise relative to the minus (-)8.2% reading posted in June, and the minus (-)6.9 reading seen in May.
And in terms of the labor market: The Number of Employees Index is plus +4.1, down significantly from June's plus +5.6 and down by two-thirds relative to the May reading of plus +12.9.
The headline Business Conditions Index fell by 50% in July. Things get even more intriguing when I shift from an examination of the Fed's words and survey results to the data-details offered by the Fed's own internal money supply and credit figures. For sure, there is some funky stuff going down in the city.
First I spotlight the continued explosion in liquidity, represented by rabid reflation in U.S. Custody Holdings.
Securities Held in Custody for Foreign Official Accounts rose by $7.036 bln in the latest reporting week.
More telling is the rapid acceleration in the y/y expansion:
Weekend, July 18: up +$326.5 bln y/y
Weekend, July 11: up +$356.4 bln y/y
Weekend, July 03: up +$346.0 bln y/y
Weekend, June 27: up +$336.9 bln y/y
However, I note a sharp concurrent disinflation brewing within U.S. domestic money supply growth, which by some measures has shifted gears completely into an overt contraction:
- 3-Month Growth Rate of Narrow M-1 Money Supply slid into negative territory for the month of June, falling to minus (-)0.9%, a virtual collapse from May's plus +4.9% three-month rate of expansion.
- 12-Month Growth Rate of Narrow M-1 Money Supply was negative, at minus (-)0.7%, sliding from plus +0.8% growth in May.
- 3-Month Growth Rate of M-2 Money was up +5.1% in June, a sizable slowdown relative to the May growth rate of plus +7.4%.
- 12-Month Growth Rate of M-2 Money was up + 6.1% in June, slowing from May's plus +6.3% 12-month growth rate.
- Worse, the shorter-term weekly data reveals a more severe deceleration, including a deep decline in narrow money supply growth since mid-June:
13-Week ROC of M-1
- Weekend, July 09: up +0.6%
- Weekend, July 02: up +1.5%
- Weekend, June 25: up +2.3%
- Weekend, June 18: up +2.4%
- Over the last month the week-week short-term rate-of-change in narrow U.S. money supply has disinflated from near the rate of price inflation, to near ZERO nominal quarterly growth. Even more rapid is the disinflation in M-2 money growth
13-Week ROC of M-2
- Weekend, July-09: up +6,1%
- Weekend, July-02: up +6.6%
- Weekend, June-25: up +6.8%
- Weekend, June-18: up +7.1%
- Weekend, June-11: up +7.5%
- Weekend, June-04: up +7.7%
So, does slowing (if not negative) U.S. domestic money growth, combined with exploding growth in Custody Holdings, infer that the nearly unbelievable continued expansion in domestic U.S. bank lending is increasingly supported by foreign export growth?
If so, then doesn't the slowdown in U.S. imports and foreign exports (aside from China) spell trouble at some point in the near future, as it relates to intensifying disinflationary pressure being felt by the U.S. consumer amid a worsening U.S. housing dynamic? Of course it does.
Indeed, sobering then is the two-week, $55.8 bln expansion in US Commercial Bank Credit, posted since the week-ending June 27th, with Loans and Leases, Commercial and Industrial Loans, Real Estate Loans, Revolving Home Equity Loans, and Consumer Loans all expanding rapidly.
Moreover, sobering as well is the subtle, sudden, and significant shift in the buying pattern exhibited by "Official Foreign Accounts", as detailed within the Custody Holdings data. I rewind and note a +$28.4 bln three-week increase in the y/y accumulation in U.S. Treasury paper within the Custody Holdings data, versus a decline in growth in holdings of Agency debt.
In other words, official foreign authorities are increasingly seeking safety.
More pointedly, when I embark on a technical overview of the US brokerage shares, I might go so far as to suggest that the largest holders of U.S. dollars are increasingly seeking to take shelter from the storm, a storm brewing in terms of intensified U.S. wealth disinflation or shelter from the exact type of storm that the Fed most fears.
In fact, this macro-monetary thought process fits almost perfectly with developments noted within the global markets, as defined by the shift towards upside outperformance in precious metals on both an outright basis, and, more specifically, relative to the U.S. financial sector.
I might say that investors are doing the same thing as foreign officialdom is doing, increasingly seeking safety from a storm that is brewing, one represented by the extending decline in the value of the USD.
I am focused on the $700 level in Gold and the 80.0 level in the U.S. Dollar Index while noting that Gold adjusted by the value of the U.S. Dollar Index is already making new record highs, already trading above the $800 per ounce price equivalent.
For evidence, see the chart on display below revealing that the price of Gold adjusted-by the U.S. Dollar Index is breaking out above its 2006 secular peak, and trading at an $851 per ounce equivalent, fully supported by a +77% two-year rate of reflation.
Of specific spotlight interest is the unique long-term weekly overlay chart exhibited below in which I plot the USDX adjusted price of Gold (dark blue line) against the price of spot Gold (light blue bars). I highlight the fact that depreciation in the value of the dollar led the way, and provided the catalyst for the upside explosion in bullion seen during 2005-06.
I have been favoring the unhedged gold mining shares for over two weeks now, and I shine the spotlight directly on the weekly chart of the AMEX Gold Bug Index, or HUI, shown below. Simply, I observe the upside chart breakout, defined by Friday's close at a new multi-month high, following a successful downside test of staunch underlying support provided by the long-term 52-Week EXP-moving average and a renewed upside acceleration in the longer-term Rate-of-Change indicator.
And, note my own famed "Launching Pad Pattern", and last week's lift-off.
I am seeking a confirming move in the underlying price of bullion, which has yet to clear the $700 psychological price hurdle, and confirmation from within the Gold ETF, as defined in the weekly chart on display below, plotting the Gold Trust Fund (GLD). A move above $69 would be bullish.
Encouraging for would-be-bullion-sector-bulls is the action portrayed in the long-term chart shown below, in which I plot the spread between the AMEX Gold Bug Index of unhedged gold mining shares relative to the underlying price of bullion. In short, unhedged mining shares are breaking out to the upside relative to gold itself, a bullish sign for the entire precious metals sector. Within this specific chart I note the bullish moving average crossover, as the 13-Week EXP-MA has rallied above the longer-term 52-Week EXP-MA, with both averages now trending higher.
Moreover, I find that the mega-macro-monthly overlay chart shown below is most intriguing as it relates to taking shelter from the storm. In this chart I plot the Dow Jones Industrial Average (blue bars) against the Gold price "adjusted" path of the Dow Industrials (dark blue line, ratio spread versus Gold). Clearly, relative to Gold, the Dow has not rallied, at all, since peaking in 2000-01. Worse, the divergence has only been this wide once before, in the beginning of the 80's, when stocks were cheap, and Gold was expensive. Now the reverse appears to be true: stocks are expensive, and Gold, even at $700 per ounce, is cheap.
When I compare the U.S. financial sector to the price of Gold, specifically the subprime mortgage fund debacle-disinflated brokerage shares, I see a long-term trend change underway.
First I note embattled Bear Stearns (BSC) relative to Gold as evidenced in the mega-macro-monthly chart on display below, in which I plot the ratio spread dating back to the mid-80s. In fact, this ratio spread has not been below its long-term 5-Year EXP-MA since October of 1990, until now.
Next I look at the same plot using Merrill Lynch (MER), relative to the price of Gold, dating all the way back to 1974 as evidenced in the monthly chart on display below. In this case Merrill is violating a triangle pattern, with the 5-Year EXP-MA already trending lower in line with a deepening negative reading emanating from the 2-Year ROC indicator.
Using this ratio spread I might suggest that the stock market's paper-reflation outperformance trend from November of 1987 ended with the equity market's secular peak of January 2001 and has been transitioning into a bear market ever since.
Within the context of the rising tide of trouble posed by the subprime mortgage space, I note data on the offer in this morning's edition of "The Gartman Letter", detailing the upcoming blow-out in ARM resets. I note $22 bln in resets seen during January of this year and a jump to $43 bln in July with an increase to $55 bln on average over the next five months. But the real fun starts in 2008, with a spike to $80 bln scheduled for January '08, $88 bln in February '08, $110 bln during March '08 for a total exceeding a quarter trln in the 1Q of next year.
With that ominous thought in tow, I focus on the financial sector on its own merits, or lack thereof, starting with the breakdown taking place in the Dow Jones Financial Sector ETF, or IYF, shown in the weekly chart below. I note the violation of the uptrend line and long-term 52-Week EXP-MA in line with a negative return, as defined by the 6-Month ROC.
Leading the charge lower is Bear Stearns, seen in the daily line chart on display below, replete with downside reversal in the 200-Day EXP-MA and a negative reading in the 200-Day ROC, in line with the technical breakdown.
Bear Stearns is not at all alone.
I note two benchmark brokerage-banking-investment behemoths, both of which are breaking down in line with Bear, starting with Merrill Lynch, and an ugly long-term weekly candlestick chart perspective defined by a rare double-outside-reversal-week pattern. Whereas each of the last two trading lows that eclipsed the long-term 52-Week EXP-MA, both of which exhibited "stick" lows, the current pattern reveals a close near the low of the week.
I also spotlight last week's sharp decline and moving average violation enacted by Goldman Sachs (GS), shown in the weekly chart below. I also specifically note the On-Balance-Volume indicator, last week's breakdown as defined by a violation of the previous 2007 low, and violation of the multi-year uptrend dating back to 2004, implying increased long-liquidation risk.
Further, intensifying weakness within the financial sector does not bode well for the broader U.S. equity market, given the fact that the financial sector, and the broker-dealer stocks in particular, have led the bull move seen since 2000 and, in fact, since the late 80's.
Note the mega-macro-monthly ratio spread chart on display below in which I plot the price of Merrill Lynch against the broader U.S. stock market as defined by the S&P 500 Index. Merrill is not only breaking down on its own, and not only is it breaking down relative to Gold, but MER is cracking relative to the whole of the US stock market too.
I do not point out Merrill for any reason other than its long price history, and not because I am specifically negative on this one single broker-dealer. Indeed, I note the teetering action in the whole group as defined by the AMEX Broker-Dealer Index (XBD) relative to the S&P 500, as financials threaten to lead the broader market to the downside amid an intensified macro-risk environment.
The macro-risk is on the rise, clearly, as I have detailed at length elsewhere.
Foreign officialdom is seeing the intensified risk. The FOMC is seeing the intensified risk. And finally, investors are beginning to see the intensified risk.
More players are seeking shelter from the macro-storm that is brewing. It is within that context that I continue:
- To be bullish on the unhedged gold mining shares, and increasingly interested in the bull side of the bullion market itself.
- To be increasingly bearish on the U.S. financial sector.
- To be increasingly bearish on the broader U.S. stock indexes relative to those in Asia and Europe.
- To be bullish on European and Asian currencies.
- To look for credit spreads to widen.
- And I continue to look for an increase in overall volatility.
In short, I suggest that investors increasingly consider taking shelter from the macro-storm that is brewing.
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