August 14, 2015
By Steve Blumenthal
“Something is deeply wrong if an economy is not growing, because it means these natural processes are impeded. That is why around the world, since the Dark Ages, lack of growth has been a signal of political oppression or instability. Absent such sickness, growth occurs.”
– Adam Posen, “Debate: The Case for Slower Growth”
Recall China’s ghost cities. We sit today on the other side of that massive build out. Global growth is slow. Deflation is the significant risk. Commodities are a mess and as we’ll look at this week, expect commodity weakness to persist.
China’s Yuan devaluation surprised the markets and, frankly, re-awakens the global currency wars. China’s move is to spur growth by cheapening their currency vs. their competitors. A stronger dollar buys more goods from Chinese manufacturers. Power to the Dollar – but that too comes with consequence.
Let’s take a look at a great piece from Gary Shilling courtesy of my good friend John Mauldin. Next week let’s do a deeper dive into the escalating Currency Wars and look into what that might mean as it relates to your portfolio. Bottom line for the immediate future – the Fed won’t raise rates in September or in December. China just did the work for them.
Included in this week’s On My Radar:
- Commodity Weakness Persists, by John Mauldin
- Trade Signals – Extreme Pessimism (Bullish), Zweig Bond Model Says Stay Long Bonds – 08-12-2015
Commodity Weakness Persists
Shilling writes,
China, The Manufacturer As manufacturing shifted from North America and Europe to China – with China now consuming more than 40% of annual global output of copper, tin, lead, zinc and other nonferrous metal while stockpiling increased quantities of iron ore, petroleum and other commodities – many thought a permanent commodity boom was here.
So much so that many commodity producers hyped their investments a decade ago to expand capacity that, in the case of minerals, often take five to 10 years to reach fruition. In classic commodity boombust fashion, these capacity expansions came on stream just as demand atrophied due to slowing growth in export-dependent China, driven by slow growth in developed country importers. Still, some miners maintain production because shutdowns and restarts are expensive, and debts incurred to expand still need to be serviced. Also, some mineral producers are increasing output since they believe their low costs will squeeze competitors out. Good luck, guys!
Gary looks at copper, oil and impact of a strong dollar on commodity prices. He concludes: “Commodity prices are under pressure from a number of forces that seem likely to persist for some time.”
Well worth the read. Click here for the full piece.
Trade Signals – Extreme Pessimism (Bullish), Zweig Bond Model Says Stay Long Bonds – 08-12-2015
I believe China’s surprise Yuan devaluation keeps the Fed on hold. Raising rates will further strengthen the dollar. A stronger dollar may ultimately be our greatest market risk – triggering crisis in the $9 trillion EM U.S. dollar denominated debt.
While the U.S. economy looks ok, the global economy is at or near recession. We are in a debt driven deflationary spiral. So as market stress intensifies, we collectively hope and pray for Fed support. Watch for the Fed signaling that September is off the table. All about that Fed – until it’s not.
Sentiment is again reading extreme pessimism. Historically, such readings are bullish for the market. Big Mo and the13/34-Week EMA trend charts remain in buy signals. The Zweig Bond Model’s buy signal, triggered several weeks ago, continues to look good. The 10-year Treasury yield has declined from 2.45% to 2.10%.
Following a defined process is important. For me, the overall trend, while weakening, remains bullish. Risk remains high. I continue to favor hedging equity exposure, allowing tactical processes and other alternative strategies to further portfolio diversification.
Included in this week’s Trade Signals:
- Cyclical Equity Market Trend: The Primary Trend Remains Bullish for Stocks
- Volume Demand is greater than Volume Supply: Buy signal for Stocks
- Weekly Investor Sentiment Indicator:
- DR Crowd Sentiment Poll: Extreme Pessimism (short-term Bullish for stocks)
- Daily Trading Sentiment Composite: Extreme Pessimism (short-term Bullish for stocks)
- Don’t Fight the Tape or the Fed: Modestly Bearish – Watch Out for Minus Two
- S. Recession Watch – My Favorite U.S. Recession Forecasting Chart: Signaling No Recession
- The Zweig Bond Model: The Cyclical Trend for Bonds is Bullish
Click here for the link to all of the charts.
Concluding thoughts
It’s the $9 trillion in dollar denominated loans that is high on my worry list. The higher the dollar, the greater the debt crisis outside the U.S. for those loans taken out by borrowers from Brazil, Turkey, Korea, Taiwan, Europe, China and others must be paid back in dollars.
Take out a mortgage for $1 million and pay it back over the next 20 years with income you earn in dollars. Borrow $1 million and pay back $1 million; however, if you live outside of the U.S. and earn your income in that country’s currency, the amount you must pay back is dependent on the move in the dollar.
If the Fed raises rates, then the U.S. bonds look even more attractive relative to German Bunds, Japanese Bonds and right now pretty much any other offering out there. Capital flows to where it is treated best. Add into the mix the problems in most of the developed world and a high probability of global recession and on comes a flight to quality. Power to the Dollar – at least for now.
Unfortunately, just as China is seeing today, a strong currency makes a country’s goods more expensive and leads to economic slowdown. A strong dollar will lead to our next downturn within a few years. Stay alert, risk focused and hedge that equity exposure.
Personal note
The beach is great and the family is happy but China did stir up some indigestion for me mid-week. A few trades to be made… We are never quite fully away in this business.
I took my chair down by the water, closed my eyes and listened to the waves crash. For me, meditation is a must and the sound of the ocean helped me get back to center. The wine helped too. The kids are really enjoying each other. Brianna begins her career in a few weeks and Tyler heads off to college on Sunday. Time goes by far too fast.
Here is a toast to peace in your life. Enjoy your family and these last few weeks of summer.
With kind regards,
Steve
Stephen B. Blumenthal
Chairman & CEO
CMG Capital Management Group, Inc.
Stephen Blumenthal founded CMG Capital Management Group in 1992 and serves today as its Chairman, CEO and CIO. Steve authors a free weekly e-letter titled, On My Radar. The letter is designed to bring clarity on the economy, interest rates, valuations and market trend and what that all means in regards to investment opportunities and portfolio positioning. Click here to receive his free weekly e-letter.
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