The Reflation Trade

Or the rate of change of inflation over time –  The Inflation rate is declining over time, but it remains positive. (Their verbiage – not mine.)

Central Banks despite their huge and sustained injections, can’t effect change… Yet… despite massive efforts Globally.

#CHINACPI #DISINFALTION
China CPI

 

 

 

 

 

 

 

China faces greater economic risks internally – The PBOC will need to mobilize once again, even with massive RMB injections.

Global reflation is failing while Debt extends.

#REFLATION #INFLATION
Global Reflation

 

 

 

 

 

We must consider what Central Banks will employ.

I don’t believe Monetary efforts will assist in preventing a further decline. Governments are going to be required to spend and spend at a pace unseen in Human History.

 

1982 – Prior Positive Correlation Au/DX

Thanks to Christopher Aaron @ iGold Advisor for jogging my brain this afternoon. Chris was kind enough to send me his thoughts and analysis.

His piece brought my mind back around to an unusual environment… as the Markets grow increasingly complex over time. I was reminded of the prior positive correlation of the Dollar and Gold – 1982 to be exact.

As you can see – it’s been awhile since the US dollar and gold price moved in the same direction.

Gold being priced in dollars – the traditional correlation has been inverse. The most recent and short-lived Positive Correlation was in January of 2009 when the rally in the US dollar corresponded with the rise in the gold price – out of the 2007-2009 Finacial Crisis – both Gold and the Dollar rose together.

During 1982 recession hit many countries including the United States… The rise in gold prices can be partially attributed to future inflation problems (i.e.. Stagflation during the late 70’s and into 1980).

That was then… a paired movement in the value of gold and the US dollar suggested central banks around the world were losing credibility.

The US dollar has been falling for some time now – the twilight of its immense seniorage privilege could be closer than we imagine.

Gold usually informs the market that investors are worried about global economic stability outside of the US and preparing for the worst – this of course is tradition… it is missing due to an intense effort to stifle the Price of Gold and Silver since 1934. Since 2011 – this effort has intensified orders of magnitude.

Often things just get screwed up, this may well be one of those periods. We shall see – this was to serve as merely a subtle reminder – we can expect the unexpected – it’s not irrational, we simply don’ know until it ex-post.

Will it happen again, It could… than again, the DX could simply fall to 70 and that would be spectacular for Gold & Silver – but rather ruinous for our Nation.

 

Energy – Externalities: when the Globe begins pricing in Euro/Gold – The US will be unable to intervene.

Energy – the EROEI will eventually shows its hand. WTIC will return to $150 and above. A high mileage Vehicle is recommended.

Long Crude is going to be an amazing trade – likely one of the most profitable. Far exceeding the metals initially – Cl & QM recommended – NO ETF’s – they leak and basically rob you of the trade for the majority of time held.

Owning Physical will be the Play in Metals. Most Mining Companies are unhedged to Energy – purposefully so. They won’t perform as expected once reality sets in – this next run is a pure play on the Metals.

Will the Miners run… yes, of course, but over the Long Haul they are paper promises to delivery reserves in the ground. Very few will be LT Holds. Specs will chase the Juniors, they are assured of screwing shareholders once again.

The temptation will be too grand.

chart compares the month-end LBMA fix gold price with the monthly closing price for West Texas Intermediate (WTI) crude oil since 1946.
Chart compares the month-end LBMA fix gold price with the monthly closing price for West Texas Intermediate (WTI) crude oil since 1946.

 

 

 

 

 

 

 

Chart tracks the ratio of the price of gold per ounce over the price of oil per barrel. It tells you how many barrels of oil you can buy with one ounce of gold.
Chart tracks the ratio of the price of gold per ounce over the price of oil per barrel. It tells you how many barrels of oil you can buy with one ounce of gold.

 

 

Delta

I had a profit Target for the ES @ 2264 during the 2016 Election cycle. We completed and exceeded it by a wide margin – the draw was to 2520 as I suggested back in December based upon channel continuation – we hit 2488. Not too far off, if it is indeed complete for this move.

We never had a pullback – it may well have finally arrived.

During 2015 & 2016 – August served as retracement month for the Broad Indices. Will August of 2017 provide a pullback into support?

We will know shortly – we broke the longs on the sideways consoldiation trade. There is the potential for a new measured move from Lows to Highs.

Resistance is 2475 – with 2478 as the 12 tick overhead absolute.

We have broken a number of technical Longs on the YM as well… a break of trend and failed the series.

The Dollar remains above the absolute support @ 91.88, but remains a very Negative setup – The Yen is straddling the 111s with 109s on deck.

The NQ is no different – same rules apply.

Shorts will chase the swoon down, setting up the next short at the  new draws off the bottom – I will complete those when available.

The Crude Oil inventory will set the trade going forward – resolution of consolidation – up or down.

The DX/JPY is within its fifth week of spreading. Last week was a large consolidation. Overnight we sold off… leading us back to 109.50 & 109.35.

110.25s would be the next entry into the trend.

Gold & Silver continue to rally inside of their longer term trends – 1288/91 and 1338 are in play. The overnight daily draw hit to the tick off the 6/6 highs to the 7/7 lows.

I’ve had to flip at this juncture and reverse the trade. There is no short trade, not yet. It’s been blown out and when the market moves against your thesis – you obey.

Everything is about to flip – this is the markets message.

Every week we have rallied into the close of the week – the one exception – last week. Support levels traded while the DX/JPY found support. Gold & Silver retest the 38.2% and 50% Short. The resistance levels are DX/JPY – we need to watch the pair closely for pullbacks that lead to new highs and higher yearly highs.

Silver is breaking up, the next measured long would trade off a retracement – by the numbers.

The Bond Market has been defending Long setups for Six Months… a pullback is to be expected – then resumption of the trend.

Everything is about to change – we need to adapt and obey.

 

YM

Everything is in the same trend… Currencies have been the most technical all Summer.

USD/JPY remains the key.

Gold has held 1257.25 – Support trading. Dollar Yen – resistance trading.

No confirmations of extensions – we should see it today after 10AM EST.

We may well be looking at a break and the opportunity to Buy pullbacks in Gold with the overhead targets of 1288 & 1338.

Caution warranted as we are seeing Silver defend pullbacks.

Watch the Long setups, we have no short setups to trade – DX/JPY is going to provide all the information necessary. 

ECN Data 2Day

Important Data released today and Friday bares close scrutiny. It will shape action into Fridays session.

7:00 AM ET

MBA Mortgage Applications

8:15 AM ET

ADP Employment Report

10:30 AM ET

EIA Petroleum Status Report

Yellen will be uttering her words of wisdom on QT later today – indicating timing of normalization as well as tightening for December.

Friday we will see ADP Employment and Trade Data.

Monday is a Full Moon.

 

IMF says Dollar overvalued; Euro, Yen, Yuan broadly in line with fundamentals

The International Monetary Fund on Friday said that the U.S. dollar was overvalued by 10 percent to 20 percent, based on U.S. near-term economic fundamentals, while it viewed valuations of the euro, Japan’s yen, and China’s yuan as broadly in line with fundamentals.

The IMF’s External Sector Report – an annual assessment of currencies and external surpluses and deficits of major economies – showed that external current account deficits were becoming more concentrated in certain advanced economies such as the United States and Britain, while surpluses remained persistent in China and Germany.

While the report assessed the euro’s valuation as appropriate for the eurozone as a whole, it said the euro’s real effective exchange rate was 10-20 percent too low for Germany’s fundamentals, given its high current account surplus.

Britain’s pound, meanwhile, was assessed as up to 15 percent overvalued compared to fundamentals, which include a high level of uncertainty over Britain’s post-Brexit trading relationship with the European Union.

The Fund said the dollar’s appreciation in recent years was based on its relatively stronger growth outlook, interest rate hikes versus looser monetary policy in the eurozone and Japan, as well as expectations for fiscal stimulus from President Donald Trump’s administration.

But so far this year, the dollar index, .DXY the broad measure of its value against other major currencies, is down more than 8 percent this year and is off to the worst start to a year since 2002.

The IMF recommended that U.S. authorities take steps to shrink a current account deficit that remains too large, by reducing its federal budget deficit and passing structural reforms to increase the savings rate and improve the economy’s productivity.

“It’s important to address imbalances, because if they’re not dealt with appropriately and through the right policies, we could have a backlash in the form of protectionism,” IMF Research Division Chief Luis Cubeddu told a news conference.

Cubeddu said that the persistence of current account surpluses in export countries such as China and the growth of deficits in debtor countries such as the United States suggested that the problem would not clear up automatically.

“That is, prices, savings and investment decisions don’t seem to be adjusting fast enough to correct imbalances. This partly reflects rigid currency arrangements, but also certain structural features, like inadequate safety nets, barriers to investment, which leads to undesirable levels of savings and investment,” he said.

The report said that while China’s yuan was broadly in line with its fundamentals, IMF models showed wide divergences with desired policies from a 10 percent overvaluation to a 10 percent undervaluation due to uncertainties over Beijing’s policy outlook.

The U.S. Treasury in April refrained from declaring China a currency manipulator despite Trump’s campaign promises to do so, citing Beijing’s interventions last year to prop up the yuan’s value in the face of capital outflows. But it kept China, South Korea, Taiwan, Germany and Switzerland on a monitoring list for large external surpluses.

The IMF said China’s current account surplus was growing again after declining in 2015 and 2016 and needed to be reduced. This should be achieved by rebalancing the economy away from investment and credit growth toward more consumption, with a stronger safety net, reforms to state-owned enterprises and opening Chinese markets to foreign competition.

The report also showed that the IMF considers Mexico’s peso and South Korea’s won both to be undervalued by 5-15 percent compared to their fundamentals. The Fund said it expects Mexico’s undervaluation to reverse as risks of protectionist U.S. policies dissipate, but South Korea needed to stimulate domestic demand to reduce a large current account surplus.

Reporting by David Lawder; Editing by Nick Zieminski, Bernard Orr – Reuters

*** The IMF is run by the ESF… consider this message track carefully.