weekly market report 6/5: FINALLY some action

Let’s begin by reviewing the first words from my update last week, then looking at the recent gains associated with that forecast.
I’m watching for gold and bonds to breakdown this week….”
 

Well, bonds finally did dip hard. I highlighted this week in the chart below. (Gold and silver also dropped, though only modestly so far.)

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Next, let’s look at two of the main investments that I use to profit from declines in metals and in bonds:

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DUST changes value based off of prices of certain gold mining companies. Even though metals prices have been “going against my forecast” for most of the last few weeks, I have taken positions occasionally in JDST and/or DUST. Between those two, DUST has done better in recent weeks overall, rising almost 40% from 5/19 to this morning.  

TMV rises when US bond prices fall, so it went up about 23% since 5/22, with over 1/3 of that gain just this morning.

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Next, moving on to US stocks and then global oil prices, I have been focusing on the waning momentum in both of those markets across recent weeks. While I stated last week that there was plenty of potential for a continuing “drift upward,” I still expect that to resolve downward (if not next week, then soon after).

Lately, I have been taking some occasional small positions for a lasting drop in those markets (with mixed results). As of this week, so far the rallies have continued.

Below is oil’s last few weeks, with the strongest part of the rally long past (a rapid rise of 180% from the black arrow to the green arrow… compared to gains of a little over 40% more since then):

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This morning, both markets (oil and US stocks) rose sharply in reaction to a news release. Such short-term “buying panics” are often enough to exhaust the remaining potential for a rally. I would not be surprised if stock prices (globally) fall hard early next week.

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So, the euphoric enthusiasm of mainstream investors in the US is evident in the following contrast. Even though total job losses this year in the US are extremely high, there is actually more optimism now than there was in January when I reported “historic extremes of downside-risk” in US stock markets. In recent months, the economic destabilization that is manifesting internationally is more sudden and severe than anything that has happened in my lifetime. Yet, investors in the US (unlike Hong Kong and certain other parts of the world) are pouring back in almost “as if the recent destabilization didn’t even happen.”

 
My analysis is that stock prices in the US are even more unstable now than they were in January. Many companies have FAR worse finances, as well as many middle-class households. Yet, stock prices are almost as high as in January when the final stages of the prior rally manifested.

Given the extent of the downturn that has already manifested, I am doubtful whether Europe will recover. Europe’s stock prices peaked in 2000 and, according to my analysis, many economic problems have been getting worse there for the last 2 decades. I expect the “shock” of recent months (the cash crunch) to eventually set off quite a sequence of selling panics.

One of the next sell-offs that I expect will be the selling of Euros as people flee toward the US Dollar and away from Europe’s “accelerating catastrophe.” On that note, here is what I wrote last week about the EUR:USD forex rate.

I expect the latest rally to “fail badly.” The closer it gets to 1.13, the more interested I will be in watching for a sharp enough decline that I want to begin to incrementally increase exposure.

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So, I do believe that the recent surge to nearly 1.14 was the end of the rally. Prices quickly fell below 1.13.

As I expected, the latest rise has been slower than the one in late February. While this market has been rather flat for the last two months, the market conditions are quite ripe now for a sharp and lasting decline. Prices could easily fall in a single week to erase the last 2 months of modest rallying.

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In some ways, investment markets are like a wind-up toy. Like winding up the spring apparatus, it can take a long time to accumulate a pressure that releases rather suddenly. A key part of my forecasting is to monitor measurements of such “unresolved pressures.”

How did the US stock market erase 3 years of gains in a few weeks early this year? There was a measurable accumulation of “pressure” which was historically extreme. Many current measures are currently even more extreme.

After the January 8th peak in global oil prices, there was also a historic decline. After weeks and weeks of decline, there was a selling panic that in a matter of hours brought crude oil prices from the upper $20s to under $7. But that created a contrary “pressure accumulation” that lifted oil from under $7 in mid-April to nearly $40 today (around 6 weeks later).

So, with investment markets, there is the alternating aspect like of tides or a pendulum, but also the “sudden release” aspect of a wind-up toy (after a very slow build-up phase). These principles apply to real estate as well as bitcoin.

Most investors do not recognize that their investment strategies are fixated on “entering markets that are growing more popular” rather than exiting those markets while they are still popular. The analogy of the poker game is important to me. Every dollar that a player takes away from that table after a win, some other player brought to that table. It is the same principle as with betting on a sporting event, with all the winnings coming from someone else’s “enthusiasm to risk their wealth.”

“Safe” things like insurance annuities or pension funds are not magical sources of wealth. They are actually some of the most unreliable retirement investment vehicles in our midst. While that may not be obvious to most people, that is because they have not researched the topic to make such an assessment.

The massive accumulations of enthusiasm and complacency can be “released” quite suddenly. That reminds me of people recently discussing the issue of whether property insurance policies will cover property damage during “civil unrest.”

I will comment by making this uncontroversial statement. Even if a policy does cover such a thing, an insurance company that has no money to pay what they legally owe will not pay what they legally owe.

A pension fund with no money left may still have a legal obligation to pay beneficiaries, but that is just a legal obligation. That is like a court judgment against a debtor who is insolvent (bankrupt). Court officials cannot enforce it even if they wanted to.

So, the gaps between popular perceptions and actual reality can slowly diverge across very long periods of time, then “close.” The gap between perception and reality can vanish in a matter of seconds… or a matter of weeks.

Either way, it is valuable to measure both the reality of things and the public perceptions of those realities. Where the gap is historically unprecedented, the opportunity may be as well.

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