Wither now for the markets?
(These comments were written on 6th to 9th June 2006)
Things feel positioned such that large change could happen fast. The equilibrium is fragile. Geopolitics are mostly behaving for now so I will focus on the US markets.
These have been a bit odd with stocks, commodities, bonds, currencies, moving in somewhat counter-intuitive ways in recent months. One would normally expect gold to go up when the US$ goes down, etc, but such 'normal' relationships have been at best unreliable, at times perverse, lately. I have the feeling that the reliability is creeping back in to those normal market relationships, the next Fed interest rate decision at the end of June will be particularly important in setting the tone. Reality is that the Fed MUST increase rates then - now that the majority expectation is that - to do otherwise would be admission that the US economy is too weak to take it.
US$ - about a month back it rapidly lost around 5% of its (DX) index value and has been in a narrow range between 84% and 85% of that index since. The question here is will it bounce back to perhaps 87% before declining to near 80% or miss the bounce phase.
Gold - has it retraced enough to build its strength for the next bull phase (price increase)? From the recent $720 peak it's back to $620-ish. Pragmatically I'd say: if the US$ bounces then gold has scope for more downside ($600, $560) but if you plan to buy gold for the medium to long term now is probably a good time to commit half your money, it should hit $1400 within 2 years. Silver too, it's below $12 now, it won't get much cheaper, could get much more expensive ($40 to $100). There is scope for a further 10% downside correction in next month or so and 100%+ increase in both gold and silver within a couple of years, buying opportunities (that is, moments of low price) will be limited, this may be the best chance you see.
Oil - currently about $71, declines much below $70 seem unlikely - the current trading range seems to be $70 to $75, moves below $65 would be surprising in the rest of 2006, $85 is more likely since we are now into hurricane season, spikes to $95 or beyond are plausible this year.
Property - has only begun to fall in price, there is much more downside to come. Properties for sale are higher than for more than a decade, many areas have 6 months worth of sales in unsold properties. Prices have barely started to reflect this change in supply / demand, price reductions of 30% and more are probable in recently overheated property areas and markets.
Consumer spend - will contract significantly due to the above two paragraphs. The consequence is that the US economy will contract, quite sharply. This has begun and will accelerate over the next year.
Soft commodities (coffee, cocoa, wheat, corn, soybeans, etc) mostly haven't benefitted from the run up in price of the metals and energy commodities. With the centre of the USA being a mite parched, humans consuming more grains than they are producing, fertiliser and transportation prices climbing, I expect some significant increases in these. Food is going to get more expensive.
GDP - people are going to be very surprised when 2006 Q4 shows negative growth. They'll be a bit surprised when 2006 Q2 comes in at about 3% or less, rather concerned when 2006 Q3 is below 1.5%.
Inflation - is growing more than the market bozos expected, it will grow significantly more over the next 2 to 4 months due to the low rates in 2005 months dropping out of the calcs. Near the bottom right of this page:
http://inflationdata.com/inflation/Inflation_Rate/AnnualInflation.asp
you will see the individual month's data. Inflation over the 4 months so far reported in 2006 is at an annualized rate of over 7%, May and June 2005 had less than zero inflation overall, the inflation picture will be looking significantly worse once the May and June 2006 data is reported. Headline inflation will top 5% for the first time in well over a decade in the next 3 months.
A note on US govt inflation and GDP statistics: there could well be some sudden tweaking of these calculations in the near future. Because of the way the property element of inflation is calculated (using equivalent rent) it has the tendency to understate inflation when property prices are increasing and overstate it when they are decreasing. Since we are now in the latter state TPTB (the powers that be) might find it desirable to change the rules.
Interest rates - helicopter commander Ben Benanke must appear strong in the face of inflation (or the US$ will be toast and with it the US economy). Thus the Fed rate must continue to go up, probably at least twice more, to 5.50% or higher. Real US interest rates have, at long last, crept up a bit and sit above 5% now; fixed rate mortgages are above 6%; access to money is tightening. Even the current US interest rates will tip the US economy into recession soon enough.
Stocks - have held up well due to liquidity pumping, decent corporate profits and hot air. There are many 'defence forces' against a sharp drop in US stocks nowadays, the PPT (plunge protection team) being just one. It looks like reality is just beginning to percolate into this corner of Wall Street and that the happy gas of Fed liquidity has started to dissapate. A plunge is on the cards, we may have seen the first stages. The inevitable statistical spurt in inflation data and the almost inevitable further Fed rate hikes indicate a further 10% to 20% drop in stock price indices over the next 3 months - unless the floating and 'free Fed' money has nowhere better to go in which case we could even see new highs in the US stock indices, lol.
Next week - May's inflation data is due out, PPI on Tuesday 13th, CPI 14th June. If it's the least bit worse than expected (PPI core and CPI core +0.2%, headline CPI +0.5%) stocks will fall through some important support levels and probably keep going down. I don't expect the US$ to benefit much if that is the case, though, the Forex markets look to have priced in a rate hike at end of June. TICS data on Thursday is more likely to move the US$ up or down if outside the $65 to 85 billion range.
The US economic picture will be looking significantly worse in 3 months time, I will hazard guesses for 15th September 2006 (barring major geopolitical upsets):
US$ 83.5% trade weighted, Euro 1.31, Yen 108
Gold $680
Oil WTIC $82
Fed base rate 5.50%
Stocks DJIA 9,200 S&P500 1,090
Speaking of geopolitical upsets, now is the time my hunch that GW Bush has a nasty tumble becomes due. No obvious signs of it yet - except he seems to have been keeping a fairly low profile the last month or two, let's see what the next couple of weeks bring.
Things feel positioned such that large change could happen fast. The equilibrium is fragile. Geopolitics are mostly behaving for now so I will focus on the US markets.
These have been a bit odd with stocks, commodities, bonds, currencies, moving in somewhat counter-intuitive ways in recent months. One would normally expect gold to go up when the US$ goes down, etc, but such 'normal' relationships have been at best unreliable, at times perverse, lately. I have the feeling that the reliability is creeping back in to those normal market relationships, the next Fed interest rate decision at the end of June will be particularly important in setting the tone. Reality is that the Fed MUST increase rates then - now that the majority expectation is that - to do otherwise would be admission that the US economy is too weak to take it.
US$ - about a month back it rapidly lost around 5% of its (DX) index value and has been in a narrow range between 84% and 85% of that index since. The question here is will it bounce back to perhaps 87% before declining to near 80% or miss the bounce phase.
Gold - has it retraced enough to build its strength for the next bull phase (price increase)? From the recent $720 peak it's back to $620-ish. Pragmatically I'd say: if the US$ bounces then gold has scope for more downside ($600, $560) but if you plan to buy gold for the medium to long term now is probably a good time to commit half your money, it should hit $1400 within 2 years. Silver too, it's below $12 now, it won't get much cheaper, could get much more expensive ($40 to $100). There is scope for a further 10% downside correction in next month or so and 100%+ increase in both gold and silver within a couple of years, buying opportunities (that is, moments of low price) will be limited, this may be the best chance you see.
Oil - currently about $71, declines much below $70 seem unlikely - the current trading range seems to be $70 to $75, moves below $65 would be surprising in the rest of 2006, $85 is more likely since we are now into hurricane season, spikes to $95 or beyond are plausible this year.
Property - has only begun to fall in price, there is much more downside to come. Properties for sale are higher than for more than a decade, many areas have 6 months worth of sales in unsold properties. Prices have barely started to reflect this change in supply / demand, price reductions of 30% and more are probable in recently overheated property areas and markets.
Consumer spend - will contract significantly due to the above two paragraphs. The consequence is that the US economy will contract, quite sharply. This has begun and will accelerate over the next year.
Soft commodities (coffee, cocoa, wheat, corn, soybeans, etc) mostly haven't benefitted from the run up in price of the metals and energy commodities. With the centre of the USA being a mite parched, humans consuming more grains than they are producing, fertiliser and transportation prices climbing, I expect some significant increases in these. Food is going to get more expensive.
GDP - people are going to be very surprised when 2006 Q4 shows negative growth. They'll be a bit surprised when 2006 Q2 comes in at about 3% or less, rather concerned when 2006 Q3 is below 1.5%.
Inflation - is growing more than the market bozos expected, it will grow significantly more over the next 2 to 4 months due to the low rates in 2005 months dropping out of the calcs. Near the bottom right of this page:
http://inflationdata.com/inflation/Inflation_Rate/AnnualInflation.asp
you will see the individual month's data. Inflation over the 4 months so far reported in 2006 is at an annualized rate of over 7%, May and June 2005 had less than zero inflation overall, the inflation picture will be looking significantly worse once the May and June 2006 data is reported. Headline inflation will top 5% for the first time in well over a decade in the next 3 months.
A note on US govt inflation and GDP statistics: there could well be some sudden tweaking of these calculations in the near future. Because of the way the property element of inflation is calculated (using equivalent rent) it has the tendency to understate inflation when property prices are increasing and overstate it when they are decreasing. Since we are now in the latter state TPTB (the powers that be) might find it desirable to change the rules.
Interest rates - helicopter commander Ben Benanke must appear strong in the face of inflation (or the US$ will be toast and with it the US economy). Thus the Fed rate must continue to go up, probably at least twice more, to 5.50% or higher. Real US interest rates have, at long last, crept up a bit and sit above 5% now; fixed rate mortgages are above 6%; access to money is tightening. Even the current US interest rates will tip the US economy into recession soon enough.
Stocks - have held up well due to liquidity pumping, decent corporate profits and hot air. There are many 'defence forces' against a sharp drop in US stocks nowadays, the PPT (plunge protection team) being just one. It looks like reality is just beginning to percolate into this corner of Wall Street and that the happy gas of Fed liquidity has started to dissapate. A plunge is on the cards, we may have seen the first stages. The inevitable statistical spurt in inflation data and the almost inevitable further Fed rate hikes indicate a further 10% to 20% drop in stock price indices over the next 3 months - unless the floating and 'free Fed' money has nowhere better to go in which case we could even see new highs in the US stock indices, lol.
Next week - May's inflation data is due out, PPI on Tuesday 13th, CPI 14th June. If it's the least bit worse than expected (PPI core and CPI core +0.2%, headline CPI +0.5%) stocks will fall through some important support levels and probably keep going down. I don't expect the US$ to benefit much if that is the case, though, the Forex markets look to have priced in a rate hike at end of June. TICS data on Thursday is more likely to move the US$ up or down if outside the $65 to 85 billion range.
The US economic picture will be looking significantly worse in 3 months time, I will hazard guesses for 15th September 2006 (barring major geopolitical upsets):
US$ 83.5% trade weighted, Euro 1.31, Yen 108
Gold $680
Oil WTIC $82
Fed base rate 5.50%
Stocks DJIA 9,200 S&P500 1,090
Speaking of geopolitical upsets, now is the time my hunch that GW Bush has a nasty tumble becomes due. No obvious signs of it yet - except he seems to have been keeping a fairly low profile the last month or two, let's see what the next couple of weeks bring.
posted by Agric | 22:47
0 Comments:
Post a Comment
<< Home