THE CURRENT NARRATIVE ON STOCKS REACHED DANGEROUS LEVELS

The markets cheered and climbed higher despite the potential of more interest rate hikes int he future. First, the PMI data came in at 54.2 vs expectations of 53.9. Then came the Housing Market Index which came in at 70 vs expectations of 63.

The we have another USD10B of gold futures contract being dumped into the market due to the rising USD. This caused gold to break the USD1,150 support line and as a result silver plummeted by a whopping 5%! Since election, total gold futures contracts sold have exceeded the global production many times over.

But first let's look at the PMI data. Zerohedge published an interesting comparison between the PMI data which is a survey of Purchasing Managers (soft data) vs the hard data which is the Industrial Production (see chart below). Notice how completely out of sync the two sets of data are. It is the Industrial Production data that gives better guidance of the Q4 GDP.

Source: Zerhedge

Next we have the Housing Index which is a measure of the confidence (soft data) in the housing market. But let's look at what is actually happening. The Purchase Mortgage Index and Refinance Mortgage Index fell -4.0% and -4.0% respectively vs the week earlier. Yes, the builders are confident but the buyers are showing signs of fear of higher mortgage rates.

And if you remember the chart I posted a few days ago on home ownership which is in multi decades low.

So the Housing Market confidence could be somewhat misplaced as rates are expected to soar going forward. Today, Wells Fargo's 30 year mortgage rate is 4.25%.

For refinancing, the rate is 4.625% and this has got Freddie Mac (a national mortgage giant) alarmed (see chart for refinancing). The number of refinancing has dropped more than 50% (from 8.3M to 4.0M).

Source; Zerohedge

The amount of US Treasury sold by foreign central banks on a rolling 12 month period surpassed USD403B a new record by itself (see chart). The previous record was USD375B. 

This is a sure sign that US government will have to pay higher interest for its US Treasuries going forward which swell its extremely high deficit.

Source Zerohedge

The Fed targets 1.25% interest by 2017. Assuming the US government debt remains at USD20T (which will never happen due to annual deficit of USD600B), the increase in 1% interest means that interest payment will increase correspondingly by USD200B a year which it needs to borrow by issuing new US Treasuries.

We have not even counted the impact of further tax breaks as proposed by Trump.

On top of that, non financial corporations outstanding debt stands at USD5.7T. This 1% increase will result in a debt service cost of USD57B a year which will eat into the earnings. On top of that, the strong USD will weaken earnings further.

So the markets continue to ignore the weakening fundamentals, the impact of interest rate hikes and strong USD in earnings and the bond carnage which put the risks at very dangerous levels.

It pays to be careful now more than ever as the curretn narrative ons tocks has reached dangerous levels

The above is just my opinion.

THE EXUBERANCE HAS REACHED WORRYING LEVELS

All the major indices in the US continue to push to new record levels. Such exuberance has not been seen since the dot com super bull run - which points to more risks ahead. Of course some may argue that this time is different. Trump is not in office yet but the markets are all pricing as though the US GDP will grow 4% - 5% a year.

Here's why I think the markets have gone ahead of themselves.

1) The good number in US Factory Orders which rose to its highest in 16 months.This led to a higher PMI number as well. And of course the market cheered. But take out the transportation (aircraft orders) and military spending, it is down. Coincidentally, the US budget deficit rose to US$600B and debt increased to US$1.2T in the year. It looks like the US government borrowed even more money to spend to boost the economy, presumably to help the Democrats retain the Presidency. The US government is spending money at an alarming rate, money it does not have (see chart below).

2) The Unemployment at 4.6%. That is pure manipulated data. A separate report showed that anther 446K joined the ranks of people of employable age but could not find a job. That number is now 95M. Just some months ago it was 94M. Meanwhile, the bulk of it are part time and minimum wage workers and the number of workers holding multiple part time jobs have also increased. So, do you see the picture? Number of jobs is not equal to the number of persons employed. Meanwhile the Labour Participation Rate continue to remain weak - weaker than the pre-crisis level. But the markets never analyse anything beyond the headlines

3) The economy is going to reflate. Interest rates will go higher. It’s good for the banks. Therefore it is not a surprise that the Financials are leading the indices higher. Since when are higher interest rates good for the economy? When the Fed normalised interest rate to 5% in 2008 the entire global economy went into a severe recession. Higher interest rate will impact housing and refinancing.

A person needs to have 45% higher income now to buy a medium cost house than four years ago based on the revised housing loan rate. What does this tell you? To me it looks like housing is getting further beyond the reach of the average income earner. 

Higher interest rate also means higher cost of debt service for corporations. Since the last few years US corporations have borrowed US$2T – US$3T. What will higher interest means to the earnings of these companies?

Another thing which investors are ignoring is the bond carnage. US Treasuries are being dumped, therefore pushing the yields higher. This could impact on the borrowing costs of the US government. The US would have to borrow at a higher interest rate to pay for debts which it incurred at lower interest rate. This is the most dangerous part which the markets ignored.

4) The strength of the US$ will hurt multinationals. According to Fact Sheet 50% of the companies in the S&P earn their revenue abroad. Yet the markets are not even pricing in the impact of the US$ on their earnings.

It does pay to be careful when markets are at such lofty levels.

In the meanwhile, avoid buying any gold or silver miners as I believe there could be a takedown in the precious metal in the run up to the FOMC meeting next week where the markets have price in a 0.25% hike in interest rate. The best time to reassess your position again is after the FOMC meeting. However, other miners in iron ore, lithium and copper have seen their share price risen in the past few weeks.

ITALIAN REFERENDUM AND GOLD AND SILVER TAKEDOWN

The Italian referendum came and went. But the markets have never been more chaotic.

As Zerohedge reported, in BREXIT, it took the markets 3 days to recover, in Trump's win, it took 3 hours and in the Italian referendum, it took 3 minutes for the markets to swing from a loss to a gain, thanks to central banks intervention once again. 

It looks like the central banks were able to act in unison to prevent any fallout. Gold was once a gain a victim. A total of US$3.5B of gold contracts were dumped starting with the LBMA open and then another huge sell off at the COMEX open. However gold recovered towards the end of the trading day losing just a few Dollars. Silver was likewise manipulated, but it held on to its position and was little change at the end of the trading day.

Although at the beginning the miners surrendered more than half of their gains achieved Friday, by the closing bell the some miners were mostly in the green.

The situation was not helped by rumours that India is restricting gold ownership which later was denied by the officials. Frankly I don't see that happening as many temples in India have vast amount of gold and it is unlikely the government would want to stir a hornet nest by imposing restrictions on gold ownership. Still the bullion banks will ride on any rumours to take gold down.

Then we have the liquidity problem in China that is causing the government to restrict import of gold despite the large appetite for the precious metal in China. The liquidity crisis in China is a major problem and could trigger a wide spread crisis in the region. Already, there are several restrictions on cash such as conversion to foreign currencies, bitcoin and merger and acquisition by state companies. China would not impose such restrictions if the situation is not dire.

However, the demand for gold in India continues unabated. Chinese are paying more than US$20 premium per oz over the spot prize. In India the black market for gold is more than US$3,000 per oz. The greater the restrictions the greater the demand.

So the bullion banks use the restrictions as a negative narrative to push down the price of gold, but events within the countries show otherwise. Therefore it is not surprising that many long term holders panicked and sell off.

If anything the crisis in India and China shows that when all else fail, gold and silver are the only protection against major crises.

Going back to silver. Silver has held up pretty well because silver is not only a precious metal but an important industrial metal.Silver is used for all types of electronics due to its super conductivity. it is also used in the medical industry due to its medicinal properties. None of these are ever recycled. So silver supply is falling and production now is lower than 2015.

Economic growth in US could lead silver higher, not as a precious metal but as an industrial product. Since May, the US has been importing tremendous amount silver. It could be a sign of demand and that bullion banks have shortage in silver. Silver therefore could be the Achilles heel of the bullion banks.

The US$ has weakened somewhat in the last few days. One thing to look out for is the USD/JPY rate. The elation of a Trump victory has caused the US$ to skyrocket and the Yen weak. What happened next was a carry trade in Yen (due to low interest rate) to purchase securities in US, which pushed US$ higher and the Yen even weaker. According to Phoenix Capital, the carry trade was somewhere in the region of US$10T. I will be watching for further signs for the Yen to strengthen due to the following:

1) As the US stock market losses steam and economic realities set in, a big correction could ensue and with that a falling US$

2) Further dumping of US treasuries. This is akin to dumping US$ which could weaken confidence in both the US economy and US$

3) A sell off in international bonds could reach Japan's shore. About 10% of Japanese bonds are owned by international investors. A sell off could spark a rise in yield thus making the Yen stronger and the US$ weaker

4) A falling US$ will mean a stronger Yen and this could cause a domino effect as the carry trade is unwound. There will be a massive crash as investors panicked pushing the US$ lower

In such a scenario, gold and silver, miners and related ETFs could do well.

Precious metals aside, I believe the next major trade will be in commodities, and companies involved with commodities could perform better than other industries. Some of the major movers recently are iron ore, zinc and lithium Another commodity which has reversed its downtrend is copper. It therefore pays to look out some good copper producers.

The above is just my opinion.

CARNAGE IN THE BOND MARKET AND THE DISCONNECT IN THE STOCK MARKET

A lot has happened in recent weeks. But lets tackle one issue at a time.

Saudi Arabia and China are dumping US Treasuries, thereby causing the yield to rise. Dumping US Treasuries by billions (USD375B in the last 12 months to be exact) is akin to dumping of USD. By right, it should cause a fall in the value of USD. However, the increase in yield is prompting many to speculate that the Fed will raise interest rates aggressively, which boosted the value USD.

Herein lies the disconnect.

1) A strong USD will hurt US multi-nationals as Emerging Markets currencies have collapsed vs the USD. This could cause a fall in earnings in Q4.

2) Similarly, US exports could hurt as a stronger USD will make US made goods more expensive. So export based companies could see their earnings being hit in Q4.

Yet, the Trump euphoria continues unabated as the various indices made record highs. If 1) and 2) is likely to happen, with new record highs being made, this means that the PE ratio could explode higher, pushing the risk to reward ratio higher in the process.

3) High interest rates means that mortgage rates will spike. In fact, right now the US mortgage rate has spiked above 4% which is a 50 basis point move. Meanwhile property price in Miami, San Francisco and NY are under pressure. Foreclosures in the month of October rose 27% vs September. So with higher mortgage rates, expect more foreclosures culminating in a Housing Crash 2.0. Yet investors choose to ignore this underlying problem.

4) While Trump's fiscal stimulus looks good on paper, how are they going to be finance remains a BIG question. On this question, this is what his chief strategist, Bannon has to say:

"The conservatives are going to go crazy. I’m the guy pushing a trillion-dollar infrastructure plan. With negative interest rates throughout the world, it’s the greatest opportunity to rebuild everything. Ship yards, iron works, get them all jacked up. We’re just going to throw it up against the wall and see if it sticks.”

Is he inferring that Trump would squeeze the Fed for more QE?

What about the US debt? Higher interest rates would mean higher debt service. So how will the budget conservative House react to the fiscal stimulus? Will it be trimmed down? Watered down? Full support?

As it is, the market has got ahead of itself which make the coming weeks and months dangerous.

Two events to look out for are the early December voting by the Italians and Austrians. According to the polls, the right-wing and Leave EU parties in both Italy and Austria are forging ahead.

In France Le Pen who is anti EU is also ahead of the polls.

Rest assured, there will be a lot of volatility and with the EU facing a banking crisis, any major disruption in the EU could snowball into a major crisis due to the interlinked financial derivatives.

Meanwhile, the Fed refused to commit a rate hike December even as the market priced in a 100% chance of a rate hike. Yellen kept on repeating that the case to raise interest rate is high and likely to be soon. As Peter Schiff, a well known economist said, "Why say soon? Why not just say in December?"

The reason as he reasoned out, even the Fed is not 100% sure.

WHY THE US IS HEADING TOWARDS HIGHER INFLATION

Been away for a few days, but still keeping tap on the news in several fronts.

Let's talk about the Trump euphoria and the upward trend in the US indices.

The Dow made historic record high levels while the S&P and Nasdaq continue to trend higher. The argument is that Trump's policies will be good for US growth, and a strong US economy means a stronger US$ and rising interest rates.

Trump intends to have 15% corporate taxes and scale back payroll tax. Lower corporate tax will allow companies to repatriate their trillions of dollars back to the US from overseas and relocate their manufacturing back to the US.

Trump indicated he would implement strict immigration rules and deport illegal immigrants with criminal record, and according to some early estimates, as many as 2 -3 million people.

Also, Trump would slap 35% tariffs on a selected range of imports.

Besides the above mentioned, Trump's plans include spending US$1T to upgrade and build new infrastructure and continue to expand US military.

According to Ray Dalio, total US debt and unfunded liabilities is 1,100% of US GDP. Herein, lies the main challenge and why the US will face tremendous headwinds going forward.

And according to Zerohedge China has not bought any US Treasuries for quite some time and has been aggressively selling them since the election.

Here's my take based on the news:

1) Debt and unfunded liabilities remain the most thorny issue but Trump has not announced any plans how to combat these two which is why I think debt will continue to skyrocket under Trump due to spending on infrastructure and military in a reduced tax environment which in turn lowers government income. Sure, the growth in the economy could increase corporate tax and payroll tax revenue but according to the Congressional Budget Office, Trump's plans could likely increase US debt by another US$5T.

2) Trump may have the private sector funding part of the infrastructure development and allow the private sector to collect toll in return. So this would pass the burden to the consumer, possibly impacting on their consumption and create inflationary pressure due to price increase of goods as the tolls will increase the cost of delivery. In this case we have consumer with lower payroll tax but needing to pay for tolls and increase in price of goods. This may negate the impact of a lower payroll tax.

3) Deportation of illegal immigrants and a strict immigration policy could cause labour shortage. In a tight labour market, wages would have to increase and this could eat into companies profit. Company earnings could be pressured. The only way to offset this is to pass the labour cost to consumers. So inflation would rise.

4) As a result of rising inflation, the Fed would have to raise interest rates. As interest rates rise, so too will be the amount of interest the US government has to pay for its debt. The US deficit rose to more than more US$600B in 2016 with interest rate at 0.50%. With inflation expected to rise, the US deficit will continue rising going forward, and at a 5% normal rate, will push the US interest payment to US$1T a year based on a US$20T debt level! With mounting deficit and higher debt service, the US will have to resort to money printing. While the expectations of higher interest rates push up the US$, once the US government resorts to printing its way out of debt and to fund its liabilities, the US$ will tank.

Raising interest rates could impact upon the earnings of many companies as many have borrowed excessively to buy back shares in the last few years. So companies may have to cut spending or increase price to ensure earnings growth.

Not to forget any huge shift in interest rates could unravel the US$1.5Q derivatives market.

If the US is serious about reining in its debt, it would have to cut spending drastically, but which government will do that? Especially the US, which spends more in military and any country in the world?

5) A strong US$ will result in US multinationals being hit hard as their earnings in US$ will fall drastically. Export based companies will also be similarly impacted. Lower earnings could push the indices back to lower levels. The S&P now is valued at almost 60% higher than its historic average.

6) Slapping a 35% tariffs on goods will lead to higher inflation. So again this cost will be passed on to consumers. With costs such as toll, finance, labour and tariff being passed to the consumer, it could affect the consumer behaviour. In the event of higher interest rates, consumer will likely to spend less (due to inflation) and save more (saving against further inflation). So collectively, the impact on the economy could be worse and thought.

All the talk the inflation is bad for precious metals is unfounded. In the period of hyperinflation in the 1970 - 1980 gold rose 325%.

So in the end, we will come back to the vicious circle of more money printing, QE and loose monetary policies. It is by this rational that China is dumping US Treasuries. The world economy has gone past the point of no return with global debt now standing a record high. The only salvation is to rein in excessive government spending. But which government is ever willing to do that for fear of public discontent and revolt?

AFTERMATH OF THE US ELECTIONS

Yesterday has been a very volatile day. Gold spiked US$60 per oz before the usual suspects (central and bullion) came in and whack it back down to the pre-election level as most were shorting gold in preparation that Hillary will take the presidency. But in the retail market space, there was frenzy buying of gold, so much so that some retailers have to demand for more gold (source: KWN).

Meanwhile you have the banks coming in and talked up the US$ by restating that the Fed is still on course to raise interest rate in December when it tanked more than 1.5% points vs other currencies.

The unexpected result was of course the market spiking more than 1% after experiencing a limit down in the afternoon before the US open. Suddenly the market is receptive of Trump's plans which include making US infrastructure second to none. This of course entails more spending via debt issues.

So in this case, the inverse ETF failed to deliver the desired result yesterday. However, I believe there will be further volatility ahead such as the December 4 Italy referendum,where a Trump victory has emboldened the Leave-EU party. And in mid December we will know if the Fed will raise interest rate. News came out that Yellen will not be renewed a second term by Trump. So the inverse ETF is still an important tool as an insurance policy but never use it as a major investment (a 10% - 15% holding will suffice).

The miners did end in the green and as of this morning gold is also trending up.

Some analysts are predicting that the establishment, whose candidate Hillary lost in the election, will attempt to crash the markets so that Trump will be under pressure to include the establishment in his plans. This remains to be played out

Meanwhile something happened to the bond market. China sold off a large portion of US Treasuries yesterday, while the auction for the US 10 Year Note went badly. The 30 Year Treasury also saw similar sell off. And here's the question: How is the US going to finance her spending on infrastructure if US Treasuries are being dumped? The answer of course, direct printing of money and this will expand the monetary base, making gold attractive in the process.

As bond yields climb, the pressure will be on the stock market to deliver higher yields than bonds, and if this does not happen, then the overvalued stock market will fall. The current S&P is overvalued about 60% above historic average, so when it falls it will fall hard. Your inverse ETF then will ensure your investment is "protected".

The above is my opinion, you are encouraged to do your own research. Meanwhile, I continue to be bullish on precious metals, miners and inverse ETFs.

OCTOBER JOBS REPORT. WHY CONSUMER SENDING IS NOT AS STRONG AS THE FED SAYS

Here are some excerpts from Zerohedge and how I see it.

The Non-Farm Payroll came in at 161K below expectations of 173K, although August and September numbers were revised higher by 44K in total

The disturbing data must be the number of people not in the labour force which spiked 425K to 94.6M.

Not only that, the number of people holding multiple jobs just spiked to 8.05M, the highest on record. While the number of jobs growth may look impressive it is NOT one job per person across the board. The US has lost a lot of full time jobs, only to be replaced by part time and minimum wage jobs.

Meanwhile the labour participation rate remains low.

These are the signs that show that consumers may not have the money to continue spending like before.The fall in consumer confidence is a sure sign that going forward, things will be much more bumpy.

Don't believe so? Look at the US Debt Clock. Credit card debt is just shy of US$14B to reach US$1T. Consumers are loading up their credit card debts to sustain their livelihood or to fund purchases which they can no longer afford!

It seems all types of debts in the US is on course if not already surpassing the trillion dollar mark.   

Both student and auto loans have long since surpassed that mark - which brings us to an interesting article about auto loans from Zerohedge. 

In the recent FOMC meeting minutes the Fed was saying that consumer spending was strong... here's the chart (source: Zerohedge) which shows how 'strong' they were as repossession of vehicles spike alarmingly to levels seen in the previous recession. This is an indication the the subprime auto loans granted to push auto sales is now rearing its ugly head.

So here's how I see it. There may not be any hike in interest rate in December at all, and the present rate will continue indefinitely, or a 25 basis point hike in December, and no other rate hike thereafter indefinitely.