"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Monday, April 15, 2013

China, Boston - derail equities

News of a slower than expected growth rate in China, combined with a heart-wrenching tragedy in the city of Boston, served to pull the rug out from beneath the US equity markets today.

Before moving any further, let me state my great distress at seeing the pain and grief of my fellow citizens in the city of Boston at what has been a generally festive time for that city and its inhabitants.

Once again a sad reminder that evil exists in this world. Between what is happening there, what is happening in the global financial system, and what is happening on a moral and ethical nature in this land, it seems as if the wheels are coming off of the bus of this society.

"If the foundations be destroyed, what can the righteous do?" asked the Psalmist in Psalm 11:3.

His answer?
"God is our refuge and strength, a very present help in trouble. Therefore we will not fear, though the earth should change, and though the mountains slip into the heart of the sea; though its waters roar and foam, though the mountains quake at its swelling pride.

There is a river whose streams make glad the city of God, the holy dwelling places of the Most High. God is in the midst of her, she will not be moved; God will help her when morning dawns.

The nations made an uproar, the kingdoms tottered; He raised His voice, the earth melted. The Lord of hosts is with us; the God of Jacob is our stronghold.

Come behold the works of the Lord, Who has wrought desolations in the earth. He makes wars to cease to the end of the earth; He breaks the bow and cuts the spear in two; He burns the chariots with fire.

"Cease striving and know that I am God; I will be exalted among the nations, I will be exalted in the earth.'

The Lord of hosts is with us; the God of Jacob is our stronghold."  (Psalm 46: 1-11)

Moving to the actual performance of the equity markets here in the US, I want to again focus in on the Russell 2000, seeing that it is perhaps the best indicator of equity investors' willingness to assume risk. Here is the final chart for the session. Note that the close was beneath both the previous support level and the 50 day moving average.

Note also the significance of the Fibonacci retracement levels posted. The first retracement level of 25% comes in at the 906 level. The session low was 904.91 with the close being 907.18. It is coincides nicely with the horizontal support line near 910. This market will need to hold here, right now, or it is going down to 880. which would also take it below the 100 day moving average.

Honestly, this scenario that we witnessed today in both equities and in commodities, is eerily similar to what we witnessed in 2008 when the JAPANESE YEN CARRY TRADE began to be unwound. You might recall at that time, the entire world of hedge funds were short the yen by borrowing in yen terms at inordinately low interest rates, and then taking those proceeds and investing them abroad into nearly anything that was not nailed down. Not only that, but then this brainless lemmings leveraged themselves to the gills in their rapacious pursuit of even greater profits to the point that they were all on the same side of the same trade with massive positions all leaning the same direction.

When the news began to surface that Lehman and Sterns were in trouble, there was a mad rush to the exits by these funds and literally no one, and I mean NO ONE, to take the other side of the trade. We saw a virtual meltdown across the markets that collapsed not only the equity world, but the entirety of the commodity world as well. 

Let me explain what I think is now happening - Gold had stabilized near $1360 even as the equities were weaker but when the Boston news hit the wires, the stock market began a sharper selloff with volume picking up. As it dropped through downside support levels, gold began to move sharply lower falling another $25 in literally minutes. It fell as low as $1335 before it bounced some.

While this was occurring, simultaneously, the Japanese yen was experiencing its version of a mini MELT UP. Fundamentally, there is absolutely no reason to buy the Yen, not when it is the express intent of the political and monetary leaders there to deliberately weaken it. Most speculators who have been around for a while in trading the currencies, know that the Bank of Japan is not to be trifled with when it comes to their dearly beloved Yen. If they begin to express displeasure about the level that their currency is trading at, specs had better be careful because they will annihilate anyone who dares to go against their intentions. Nonetheless, the Yen was up nearly 2% against the Dollar alone with a greater increase coming exactly as the stock market fell apart.

In short, the Yen carry trade is being unwound today and just like it crushed the gold price in 2008, it is what it now working against the gold price. The margin related selling then gets amplified as more of these carry trades (one shorts or borrows yen and then buys gold with those proceeds) are reversed. Gold then gets sold, along with the rest of the commodity world, and now, today, the equity world, and the yen gets bought - and this is important - REGARDLESS OF FUNDAMENTALS. Those are meaningless when there are such vast sums of money involved in these one-way highly leveraged bets.

If you want to know why I despise these Central Banks so much and why I detest what they are doing, just look at the results of their handiwork when it all comes apart. These people are the ones that created this environment in which SPECULATORS GONE WILD is the new normal. They prod, cajole, tease and practically entice them into making enormously leveraged bets, particularly on stocks, to give visually proof of the "success" of their bond buying schemes. As long as those speculators oblige, all is well and these masters of the monetary universe go around patting themselves on the back for their keen insight and ability to cure what ails the economy. Meanwhile, when something occurs that then upsets this nicely arranged apple cart, all chaos is unleashed in the markets as these complacent speculators, all belatedly wake up to the fact, they are now on the wrong side of a losing trade with no one to take the other side.

At that point, it becomes a sort of footrace to the exit to see who can dump their entire positions before the next guy can. There is no finesse, no attempt at scaling out, no attempt at subtlety - it is all overboard at once.

I am not sure when this pressure will let up but I am completely confident that if it does not let up soon, the monetary authorities are going to be forced to intervene yet again to come up with some sort of soothing words, vis-à-vis, policy action that they stand ready to enact to grease the tracks of the global economic train tracks. Certainly the Japanese monetary authorities are not going to put up with this again, as they were on the receiving end of an unwind back in 2008 and they did not like it one bit. As a matter of fact, their recent comments have made it evident that they believe as a result of this unwinding that began back then, the Yen remains overvalued in their view and needs to move lower.

Fortunately, this new yen carry trade has not been taking place for the same length of time as the former one did but nonetheless, we can still see what happens when Central Banks succeed at herding hedge funds all into the same spot at the same time.



  1. Dan, I enjoy reading your posts as much as you enjoy reading scripture. Thanks again.

  2. Thank you, Dan, for the reference to Psalm 46. It's a very timely reference.

  3. If we look at the DOW on the overnight all is green again.
    As you have stated Dan, an earthquake could cause California to tumble into the sea and the DOW would rally the next day.

    It is my belief that the FED buys the DOW/S&P directly. Even the hint of a correction is no longer allowed.
    We are all learning a valuable lesson in what it means to have the reserve currency of the world. The power of the printing press is beyond description.
    When Ben said he would drop money out of helicopters he was not kidding. We are witnessing it first hand.

  4. There were more than enough warnings all around that the gold price was going way down for weeks. I wonder how many bulls truly got caught off guard and got severely damaged on Comex. It would have to be the really dumb or unsophisticated ones. I think the sophisticated bulls fully knew there was going to be a take down. They will be back in there sooner rather than later after the down trend finishes out.

    We still need to hit that Fibonacci number around 1200 to bottom out. I think markets react faster going up and down than they did before especially with advent of computer trading and online internet access. When 2008 happened, the general view was that it will take a long time for pm market to rebound but that was an erroneous perception. Those days on "long term" damage are overblown. Also I just don't see this altering the demand for gold especially from asia.

  5. "I am not sure when this pressure will let up"

    Well I guess it's until Bernanke is out of the office.

  6. Your blog is a blessing in these troubled times. Im out of all paper investments
    but will follow a few of the commenters i have grown to trust for their
    Impartiality and wisdom. Time to invest in our communities and hobbies and
    Preserve our sanity.

  7. Dear Brother Dan

    Thanks for your comments.
    I like them so much and special because you are also a believer.
    i seeked the lord for revaltion for the things to come and what is going on right now.
    in my mind came the thoughts in the night:

    JP Morgan was so much short.
    if the price for precious metals would have gone higher they would have got massive trouble.
    so this artificial takedown gave them the opportunity to change the side.
    i guess so and maybe COT Data from next friday will reveal something more.

    what does that mean for the future?
    i see a global econmic meltdown as already visible in foodstamps and other indicators.
    but not visible so far in the stock markets.

    also in the bible stands for our lord jesus the sign of jonah
    Mathew 12,39
    Mathew 16,4
    Luke 11,29

    It might be that way that the precious metals will go through the SAME pattern.
    that went trough my mind also.

    so i will step to the side and look how the things unfold.
    also in the last gold bullmarket there was a 46% decline which had it low in 1976 august.
    found a comment on safehaven from casey research about the mood and comments from analysts in that time.
    this looks also equal what is spoken today.

    i do not know your opinion on rick joyner and pat holloran.
    rick joyner spoke from this battle about the banks long time ago in a prophecy.
    he spoke also from a global econmic meltdown starting with fukushima.
    pat sees hyperinflation coming in the fall 2013 and to protect via physical silver coins.

    i also as you feel not comfortable with the direction of copper and invers direction for the dow.

    so evil the thing in boston is and life is much more precious then money....
    it might be the game changer that the dow will start to decline.
    i dreamed of shorting the dow.
    i will watch that also.

    be blessed

  8. Well, I wouldn't hold your breath waiting for the DOW to correct.
    How can a market go down when there is a helicopter hovering over it's headquarters with some crazy guy shovelling money out the door.

    Dan's observations are correct...every dip will be followed by mindless buying.

    I have read several times that the DOW (for a period of time) will vastly out perform gold...I laughed when I first read that....not laughing anymore.

    Don't fight the FED


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