The Property Bull is Dead – What Happens Now?

The Property Bull is Dead – What Happens Now?

“The Trend is your Friend, until it Ends!”

The trend in the property market has been up for so many years now, that for a sizable part of the population it is all they have ever experienced. Starting in the early 1980’s from a point where property was seriously undervalued by historical standards, global real estate began a multi decade climb that has seen valuations go from undervalued to reach stratospheric heights in some parts of the world.

When the trend changed in favour of property, the recovery was initially driven by investors lured by high yields and the added benefit of falling interest rates - a virtuous combination. However as the years have progressed and debt has become easier to obtain, cheaper to borrow, and easier to leverage, the property market has morphed into a speculative frenzy driving valuations to excesses never seen before.

However, before we look at how the bull market will end, its worth taking a look at how it develops in the first place.

The Three Phases of the Property Bull Market

THE Stealth PHASE

The first stage of a property bull market we can think of as the stealth phase, which is the start of the upward trend. The stealth phase typically comes at the end of a downtrend, when everything is seemingly at its worst. But this is also the time when the price of property is at its most attractive level because by this point most of the bad news is priced into the market, thereby limiting downside risk and offering attractive valuations.

This is therefore also the point at which informed investors start to enter the market, looking for property investments offering fantastic yields and growth opportunities.

The majority of this phase will be characterized by persistent market pessimism, with most people thinking things will only get worse.

It is only towards the mid-to-latter stages of the stealth phase that we see the price of the market start to move higher.

The awareness PHASE

When informed investors entered the market during the stealth phase, they did so with the assumption that the worst was over and a recovery lay ahead. As this starts to materialize, the new trend moves into what is known as the awareness phase.

During this phase, negative sentiment starts to dissipate as lending becomes cheaper and more affordable. As the good news starts to permeate the market, home owners start to trade up and first time buyers come to the party. Attracted by the now steadily rising prices, this is also the time when the number of speculators increases, creating more demand and sending prices higher.

 THE MANIA PHASE
As the market inexorably moves higher and the move starts to age, we begin to head into the mania phase. At this point, property is the ‘go to’ investment. Credit is cheap to get and banks are falling over themselves to lend it. Increasing numbers of property owners, seduced by the seemingly never ending gains, join the ranks of property investors, thereby competing with the desperate and hugely leveraged first time buyers.

With valuations now reaching ludicrous levels, this last stage in the upward trend is the one in which the smart money starts to scale back its positions, selling property off to those now entering the market. The perception is that everything is running great, that only good things lie ahead and that the market will keep on climbing higher.

This is also usually the time when the last of the buyers start to enter the market - after large gains have been achieved. Like lambs to the slaughter, the late entrants hope that recent returns will continue. However, with valuations incredibly over stretched and the interest rate cycle about to turn against them, they are buying near the top.

The Tipping Point

There are a number of factors that can affect the price of property. The level of interest rates and inflation, the outlook for the economy, the availability of credit, and changes in the population numbers to name a few. All these factors can help accelerate, or slowdown a trend for a period of time, but none of them are capable of changing or reversing the dominant trend in motion. Property, like all assets, move in long term repeating cycles from under-valued to over-valued and back again, in a process we have observed for millennia. And although certain measures may delay the inevitable (usually with more painful consequences later on), once the peak of overvaluation is reached, the market will start its long, painful journey to once again reach undervalued levels, where finally a new bull market will spring forth.

In many parts of the world we have witnessed a change in the property market dynamic since the global financial crisis of 2007. Up till that point we saw a broad based bull market with massive participation and prices rising across the board. But since the price falls triggered by the GFC a change has occurred. Once the dust settled, prices once again started to rise, but this time the rise was driven by big money looking for safe havens in the large centres of the world, not by broad based buying. We witnessed new highs in many of the worlds biggest cities, but the breadth of the market was slowly falling away, and in many countries the gains in the wider property market has seriously lagged behind. This 'two-tier' market, and distillation of the gains into an ever decreasing pool of investments is classic sign of the late stage of a bull market. And in the last year or so we are seeing price falls in those large centres as the cycle rolls over. As the process moves on, we will start to see these falls ripple out until the entire global property market is in retreat.

What we have witnessed since those far off days of the 1980’s is a global property market moving from extreme undervaluation to extreme overvaluation, and the current combination of sky high valuations and enormous levels of property debt leave us awaiting the catalyst that will propel the market lower. 

Which brings us to interest rates.

The Power of Interest Rates

Contrary to popular belief, Central Banks around the world do not control the interest rate market. They do have the power to set the official cash rate (called various things around the globe), but unless they intervene directly into the bond market by buying or selling (as we have seen with quantitative easing), all other rates, be it 3 month, 1 yr, 5 yr or 10 yr etc are set by how those bonds are trading in the market. It is therefore the supply and demand for bonds that is the critical factor in establishing the interest rates that matter to you and I, not the rates that the central banks control. So just because the central bank changes its rates, does not mean it will be mirrored in your mortgage rate, credit card rate or deposit rate. 

But it gets worse.

The US dollar is the world’s reserve currency, meaning that the US Bond Market is seen as the safest investment in the world, and therefore bond markets around the world are all referenced to what happens in US bonds. In simple terms this means that if investors start to sell US bonds, thereby driving interest rates up, this will also be reflected in interest rate movements around the globe – when US interest rates go up, so do ours!

We can now see that the domestic factors that affect interest rates in our own countries can be overwhelmed by the movements of US interest rates. So bearing in mind the importance of interest rates on property prices, it is critical that we pay attention to the outlook for US interest rates, and it is not a pretty picture.

Here we can see a chart of the US 10 yr bond yield from 1960 to the present day. It illustrates the rise in rates from the 60's, through the inflationary period of the 70's and finally peaking in the early 80's. Since then, rates have ground inexorably lower until finally reaching a bottom in 2016. This snapshot only shows the cycle from the 1960's to the present day, however if I were able to obtain the data you would be able to see this pattern repeated time and time again. Unfortunately for us, the lows we have experienced through this particular cycle have carried interest rates to levels never experienced before, and as high interest rates follow low interest rates as sure as night follows day, we have much higher rates in our future. 

To get a better timeline on that, we need to look at a shorter term chart.

In this chart we get to see more detail of the US  10 yr bond yield over the last 10 year year period. It is apparent that we have experienced a huge basing pattern as rates have moved between the 1.3 to 3% zone ( the rates in the charts are expressed as 10x the rate ie 13.36 rather than an actual rate of 1.336). Basing patterns are important to pay attention to, as the rule is that the longer the pattern lasts, the greater the move will be when it finally breaks out. And although only by a small margin, prices have broken out and exceeded the previous highs established back in 2014.

Overhead resistance will still be offered by the falling 200 day moving average (green line on chart) so it may take a little while to work through this. However once that is overcome, much higher rates await.

This picture is corroborated when we look at a point and figure chart.

Here we can see the big move up from the lows of 2016, giving us a projected target of 4.967% (49.67 on the chart) resulting in a 70% increase in borrowing costs from the current level. But this will only be the start. Having fallen so far for so long, history tells us that we should expect a protracted rise in interest rates, and as we now know, once the trend is in motion there is no stopping it.

This rising interest rate environment, allied to stratospheric property valuations and huge leverage is the recipe for a housing price disaster. It has been an incredible ride, but contrary to popular thinking, interest rates do not stay low indefinitely and housing bull markets don't last forever.

What Happens Now?

As the combined factors of over leverage, over valuation and rising interest rates start to take affect we will see the property market change:

1. The volume of sales starts to fall as the cash buyers at the top end of the market dry up.
2. There is a growing disconnect between sellers expectations and what buyers will pay, decreasing the level of sales still further.
3. As the market stagnates buyer perception of potential gains changes and bidding prices start to drop.
4. Sellers start to become aware that the market has changed, and that they need to lower prices if they wish to sell.
5. Usual real estate bullshit around it being a good time to buy.
6. As interest rates start to rise, banks start to reduce their exposure to mortgage debt and make it harder to obtain a mortgage.
7. Speculators leave the market, reducing the demand for property still further.
8. The first whiff of fear takes hold. Property owners that are forced to sell have to accept much lower prices.
9. Some over leveraged property owners, squeezed by falling prices and rising mortgage costs , hand back the keys.
10. The constantly rising interest rates and falling prices creates a vicious cycle. Sellers keep reducing prices but buyers are squeezed by reducing access to credit and rising debt service costs, reducing the amount they can pay.
11. Usual real estate bullshit around it being a good time to buy.
12. The volume of property for sale, and the length of time it takes to sell both increase. This overhang of property is an added deterrent to buyers. Why buy now when they will be cheaper next month.
13. Over leveraged property speculators start to sell down property to avoid going bankrupt.
14. Banks balance sheets are affected by the volume of failed mortgages they have, and the number of properties they now own as a result of owners giving back the keys. As a consequence, mortgagee sales increase and drive the market still lower.
15. Finally the market reaches a point of equilibrium as all the forced sellers have sold. Prices stabilize. 
16. Activity is very low. Buyers, now conditioned to falling prices, sit with bids below the market price. There are only cash buyers as credit is extremely hard to access. Sellers, wanting but not needing to sell, sit with asking prices above the market price, waiting for an uptick. Time drags by.
17. Real estate agents go bust due to low volumes. Number of agents is radically reduced.
18. Driven by a combination of falling prices, inflation and the passage of time, property is once again finally undervalued.
19. Buyers, unable to obtain property with low-ball offers finally have to pay market rate.
20. The stable prices encourage value investors to once again enter the market.
21. The overhang of property is slowly eaten into and prices start to rise.
22. The process is ready to start all over again. 
23. The usual real estate bullshit around it being a good time to buy.........finally they are right.

Dependent on where in the world you are, you will likely face some if not most the outcomes listed above. There will always be variations, for example in the US property loans are non-recourse, meaning that you can hand back the keys without the debt hanging over your head. This pushes the risk back to the banking sector which is where it should lie, and speeds up the process of falling prices and the correction to undervaluation. However, in places like the UK and New Zealand, mortgage debt stays with you, so defaulting on a mortgage is a last resort. This slows down the correction and can force the economy into a slow, grinding retreat. Whatever the local variables, the big picture is clear.

When it comes to property, the trend has indeed been our friend, but nothing lasts forever.

Good luck.

Time To Buy The US Dollar!

Time To Buy The US Dollar!

For most of this year the US Dollar has been correcting its explosive gains from its breakout back in 2014. This process of big moves followed by consolidation is fundamental to the way asset prices move, and once the primary trend is established, these periods of consolidation provide excellent opportunities to invest, safe in the knowledge that once the correction is over, the primary trend will re-establish itself.

If we look at the chart below we can see the huge correction in the US Dollar from 2001, then the massive contracting wedge basing pattern through to 2014, followed by the emergence of a new uptrend and breakout to the early 2017 highs, and finally the correction through to now.

The correction we have seen through most of this year is perfectly normal in terms of price, however it has coincided with an increasingly negative view on President Trump, and his inability to actually get anything done. Whilst in Europe, after the wailing and gnashing of teeth that greeted the Brexit vote, there is now a more positive view after the three major elections in the Netherlands, France and Spain preserved the status quo, pro Euro bias. These combined events have lead to the weakening dollar and strengthening euro, but is this dollar pessimism and euro euphoria justified? Well unsurprisingly no!

The negativity surrounding Trump is hardly surprising as he has been outmaneuvered on all sides by the very establishment he is trying to reform. This allied to a concerted effort by the mainstream media to undermine him at every opportunity has destroyed any credibility he may have had. And on those rare occasions when he has caught a break, he has quickly managed to shoot himself in the foot by his seeming obsession with inappropriate tweets. However, whilst President Trump's slide into tragic farce has impacted the dollar, the fundamental reasons to be bullish on the dollar strength remain.

Similarly, when we scratch beneath the surface of the renewed euro positive sentiment we can see that it is baseless. The fact that no anti-euro party was able to take control in any of the recent elections cannot hide the fact that the surge in anti-euro sentiment was substantial. This sets the stage for increased tensions as the global economy rolls over, the anti-euro vote grows and the two sides become more polarized.

These two trends have combined to create the dollar correction/euro gain that we have witnessed throughout 2017. However they are now getting long in the tooth, and a resumption of the primary trend is almost upon us. A view that is reinforced if we take a look at the technical picture.

Here is a more condensed version of the dollar chart showing the long basing pattern and the breakout. We can see that price has now arrived at a zone of support, and if we look at the RSI indicator at the bottom of the chart we can see that it is at its most oversold since 2008.

In we move in closer still, we can see that both the indicators at the bottom are starting to turn up, and that the RSI at the top of the chart, having reached a very oversold level, is also turning up, suggesting that the bottom is in.

One chart I often look at to corroborate what the price charts are telling me is the Commitment of Traders. These charts break down the ownership of different instruments, and allow us to see what positions the speculators (amateurs) and commercials (professionals) are taking. The commercials are rarely if ever wrong, and whilst the price reaction might not happen immediately, it pays to know what they are doing and not to bet against them. This is important to monitor because when positions become extreme they are often warning signs that a move is about to happen.

If we look at the Euro chart below, we can see that the commercials (red bars on the chart) were very long the Euro before it started its rally against the dollar back at the tail end of last year. We can also see that as the rally has progressed, the commercials have sold their positions and gone aggressively short. This is indicative that they are expecting a sell-off in the Euro, and corresponding rally in the dollar, at which point they can buy back their positions for a profit.

In conclusion, the fundamental reasons for a strong dollar have not change and the euro enthusiasm is past its sell by date. The technical picture backs up this view, with prices over-extended and the professional investors already positioned, suggesting a big move won't be far away.

This is an opportunity to get out of the euro and into the dollar for an impending rally that I believe will make most investors eyes water.

Financial Markets Update

Financial Markets Update

Many of the financial markets around the globe have enjoyed strong moves since Donald Trump's election as President of the US back in November. The perception that he would cut taxes and increase spending triggered a rapid re-adjustment in a number of markets including the precious metals, the US dollar and stock markets. Initially we saw all these markets show strong gains, as cash that had been sitting on the sidelines during the election process was finally put to work. However, as the weeks have gone by and Trump has become increasingly bogged down by the political maneuverings of both the Democrats, his own Republican party and a hostile media, this enthusiasm has started to wane. The failure last week to get Congress to endorse his attempt to repeal the 'Obamacare' healthcare program is symptomatic of the struggles Trump will face during his presidency. This ending of the honeymoon period for both the Trump presidency and the economic euphoria that accompanied it, makes for a good time to review the financial markets.

The US Dollar

During the early stages of the Trump presidency the dollar enjoyed a strong rally fueled by the belief that a more lenient fiscal policy would lead to a huge repatriation of overseas earnings by US companies. This allied to a generally improving US economy would all be dollar positive. I have spoken at length about why I believe the US dollar is going much higher in the medium and longer term ( for a recap see  http://kiwiblackers.blogspot.co.nz/2013/11/the-coming-us-dollar-rally.html ) but lets now take a look at the chart.

We can see the rally that occurred from early November through to the start of 2017, followed by a correction since. More recently this correction has gathered pace, as the defeat of the populist Geert Wilders and re-election of Prime Minister Rutte in the Netherlands has breathed some hope back into the euro project and led to some investors selling dollars to move back into euros. This reaction will likely run a little longer, but as we can see from the technical indicators at the bottom of the chart, price is starting to get oversold. I have highlighted an area of potential support on the chart, and this zone is further reinforced when we look at a point and figure chart for the dollar.

With this chart we can see the potential target price of 95.45. As always, there are no guarantees that it will be reached but it does give us a little more confidence.

 In conclusion, the US dollar will ultimately resume its climb to new highs, and this correction provides a great opportunity to go 'long'. I would rather be long a little early than try to finesse it and miss out!

The Dow Jones Index

The Dow reacted very strongly to the Trump election victory rising over 18% to its high of 21169 on 1st March. As is often the case with financial markets, the more the price goes up, the more bullish investors get until we reach a point where all the potential good news is priced in and prices only have one way to go. The Dow held out for a long time but finally it is easing off as the promise of tax cuts and increased spending becomes less certain. If we look at the current chart of the Dow Jones we can see that it reached very overbought levels and as a consequence is at great risk of a more concerted reaction. 

I have marked the more likely areas that support will be found on the chart, and we can once again look at the point and figure chart for any clues. 

Here it gives us a downside count of 19772, a correction that would finish at the first support level. Here as with the US dollar investors might be wise to invest too early rather than hope for a large correction. I have explained in prior posts why the US stock market will be the only game in town once funds start pouring back into US dollars, so trying to pick the bottom and time your investment to perfection could prove very frustrating.

Gold

Gold also fared well in the aftermath of Trumps election. It was also given a second wind by the subsequent dollar weakness. However, unlike the the dollar and the stock market, Gold (and its compatriot Silver) are still in their long term corrections from the highs of 2011, and whilst the rally has been impressive, it still has a long way to go before we can be convinced that the low is truly in.

We can see that Gold is still in the downtrend that started in July last year, and that whilst a near-term weaker dollar might give it a bit of a fillip, it is getting into overbought territory. Once the dollar starts to rally, I would expect to see gold fall hard, with the critical point being the 1124 support level. If that is broken, it opens up the 1045 level as the next target.

The point and figure chart for Gold is giving us an objective of 1119, which seems to reinforce how important that 1124 support level is. We shall just have to wait and see.

Conclusion

What I believe we are currently seeing are counter-trend moves in all these markets. With the Dollar and US stock markets, once the corrections are over they should resume their track to new highs, fueled by the increasing turmoil in Europe and the rush to find safety in the US dollar. Ultimately Gold will also find favour, but first it must finish its multi year correction. This is something we must keep a very close eye on, as when that bottom is finally reached, the upside potential will be huge.

I shall endeavour to keep you up to speed as the moves unfold and do my best to pick those entry points as they manifest.

Brexit, Trump....What Next?

Brexit, Trump....What Next?

I don’t have an extensive knowledge of Chinese curses, but one I do know is the expression ‘May you live in interesting times’. This curse is based on the fact that in human history, ‘interesting times’ have tended to coincide with upheaval, disorder and conflict. In many of the developed parts of the world we have had an unprecedented period of relative calm and stability, and in this post I will look at the changing political scene over the last few months, what it forebodes and whether ‘interesting times’ lay ahead.

My last post back in June on the eve of the Brexit decision spelt out the situation ahead of the critical vote regarding the future of Britain, and concluded that an independent Britain, free of the diktats of the European Union was a better option than being saddled to a flawed euro project that would shortly be going over the edge of a cliff. It is now clear that a majority of the voters agreed with that sentiment as the Leave camp won the vote by a slim margin of 51.9% to 48.1%.

Any hope that a result would bring an end to the bitter disagreements between the two sides however has completely evaporated, with the following weeks and months being marked by political turmoil within Britain, increasingly hostile comments from some European politicians and an ongoing legal challenge designed to prevent the British Prime Minister Theresa May from triggering a formal exit without the approval of Parliament. The binding referendum may not end up as binding as the ‘Leave’ voters envisaged.

Whilst the Brexit aftermath held the news headlines for a while, it was soon relegated as the race for the US Presidency took centre stage. The contest has been compelling viewing right from the start. From the nominee process, through the race itself and the final vote, with the Trump victory coming as a complete surprise to so many people and the subsequent reaction so similar to that in Britain post Brexit.

So are there similar themes with these two results and can a greater understanding of that connection shed some light on what we will face over the next few years? 

The simple answer to those questions is yes.

For the specifics of our current issues we need to go back to the start of the 1980’s. As we are all aware, the decades since have witnessed a huge number of changes in many aspects of people’s lives, but some have been particularly influential:

·        a massive uplift in housing values leading to wealth for some, but increasing financial strain for many others;

·        a general movement in manufacturing and production jobs from developed to less developed countries leading to a reduction in the number of jobs available for the lowest skilled;

·        an increase in mass migration as a result of religious and geo-political tensions leading to increased competition for lower grade work, stagnant wage growth and most importantly, an increase in racial and religious intolerance;

·        an increase in the ‘consumer society’, with the stampede for new, more or better, fostering general dissatisfaction with one’s lot.

·        an upsurge in the level and extent of political corruption leading to an increasingly angry and discontented electorate.

Obviously these trends have not influenced every country, region or individual equally, but they have provided the driving force that has led to this division within our societies.

If we now look back at the Brexit vote, it is easy to see where these Leave voters came from. They were the huge numbers of people that have seen their living standards drop, their jobs dry up, their neighbourhoods forever changed by massive immigration, their power to change the system stolen from them by lying, corrupt politicians on all sides; and their cries of complaint silenced by a political elite that didn’t want to hear it, and that actively labelled as ‘racist’ anyone that voiced it. Locked into this cycle of despair, is it any wonder that when an opportunity came about for a protest vote they grabbed it with both hands and said ‘Up Yours!’ to the establishment.

If we now apply this thinking to the US election the parallels are obvious. Trump won because he got the protest vote from those Americans that are not doing well. The regional voting split in both Brexit and the US elections bear this out. With Brexit it was the areas that have been hit hardest that voted to leave, and the harder they have had it over the last few years the higher the leave vote. With the US it was the same story. After years upon year of elections creating absolutely no change for the majority of the working class in the US, finally there was an opportunity to vote for a non-establishment figure, and they took it.

Yes, I know that Trump ran as a Republican, but in reality he is an independent because his wealth allows him to be. With every other president they are already in somebody’s pocket before they even get to the Whitehouse. From the moment they walk through the doors of the Whitehouse they lose any ability to reform the system, whether they were genuinely minded to or not. It’s Trump’s ability to act independently along with comments like ‘draining the swamp’ that scared the Republican elite into supporting Hillary against Trump and the interests of their own party. They would rather have seen a Democrat in the Whitehouse than see someone finally get a grip on the corruption and end their gravy train. This is precisely the kind of behaviour that many voters are sick and tired of, and only reinforced their belief that a vote for change was needed.

We can now see that it is the leaving behind, economically speaking, of a large part of society that creates the conditions for what will follow. As the wealth gap widens over many years, the feelings of disenchantment and animosity grow, resulting first in disengagement from and an apathy towards the political process, but finally in feelings of anger and rebellion that manifests in large voter turnouts and support for change in the political system that has failed them.

If we now look around the world we can see that there are numerous countries that mirror what Britain and the United States have experienced over the last thirty years, and their populations will likely be feeling the same way. The opinion polls in many European countries are supporting this view, with support for independent or anti-establishment parties rising steadily. The upcoming elections in France, Netherlands and Germany will likely reshape Europe in a way that would have felt unthinkable only a year ago.

 I think there is a distinct probability that the voters in these countries express their dissatisfaction with all that has occurred over the last few years and vote out the incumbents, replacing them with politicians of a more nationalist, populist persuasion. This will put Europe in the bizarre position of a European Union strongly pursuing a federalist agenda, whilst the member countries move increasingly away from it.

In theory this shouldn’t be a problem, as the agenda for the European Union could be redrafted to better represent the changing outlook of its member states. However, back in the real world, the European Union has been pursuing its own agenda for years, and could care less about the opinion of the average European citizen. We could easily therefore be in the position of the European Union heading in one direction, whilst the people of Europe head increasingly in the other. This is not a recipe for a happy ending, and unless the elite of the European Union accept that they are at odds with the will of the peoples of Europe, then it threatens to pull Europe apart.

When and if that time comes, we would like to think that these people in power could accept the result of the democratic process, however much at odds it is with their own personal views, and however detrimental to their personal ambitions. However, Brexit and Trump’s election have shown us that it is unlikely to be the case. These people of influence and power do not relinquish control easily, especially when it means an end to their time at the feeding trough.

But wider still, the reaction we have seen from those on the losing sides in the aftermath of those two events paints a very unpleasant picture of what we can expect. We seem to have lost the ability to put ourselves in someone else’s shoes. To see the world from their perspective and understand those things that have shaped their decision making, even if we disagree with it. The wailing and gnashing of teeth and the level of vitriol from some of those on the losing sides has been incredible. The sense of loss, of frustration and fury at the defeat has seen some verbal attacks of an intensity and ferocity that seems completely disproportionate. We are seeing almost no attempt to understand why the majority of people voted how they did and simply resorting to labeling all of them racists, red-necks etc. Instead of coming together and moving forward, opinion is polarizing further, and creating rifts that will be hard to heal.

In the case of President Trump, it’s his lack of credibility that prevents many opponents from accepting his victory. The view shared by many of his opponents that he is a sexist, misogynist, racist, narcissistic, egotist means they are still dumbfounded as to how anyone could vote for him. They don’t see him as a good candidate or as a viable president of the US, and certainly not the best person for the job. But on this issue they are really missing the point. The majority of people didn’t vote for Trump (or Brexit for that matter) because they weighed up the arguments and thought that was the right decision. Instead, they saw what the establishment wanted and voted against it. It was a protest vote, pure and simple. In fact in regards to the US election, had Donald Duck been running rather than Donald Trump he would still have got in because it wasn’t a vote for anything, but against the establishment. And there was no greater establishment figure than Hillary Clinton.

In the big scheme of things it is pointless to debate whether Trump is the right man for the job. Will he be a good President? Judging by how he acted throughout the election process, almost certainly not. But would Hillary have been any better? That depends on where you are in the societal pecking order, but the answer is probably better for some, not for others.

 It is important to realise however that irrespective of who is running the show, the outcome is baked in the cake. Those Americans that have been left behind and been silent for so long, have finally woken up and spoken, and the word was ENOUGH. They are not going to go away. And no amount of dragging the chain by those in power that have profited for so long will prevent it happening. Whether it is Trump or whoever follows him, the momentum for change is building. It is the same situation in Britain, and the trend will move throughout Europe to the rest of the world.

Brexit may have been the first indicator that something was different, but Trump’s election has shown that it was not a one off. The opportunities for citizens to express their disapproval will come thick and fast this year, and it will likely have some profound effects in ways we are only just beginning to understand. 

It would seem that ‘interesting times’ do indeed lie ahead.

The Markets

As you can probably guess, these trends will have huge impacts on financial markets. My long term views of rising Stock Markets, US Dollar, Precious Metals and Global Interest Rates are partially derived from my big picture view of the wider global economy. I am overdue for an update on these markets but I felt this post was important in establishing the political backdrop we will face.

I hope to get another post out by early February.

Regards

Paul

Brexit and the Future of Europe

Brexit and the Future of Europe

Over the last few weeks the news media has been awash with discussion and debate over the outcome of the upcoming UK vote on European membership – or ‘Brexit’. With the two sides fighting an increasingly hostile battle to convince voters ahead of the referendum scheduled for June 23^rd.

On the one hand the Remain camp argues that leaving would be hugely damaging to the UK economy and leave it as a fringe player in European and Global politics. Conversely, the Leave camp counter that leaving would actually boost the British economy, restrict the number of illegal immigrants entering the country and enable it to self-govern, unfettered by European interference.

The debate has been long on rhetoric and short on substance and it took the tragic murder of the British pro Remain MP Jo Cox by a supposed Leave fanatic a few days ago to force a rethink by both sides, and take some of the bitterness out of the argument.

Unfortunately, whilst both sides have been busy shouting at each other, it has been increasingly hard for the voters to get any unbiased information in order to make an informed decision, with the ‘facts’ put out by one side, quickly refuted by the other.

 It is incredibly hard to quantify the ‘benefit’ that the UK has obtained from being in the EU. It will always be open to a large degree of interpretation and the truth will be in the eye of the beholder. The answer probably lies somewhere in the middle, not as bad as the ‘Leave’ camp claim, and not as good as the ‘Remain’ camp counter. But in reality, there really is no point in striving to answer that question. What’s done is done, and the most important questions now are What does the future of the European Union look like? And is Britain better off being a part of it?

I have spoken in previous posts about the outlook for the European Union. Back in April 2013 when Cyprus was generously ‘bailed out’ by the Troika (the European Commission, the ECB and the IMF) I wrote the following:

‘The bottom line in all this is that the Euro project was flawed from the start. It was sold to the citizens of Europe as a financial amalgamation that would enable all the countries that participated to grow their economies and flourish, and although that certainly was a positive by-product, the main reason was to cement relationships between the major European countries (both financially and politically) so completely, that there would never again be another European war.

Unfortunately, because it was driven by politicians with an agenda rather than people that understand financial markets, major mistakes were made, including the decision not to amalgamate all the countries debts into one, creating a single Eurobond market.

These mistakes sowed the seed for the disaster that we now face.

Because it is still politically motivated, European authorities will continue on the same course, stating categorically that something won’t happen, until of course it does, forced to make harder and more unpalatable choices, as the process grinds on to its inevitable conclusion.

The real tragedy in all this is that as a result of the design flaws in the original concept, and the troika’s rigid adherence to a political ideology, it will likely foster the exact sentiments that the entire Euro project was designed to eradicate, with harmonious relationships and a sense of unity, replaced by distrust, anger and a move towards nationalism.'

As the global economy has slowed and the European bloc fallen into recession, we have indeed seen these predictions come true, with rising civil unrest, increasing distrust of the political system and stronger nationalistic feelings manifesting in many countries, even those thought of as being at the core of Europe , France and Germany. These pressures will only increase as the process unfolds.

Whilst the fundamental picture is not good, it is always handy to see how the financial markets are assessing things. The long term health of a country can often be forecast by looking at the performance of its currency relative to others. The currency rate is driven by global money flows moving across the globe looking for relative advantage. For example, if global investors see the US prospects as looking bright relative to other countries, they will sell their domestic currency in exchange for US dollars in order to buy the US denominated assets they think will perform, be they Real Estate, Stocks or Bonds etc. As a result we see the US dollar rally in relation to other currencies, and the greater the perceived relative opportunity the greater the out-performance will be.

If we now look at a long term chart of the Euro, the picture is sobering. I have used this chart in previous posts but it doesn’t get any better the more you look at it. In it we can see the entire history of the Euro from its inception in 1999, falling to its low in 2000 followed by its rally through the boom years of the mid 2000’s to peak in 2008 with the GFC, before trading lower and collapsing through 2014. Since then it has been consolidating, but that is where the good news ends. The chart is indicating a bearish price objective of 71.32 and whilst there is no guarantee it will reach this level, P&F charts can be uncannily accurate in their predictions. Either way, this chart is very bearish and a close below 105.90 will open the euro up to a very big move.

The implications of this chart are huge. Were the euro to collapse as this chart is indicating it would be catastrophic for the Eurozone economies and have profound affects around the globe. Unfortunately, in my opinion this ties in with the fundamentals of how the Eurozone political powers have been operating. Their adherence to a political dogma blinds them to the repercussions of their actions. Whilst the people of Europe become less enamoured of the European project and more nationalistic, less trustful of their elected representatives and less tolerant of the systemic corruption within these entrenched political bodies. The political bodies themselves are taking an increasingly hard line on individuals or countries that refuse to fall in. The people and their elected representatives are taking different paths and it can only end in tears.

It seems that the future of the Eurozone is already set - there is pain on the horizon. Britain has a choice, it can remain tethered to the fortunes of the Eurozone come what may, or it can take its chances on its own. Whilst that may not be anyones idea of a utopia, it is a damn sight better than the alternative.

I know what I would do

A Brief Pause or the End for Equities?

 A Brief Pause or the End for Equities?

All financial assets move in long wave cycles from undervalued to overvalued and back again, but whilst the duration of these cycles varies across these asset groups, irrespective of whether it is commodities, equities , bonds or real estate, they all move in a similar way. During the movement from undervalued to overvalues, prices rise in a long term 'bull market', punctuated by severe corrections or counter-trend moves along the way. Once the over valuation has reached an extreme, the market reverses, and enters a 'bear market' where prices once again start their long descent.

We can see this illustrated in the chart below.

 

 During the 'bull market' phase, as prices rise and the fear of the preceding 'bear market' is forgotten, investors emotions slowly move from depression through hope, optimism and exitement  to reach their final state of euphoria and greed.

However, whilst this journey might seem simple, due to these counter-trend moves the reality is very different. Whenever investors become too bullish, too confident and too convinced that a trend is in place, a correction will take place that will shake their beliefs and re-introduce a touch of fear into their lives, Is the bull market over? Will prices continue to fall? The bull market will shake some investors off its back and then continue onwards and upwards until investors once again get too bullish. This is why it is so important to monitor things like the Committment of Traders (COT) reports, as they can give great insight into the level of bullishness in a market give indications as to when a counter-trend move might begin.

We can see how these counter-trend moves have impacted the S&P 500 Index since the start of the current cyclical bull market in 2009.

These corrections are normally fast and furious, exactly the kind of conditions needed to inspire fear amongst investors, and during the month of August we have seen counter-trend moves in a number of markets, among them Equity markets, the US dollar and Gold. In the next chart of the S&P 500 Index I have extended the data to include the entire move since the 2009 lows and we can see how long it has been since a serious correction took hold, it was clearly long overdue.

Because of the severity of the latest correction, especially last weeks volatility, investors have once again begun to question whether the bull market is over. The answer is possibly, but I doubt it. Bull markets finish when the public get sucked in due to the constantly rising prices. This stampede of investors leads to spectacular price rises and a 'blow-off' phase, typified by 'this time is different' thinking and to coin a phrase from Alan Greenspan, 'irrational exuberance' (see chart below). Thus far we have not witnessed this, and allied to my belief that as the global economy unfolds money will flow into US Equities as a safe haven leads me to believe that equities will recover and go to new highs.

However, just because the market should rally to new highs doesn't mean it can't have a bigger correction now. If we look at the Point & Figure chart of the S&P Index below we can see that the rally from last weeks low at 1870 has paused at overhead resistance in the 1990 area. 

 The market is now at a critical juncture where either the panic will subside and prices will continue to grind higher, or the market will roll over again and test the lows. Should the sell-off resume, the 1870 low will provide the first point of support, followed by 1830 and 1740. It is also worth noting the bearish price objective of 1621, and although price counts tend to be more accurate when they occur in the direction of the major trend (which in the case of the S&P is up) we should not just disregard it.

  Having waited so long for a correction to materialize, it is unlikely to be over so soon, and the probability is that there is more volatility ahead. Should we retest the lows and go lower, keep your eyes on the support levels and the 'talking heads' on TV. 

When they start saying that the bull market is over, it's time to buy!

The Greek Euro Death Roll

The Greek Euro Death Roll

Like a poor story line from a soap opera, the Greek euro saga seems to have been playing out for years. On a number of occasions the warning signals have flashed amongst talk of imminent defaults, Greek economic collapse and the resultant chaos in the Eurozone, only for some political agreement to be cobbled together and the endgame kicked further down the road.

The crisis started for Greece back in 2009, badly affected by the fallout from the GFC, Greece struggled to pay back its sizeable debts. Concerned by the possibility of a Greek default, international investors stopped buying any more government debt, cutting off the usual funding stream and forcing the government to borrow yet more money from the EU and the IMF. This borrowing in turn also needed repaying with interest, and as the repayment dates loomed more borrowing was needed to fund the repayments from these previous loans, the downward spiral was set and Greece and the Eurozone became locked in a financial death roll. 

Over the years since 2009 the effects on the Greek people have been profound. Part of the terms of the initial bailout was that Greece implement a policy of severe austerity in order to get their borrowing under control. This has resulted in economic hardship, civil unrest and political turmoil as successive governments have been caught between the demands of the eurozone on one hand and the people's resistance to austerity on the other. It must be remembered of course that the Greeks have hardly been innocents in their own demise, with decades of rampant corruption, endemic tax evasion and financial mismanagement laying the foundations of disaster long ago, however it is the actions of the European Union and the IMF, more interested in their own preservation than in the welbeing of Greece that has compounded the problem.

The EU is determined to keep Greece inside the monetary union. It cannot allow the Greeks to default on its debts whatever the cost to the Greek people, as a Greek default would open the door for Portugal, Spain, Italy and a host of other countries to renege on their debts and the entire Euro experiment would die. However in spite of using increasingly large carrots and sticks in order to force the Greeks into compliance, the Greek people are becoming increasingly vocal in their opposition to the restrictions imposed upon them, and it is my belief that if not the current government,ultimately they will elect a government that will take them out of Europe whatever the cost. 

One of the ways we can see how the financial markets interpret the risks to the eurozone from a Greek default is through the currency. As a general rule, the more confidence international investors have in a country or economic zone, the more money they will move into that currency in order to invest in its bonds, equities, property etc. Conversely, as confidence wanes, these assets are sold and the money is then moved out of the currency into something with a better return, like US Dollars for example. The movement of the currency acts as a barometer, enabling us to interpret what the future might hold.

Here we can see a chart of the Euro relative to the US Dollar.

It shows us the high in the Euro prior to the GFC and the subsequent multi year trading range ending with a break below the 119/120 support in December of last year. Subsequently it dropped like a brick until finding some support in March, since when it has managed to stage a recovery. We can see from the oversold readings on the RSI indicator at the bottom of the chart that the price collapse from the 139 level was extreme and that a rally was overdue, however longer term the price move has done serious damage to the outlook for the Euro, something we can better see with the next chart.

Here we have a Long Term Point & Figure Chart of the Euro.

I have talked in previous posts about the predictive powers of a P&F chart and that whilst it isn't infallible, it can be incredibly accurate. Here we see the entire history of the Euro currency and it is clear that the breaching of the 119 level has triggered a downside count of 71.32. This is an incredible target and suggests a virtual implosion of the eurozone in its current form.

We know that since March the Euro has rallied from very oversold conditions and the next chart gives us a shorter term perspective to help gauge how much longer the rally might continue.

Here we have a shorter term P&F Chart of the Euro showing that the rally target of 113.24 from the March low has already been met, and that there is likely to be resistance around the 115 level. We also know that should 115 be broken and the rally continue, the old support level of 119/120 would provide serious overhead resistance.

When we look at these charts collectively they seem to indicate that whilst there is the potential for a further Euro rally in the short term, the medium to long term outlook is extremely negative. Although the downside count of 71.32 is extreme, when we consider the cascading effect from a Greek debt default it is not hard to imagine such a scenario and the implications of such a move would indeed be catastrophic for many people and businesses, it might well pay to consider what alternatives you might have should you be holding Euro denominated assets.

It must be stressed that the move is highly unlikely to occur in a straight line, there will be falls and rallies however the potential for a panic move cannot be ruled out, especially when the Greek domino finally falls.

Whenever Greece ultimately defaults it will lead to years of economic hardship for its citizens, however it is what it portends for the rest of Europe that is really worrying