Looking back and ahead, my view on markets

In 2011 the markets taught me an important lesson. It was the year of the Euro crisis and Gold was topping. 

I just had started to find my way in the financial market jungle when I decided to buy gold miner stocks, not realizing they were close to a market top. My simple thinking was that the Euro fundamentals were deteriorating, the Euro would have no other option than heading lower and gold should move up even more. Dollar bubble stories convinced me even more to do so.

It was a big lesson. If markets were that simple and transparent anyone could make money easy as trader. And that is not the case. I had plenty to learn how the real world was working. I’m grateful that I started to learn that lesson, and still do now as it pushes me building a mindset and skill as trader since 2011.

After 2011 the ECB started to create money and interfere in the bond market driving up bond prices and pushing down interest rates. In the US it was no different after 3 rounds of QE. This cheap credit has been used to finance stock buybacks since the bottom in 2009. 

Capital simply looks for the easiest way to profit, it doesn’t care if fundamentals stink or not. It doesn’t care if there is sound or artificial bidding under a market as long a market moves up, easy money can be made.  Central bank interference shaped long term up trends in the stock and bond market. In 2012 here was no longer a need to stay invested in Gold. It started to trade sideways and finally took a dive in 2013.

Years have passed. Have things changed in the markets meanwhile?

Gold made new highs since 2011. That’s an important change in my eyes. 

Some people are thinking that the stock market has more opportunity to move up as well as the bond market. I’m not so sure about that. It depends if the Dollar is able to keep ‘strong’ as the bulls would say. But the Dollar is heading lower the last weeks and it is a second sign that markets are changing. A third sign is the fresh upturn in many commodities and emerging markets.

So the question is whether or not smart money keeps on expecting that easy money is in the broad stock and bond markets. The stock bulls keep on thinking so, as the fresh repo interference is proof in their eyes when the Fed pumps liquidity in the market, stocks move up.  

But they do not get the whole picture. There are signs that a major top is forming in stocks. The broad stock market hasn’t made new highs, only stocks with big market capitalizations did to give an illusion of market strength. That gets investors and traders to buy while Wall Street is selling. Otherwise Wall Street wouldn’t be able to sell their large positions near a top. And don’t even start about IPO’s.  Smart money knows the rules of this game and when time has arrived to move on. In response they are shifting their asset preferences, and rotate out of stocks into precious metals, commodities and emerging markets. 

Stocks and bonds went up together the past decade arranged by zero and negative interest rates. If these markets unwind, the Fed has to step again, cutting rates and printing money again. That would be bad news, especially for the Dollar. The Fed has to create trillions Dollars in an attempt to save the stock and bond market. This is when Gold an d Silver especially will do well as a hedge against weakening currency. 

And bonds? After an almost 40 years bull market, keep your mind open for a an emerging bearish trend. The next figure shows that the supply of US debt vehicles is growing at an increasing rate. Can the market swallow it all? Time will tell.

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