weekend lounge 23/11/18, page-47

Bear markets and Deflation


Oil crashing hard on Friday night falling another 5.5%.
This brings the total decline to 32% in just under 2 months!


Brent Oil - Daily Chart




A rising Oil price is usually seen as inflationary.
A falling/crashing oil price is usually seen as deflationary.


If Oil continues to fall then the FED may think that they have raised interest rates high enough (or maybe even too high..) for this business cycle.
This could lead to the FED not raising interest rates in 2019, after the 'expected' December rate hike.

If Oil and other markets continued to fall though, the FED may not even raise interest rates in December..

A slow down or stop in rate hikes would usually be bullish for markets but it may already be too late by then for the current market..



Golds Case

A halt in rate hikes should be bullish for commodities as most commodities are priced in USD.
Under the current market conditions this would be very bullish for Gold, although we could be in a strong bear market by then, which may temporally push down the price of Gold also...

IMO if/when the FED starts lowering interest rates in 2019 then this would probably be the best time to buy Gold and Gold stocks.
Gold will likely be one of the few sectors that will perform in bear market after the initial big market decline.

There should be a significant move in Gold stocks once investors see that the price of Gold is rising higher as the general markets are still declining.

This would probably be the ideal time to enter Gold stocks..


US500 with AXGD overlayed in pink - Daily Chart (2007 - 2009 GFC Crash)





US Treasury Bonds Bullish Case

If the FED halts raising interest rates and market conditions continue to deteriorate, then the only real 'safe' asset class left for investors will be the buying of US Treasury Bonds.

The US Treasury Bonds are seen as the ultimate safe haven in times of crisis and market crashes..


As we have seen recently the US Treasury Bond yields have already started to fall, indicating that investors aren't confident that there will be further rate hikes (after December) and that they are also looking for a safe haven asset class outside of the equity markets.

(Bond yields work inversely to the price of bonds)


A key level of support is the 3.06 - 3.04 level.
If this is broken in a defining way then expect a further decline down to the 2.8 area.


US 10 yr Treasury Bond Yield (Current)




We can see that the buying of US Treasury Bonds have preceded many market crashes in the past and for the most part pushed US Treasury Bond prices higher as investors seek the ultimate safe haven in market crashes.


US500 - Daily Chart (2007 - 2009)




US 10 yr Treasury Bond - Daily Chart (2007 - 2009)





Not every crash/corrections are the same but they all usually stem from a slow down in the underlying countries growth.
The impacts of globalisation mean that now the majority of market crashes around the world happen in unison.

As a slow down in world growth becomes more apparent from declining corporate profits, investors will start moving more and more cash out of their riskier investments and into more safer investments/assets.

The more this happens the more self fulfilling a market crash becomes....



In my opinion,


The reasons that the stock market peaked this time around before US Treasury Bonds prices started rising was because of,

1. The very low yields (3.2%) offered on US Treasury Bonds that barely beat inflation.
- Why would any investor sit on a 1% return (inflation included) when they could of made 10+% just investing in any of the market indexes?
- The Dot Com and GFC crashes had the 10 yr US Treasury Bond yields at 6.7% and 5% respectively given investors a fair and risk free return.

2. Information is readily available and instantaneous now.
- The slower speeds at which information moved in the past may have prevented the majority of investors from seeing a countries growth indicators before it was too late.
- More than likely the earliest investors to buy up US Treasury Bonds before a market crash were the 'smartest guys in the room'..
- 'Rate of change' growth indicator models and also having access to privileged information would have given institutions early advantages of seeing an impending market crash.
- These models (and experience) would most likely have suggested a move into safer asset/investment classes like US Treasury Bonds.

3. Algorithm/Quantitative trading is so prevalent now.
- Some estimates put algorithm/quant trading in the 70-90% range of all trading conducted.
- With so much emotionless algo driven trading happening now, that as soon as price breaks a key level of support there is automatic selling by the algo.
- This can have a cascading/ snow balling effect just like we saw in the 2010 "Flash Crash" that dropped the DOW by 9% in 36 minutes...


US500 - Daily Chart (Current)




US 10 yr Treasury Bonds - Daily Chart (Current)





In conclusion,
and if this correction/crash is the real deal then there are still other options out there to make money when we are in a severe bear market.


Long - US T Bonds.
Long - Gold once the FED starts lowering interest rates.

Short - Equities, mainly Momentum/Growth, Tech.
Short - USD once the FED halts raising interest rates and looks to be lowering them in the future.