Cape Fear

One of the things in the media that drives me absolutely bonkers is fearmongering. You know what I’m talking about: “In this 20-minute video, Bob ‘I Can Find the Negative in Everything Including a Labradoodle Puppy’ Smith will reveal the three economic indicators that are signaling that the end of the Earth is just around the corner.”

During the first week of the new year, there was plenty of fear being spread around. I can’t imagine being an individual investor trying to make sense of something as complex as the global economy and financial markets, and having to rely on websites that scare people into reading their “research.”

Do yourself a favor and stay away from articles telling you the economy is going to collapse and a 50% decline in the stock market is imminent.

Managing your portfolio with the expectation that an economic collapse of epic proportions is right around the corner is the same as assuming that every time you step outside your house you’re going to get hit by a bus. There is about a 0.00002% chance of that happening.

Spend your time better understanding what is happening right now. As we discussed last week, markets are fleetingly reversing their Q4 2016 trends. By staying data dependent, you’ll be able to see that this reversal is providing us with an excellent opportunity to enter the best trades for Q1 2017 at prices that skew the odds of profitability in our favor.


Prepping Hard

I recently came across an article that stands for everything that is wrong with these “” websites that are always touting the end of the world. I don’t know Daisy Luther personally, but her The Organic Prepper website provides no value for individual investors trying to traverse the financial market terrain.

Here’s the executive summary: She cherry-picked 12 “economists” who think the U.S. economy is going to collapse during 2017 and drag the stock market with it. One of the people she quotes is Marc Faber. This guy tours around investing conferences year after year touting the end of the USD and of the global economy. He has never known a time period when he didn’t want to buy gold. His nickname is literally “Dr. Doom.” Enough said.

All of this leads into what she’s really selling.

“Personally, I’m prepping harder than ever before. I’ve spent too much time researching the collapse of Venezuela to sit idly by and let my family face the same hunger and desperation that is rampant there. Right now, a few rocks are falling, warning of an imminent disaster… My suggestions are: Reduce your expenses to the bone. The less monthly overhead you have, the longer you can live on your savings. Start building an emergency fund. The rainy day may be here sooner than you think. Stockpile food, OTC medications, and other necessities. (Sign up here to get a free report on what they ran out of first in Venezuela. You can use this to build a collapse-proof shopping list.) Get prepared to protect your family. When the economy declines, crime increases.”

Are you kidding me?! Do we live in Venezuela? No offense to the Venezuelan government, but I’ve seen better-run fifth grade boys’ clubs in treehouses with “No Girls Allowed” signs on the door. Daisy doesn’t give us the benefit of her process for drawing the conclusion that the U.S. is on a collision course to becoming Venezuela, but I have to respectfully disagree.

As for “protecting your family” during an economic decline, I have one question. Did your family survive from March 2015 through July 2016? I’m assuming that’s a rhetorical question and I sincerely hope it is. During that time U.S. GDP growth declined by 61% over five consecutive quarters from a healthy +3.3% down to +1.3%, before bouncing higher in Q3 2016.


Three-Headed U.S. Hydra

At my firm, we don’t trade based on fear; we develop quarterly macro themes that inform our trading. This quarter, one theme we are trading off is the “Three-Headed U.S. Hydra.” This theme represents the fact that U.S. growth is accelerating alongside rallies in the U.S. dollar and U.S. yields. Together, these three “heads” have a profound negative impact on certain financial markets around the world, specifically gold and U.S. Treasuries. Put simply, these markets cannot compete with the Hydra. As long as it lives, they will have a difficult time mustering any kind of upside beyond brief countertrend rallies within their respective downtrends.

Economically, every critical U.S. indicator has been accelerating higher for three months, and that trend will most likely continue for at least another three months. This acceleration is apparent across both the manufacturing and service sectors of the economy. In addition, the consumer looks pretty good right now. The labor market is softening, which is to be expected this late in the economic cycle. That said, wage growth is accelerating, along with personal income and disposable income.

As for the U.S. dollar and U.S. yields, the divergence between Fed policy and the rest of the world’s monetary policies puts the most important bullish tailwind of all behind both of these markets: policy tailwind.

I expect a pullback in both the greenback and yields to start the year. But once the pullback is complete, the fundamental gravity will once again exert itself and push both higher.


Group Stink Think

The problem starting out this year is that the SHORT gold and Treasuries trades are ridiculously consensus. You don’t need to look any further than positioning in the futures markets. Gold positioning isn’t quite as tilted to the SHORT side as Treasuries is, but it’s still well outside of historic norms. And speculators in the Treasury markets are leaning massively SHORT, not just on the long end of the curve but across all durations from two years out to 30 years.

This positioning won’t be a problem for long. You see, with the start of a new year comes the reset of Wall Street traders’ and asset managers’ profit and loss, which is the basis of their bonus. That means Wall Street banks and professional money managers are starting over from scratch. And if you were one of the guys who were SHORT gold and Treasuries coming into the new year, then you are already underwater after just one week.

Trust me, there’s one risk these guys manage above all others, and that’s career risk. If gold and Treasury SHORTs get squeezed just a bit more, watch how fast they run for cover to close out their SHORT exposures. That is going to push these markets up quick, fast, and in a hurry. In the case of Treasuries, speculators have the shortest Treasury exposure EVER, which means the short squeeze will be violent.

A word of caution: don’t try to SHORT these markets before the short squeeze has run its course. Shorting a market that is being squeezed higher is a surefire way to get your face ripped off. Don’t worry about catching the very top of this January move in either market. You don’t have to catch the top in order to position yourself for possible double digit returns on both trades.

Last week’s 2% rally in gold, which closed at $1,172.90, is nice, but it’s only the beginning. Any golden short squeeze could push gold as high as $1,230, possibly $1,240. There will be no floor until $1,089, which is 12% lower.

Likewise, 30-year Treasuries rallied 75 basis points to close the week at $151.23, but they could trade as high as the $160.00 area before the short squeeze reaches exhaustion. There is no real support in 30-year Treasuries until $140.22, which is 13% lower.

Stay away from “analysis” that says the U.S. economy is going to collapse this year and that you should be cornering the market on canned SPAM. I have no idea if the U.S. will ever turn into Venezuela, but I’ll bet you dollars to donuts it doesn’t happen this year. I’m also not rushing out to get my daughter her own security detail in anticipation of The Purge. However, I am going to use the self-survival instinct of Wall Street cronies to my advantage.

The trajectory of U.S. economic growth and Fed policy is supportive of further gains in the greenback and U.S. yields, which is decidedly bearish for gold and Treasuries. Stay data dependent and use any further rally in these markets to get SHORT before the next down move.