IN-DEPTH: TRANSCRIPTION - A STRUCTURED INVESTMENT APPROACH
SLIDE 5 - GLOBAL MARKET SEQUENCING
What a lot of Individual investors don't fully appreciate, but Institutional Investors do, is that often coming problems in the equity market are telegraphed in advance via other markets. Specifically, shifts in the Currency markets trigger movements in the Bond Market, which in-turn results in moves the Equity Market.
The Currency Market trades over $5T in volumes on a daily basis. The Guerrilla sized Bond market is much smaller than the Currency markets but still massive in comparison to the global equity markets. The Equity markets are relatively small in total comparison. If nothing else the shear volumes dictate this but it is more than just that.
You might want to think of this relationship in this way as shown in our illustrative "dog" example graphic to the right. The Currency markets like a thinking brain identifies imbalances and often changes first. Then as Money or Currency flows start to shift the body starts to react with motion and momentum. It is not unusual for the equity market to be the last to move. In many ways the equity markets are more emotional and sentiment oriented rather than analytical like the other markets. Like a dogs wagging tail it moves based on how the dog actually feels about something.
As I often stated at the beginning of these LONGWave videos, the Longer Term the equity markets are about Fundamentals, in the intermediate term Risk and in the short term this Sentiment & Confidence.
The highly successful investor Warren Buffett often describes the market as a "Slot Machine" in the short term while being a "Weighing Machine" in the Longer Term - a slightly different way of expressing similar observations.
But this sequential process has been changing with the the world's financial markets becoming globalized and now reacting much faster. The Global Macro has become much more important which we discussed in the June UnderTheLens video entitled "Macro Investing in an Era of Political Discord". Credit has always been important to markets, but now Credit is Global. This along with the fact we have shifted to an era of "Creditism" from "Capitalism" has further made the global role of the credit cycle critically important.
However, Credit is not really a market. Yes there are Credit Default Swaps and other instruments that allow you to trade it and to some degree measure it but the area is so vast and complex, with so many variables, it is hard to easily capture its nuances. I didn't say it wasn't possible or not being done - but certainly not by individual investors or small institutional market participants. This is the purview of the major international banks & global insurers as well as hedge funds. Today the first mover is the Global Credit Cycle - not individual Domestic Business Cycles.
A way to think about this is the Credit Cycle has become the Sensory input to the brain. It smells out, sees and hears changes first. This may have always been the case but today it is a demonstrable reality!
I have shown this graphic before in case you have any doubt about the importance of Credit and the global shift to "Creditism" which my colleague Richard Duncan has written extensively about. We are in an era dominated by Consumption lead economies which no longer are driven solely by the Capitalist underpinnings of Savings and Investment.
Today's practical investment approaches and methodologies must incorporate this or be continuously blind sided by change and miss profitable investment opportunities.
We nibbled at this subject in out recent March UnderTheLens video entitled "Global Liquidity, Credit and Flows".
We encourage you to review this video if you haven't already. We don't have time in this session to discuss all of its materials.
This illustration gives you basic building blocks of the Credit Cycle in which those in the credit business participate.
Those participants are dominated by bankers:
- Global Liquidity is dominated by the Central Bankers and their monetary policies,
- Credit and Debt is dominated by the Domestic and Shadow bank lending participants,
- Flows is the purview of the International Banks and global Hedge Funds.
Credit is not really a centralized exchange traded market, though there are many trading instruments which fall under different parts of the Credit field. I have abbreviated here only a few of the many components under each of our major captions.
The list however is huge especially when you consider the roll-up involving all the major countries of the world.
This is not a field for the novice or someone with limited time and means!
So what do you do about it?
This is one of the reasons we started MATASII.com. To build a platform that allows smaller investors to get a better handle on Credit, Currencies and Bonds markets in such away as to assist with developing their equity investment strategies.
We attempt to distill a lot of the complexities into understandable and actionable investment approaches - starting with Credit.
We endeavor to create road-maps to better identify what is critically important for you to watch and track.
These Macro Maps are not pulled out of the air but are based on a very structured process.
Credit / Currencies / Bonds / Equities shown at the bottom is only one component of our Macro Analytics which in turn is only one part of our Process / Methodology / Platform & Investment Themes structured process approach.
We certainly don't get everything right, but we have found we are seldom truly blind sided by something. We may miss some Strategic Investment Insights ( we currently have 8) but then we are more often than not in the important ones early.
We additionally overlay Generational Cycles,
With Business Cycles,
With Monetary Policies,
With Fundamentals, Risk and Sentiment to arrive at probabilities of occurrence.
Our Technical Analysis and proprietary HPTZ (or High Probability Trading Zones) then gives you triggers and targets to assist you in developing your own investment strategy further. We don't tell you what your investment strategy should be. We do the research and analytics. You do the rest.
I didn't mean to make this a MATASII commercial but we have so many new subscribers and we sense many don't fully grasp the reason for why the MATASII.com site is so extensive or how to fully use it effectively. We certainly wish that we could make it simpler and less involved but the investment environment today doesn't allow for this.
Initially, MATASII was actually three sites that were amalgamated. The GordonTLong Market Research site, the technical analysis site "Triggers" and a private proprietary site structured on what were termed Strategic Investment Insights or SIIs.
Let me share a few charts of what all this research is presently telling us. Because this video will eventually be shared in a time dated fashion in the public domain we refer subscribers to the subscriber side of the site for more detailed analysis. For non-subscribers we encourage you to explore the public side of the site for further introductory & free ressearch.
Starting with Credit we currently see a high probability of the following occurring:
- Yields have more to run and will likely top in Q4 somewhere south of 3.5% on the 10Year US Treasury,
- IG (specifically BBB) and HY yields will increase their yield spreads and march higher into the coming recession and global slowdown shown in grey and red on the right,
- Equities are likely to finally top in late 2018 or Q1 2019 with the S&P 500 at ~ 3050 as central banks withdraw liquidity.
- Of course as markets deteriorate you can fully expect the central bankers to increase liquidity but it won't work this time around as it has in the past.
- Over-leveraged Corporations and Zombie Corporations will not be able to finance their debt and will force them to push their prices higher.
- Bankruptcies, bailouts and government guarantees will not be sufficient as we head into 2022.
- The Debt Supper Cycle will be demonstrably over by then and the mistaken policies of Unsound Money and Fiat Currencies will have to be reckoned with.
The US$ is critical to the timing of all this.
- Global De-Dollarization has already begun and will only accelerate through 2022,
- In the near term however we see dollar strength increasing rapidly due to a pronounced Euro-Dollar and a global dollar shortage. This is primarily driven by the $9T in US$ denominated Emerging Market debt and the perfectly predictable Echo Boom we outlined as inevitable 5 years ago in these videos (see the Macro Analytics archives for these),
- A compounding flight to safety in the US dollar will eventually reverse by 2020-2022 because of De-Dollarization.
- Expect the IMF to become a dominate policy setter as the world shifts to a multi-polar form of governance as the US dominated uni-polar world environment comes to an end with crashing entitlement funding problems further accelerating de-dollarization.
In the near term we have seen the US dollar steadily fall since Trump was elected which has helped US asset values. This drop has recently reversed, exactly as our Ellipses drawn over 2 years ago predicted it would. The US dollar is rising and now causing major problems for Emerging Markets which will soon spill over into the unsound and fragile EU Banking System.
We currently expect a consolidation in the US$ before advancing higher over the next 12-24 months. This is likely not be good for the Precious Metals markets.
The Bond Market has also been following our models sine the Trump election victory.
- Rates have rapidly risen to the critical 3% range on the 10Y US Treasury Note.
- We see a near term pull consolidation in rates before marching higher to possibly the 3.5% range.
- This whole movement however is an ending diagonal pattern - a corrective formation in long term falling real rates.
- It foretells of much lower longer term sovereign rates in late 2019 and onward.
In the short term the US Equities have completed a consolidation triangle pattern which is a classic "continuation" pattern of the existing trend - which is upward.
We presently need to see the dotted lines shown here on the DJIA chart to be decisively broken to confirm the continuation pattern.
A similar pattern is seen here in the S&P 500
A pull back as part of a Wave 2 is highly likely, however this is only part of a final 5 count wave still ahead, which will likely end at its Fibonacci target of approximately 3050.
All of this is of course subject to change and is why you need to monitor our posts and live charts on our site.
Though we feel there is more to go in the equity markets, remember the last 5% is always the most expensive!
Our Strategic Investment Insight's are therefore presently focused on Bond, Credit and Currency investments for all the reasons we initially discussed. Our Equities insights are now more about positioning for high probability 'shorting' opportunities. Check out our Watch lists for ideas - these are not recommendations but only instruments to pay particular attention to.
Our analysis nailed the Deutsche Bank collapse for those that have been following our "Lenders" SII.
If you haven't already reviewed our recent LONGWave release on "Follow the Cycles" we encourage you to do so. We are in the midst of completing important Generational cycles which will dominate global markets in the decade of the 20's.
As I often do, never forget that the powers to be will continue to print the money to solve any and all problems until such time as no one will take the money or it is of no value. That you can be assured of.
That day is still in the future so take advantage of this "true-ism" as it currently unfolds.
Investing is always easier when you know with relative certainty how the powers to be will react. Your chances of success go up dramatically!