Deaf, Dumb, and Blind

Transcription

1 1 Deaf, Dumb, and Blind 2017 Phoenix Capital Research, OmniSans Publish, LLC. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), in whole or in part, is strictly prohibited without the express written permission of OmniSans Publishing, LLC. All Rights Reserved.

2 Disclaimer: The information contained on this newsletter is for marketing purposes only. Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice by Phoenix Capital Research or any of its affiliates, nor is it to be relied upon in making any investment or other decision. Neither the information nor any opinion expressed on this newsletter constitutes and offer to buy or sell any security or instrument or participate in any particular trading strategy. The information in the newsletter is not a complete description of the securities, markets or developments discussed. Information and opinions regarding individual securities do not mean that a security is recommended or suitable for a particular investor. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. Opinions and estimates expressed on this newsletter constitute Phoenix Capital Research's judgment as of the date appearing on the opinion or estimate and are subject to change without notice. This information may not reflect events occurring after the date or time of publication. Phoenix Capital Research is not obligated to continue to offer information or opinions regarding any security, instrument or service. Information has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. Phoenix Capital Research and its officers, directors, employees, agents and/or affiliates may have executed, or may in the future execute, transactions in any of the securities or derivatives of any securities discussed on this newsletter. Past performance is not necessarily a guide to future performance and is no guarantee of future results. Securities products are not FDIC insured, are not guaranteed by any bank and involve investment risk, including possible loss of entire value. Phoenix Capital Research, OmniSans Publishing LLC and Graham Summers shall not be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided. Phoenix Capital Research is not responsible for the content of other newsletters to which this one may be linked and reserves the right to remove such links. OmniSans Publishing LLC and the Phoenix Capital Research Logo are registered trademarks of Phoenix Capital Research. OmniSans Publishing LLC - PO BOX 2912, Alexandria, VA 22301

3 Deaf, Dumb, and Blind Federal Reserve policy just crashed into a wall. The Fed s primary role is to act as a source of financial stability. Indeed, this was the entire reason the Fed was created back in 1913 (whether or not the Fed has succeeded at this is a different story). At that time, the United States had just experienced its first systemic banking crisis (the panic of 1907). The Fed was designed to insure such a crisis never happened again by giving every financial institution in the United States access to emergency lines of capital should solvency become an issue (again, whether or not the Fed has succeeded in its stated objective is highly debatable). The Fed s mandate was then changed in the 70s when the unthinkable happened: an inflationary recession. Prior to this (from 1913 to 1971), the Fed was operating in a world in which the US Dollar ($USD) was at least partially connected to the Gold Standard. Once Nixon ended this link in 1971, what has previously been unthinkable happened (the inflationary recession of the 70s) and the Fed s mandate was changed to focus on maintaining financial stability along with maximum employment and stabilizing prices. September SHORT-TERM ISSUES Yellen makes an astonishing admission. The Fed is wrong?!?! Gold and Silver pullback before the next major leg higher. Natural gas ready to rally. INTERMEDIATE-TERM ISSUES Inflation trades to outperform stocks for the next six months. $USD to drop into the 80s. Emerging Markets ready for new bull market. LONG-TERM ISSUES A Crisis worse than Eventual market collapse of 50%+ in real terms. A scramble for high-end collateral to bring about derivatives collapse/ implosion of big banks. Again, the Fed, in its current form, is meant to focus on maintaining maximum employment, along with stable prices. In this context, the Fed is meant to focus on the US s inflation and employment numbers above all other economic data, followed by insuring 3

4 financial stability/ staving off financial crises. But what if the inflation and employment numbers (the actual data to which the Fed is meant to react) are bogus? Of course, that is a hypothetical question. It is obvious the employment and inflation numbers in the United States are bogus. And they have been for years due to political influence. The process started under Nixon, and has since worsened with each new administration. Perhaps the single most egregious data manipulation occurred under the Obama administration in which we were told that the US economy was in a robust recovery and that millions of jobs were being created, despite the fact that some 90%+ of those jobs were based on statistical manipulations in economic spreadsheets rather than actual people being hired. This is not a left vs. right or Democrat vs. Republican argument, and I am not singling out the Obama administration for political purposes. The reality is that the US starting fudging key economic metrics decades ago. And the longer this game has persisted, the worse the data has become as each new administration piled new manipulations on top of all of the preexisting ones. The Great Financial Crisis of 2008 worsened all of this, as the data from the period was so negative that it screwed up all previous adjustments. Put simply, any economic data point that was based on Year Over Year comparisons or seasonable adjustments was no longer valid. The statisticians in charge of economic data in the US tried to deal with this by adding even MORE adjustments to the data. However, all this did was make the data even less accurate to the point that for some jobs reports, adjustments created more jobs than the economy! I bring up all of this, because it was THIS highly skewed, inaccurate data that the Fed was using to guide its monetary policy. As I pointed out time and again starting in 2009, it doesn t matter how complicated/clever your forecasting model is, if you are using garbage data, your forecasts will be garbage. First, let s consider the inflation numbers. Perhaps the biggest fraud ever committed in financial history concerns the understating of inflation in the Unites States post By the Fed s own admission, the US Dollar has lost some 84% of its purchasing power since 1971, and yet the Fed has routinely claimed that inflation has been subdued or under control throughout that time period (with the brief exception of the inflationary spikes of the 70s). 4

5 With this level of currency depreciation, incomes would have to rise exponentially to compensate for Americans higher cost of living. They haven t. As a result of this, Americans have increasingly relied on two parents working instead of one, while supplementing their incomes with credit cards and other debt instruments. The below chart is possibly the single best argument against any claim by the Fed or others than the official inflation numbers are accurate. If income growth was indeed greater than the rise in inflation post-1971 as the below chart suggests, most families would currently have only one parent working and STILL be saving money. Instead, today the norm is for both parents to work and the average US household to be sitting on over $137,000 in debt. Put simply, the official inflation numbers are garbage. 5

6 Let s move on to the employment numbers. The US unemployment numbers have been inaccurate for decades. However, in the last eight years they became so absurdly false, that in 2014, the Fed opted to created its own employment metric, the Labor Market Conditions Index. In March of last year (2014), the Federal Reserve introduced a new tracking indicator to assess changes in the labor market. It's called the Labor Market Conditions Index (LMCI), which the Fed defines as a dynamic factor model that extracts primary variation from 19 labor market indicators. In other words, the LMCI tracks changes in the labor market by finding variations from multiple labor indicators. Indicators range from unemployment rates to wages to layoffs to business surveys. The LMCI plays a critical role in helping the Fed with one of its two mandates: ensuring maximum employment. It's one of the factors that the agency will take into account when it considers raising interest rates later this year. Back in 2014, the Fed claimed it was creating this metric to created a more dynamic measure of the US labor market, but the reality was that by that point the Fed was well aware that the official unemployment/ employment numbers were garbage. 6

7 Unfortunately, even the Fed s new metric fell victim to the same machinations. As a result of this, in June of this year (2017) the Fed stopped using its Labor Market Conditions Index. Yes, the Fed s own metric, designed specifically to detail the labor market accurately, lasted only two years before it too became completely useless and was abandoned. There are in fact many more detailed problems in both the Fed s inflation and employment numbers, but you get the general idea: that the official data that the Fed has been using for its forecasts is hopelessly flawed. Pat of this is intentional (the Fed purposely understates inflation to hide the fact that incomes/quality of life have fallen in the US since the 70s), the other part is unintentional (once you begin adjusting data for political purposes, at some point the data becomes so inaccurate that even a well-meaning person can t make sense of it) but the outcome is the same: not even the Fed with its army of economists, can use this data to accurately predict anything anymore. This is largely why virtually all of the Fed s forecasts since the great Financial Crisis have proven incorrect. It is why Fed officials make little if any sense when they are put on the spot in Q&A sessions. And it is why Janet Yellen was forced to do the unthinkable earlier this week. I ve noted over the last few months that a distinct shift was occurring at the Fed. From November 2016 until June 2017, the Fed was adamantly hawkish, hiking interest rates three times and discussing a balance sheet reduction that would feature draining liquidity from the financial system. Then suddenly in late June 2017, Fed Chair Janet Yellen did a complete flip-flop and stated in her semi-annual speech to Congress that the Fed was about done with rate hikes and that any balance sheet shrinking would NOT drain liquidity from the system. Then in July, the Fed FOMC minutes revealed that the Fed had absolutely no clue what was going on with inflation. According to the July FOMC statement 1. Most participants expect inflation to pick up over the next couple years. 2. Many Fed participants think inflation will remain below 2% longer than expected. 3. Many Fed participants believe that inflation measures dropped recently due to idiosyncratic factors. 4. A few Fed participants believe the Fed s framework for forecasting inflation is no longer 7

8 !?!?!? valid. 5. Some Fed participants noted their increase uncertainty about the outlook for inflation. This confusion carried over into Fed Chair Janet Yellen s Jackson Hole speech in August during which, despite potentially being her last major speech as Fed Chair, she made no mention of the economy or inflation. By this point it was clear the Fed was in total chaos. It s one thing to openly lie about things (employment, inflation, GDP growth) to continue a narrative (recovery). It s another to completely give up discussing one s primary subject matter (inflation and the economy). As you ll recall I was completely stunned to see Yellen do this. However, even that didn t prepare me for what Yellen did on Tuesday of this week. Tuesday, August 26 th 2017 is one of the most important days in investment history. That was the day that a Chair of the Federal Reserve stated: 1) The Fed does target stock prices when timing its rate hikes. Yellen Speech: Fed is taking into account movements in asset prices in deciding rate hikes [asset prices= stock levels] 2) The Fed was WRONG (!?!?!?) about inflation and employment. The Fed may have overstated the strength of the labor market and the rate of inflation, leading to monetary policy ahead that will be easier than thought, Fed Chair Janet Yellen said. Yellen admitted that trends in employment and wage and price pressures have shifted from what central bank forecasters expected

9 3) Despite all of this, the Fed should continue to gradually raise rates to stop employment from over-heating.!?!? While recent soft inflation readings justify a gradual pace for interest-rate hikes, there is also a danger of moving too slowly, Federal Reserve Chairwoman Janet Yellen said Tuesday. We should also be wary of moving too gradually, Yellen said in a speech to the National Association for Business Economics meeting in Cleveland. There is a risk that the labor market could become overheated, causing an inflation problem down the road, she said. And persistently easy policy could have adverse implications for financial stability. For these reasons, and given that monetary policy affects economic activity and inflation with a substantial lag, it would be imprudent to keep monetary policy on hold until inflation is back to 2%, she said. If you were looking to make a series of statements that inflicted the maximum amount of damage to Fed credibility, you couldn t do better than the above. Not only did Janet Yellen confirm what previously had been conspiracy theory (that the Fed makes rate hikes based on where stocks are trading), but she then admitted the Fed was wrong about the two most important areas of Fed analysis (inflation and employment) and then followed this up by saying the Fed will continue to hike rates because inflation might become a problem down the road and the labor market might overheat. Put simply, the current Fed Chair just stated, in public, we have no idea what s going on, and we ve been totally wrong on the most important stuff, but we re going to continue doing the same thing in case somehow the stuff we re wrong about happens. It s simply astonishing. The Fed is now officially deaf (to criticism), dumb (unable to articulate anything) and blind (to the obvious signs inflation is ripping through the financial system). Regarding that last element, while the Fed is focusing on stock prices, other assets are beginning to SCREAM inflation is coming. 9

10 As I have noted previously, food inflation is the single best predictor of future inflationary shocks. With that in mind, let s turn our attention to agricultural commodities prices. Wheat prices have broken out of a long-term downtrend. Same with Corn. 10

11 Similarly Soybeans look extremely bullish. Indeed, the entire Agricultural commodity complex looks like a coiled spring about to erupt higher. 11

12 These prices moves are beginning to seep into food inflation as well. As a whole, Food and Beverage inflation has broken out of a descending wedge pattern (blue lines) in the context of a massive wedge triangle pattern (purples lines). We re heading for a test of the upper purple line shortly. Put simply, food inflation is on the rise. Overall inflation will be following by a few months, but it s coming. Indeed, while the Fed s official Consumer Price Index (CPI) measure is understating true inflation, other, less popular (but more accurate) Fed inflation measures are already showing signs of heating up. The Atlanta Fed s less popular but far more accurate sticky inflation measure (this measures inflation in prices are slow to change) is already above 2%. This is HIGHLY inflationary, particularly when you consider that it remains at these elevated levels DESPITE the Fed hiking rates THREE times AND preparing to shrink its balance sheet! 12

13 Meanwhile, the Cleveland Fed s median core inflation (again, a more accurate measure of true inflation than the Fed s official CPI) is clocked in at over 3%. According to the Federal Reserve Bank of Cleveland, the median Consumer Price Index rose 0.2% (3.0% annualized rate) in August. The 16% trimmed-mean Consumer Price Index also rose 0.2% (2.3% annualized rate) during the month. The median CPI and 16% trimmed-mean CPI are measures of core inflation calculated by the Federal Reserve Bank of Cleveland based on data released in the Bureau of Labor Statistics' (BLS) monthly CPI report. Put simply, inflation is rising. And at it is going to be getting worse in the weeks and months ahead. Indeed, the single most important chart for identifying inflation vs. deflation (the TIP: TLT ratio) in the financial system looks as though it has bottomed. As you can see, the TIP:TLT ratio held support (the red line) and is now turning upwards. This is HUGELY inflationary. The next move is likely to test the upper blue trendline. 13

14 Below is a close-up of this ratio. As you can see, the run to 0.94 has begun. And if we take out that upper blue line it s INFLATION time (think another 2011-type spike). 14

15 To give you an idea of the magnitude of the potential move we re talking about, below is a chart of the TIP:TLT ratio (black line) with the commodities index overlaid on it (blue line). The red circle is the upside target for what s coming once the TIP:TLT ratio takes out its upper blue trendline. Gold and Silver have already picked up on this when they bottomed in early July before ripping higher into late August. They are now correcting and flushing out trend chasers and other hot money traders. But I expect both precious metals to bottom in the next five days at which point they will begin their next and MAJOR legs up. Gold: once we reclaim $1,300 (in the next five days) the move to $1,400 has begun. 15

16 Silver: once we reclaim $17 (again, in the next five days) the move to $19 has begun. 16

17 While Gold and Silver are consolidating, a specific Gold miner has caught my eye. I m talking about Iamgold (IAG), which is about to break out of a massive cup and handle pattern: Once we break that red line, we re on our way to $12. Time to buy. Action to Take: Buy Iamgold (IAG). Another area of the markets that is ready to rip higher is Natural Gas (UNG). This asset class has had a brief correction over the last two weeks, but the bottoming process now looks complete. The move to $8.00 will be starting in the next week. 17

18 The biggest beneficiary of this will be Southwestern Energy (SWN). SWN has just broken out a falling wedge pattern. We re going to $9 by year-end. 18

19 Finally, the long awaited correction in emerging markets is here. More than any other markets, Emerging Markets will benefit from inflation. But right this minute, they, like Gold and Silver, need to correct. Once this correction ends (in the next 2-3 weeks) it will be time to load up on these assets. The Emerging Markets ETF (EEM) is going to $42 and change. It will then be time to buy. Our target for Brazil (EWZ) is within the red lines. 19

20 Ditto for China (FXI). 20

21 This concludes this month s issue of Private Wealth Advisory. The key trend for the next 6-12 months is inflation. This trend is going to benefit Emerging Markets, Commodities, Oil and Precious Metals. We caught the first leg of this major trend already with some terrific gains. We re now getting ready to position for the next leg up in Emerging Markets (two-three weeks), Precious Metals (next five days), and Natural Gas (next five days). I m watching the markets closely and will issue updates as needed. Barring any new developments you ll next hear from me next Wednesday after the market s close in our usual weekly market update. Until then Best Regards, Graham Summers Chief Market Strategist Phoenix Capital Research 21

22 OPEN POSITIONS STOCKS PORTFOLIO CURRENT GAIN/ POSITION SYMBOL DATE PRICE PRICE LOSS RPX Corp RPXC 8/5/15 $15.48 $ % Agricultural -6% RJA 1/12/17 $6.46 Commodities ETF $6.05 Public Storage PSA 3/23/17 $ $ % Verizon VZ 4/26/17 $47.17 $ % Vietnam ETF VNM 6/7/17 $14.64 $ % Pioneer Natural -7% PXD 6/15/17 $ $ Resources Southwestern SWN $6.17 $6.14 0% 7/19/17 Energy EOG Resources EOG 7/19/17 $95.00 $ % Natural Gas ETF UNG 8/2/17 $6.30 $6.58 4% Energy Transfer ETP $ % 8/2/17 $18.50 Partners Enterprise Products EPD $ % 8/9/17 $26.12 Partners Uranium ETF URA 8/29/17 $13.53 $ % Cameco CCJ 8/29/17 $9.88 $ % DB Commodity ETF DBC 9/13/17 $15.26 $ % Prices as of market s close 9/28/17 Returns include dividends 22

23 BONDS PORTFOLIO POSITION SYMBOL DATE PRICE Long Treasury ETF TLT 7/27/17 $ Emerging Market Bonds ETF EMB 7/27/17 CURRENT GAIN/ PRICE LOSS $ % $ $ % PRECIOUS METALS/ MINERS PORTFOLIO POSITION SYMBOL DATE PRICE CURRENT PRICE GAIN/ LOSS Gold 3/17/10 $1,120 $1, % Silver* 3/17/10 $16.23 $ % Wheaton Precious -8% WPM Metals Corp** 10/5/16 $20.83 $19.24 First Majestic Silver*** AG 5/12/17 $7.91 $ % Gold Miner ETF GDX 9/20/17 $23.50 $ % Gold Mining Juniors ETF GDXJ 9/20/17 $34.11 $ % Klondex Mines KLDX 9/20/17 $3.61 $3.56-1% Wesdome Gold Mines WDO.TO 9/20/17 $2.21 $2.26 2% Iamgold IAG 9/28/17 $6.66 NEW! Prices as of market s close 9/28/17 Returns include dividends *Average price of $17.50 and $14.97 ** Average price of $19.07 and $22.59 *** Average price of $7.11 and $

24 SPECIAL SITUATIONS/HEDGES/SHORTS PORTFOLIO POSITION SYMBOL DATE PRICE CURRENT PRICE GAIN/ LOSS France ETF (SHORT) EWQ 9/16/16 $23.38 $ % Italy ETF (SHORT) EWI 9/16/16 $21.56 $ % Russell 2000 ETF (SHORT) IWM 12/14/16 $ $ % Apple (SHORT) AAPL 3/23/17 $ $ % Facebook FB 5/31/17 $ $ % Alphabet GOOGL 5/31/17 $ $ % Homebuilders ETF XHB 8/9/17 $37.94 $ % CASH/ CURRENCIES PORTFOLIO POSITION SYMBOL DATE PRICE CURRENT PRICE GAIN/ LOSS Euro Trust FXE 8/23/17 $ $ % Prices as of market s close 9/28/17 Returns include dividends 24

25 RECENTLY CLOSED POSITIONS POSITION SYMBOL DATE PRICE SELL DATE SELL PRICE GAIN/ LOSS American Eagle AEO 5/26/16 $15.36 Outfitters (SHORT) 1/31/17 $ % Cliffs Nat Resources 19% CLF 2/8/17 $10.15 $12.10 (FIRST HALF) 2/13/17 Ambev ABEV 11/25/16 $4.96 2/23/17 $ % Cemex CX 11/25/16 $8.07 2/23/17 $8.69 8% Cliffs Nat Resources 10% CLF 2/8/17 $10.15 $11.13 (SECOND HALF) 2/23/17 Exxon XOM 9/24/14 $ /8/17 $ % Enterprise Products 9% EPD 11/31/16 $25.93 Partners 3/8/17 $27.83 Natural Gas ETF UNG 2/22/17 $6.57 3/8/17 $7.11 8% Emerging markets ETF EEM 1/12/17 $ /10/17 $ % Barrick Gold ABX 10/5/16 $ /10/17 $ % Uranium ETF URA 6/8/16 $ /12/17 $ % Cameco CCJ 1/4/17 $ /12/17 $ % Coal ETF KOL 1/4/17 $ /12/17 $ % Silver Standard 10% SSRI Resources 10/5/16 $ /12/17 $11.32 Royal Gold RGLD 2/8/17 $ /12/17 $ % Silver Miners SIL 3/15/17 $ /12/17 $ % US Steel (SHORT) X 2/1/17 $ /13/17 $ % Copper Miners ETF COPX 3/23/17 $22.64 (SHORT) 4/18/17 $ % 25

26 RECENTLY CLOSED POSITIONS CONTINUED POSITION SYMBOL DATE PRICE SELL DATE SELL PRICE GAIN/ LOSS 5% EPU 12/7/16 $33.23 Peru ETF 5/17/17 $34.77 Brazil ETF EWZ 2/8/17 $ /17/17 $ % Utilities ETF XLU 2/8/17 $ /17/17 $ % Solar Energy ETF TAN 4/19/17 $ /17/17 $ % Royal Gold RGLD 4/26/17 $ /17/17 $ % Southwestern Energy SWN 3/30/17 $8.15 5/24/17 $ % Gulfport Energy GPOR 3/30/17 $ /24/17 $ % US Oil Fund USO 4/26/17 $ /24/17 $ % Exxon Mobil XOM 5/3/17 $ /24/17 $ % Energy ETF (SHORT) XLE 5/24/17 $ /5/17 $ % Emerging Mkts Bond ETF EMB 11/21/16 $ /7/17 $ % Long US Treasuries TLT 11/21/16 $ /15/17 $ % Nuveen Enhanced Free $13.12 Muni Credit Fund NVG 1/2/14 6/22/17 $ % Rio Tinto RIO 6/19/17 $ /10/17 $ % Clear Energy ETF PBW 4/19/17 $4.06 7/10/17 $ % Enterprise Products EPD $26.00 $ % 6/22/17 Partners 7/17/17 US oil Fund USO 6/28/17 $9.20 7/17/17 $9.57 4% China ETF ASHR 2/1/17 $ /24/17 $ % Uranium URA 6/15/17 $ /24/17 $ % Cameco CCJ 6/15/17 $9.14 7/24/17 $ % US Steel X 6/19/17 $ /24/17 $ % Freeport McMoran FCX 6/19/17 $ /25/17 $ % Biotech ETF IBB 4/26/17 $ /25/17 $ % Baidu BIDU 6/7/17 $ /27/17 $ % Peru ETF EPU 6/22/17 $ /27/17 $ % Chevron CVX 6/22/17 $ /2/17 $ % Euro Trust FXE 10/5/16 $ /2/17 $ % US Dollar ETF UUP 8/2/17 $ /23/17 $ % 26

27 RECENTLY CLOSED POSITIONS CONTINUED POSITION SYMBOL DATE PRICE SELL DATE SELL PRICE GAIN/ LOSS US Dollar ETF UUP 8/2/17 $ /23/17 $ % Gold Miners ETF GDX 10/5/16 $ /5/17 $ % Gold Mining Juniors ETF GDXJ 10/5/16 $ /5/17 $ % Randgold Resources GOLD 5/12/17 $ /5/17 $ % Klondex Mines KLDX 8/10/17 $2.94 9/5/17 $ % Wesdome Gold Mines WDO.TO 8/10/17 $2.18 9/5/17 $2.37 9% New Gold NGD 10/5/16 $3.88 9/6/17 $ % Barrick Gold ABX 4/26/17 $ /6/17 $ % Silver Mining ETF SIL 4/26/17 $ /6/17 $ % Silver Standard SSRI 4/26/17 $9.94 9/6/17 $ % Transocean RIG 6/15/17 $8.56 9/26/17 $ % Helix Energy Solutions HLX 7/19/17 $6.16 9/26/17 $ % Oil Services ETF OIH 8/23/17 $ /26/17 $ % Apache APA 8/23/17 $ /26/17 $ % Halliburton HAL 8/23/17 $ /26/17 $ % 27