Our Momentum Peak Forecaster is a proprietary indicator that goes straight up as a market becomes highly speculative. The more intense the buying mania, the higher the Forecaster goes.
The highest reached was 1.37 with the culmination of the frenzy in gold and silver in 1980. This was 2.5 months before the conclusion in January 1980. The lowest trigger was 1.21 reached in May 2006, when we took this as a signal on the housing boom. The Case-Shiller index topped in June-July and our review on the pending decline in house prices included previous post-bubble collapses in real estate and was published that August.
We stumbled upon this unique indicator in 1998 – within the mania in narrowing credit spreads as the European Community was coming together. It led the reversal to widening by 3 months which took out Long Term Capital Management in that August to October calamity.
Back-dated to 1970, this has registered 1.21, or higher, seven times and only the 2004 example did not result in a dramatic event.
The Forecaster becomes effective when it stops going up and this typically leads the speculative peak by 2.5 months to 3 months.
This Time Around
The forecaster reached 1.28 at the end of December which compares to 1.23 registered before commodities peaked in 1974. This suggests that this peak may be more exciting than that example. On the other alternative, it may not be as intense as the 1980 example that reached 1.37.
Of course, this can't be determined until speculators (both private and within central banks) become exhausted and another liquidity problem is discovered.
Since the end of the year the indicator has been going down and once it turned down the mania would likely complete in the third month out. This could be within a six-week period centered in March.
In our All-One-Market thesis of inflating asset prices against dollar depreciation, all sectors may not peak at the same time. The action could narrow its participation to just a few leaders. Our ChartWorks technical research concluded some weeks ago that crude oil as well as silver and gold would be the focus.
The following tables all of the readings above 1.21 on data back to 1970, the complete chart is on the last page:
(*AOM = All-One-Market)
Is the market up when it should be?
Are there signs of intense speculation?
Yes – our Forecaster reached 1.28 which suggests that the frenzy would be greater than with the commodities boom in 1973-1974, but not as intense as with the precious metals blow-out in 1980. A number of our technical indicators are reaching extreme readings-- independent of the Forecaster.
How sound is the big story with the mania?
Key stories include the incredible ambition of the Fed to seriously depreciate the dollar, Chinese buying of commodities, food hysteria and Middle East troubles becoming acute.
Other than today's focus upon China, these serious concerns were part of the action in 1973 and 1980. In the 1970s Japanese mining companies were noticeably ambitious in acquiring properties and production around the world.
By 1980 most everyone expected crude to go up forever. Banks were aggressively lending to oil companies that had decided that metal prices were no longer cyclical as well and were taking over mining companies.
The denouement later in the 1980s had official hearings to find out how all the money could disappear. The Wall Street Journal reported about a judge addressing that question to a young and former banker from Oklahoma. The answer was "We spent it on wine, women and song – the rest we just pissed away."
This mania is reaching measurable excesses in the appropriate time window. We have been describing the action as dancing on the edge of a snow cornice and everyone knows that these are likely to fail in the spring.
Not all commodity sectors are likely to peak at the same time. However, at cyclical trend changes stock prices often lead the reversal in product prices and our frequent publications have been looking for opportunities.
Once the hot action fails it is probable that it could be quickly followed by the next recession. For centuries, big booms in commodities have been usually followed by business contractions. Prosperity has been associated with rising prices and hard times with falling prices.
On two of our examples, correlation with our Forecaster signal and the advent of the recession has been interesting. When commodities are a significant part of the play – watch out.
On the November 1973 signal the recession, according to the NBER, started that November.
On the November 1979 signal the action climaxed in January 1980, the month that that recession started.
Details and Implications
Food hysteria is as old as agriculture and historians have described such disturbances as "peasant bread riots". The literature makes no mention of "governing class bread riots" because their living the good life prompts popular uprisings amongst those who pay the taxes so essential to the governing classes.
The previous century of authoritarian government funded by currency depreciation became intolerable in the late 1500s. An historian noted that what might have been a typical peasant bread riot turned into an "iconoclastic rebellion" where the symbols of authority and authority itself were attacked. A great reformation of government excesses followed.
Over the next few years this seems again possible, but let's review some more recent disruptions in the Middle East – when our Forecaster kicked in.
The "Yom Kippur" surprise attack upon Israel occurred in October 1973 and the Forecaster signal happened on November 23, 1973 and that was 3 months before commodities blew out.
The next set of political disturbances that go with inordinate price increases swept the world in the late 1970s. Again the Middle East became agitated and the Iranian hostage incident started on November 4, 1979. The Forecaster signal occurred on November 9 – two and a half months before the excitement in precious metals concluded on January 21, 1980.
The extremes of that speculation provide some comment on the conventional wisdom that Paul Volker [Volcker] personally ended that bout of inflation in the Consumer Price Index.
Volcker was instrumental in abandoning the remnant of the US gold standard in 1971. After starting in central banking in 1952 he became Fed Chairman in August 1979 and being the "new" man on the job has been credited with ending that inflation.
This seems unwarranted as the speculation became irresistible – as they all do – and the consequent collapse would have happened even Volcker had been still at the New York Fed. At least he does not suffer from the stigma of attempting to keep a mania going. Bernanke seems to have two opportunities for such stigma.
The notion that Volcker lowered CPI inflation from 13.5 percent to 3.5 percent in 1983 seems difficult to support. The Fed continued to push credit and excess funds went into inflation in financial assets – a condition that interventionists still do not fully understand.
Should a recession start soon it will mark an end to the notion that policymakers can handle any contingency by injecting massive amounts of "stimulus". All that it does is stimulate speculation when the markets want to speculate.
But hey – but with ferment in the Middle East and soaring crude oil prices the establishment now has a reason for the recession – just as in 1973 and 1980.
Momentum Peak Forecaster, Updated
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