The DSI Says Gold and Bonds are About to Tank
In military aviation pilots are taught about an important concept called being on the Back Side of the Power Curve. For every aircraft and altitude there is a speed and power curve. Until the aircraft gets too slow things work just fine. A lot like the Fed. But when the aircraft flies too slow and drag gets too high, the addition of more power makes the situation worse. The aircraft stalls no matter how much power the pilot applies. A lot like the Fed.
On Tuesday the 3rd of March the Fed surprised the market with a 50 basis point drop in interest rates. The move was intended to reassure the market that the Fed had things under control. The market in turn surprised the Fed by doing the opposite of what those investing using the rear view mirror believed.
The market tanked. Of course it tanked, the economy was on verge of stalling due to the highest debt level in history and just as it hit the stall point, the Fed jammed on the afterburner. Bad idea. But what a wonderful example of why pilots and the Fed should never add power when they are on the backside of the power curve.
Markets don’t trade on fundamentals or because of technicals. At every market top there are a hundred reasons to buy. That’s what makes a top. And at every market bottom there are a hundred reasons to sell, that’s how you know it’s a bottom.
Markets trade on emotion and if you can just measure that emotion with accuracy, you can make a lot of money or in the worst case, avoid losing a lot of money. I wrote about the propensity of the stock market to top based on nothing more complex than the Fear and Greed index on January 1st.
On Friday March 6th the Fear and Greed index became the opposite and then some of the late December reading as it hit a reading of 6. That’s really fearful.
(Click on images to enlarge)
Monday March 9th is going to be an interesting day. The DSI for Treasury Bonds had a near all time high reading of 98 on Friday March 6th. It’s only been higher one time, which was back in December of 2008.
The DSI may bounce around at record highs for two weeks as it did in December of 2008 during the GFC but there is another interesting issue that makes me think we will have a turn almost at once. The 9th of March marks a full moon and according to Tom McClellan his research showed that at full moons, markets tended to either accelerate in the direction they were moving or do an immediate U-turn.
Gold has wanted to correct for a couple of months. Gold shares peaked relative to gold at the start of the year at exactly the same time as I was saying to beware the stock market. I started to lighten my percentage of shares to cash during what was a great time to be selling shares. I have kept my core positions but selling when you have a profit beats the hell out of selling at a loss.
Gold needs a correction. Two weeks ago the DSI on gold hit 96 and that says things are getting frothy. I always get a lot of hate mail when I point out that gold and resource stocks sometimes go down but that just tells me I have nailed it.
We have entered the Greatest Depression. The latest chaos in the stock market is just the beginning. It’s going a lot lower. And likewise, bond prices could go higher with gold. But when everyone is on one side of the boat, that’s not a percentage bet.
Meanwhile the Coronavirus spirals out of control. In the US the number of cases went up almost 400% in a week, from 68 on the 29th of February to 378 on the 7th of March. That’s nothing. In France cases exploded higher from 100 cases on the last of February to 653 a week later for a 550% higher reported number of cases in a week. Germany showed a 750% increase in Coronavirus cases in the same week.
The travel industry is being destroyed. The world faces a critical shortage of medicine starting at once. Airlines may as well fold now and get it over with. The Coronavirus will not cause the Greatest Depression. That was on the cards already due to the incredible amount of debt in the world that will never be paid. The Virus is little more than a catalyst but it is a black swan of black swans and makes for a handy excuse.
Meanwhile the latest act out of Washington is Donald Trump playing Archie Bunker in a comedy with tragic overtones with Mike Pence cast as Barney Fife. Pence believes you can pray away an outbreak of a deadly virus while Trump believes women only have two important attributes and you can conduct world affairs on Twitter. I sorta suspect the biggest two boobs in the White House don’t belong to Melania.
Anyone appointing a born again Christian who believes in neither science nor evolution as the leader of the US fight against a deadly virus is an idiot. But it’s a case of the blind leading the blind.
Readers, don’t be tempted to consider writing a novel or a screenplay to be made into a movie using our own Archie Bunker and Barney Fife as characters. If your plot was identical to the facts it would be rejected as being too far fetched to be believed.
The stock market hasn’t finished its crash. The Everything Bubble just blew sky high and the ensuing deflation is going to take everything down.