He was kind enough to give me an update and allowed me to share it with you..
Here’s what Neppolian is looking at:
1. Indian indices, both Nifty and Bankex, are recovering from a good support level of 10 QMA. In my experience the first drop to 10QMA is always bought into and capable of producing a rally with or without any policy measures by the government (in this case a tax rate rationalisation).
2. However, I also note that prior to this rally both the indices had effected a widely followed measure of bear market definition called a “death cross” (50dma closing below 200DMA). This condition still persists even after a 10% rally in the indices. No one seem to be minding it. Any which ways I follow a more longer term measure of death cross (100DMA closing under 200DMA) to signal an onset of a bear market. This is the reason why markets actually rally even after publicly followed death cross settings of 50dma <200DMA condition.
3. Markets have reached the most important area of resistance 11600 in Nifty and 31000 in Bankex….this is the area defined by the election results day (23rd May 2019) gap. Please note that the indices had embarked on the June to September collapse only after falling under this gap post forming an all time highs in the results euphoria. So it is pertinent that the indices must eclipse this level of 11600 and 31000 on a monthly close basis for furthering the positive bias.
4. Even today 66% percent of Nifty constituents are Trading with a conventional death cross of being 50dma <200DMA. On my measure of 100DMA <200DMA 40% of Nifty components qualify. These are weak settings suggestive of a capped upside potential.
5. The ratio line of large cap v/s midcap index, still is tracking in favour of large caps. So a broad based rally may remain elusive till the ratio line decisively shifts in favour of midcap. A bull market in my sense is defined when midcap outperformance rules.
6. However we can remain open for a furtherance of rally to the past all time high of 12100 if the following developments appear:
a. The conventional death cross condition is reversed in both indices ( if 50DMA >200DMA comes true).
b. Midcap outperformance starts
c. In all future correction if any, Nifty holds above 11200.
On the global level, the 20 year cycle top measured from 1999 top to be ending in 2019 is yet to play out. We have 3 more months for this top to be put in. This could happen in the coming 3-6 months in parabolic fashion to seal a top or failing which we can assume that markets may have already topped. A falling USD, which may come true if USD index cracks 92 can give fillip to a commodity fueled /inflationary sympathetic parabolic rally in equities to end this long term cyclical top. Ideally next 3 years from 2020-2022 should be a down cycle for risk assets including equity. When this global down cycle plays out India will follow suit down along with global markets. The only missing piece in global recession possibility is the absence of commodity fueled inflation. Let’s see if it plays out.
Obviously, the big question to ask and answer is whether the cyclical top doesn’t come at all or gets extended in time because of unconventional policies of global central banks. I get asked this question umpteen times in a week. In my experience of cycle studies, of the past 125 years, long term cycles have never failed…they may get extended by a quarter or two but not fail completely.
Even as this cycle is yet to played out globally, indian mid and small cap sectors and some select large caps have clearly seen this cycle effect playing out for the last 18 months. Most midcap and small caps have lost 50-80% of their peak value. I have never seen so many corporations going bust in any of the previous cycles. Nifty holding up higher levels have been a mirage. The pain suffered by mid and small cap portfolios of even well diversified mutual funds have been colossal. I have personally witnessed absolute clueless state of PMs in the past 18 months. The best names have lost. Hope you remember, my 2018 year report highlighting a new proprietary metric that red flagged Indian mid and small cap indices along with Dow being in bubble territory. Rest is personally witnessed by you and me.
In spite of these trying times, I must confess that long term bullish settings (8+ years) remain intact in Indian shores. I feel in the next cyclical bull market to begin from mid 2022, India will hugely outperform global markets as lot of kitchen sinking is done now and the govt policy will continue to press on ethnic cleansing of dirty corporates.
Next cyclical top is likely in 2026 (8 years from 2019) and a much larger cycle top in 2035 (16 years counted from 2019 encompassing two 8 year cycles).
Hope I have given near, medium and long term views here.
Martin writes…..There is a clear rising risk factor emerging from both politics and geopolitics as we move into the January turning point on the Economic Confidence Model. As the economy turns down and as we head into the 2020 presidential elections in the United States, we are facing rising risk factors on many fronts. The Democrats bashed Russia over the 2016 elections, blaming them for releasing Democratic emails that revealed the extent of their corruption. This has increased the tensions with Russia, rekindled the Cold War, and placed us at a far greater risk of war than at any time post-Vietnam.
We have a liquidity crisis unfolding because of massive uncertainty. In October, Draghi leaves and Lagarde enters who believes the answer is to eliminate cash. This is causing dollar hoarding and there are more $100 bills in circulation now with 70% of the physical money supply being hoarded OUTSIDE the USA. Even Australia is hunting money aggressively. They are even proposing nano-chips in $50 bills and up to be able to track hoarding. So smart Australian’s won’t hoard A$ – they will use foreign currencies. Dah?
I mean what I say that the central banks are TRAPPED!!!!! People have NO IDEA what we face. The system is unraveling but not even those in government have understood how it was interwoven to begin with. This is all part of how we are headed into a major Monetary Crisis Cycle and I fear they will misunderstand it once again and create more stupid laws that will bring the entire house of cards down by the time we reach 2032.
If you just play out what has taken place in socialism, there will be $400 trillion of unfunded liabilities by the time we get to 2032. That cannot be dealt with and I suspect we will see more authoritarian usurpation down the line. This is also why I have stated, my fear is NOT Trump, it is what comes AFTER Trump!
So buckle up. We are going to witness things many never even thought were possible. This may be the real confrontation between good & evil.
The NY Federal Reserve announced last week that they will continue their repo operation until October 10th, 2019. The repurchase agreements will amount to up to $75 billion per day. Additionally, they plan to offer three two-week repo operations of up to $30 billion each round.
The constant intervention of the Federal Reserve into the REPO market is the result of a global dollar shortage on a monumental scale. There is a liquidity crisis unfolding as CONFIDENCE is collapsing in Europe and Asia. The Federal Reserve has been intervening into the REPO market in a desperate effort to maintain its lower target on interest rates.
I have been warning that about 70% of physical paper dollars is now circulating outside the USA. There are also now more $100 bills in circulation than $1. With the rising pressure outside the USA to eliminate cash in order to confiscate money from their citizens to support the broadening collapse of socialism, there has been a MAJOR panic pushing into the dollar.
Despite the fact that early in 2019 the headlines were that foreign governments were dumping US debt spinning this into stories that the dollar would crash. In reality, selling of US debt at that point in time was an effort to stop the dollar’s rise. However, as the world economy continues to implode going into the bottom of the business cycle as measured by the Economic Confidence Model, exactly the opposite has been taking place. As of July 2019, the foreign holding of US debt rose to $6,630.5 billion up from July 2018 $6,254.4 billion.
The increase from $6.2 trillion to $6.6 trillion is showing the scramble into dollars even on an official level. As more and more US debt is taken up overseas as a hedge against the rising risk of the punitive sanctions of canceling foreign currencies as Christine Lagarde is preparing to take charge of the European Central Bank in October, the panic into the dollar assets is removing US debt from domestic holdings resulting in a LIQUIDITY CRISIS beyond anything you will find in the traditional economic textbooks.
We invented Capital Flows analysis. We have the only real database tracking capital flows historically. There will be numerous people who will now repeat what is written here as if it were their original analysis. Without a database, it is hard to imagine how they can make such claims since this is NOT based upon opinions or reading news headlines.
So welcome to the new world where economic theories are crumbling before our eyes and falling to the floor as dust in a world that no longer exists. We are entering a new period of reality where whatever you thought was happening may prove to be the opposite.
We hereby want to inform you that as of last
week friday, our proprietary inflation indicator has switched from a “50%
RISING INFLATION” to a full blown “RISING INFLATION” signal.
At a point in time where disinflation and deflation scare once more seem to be
the name of the game in financial markets, we are receiving an opposing
indication from our inflation signal. We therefore want to take some time to
discuss this signal change and explain our investors how this will impact our
investment strategy.
Our view on the current market environment as well as an elaborate
interpretation of our recent inflation signal signal can be found in the
following document:
The hunt for taxes is moving into high gear in Germany. Prior to 2017, it was possible to buy gold anonymously in quantities up to €15,000. In 2017, this limit was reduced to €10,000. Now, Merkel has drastically reduced this limit to just €2,000 beginning in 2020. Any transaction greater than that amount requires the buyer to prove their identity and give their data to the gold trader.
Martin Armstrong writes in his blog… The Merkel government has been making a concerted effort to introduce a total surveillance state and track the finances of its citizens. There is chaos in Europe with negative and punitive interest rates, high bank charges, and a declining euro. All of this is mixed with a prolonged economic recession in Europe since 2007 as we approach a 13-year decline in 2020. More and more Europeans are looking for ways to safely and anonymously invest their savings, which have been under direct assault by the government. This has been leading to the hoarding of US dollars and now the change in legislation on gold is only going to increase the switch to dollars.
I look at everything from Capital flow point of view and believe fundamentals follow Liquidity or Capital flows. Shift enough Capital into one place and you will start seeing all assets going up irrespective of fundamental valuations..
Martin Armstrong writes in his blog…
Canada will benefit from the capital inflows to North America which will not be as intense as those into the USA because of your government’s punitive actions against foreign investors and its sheer stupidity in understand international trends.
Canadian real estate will be a hedge for an Emerging market investor looking to buy asset which maintain the purchasing value of money.
He further writes… Here is an illustration of our Canadian Real Estate Index in both Canadian dollars and in Chinese yuan. You can see that from the Chinese perspective, Canadian real estate is still rising as a hedge against their currency.
Here is the Canadian Real Estate Index in terms of Euro. Again, we are witnessing breakouts that are stronger in foreign currency than in Canadian. As we head into the Monetary Crisis Cycle, capital flight from Asia and Europe will continue and this will distort the profits they think they are making in real estate not understanding that they are playing the currencies.
Nevertheless, the is all part of the shift from Public to Private assets. While the “real terms” perspective of “value” may not be making new highs in purchasing power, this is still part of the shift from public assets. Some people will buy equities, others will go into real estate, and still others gold or other precious metals. The end game is to divest yourself of public assets and stay away from “fixed rate” investments where you are the creditor. Borrowers should be fixing their loans.
He concludes….The majority of people just look at the price and do not understand that the currency swings can make a bad investment look good. You must always look at this from an international perspective.
We are still miles away from a true bull market in crude. Could that happen? For sure. But the fate of the energy market still lays in front of us. The bulls should temper their enthusiasm.
Yet I am by no means sanguine about the energy market. What am I worried about? I am concerned that a Saudi Arabian military response will cause a crude oil move that would be epic. I am not predicting that by any means, but the one thing I have learned over the decades is that markets can move way more than almost anyone can imagine.
This recent volatility is unusual given the last decade’s muted price action, but make no mistake, further escalation in the Middle-East will result in limit-up moves in crude oil futures.
Recessions become self-fulfilling prophesies late in an economic expansion at a point when people finally start believing and acting like one is imminent. It is particularly true when asset bubbles are present. A huge spike in concerns about the economy as measured by Google Trends analysis of the search word “recession” was not a contrary indicator at all at the very beginning of 2008. Indeed, it proved to be the start of the economic contraction. NBER, the official recession-calling body of economics PhDs, did not declare it until twelve months later as typical. We believe the current late-cycle spike in Google recession searches will prove prescient once again.
US and Global Macro Indicators
Beware the narrative that the US economy is still strong when it is being spun by conflicted central bankers, politicians, and investment professionals. The truth is that the macro indicators have been turning down materially all year as we can see by the year-over-year change in the Atlanta Fed’s GDPNow macro model.
It’s like in early 2018, when the predominant storyline was “synchronized global growth”. That narrative persisted throughout the year, but global stocks (ex-US) peaked in January. Surveys of global manufacturing purchasing managers have been in decline ever since and have gone into recessionary territory over the last three months.
But the US stock market is still near an all-time high. And today, hand-holding market pundits still cling to the dying notion that the US economy is strong, kept alive by hopes that a new round of Fed easing, the so-called “mid-cycle adjustment” can reverse the deteriorating conditions. Bulls are ignoring deteriorating material macro indicators like the US Bureau of Labor Statistic’s “preliminary” 500,000 jobs reduction for early 2019, the dismal August ISM manufacturing report, and the big drop in last month’s Michigan Consumer Sentiment Index.
The last time US macro data was deteriorating this badly, it was 2015 and several emerging markets went into recession at the same time as the Chinese stock market crashed and its currency began to devalue. US recession was averted after the Fed hiked just once at the end of 2015 then paused for a year. The Fed executed a rare soft landing and the business cycle was extended for more than three years now to what is the longest expansion in US history. But the Fed hiked rates eight more times from December 2016 to December 2018 and engaged in $650 billion of quantitative tightening through May of this year. The economic outlook today is much more foreboding than it was in late 2015, particularly as China is now facing much bigger recessionary pressures of its own.
In the history of the federal funds rate, 1995, 1984, and 1966 were the only mid-cycle adjustments (cuts after hikes) that led to soft landings and extensions of the business cycle. The 2016 pause mentioned above was arguably another. It’s too late in the expansion to work now. Asset bubbles are too big.
We are record late in an expansion in the US with several inversions in the Treasury yield curve having breached levels that historically have a perfect track record of predicting an oncoming recession. These include the 3-month versus 5-year and 10-yr spreads as well as Crescat’s own percentage of inversions indicator. More than 70% of the US yield curve has inverted already in this cycle, a level that has preceded every economic downturn since the 1970s.
Asset bubbles are much bigger today than they were in late 2015, particularly the US stock market. Michael Burry of Michael Lewis’ Big Short notoriety recently made a call in a Bloomberg interview that we are in a passive indexing bubble that will end like the subprime CDO debacle that led to the global financial crisis. In the history of the Wilshire 5000, the total US stock market index, stocks recently reached their most expensive ever relative to the underlying economy, higher than the peak of the tech bubble in 2000.
We believe based on our macro modeling that 2019 is the downturn that is highly likely to continue into a hard landing. It’s too late for a Fed mid-cycle adjustment to keep the expansion going. That ship sailed post 2015. With the latest excesses in passive investing, the world has reached a level of gross valuation ignorance that could make the coming bear market particularly brutal.
Our composite of macro indicators says that the crash window is open. Recessions are necessary, normal, and inevitable. The longer they are postponed through government intervention, the greater the mal investment, the bigger the speculative bubbles, and the more violent the downturn.
The global yield curve continues to be as inverted as other market peak times. The chart below is just an update of these 18 economies that now have their 30-year yields below the Fed funds rate. Thailand just recently joined the pack. These distortions are just another ominous sign for the global economy.
As history has shown us repeatedly, when the South Korean won breaks down, global stocks tend to follow. The chart below is another macro timing indicator at a critical level today. South Korea heavily relies on exports and its currency is a barometer for financial conditions worldwide. The won is now re-testing a major support line and further depreciation could be detrimental for equity markets globally.
China & Hong Kong
The Chinese economy is at the outset of a debt and currency crisis. No other country has grown debt so aggressively for so long and in such an extreme manner. China built an oversized banking system that now undergoes a rising nonperforming loan problem, a precarious housing bubble, and a political leadership that remarkably resembles a crony-kleptocracy. China’s declining current account problem imperils its entire mercantilist approach, while its push towards a consumer-driven growth model never seemed so far-fetched. Rising social unrest, trade tensions, and food inflation are just icing on the cake for these macro inconsistencies.
The yuan just had its worst month since 1994, even bigger than the 2015 devaluation. We expect much further currency dilution as the PBOC continues to mobilize aid for its failing banking system. We are at the early stages of all these issues. Just this year, the Chinese government was forced to engineer three bailouts: Baoshang Bank, Bank of Jinzhou, and Hengfeng Bank. In aggregate these banks hold close to $420 billion in total assets. Although accounting for a small portion of China’s $42 trillion colossus on-balance-sheet banking system, it’s a sign that the economy is under severe pressure. We expect much larger loan losses to soon surface. According to Bloomberg, China’s central bank recently concluded its first review into industry risk and 420 firms, all rural financial institutions, were considered “extremely risky” and just two received a top rating. China’s debt levels are overwhelming, and a significant currency devaluation is likely on the way.
Per the Bank of International Settlements (BIS), China’s total international bank claims have just contracted for the first time in three years reflecting an early warning sign of financial stress. These claims, valued at $920 billion, comprise cross-border transactions in any currency plus local claims of foreign affiliates denominated in non-local currencies. Chinese banking activity similarly faltered during the emerging market crisis in 2015 and the global financial crisis.
In our previous letters we noted that the median Chinese stock had fallen close to 40% during the 4th quarter of 2018. Since then, the PBOC has attempted to revive its economy through aggressive monetary policies that continue to put downward pressure on its currency to depreciate against the dollar. The Chinese central bank targeted specific forms of liquidity injection, one of them being through its state-owned commercial banks. Their quarterly rate of change in total assets just surged as much as it did times prior to and during the global financial crisis.
Large sums of investment into non-productive assets, that’s China’s real estate conundrum. Across publicly traded companies, the industry of Chinese property developers and homebuilders is now worth over $1.25 trillion in enterprise value. In contrast however, these businesses only generated about $1.5 billion of free cash flow in the last 12 months, in aggregated terms. Also, close to 55% of Chinese property developers aren’t even profitable on a free cash flow basis, according to their latest report. These companies have now accumulated close to $631 billion in outstanding net debt while total equity value accounts for $585 billion – or equivalent to 108% net debt-to-equity ratio. To put into perspective, that’s the exact same proportion US homebuilders had right at the peak of the housing bubble.
Since 2008, Chinese property developers have accumulated close to $245 billion in free cash flow losses while debt levels continue reaching record levels!
Just recently, we noted China Evergrande, a heavily indebted property developer, reporting that its profits were cut in half, down 52% on a year-over-year basis. Per Bloomberg, 47% of Evergrande’s debt matures this year. The stock is now down 44% in the last 5 months. We think this could be the canary in the coal mine for China’s debt debacle.
China’s sales of commercialized retail and office buildings are down 13 and 10% for the month of June. Its residential market continues to rise, but historically it tends to follow these other two markets closely. It’s important to note that office buildings are now falling the most since the global financial crisis.
House prices in Hong Kong have risen to absurd levels adding to the country’s banking and currency risks. Its secondary residential market is up 40% this year and now valued at over $1,700 per sq. ft.! In our view, these prices are completely unsustainable. Rising mortgage rates, social unrest, political crisis, and capital flight should all be catalysts for a major economic downturn in Hong Kong.
China’s financial gateway to the world is falling apart. Every Hong Kong bank is breaking down from a major support line. Refer to the sequence of charts in the appendix at the very end of this letter. These charts resemble US banks during the global financial crisis when they broke similar trend lines in early 2008 right before the bigger collapse. Hong Kong’s banks are clearly signaling challenging times ahead. We believe capital is fleeing the financial hub portending a likely de-pegging versus the US dollar.
Hong Kong banks are also provisioning only 1.7% of their revenues for loan losses. That’s close to a record low, and even below levels prior to the Asian Crisis. Are HK banks accurately depicting the potential for credit losses? Their historical average is about 12% of revenues.
Hong Kong’s corporate and credit growth are also diverging the most since the global financial crisis, another leading indicator of financial stress.
In Conclusion
The truth of asset bubbles and economic weakening matters more than the hope from imminent Fed easing. We believe the global economy along with its many over-valued equity and credit markets are likely to soon head into a severe downturn. The Fed’s polices of near-zero interest rates and quantitative easing since the global financial crisis have created a lack of price discovery in stocks and corporate credit. Investors’ speculative behavior is a natural reaction to cheap money and has played an integral role in inflating these markets. Just as asset prices rise in a positive feedback loop of easy credit, investor speculative behavior, consumer and business spending, so they decline in the opposite self-reinforcing fashion. Such is the natural ebb and flow of the business cycle.
