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The Big Picture February 2016

Posted by jdavis on February 16, 2016

In The Big Picture I show what is really going on and what informs our thinking.

Look at December's to see what I showed then.

The following is a sample of what I see now: (see lots more on Twitter @j0nathandavis )


Recession Watch

As I discussed, last time, as the differential rate between the 10 year government borrowing rate and the 2 year falls the risk of Recession rises.  Sure enough, as I thought was indicated, the differential has fallen below the 1.2 or so level.  It is now heading towards 0.  Below 0 the short term rate is higher than the long term rate.  This has always occured in times of Recession.

The risk of Recession is sharply rising.  This is not conjecture or opinion.


According to Yahoo, the INSAX fund invests primarily in U.S. companies.  It normally purchases positions in stocks that are experiencing insider buying by corporate executives, directors, large shareholders or activist shareholders.  You could say Smart Money.

As you can see, Insiders were buying heavily until the Spring of last year... which happens to be also the peak in share prices.  Note the high correlation between insider buying and the stock market index level.

Since then, insiders have been selling heavily.  The stock market has sold off but not as much as insiders have.  This suggests the share index hasn't stopped falling.  Yes really.

European banks' share prices

2008 was, literally, the biggest economic and financial crash in history.  It may not feel it to many as the policymakers then stole from our kids to bail out the banks and bankers and brought interest rates to their lowest ever, and kept them there since.

The chickens are now coming home to roost.

Banks' shares, in a financial economy, will be high when all is well and vice versa.

European (and US) bank shares are homing in on the lows of the last crash.  This is the opposite of all is well.


A few years ago, I coined the phrase #turningjapanese on Twitter.  Now everyone's using it.  Because we are.

32 countries - First World Countries - now have NEGATIVE interest rates (The ECB has 28 alone).

If this isn't deflationary I can't imagine what is!  What is your portfolio manager doing about this?

We're heavily investing in US Treasuries, which, incidentally, have soared some 30% over the last 2 years...

NB.  Within a couple of years expect many more developed economies to have negative rates, including the US and the UK.  Central Bankers are quite mad.  Quite quite mad  (and bad).

Finally, for this edition of The Big Picture, the following is, in my opinion, thee most important economic issue that the Western World has had to face in GENERATIONS!:

As China's foreign exchange reserves have fallen, as has its currency - the RMB, Renmimbi or Yuan.  And the outflow of reserves has been speeding up.

The weakening of the Yuan - as I started writing about in the middle of 2014 - has sent deflation to the West... as we pay less for the same 'stuff' they export.  So, whatever central bankers do to try and create inflation, they fail - as the global deflationary forces are too strong for even the 'mighty' and omnipotent central bankers (so they say).  Again, I have said, when the global markets stop 'believing' in the powers of central bankers THAT is when we see stock markets die.  It's happening now.

The central bankers can no longer, by sheer force of will, make stock markets rise - which has been their clear stated intent.  (You couldn't make it up!)

Now, the Yuan has fallen around 10%.  And we, in the West, have no inflation and we have crashing stocks and corporate bonds and commercial property and rising quality government bond prices.  On top, falling residential property prices are baking in the oven.

The thing is (and what a thing!!!), China's reserves are rapidly depleting.  Smart analysts estimate this year they could run out.


Which could mean what?

It could mean that China materially (20-40%) devalues its currency.  This would unleash a Poseidon Adventure-sized tidal wave of Deflation onto the West.  That's you and me.


Are you prepared for a Poseidon Adventure-sized tidal wave of deflation?  Think I'm exaggerating?  Think again.

Better still, speak to your portfolio managers.  If dissatisfied with their answers, speak to me on a confidential, no-obligation basis.

Man the lifeboats!



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