Ainslie Bullion - Daily news, Weekly Radio and Discussions

Subprime Hospital Pass?

So have you watched "The Big Short" movie yet? If not, and especially if you have friends and loved ones who still 'don't get it', you really should (with them). It explains the property subprime mortgage instigated GFC wonderfully.

We scan the news everyday to bring you relevant news, particularly that not propagated by the easily accessible mainstream media. We came across the following from The Wall Street Journal over the weekend and just have to share it, as we are simply amazed not to have read it repeated elsewhere.

"Bonds backed by certain risky single-family mortgages topped $1 trillion for the first time in November, crossing that threshold amid rising warnings for one corner of the housing market.

'These mortgages are insured by the Federal Housing Administration and typically go to borrowers with small down payments and lower credit scores. Banks have pulled back from issuing those loans and from packaging them into bonds sold to investors.

'The result: In the first three quarters of 2016, banks accounted for 9% of mortgage dollars originated by the FHA's top 50 lenders, versus 62% for all of 2010, according to Inside Mortgage Finance. Nonbank lenders accounted for 80% of mortgage bonds backed by single-family FHA loans in July 2016, versus 9% the same month in 2010."

How do you like that for a transfer of risk from the TBTF (too big to fail) banks to 'non banks'?

In a sky quite literally abound in circling black swans, this must surely fall into that category.

 

Gold After POTUS Inaugurations History Repeating?

At a time when everyone is trying to figure out where this market may go it may be instructive to look at history (with the usual waiver 'past performance may not be a predictor of future results'.but it often 'rhymes'). Over the weekend we saw this from Bloomberg:

"Gold bulls wagering the bullion rally has more room to run may have history on their side with the arrival of a new U.S. president.

A look at recent presidential transitions supports optimism among traders over the metal's prospects. Gold has averaged gains of almost 15 percent in years marking the inauguration of a new president since the 1970s, advancing in five of those seven years. In contrast, the S&P 500 index of equities declined in four of those years for an average loss over the period of 0.9 percent.

From Presidents Gerald Ford to Barack Obama, bullion has often served as a haven in times of political flux. The metal has climbed almost 5 percent this year as questions over the possible economic impact of Donald Trump's policies add to investor angst over Brexit and mounting trade frictions. Bulls reason that gold will extend its gain as scant details of Trump's fiscal stimulus program and tensions with trading partners including China unnerve investors."

As often happens soon after such predictions the market started to do the opposite. Last night the S&P500 surged and reached new heights whilst spot gold lost around $9 in a similar % fall to the shares' gains after hitting a 2 month high on Monday. Last night's share rally seemed to take the (short term) good bits of Trumps actions (reinstating some major oil pipe construction projects) and ignoring the potentially damaging (medium term) trade protectionism policies, one of which was ditching the Trans Pacific Partnership directly affecting Australia. We expect these confused market fluctuations / volatility to continue for some time as, post the Trump hope trade, the market tries to assess the Trump reality implications. It's why we preach balance. The harsh reality is that in the short to medium term no one really knows where this will go and there could well be more gains to be made in shares. What we do know however, is that at some time this cocktail of record high debt, stimulus supported financial markets, and unstable geopolitical environments WILL see a crash in financial markets. The unprecedented extent of those contributing factors promises one of epic proportions. Making sure you have that uncorrelated asset in your portfolio has never been more important.

 

Is China About to Crash Financial Markets Again?

Trump is talking big about China being a 'currency manipulator' and applying a punitive 45% tax on Chinese goods. It has world leaders very very nervous as a few decades of globalisation looks set to be undone. But the other thing at play here is that 'currency manipulation's' other consequences. When China devalues the Yuan because of a surging USD it is pegged to, it sparks a surge in capital outflows from China as the smart money gets out before it goes lower, including cashing out of their sharemarket en masse to liquidate that cash. If you recall August 2015 when they devalued the Yuan by a whopping 3% overnight it caused US shares to plummet 11%. Ainslie customers at that time will remember the line-up to buy and the incredible depletion of stock from one of Australia's biggest bullion dealers. It was worldwide and extraordinary. We then saw China devalue again, albeit more stealthily from December 2015 to January 2016. Again shares dropped in the order of 12% and gold saw its strongest start to a year in 3 decades. Jim Rickards sees signs of this coming again.

"When China devalued the yuan in August 2015, capital outflows surged. Once the yuan stabilised against the dollar in early 2016, the capital outflows were greatly reduced. That's since changed. Now, early in 2017, capital outflows from China have reached unsustainable levels. If it keeps selling US dollars to prop up the yuan, China will burn through all its US dollar reserves by the end of the year at the current rate.

I'm keeping a close eye on these outflows. They're one of the main indications and warnings I'm watching to determine the timing of the next Chinese devaluation.

In the short run, US stocks could be headed for a fall since the Trump reflation trade is running out of steam, and renewed tough talk by some Fed officials of additional hikes suggests a stronger US dollar. Right now, it looks highly likely that the Fed is going to raise in March after raising in December.

The Fed is concerned that US stocks are in bubble territory. They suggest that the easier financial conditions caused by higher stock prices make this a good time to raise interest rates. The rate hike talk then makes the US dollar stronger and puts pressure on the yuan. An unstable yuan triggers capital flight, which causes a spill-over liquidity crunch, which in turn could lead to a correction in US stocks.

Once the correction takes place, the Fed can try to rescue the stock market again with more dovish signals. That would weaken the dollar and stabilise the yuan. But the risks are that the Fed has not learned from its past mistakes, and late March to April 2017 could be a replay of August 2015 and January 2016.

And after all these years of market intervention, the Fed may well be out of powder to handle another crisis."

 

Yet Another Big User for Silver

Something a little different today... We often talk of silver 'wearing 2 hats' in that about half is used as a precious metal and about half industrial metal. Those industrial uses are growing in some exciting new areas like polyethylene, and as of last week, the world's 2nd biggest car manufacturer, VW, just considerably increased demand for silver by using it to heat windscreens instead of the traditional (and relatively crude) copper wire solution. This from VW:

"Perfect visibility with no heating wires the climate windscreen from Volkswagen"

Neither ice scraper nor de-icing spray provides the perfect solution. Volkswagen is offering a genuine alternative with the climate windscreen. It heats up without the use of any filament wires, thus providing perfect visibility. Any renewed misting or icing up is also prevented.In this wire-free system a wafer-thin electrically conductive layer of silver within the laminated glass provides the required heat by converting electric current. Volkswagen is offering the wire-free heated for the Golf, Golf Sportsvan, Tiguan, Sharan, Passat and Passat Variant models. In the summer, the thin layer of silver acts as a passive heat shield it is able to reduce the inside temperature by up to 15 degrees more than conventional glass with green tinting."

Throw in solar panels, electronics, medical equipment and applications, PE, etc and this relatively tiny silver market has some large and growing users. At a time of great economic and geopolitical uncertainty fuelling its investment demands, the future appears to bode well for the metal. And all this at a Gold Silver Ratio of around 70!

Silver jumped much more than gold Friday night and whether this news contributed to that can't be confirmed. It did however push that GSR down a full point and the spot price is now up 7% for the year already.

 

'Fake News' via Officials too?

There's a lot of talk about 'fake news' and it is always implied whatever comes from 'officials' is correct. But what if the officials want to paint a better picture than reality? Americans turned to Trump because things quite simply weren't as rosy as Obama tried to make out. You can't hide the impacts of reality. We have on occasion reported on shadowstats.com 's work as he keeps the data honest by showing how things would look now if the same methodologies were used for economic 'measures' like inflation and employment. The officials keep changing the way such data prints are calculated and you may be surprised to know those changes make things look better.

On the back of the poorer than expected official US Q4 GDP print on Friday night (just 1.9%) it's worth looking at some recent work by shadowstats.com about how GDP really looks when real inflation figures are used:

 

More Sharemarket Crash Warning Signs

So now for something completely different some more evidence of what looks to be a very overly exuberant US sharemarket, this time courtesy of some excellent graphs from the Lamensdorf Market Timing Report who have just issued a recommendation to go to their maximum short position of 50%...

Firstly, listeners to the Weekly Wrap will know how consumer confidence has rebounded strongly on Trump-phoria. The chart below shows the unhappy relationship between euphoric confidence and the Dow Jones immediately after each peak.. At 113 it is now at its highest in over 15 years.



Second Sharemarket capitalisation as a percentage of gross domestic income is currently at its second highest level in 90 years at 131%!



Third For some the purest or least subject to manipulation figure is the price to sales ratio (as opposed to the traditional 'earnings' which can be enhanced through accounting tricks). On the S&P500 it is also at its second highest level in history with, yet again, the extraordinary dot.com bubble the only one higher (and it lost 80% in its crash)



But it's probably different this time yeah?....

 

Nah the same as the last two recessions in Australia, a blip and than all up after that for 20 years.

We do live in the lucky country

 

Which 'Snowflake' will cause the Economic Avalanche?

Yesterday we looked at some more valuation type charts showing how 'full' this market is currently running. To use the avalanche analogy, the mountain is fully laden with snow; which snowflake will be the one to trigger the avalanche that sees it all come tumbling down? History shows it is not often the one you expect. Last year it was all about Deutsche Bank, Brexit, Trump etc to name a few. Whilst Brexit caused reportedly the biggest 2 day sharemarket loss in history we saw it immediately rebound almost to where it started and then upward from there once people realised it was a process not an event. Well that 'process' is about to get seriously 'event-ish' as PM May looks to enact article 50 by March, the so called 'hard Brexit'. That's one serious snowflake and the first critical step happened last night with the law passing its first vote through Parliament.

The other thing we have seen this week is the realisation that the hope filled Trump trade may have been a little premature. Notwithstanding the public revolt on some of his executive orders, we have also seen that many of the very key promises that excited financial markets so are delayed, or set to be through congress. The tax breaks are on ice until 'Spring 2018' (US time), the huugge infrastructure spend looks likely to need Senate Democrat support and they have a whole other idea on the table, and the repeal of Obamacare too looks to be months away. The market (down considerably this week) is smelling BS and snowflakes are settling.

Last night the US Fed met and whilst they predictably kept rates on hold, all eyes were deciphering the minutes for cues as to whether their '3 hikes this year' story holds for starting in March. On balance the market read them as more dovish and March less likely. And so predicably shares rallied modestly. The fact remains however that as inflation strengthens to 2 year highs and the sharemarket bubble (outside of this week) inflates further and further, the 'story' still supports a hike soon. If so, how will the market handle 2 or more quick rate rises in succession? To continue the snowflake analogy, the Fed sending dovish signals and keeping rates ultra low is like a giant 'Fed Net' above the mountain catching snowflakes before they hit it. At some stage that net will give and all those accumulated snowflakes hit the mountain in one go. The Fed may seem all powerful but you can't defy economic gravity forever

And of course, as we wrote last week, how will China react to a subsequently stronger USD? The threat of a large devaluation looms as large as any snowflake out there.

But there are many yet to land and to pick one would be foolhardy. The mountain may bear much more yet. Just make sure you are ready.

 

'Surprise Inflation' is Spiking

There are such conflicting signals out there at the moment. Yesterday we saw the Chief Economist from Capital Economics (one of the better track records around) calling a 1% cash rate for Australia before years' end with 2 more rate cuts later this year as he sees real lower inflation and lower growth than expected.

Contrasting that the US Fed changed its language this week saying the US will see 2% inflation in the near term. Gone is 'maybe'.

The combination of a rising US cash rate and falling Aussie would surely see the AUD fall sharply and yet yesterday's jump on the trade surplus had some calling an 80c AUD by years end!?

One thing does seem certain, and that is that in the main (maybe we will be the exception), there appears more concern about rising inflation amid softening and widespread stagnant growth i.e. stagflation. The chart below from Zerohedge using Citi's latest data paints a concerning picture (for those who don't own gold).

The global Citi Inflation Surprise Index , which measures price surprises relative to market expectations, is at the highest in more than five years and only just turned positive in December, the first time it's done that since 2012. We discuss a couple of these surprises in today's Weekly Wrap. The red line is self explanatory. It's not a good mix and Trump aside, explains why gold and silver are up strongly already this year.

 

WGC Gold Demand Trends 2016 Full Year

Those in or following the gold market last year will know it was a year of 2 halves. Strong gains for the first (roughly) half were largely given away by years end, especially post Trump.

The World Gold Council just released their annual Demand Trends for the full year 2016. Here is a summary:


The gold price ended the year 8% up after peaking in September (we think it was July that it peaked highest) 25% up in USD spot terms.
Investment demand as a whole (ETFs, bars and coins) was up strongly on 2015, with a 70% increase to 1561 tonne.

2016 saw the second biggest year for gold backed ETF's on record with demand of 531.9 tonne despite outflows in Q4. It was the highest since the 2009 GFC rally.

Bar and coin demand was down slightly (2%) on 2015 with subdued demand for the first 3 quarters but demand spiked in Q4 on the softer price, particularly from China who ended the year up 25% on 2015. India was down a hefty 17% for the same reasons as jewellery as follows.

Jewellery demand saw a 7 year low off the back of 'regulatory and fiscal hurdles' in India and China's softening economy.

Central bank purchases saw their 7th consecutive year of net purchases at 383.6 tonne, however with the squeeze on FX reserves and troubles in Venezuela, Jordan, Argentina etc, some were forced to sell or suspend purchases (reinforcing the personal attribute too as a highly liquid asset to get you out of trouble in times of economic distress). Central bank purchases were therefore down 33% from 2015. Russia and China were notable exceptions, adding heavily to their reserves.

Technology uses continued their gradual decline, down 3% on last year and accounting for 322.5 tonne.
On the supply side of things mine production was essentially stagnant, up just 3 tonne to 3,236 tonne. Recycled gold saw a somewhat predictable rise with the surge in price last year, up 17% to 1308.5 tonne.

 

Here we go againTrump Reopens GFC Floodgates

For a President 'for the people' and who was going to 'drain the swamp' it is nothing short of hypocracy that Trump has commenced unwinding the Dodd-Frank Act, originally enacted to protect consumers from the sorts of unconscionable acts by banks and financial institutions in the lead up to, and ultimately causing, the GFC. Maybe we shouldn't be surprised given he has ex Goldman Sachs execs in key financial roles in his administration. From Bloomberg:


"Chief executives including Goldman Sachs Group Inc.'s Lloyd Blankfein and JPMorgan Chase & Co.'s Jamie Dimon have been pushing for changes for years, arguing that the industry has been too constrained by the system put in place by the 2010 Dodd-Frank Act. After Trump focused on limiting trade and immigration during his first two weeks in office policies opposed by many in the financial industry the president's stroke of a pen unleashes a process to undo many of the rules they find most irksome.

"We're going to attack all aspects of Dodd-Frank," Gary Cohn, director of the White House National Economic Council, said Friday"

Great for the Lloyd's and Jamie's of the world but not for the common person we'd suggest. It seems the head of the European Central Bank (ECB), Mario Draghi agrees and last night unleashed the strongest rebuke from Europe yet (from Reuters):

"The last thing we need at this point in time is the relaxation of regulation," Draghi told the European Parliament's committee on economic affairs in Brussels. "The idea of repeating the conditions that were in place before the crisis is something that is very worrisome."

Draghi also took aim at the accusations of Euro currency manipulation by Trump's team's we discussed in last week's Weekly Wrap. Draghi strongly denied it and maintained the Euro is weak simply because of the weak Eurozone economy and that the current 'spike' in inflation (1.8% in January) is transitory and not supported by underlying inflation figures which remain weak. The ECB have to date printed Eur3.72 trillion buying sovereign and corporate bonds and equites in a desperate attempt to reflate Europe and of course in the process have 'inadvertantly' suppressed the Euro

This global cocktail of economic stress is seeing gold continue to shine this year amid the aforementioned, Trump's threats of a trade war (and general irrationality), Euro bond risk surging on upcoming election risks, this weeks news of China being forced to tighten, and now concerns about the US debt ceiling fast approaching.

That Trump is looking to loosen regulations amongst banks desperate to keep this overleveraged system from imploding is huuugely irresponsible.

 

And here we are think that the system is coming to an end, lol. They can keep this charade going for a long, long time.

 

Gold in an Uncertain World

We don't know about you but each new morning as we awake and look to the news it is preceded by an underlying thought of 'what did Trump do last night'? Love him or hate him, he has certainly thrown unprecedented 'uncertainty' into the mix of global affairs. Gold, as the world's safe haven is relishing this environment, up 7% this year (and silver up 10%). Shares are unsure, the S&P500 up just 2.4% this year, having established an uncanny correlation with his favourability (according to Credit Suisse) as follows:



And let's be clear, this is a global issue, not an American one. As we touched on yesterday the EU have taken great umbrage at his currency manipulation accusations, threats of trade barriers and unwinding the Dodd Frank Act. European Council President Donald Tusk wrote in a letter to European leaders that 'worrying declarations by the new American administration all make our future highly unpredictable,' and that there should be no surrender 'to those who want to weaken or invalidate the transatlantic bond.'

China on the other hand has the same issues as the EU to deal with together with overt military threats over the South China Sea confrontation. China, never a shrinking violet, has made numerous direct and firm responses seeing tensions between the superpowers at historic highs.

The biggest wild card by far is that of nuclear war. If you watched 4 Corners last night you will understand why. For a man so clearly impulsive and at times belligerently reckless to have unfettered, unilateral access to 'that' button has many rightly worried. Unlikely, to be sure, but not the first time we've said that on the Trump journey.

There was a thought provoking article in the weekend titled "How much longer will peace hold out?" which explores the current environment in the context of it having been 60 years since the last major war. It's an interesting article with a number of links to further reading and you can read it by clicking HERE.

The reality is a major war is most unlikely but these actions, posturing, and face saving add to an uncertain global environment of trade, finance, race, religion and politics. Gold ownership has arguably rarely been more important. As we say 'Balance your wealth in an unbalanced world'.

 

The "Smart Money" Is Worried

There is a growing trend of billionaire investors voicing concern over what lies soon ahead. Yesterday Larry Fink, the head of the world's biggest asset manager Blackrock ($5.1 trillion in assets) said the US economy is in the midst of a slowdown and financial markets could see a significant setback, because of uncertainty over global trade and the Trump administration's plan to cut taxes. Speaking at the Yahoo! Finance All Markets Summit he said "I see a lot of dark shadows.The markets are probably ahead of themselves." He also warned there will be 'huge tension' between the Fed and Trump.

We've just learned too that Stanley Druckenmiller, arguably one of the most respected hedge fund managers on Wall St (and who we've written about here and here) loaded up on gold again in December and January after famously offloading at the election result price peak in November. He loaded back up on the realisation prompted by concerns expressed by both Yellen (US Fed) and Draghi (ECB) that economic growth could be derailed by Trump's policies.

Fink and Druckenmiller are not alone, recently fellow billionaire Wall St legends Ray Dalio, Jeffrey Gundlach and Bill Gross have issued similar warnings.

It would seem an issue of timing. Trump's potential positive stimulus through tax cuts and infrastructure spend are on ice but his moves on border controls and trade are likely more immediate so you get the bad before the good at a time when the market is based on nothing more than hope. Hope can evaporate very quickly compared to fundamental strength. There is also the issue of a certain debt ceiling expiring mid next month

The exodus from the market by the big banks, hedge funds, and importantly executives within these companies, etc, the "Smart Money", is well documented this year. Bank executives have unloaded literally $100's million since the election and the following chart speaks volumes as corporate insiders (those really in the know) have unloaded their own shares at an alarming rate:



Finally Bank of America Merryl Lynch regularly publish client net purchases. They had this to say:

"All three client groups (hedge funds, institutional clients, private clients) were sellers of Discretionary stocks last week, where this sector has seen among the weakest results and guidance this earnings season. Clients also sold stocks in Tech, Real Estate, Materials and Utilities."

This graph says it all:

 

Gold Bull Market $6000 by 2019?

We've shown you the chart below (courtesy of Casey Research) before but it is worth updating and revisiting now. We could have a debate about whether, after the correction late last year, we are technically still in a bull market for gold or not, and you will have your own view. Casey Research certainly maintain we are, and remind us that every bull market has its corrections on the way. We often remind you that is why they are called 'bull' markets not 'escalator' markets it can be a wild ride and there are always clowns in front of you testing your resolve.

Despite the correction last year (thanks in large part to Trump) we haven't breached the lows set in December 2015, the market is intact. Trump will continue to influence the price of gold for some time, be that positively as his promises of fiscal stimulus look premature and trade/geopolitics moves look dangerous; or negatively like last night on a simple statement 'promising' "Something Phenomenal On Taxes In Next 2-3 Weeks".

The vertical axis on the left shows % gains in previous gold bull markets. The axis on the right shows the dollar value equivalent for the current market which started at $1050 in December 2015. As you can see, if we follow previous markets we could see gold at anywhere between $6000 and $8300/oz quite soon. Note the size of the corrections on the way, so any exit at what you think is the top at the time may be wise to be done in increments in case it is just an intra bull market correction.



Keep in mind too that the gold silver ratio is still up around 70:1. That is still very high. In each of those gold bull markets silver did what silver normally does as gold shoots up, silver rockets up, sling-shotting past as the GSR drops down to say 30 in 2011 or 18 in 1980. The latter would see silver at $333/oz if gold was $6000 or $461/oz if gold was $8300, a 2000% gain on today.

Again, history may not be an accurate indicator of future performance but it often rhymes

 

Long Term Golden Cross Just Happened

On Friday we showed you a chart comparing previous bull market runs in gold and, if indeed we are in the early stages of a bull run that started in December 2015, where we sit now. The question for some, given the scale of the correction late last year, is 'are we still in a bull market?'.

To help you decide, it may be instructive to look at long term moving averages in the gold price. Whilst last year we saw a golden cross of the 50 day moving average breaking up through the 200 day moving average seeing gold go on to surge to US$1365, daily averages are arguably a little too 'zoomed in' to rely on longer term trends. That is why something that happened just recently should be taken notice of. We had a longer term golden cross with the 50 Week MA (red line below) breaking up through the 200 Week MA. This is something that has only happened 4 times in the last 25 years and each time saw a 3 to 10 year rally in gold, with the last as pictured below seeing gold go from $290 to an all time record high of $1923, a 563% increase.



And again as discussed on Friday, silver has a habit of lagging gold (high gold silver ratio currently 69) and then sling-shotting past gold once the gold price starts to take off (hitting 30:1 at the peak in 2011 above). Looking at the same chart for silver below you can see this starting to play out but you can also see silver is the more volatile of the 2 being a smaller market with the dual forces of investment and industrial demand:



Again we have to stress that historic performance is not necessarily an indicator of future performance but there are a number of historic 'coincidences' painting a pretty compelling picture right now.

 

Top Political Uncertainties of 2017

It's no secret we think 2017 will be a volatile year in global politics, particularly on the continent. It's rare to see a concise account of these and for that reason we are reproducing a piece by Greg King of REXshares titled "The Top 5 Political Uncertainties In 2017" below. Whilst it is a balanced account we think it misses 3 doozies, being the US Debt Ceiling deadline on 17 March, the Italian elections and subsequent 'Itexit' threat (timing TBC), and under any heading of biggest political risks one must include the broad category of 'Trump'. Not to be flippant, but that single 'word' has bearing on the South China Sea tensions, global trade restriction fallout, Iran and North Korea chest beating responses, etc etc. An impetuous world leader cannot be overlooked in such a list. But over to that article:

"In order of their occurrence, here are the top 5 political uncertainties we see ahead of us in 2017:

March 15th: Netherlands Prime Minister Election:
Historically, one of the more liberal countries in the EU, the race in Holland for the Dutch parliament is leaning towards a far right political party - the Party for Freedom (PVV), led by Geert Wilders. Mr. Wilders' policy proposals include a pledge to leave the European Union and ban all Islamic symbols, mosques, and the Koran. While the size of the Dutch economy may limit the immediate global economic impact, if a "Nexit" were to unfold, Wilders anti-refugee and protectionist sentiment would help set the stage for EU elections in 2017.

March 26th: Hong Kong's Chief Executive Election:
Here the race is less about right and left or a shift towards populism, but rather about the deteriorating relationship between the Hong Kong people and the Chinese administration. The backdrop to this race began unfolding with the Umbrella Movement in 2014. Last November, Chinese President Xi reiterated China's policy of one country two systems, and quashed any ideas of political independence for Hong Kong. A recent report from Amnesty International finds Hong Kong's human rights have deteriorated to their worst level since China took back control of the region in 1997.

April 23rd and May 7th: France's First and Second Round Presidential Election:
In December, President Franois Hollande announced he would not run for reelection in 2017, further energizing the anti-establishment movement in Europe. The French presidential candidate with the most buzz is far-right candidate and Nationalist Front party leader Marine Le Pen, who would like to leave NATO, and who has suggested that Portugal, Italy, Spain, Ireland, Greece and Cyprus should all join France in leaving the European Union. Polls currently have her ahead in the first round of voting, putting her in a close race for President. Even if she lost, her party's growing appeal is probably shifting French politics further to the right. The Nationalist Front party has the most support among French people aged 18-34.

May 19th: Iran Presidential Election:
Hassan Rouhani won in a landslide presidential election in 2013 to succeed the hard line President Mahmoud Ahmadinejad on a moderate platform with promises to work with Western powers. However, a hardline candidate may again see an opening as the Iranian economy plods along - the Iranian Rial traded at all-time lows against the U.S. Dollar in December, Trump's tough campaign trail talk on renegotiating the nuclear deal also looms, and Rouhani recently clashed publicly with the country's conservative judiciary as tensions rise ahead of this year's election.

October 22nd: German Chancellor Election:
Angela Merkel is running for a fourth term and is currently expected to win, but the nationalist Alternative for Germany party (AfD) is growing in popularity. Following the horrific Christmas truck attack in Berlin the AfD jumped to 15.5 percent of the vote while Mrs. Merkel's Christian Democrats dropped to 31.5 percent. This follows AfD's outperforming of Merkel's party in her home state elections in September as they campaign against open door policies which allowed one million war refugees and migrants from the Middle East, Africa and Asia to settle in Germany over the past year. If Germany experienced further terrorist attacks, the anti-EU, anti-immigration party may continue to gain in the polls and possibly threaten Merkel's re-election bid.

Investor Positioning:

It's perhaps more important than ever to take stock of upcoming political events. Added to these 'Top 5', other political risks include what the Trump administration might precipitate in Russia, China, North Korea, and Syria. Eurasia Group has called 2017 the "most volatile" year for political risk since World War II.

During uncertain times, an investor may consider a tactical allocation to gold and volatility. Empirical research shows that gold can exhibit both 'hedging' and 'safe haven' properties,1 and volatility products [VIX etc] can be uncorrelated with the stock market."

 

Fund Managers' Biggest Risks and Gold Bet

Last night at her semi annual monetary policy testimony before Congress, US Federal Reserve Chair Janet Yellen said "Considerable uncertainty attends the economic outlook," referencing.. "possible changes in US fiscal and other policies". Those 'other policies' are likely a direct reference to Trumps trade protection policies that have everyone around the world nervous. The market read her broader address as indicating rates may be hiked sooner than later.

And so, topically and continuing the theme of yesterday's article today we look at some charts courtesy of Bank of America Merryll Lynch's (BofAML) latest monthly survey of fund managers.

When asked what catalyst will likely start the next bear market, guess what was top of the list? #1 Yellen's fear and #2 Yellen's actions.



Likewise (and again directly relevant to yesterday's news) the following outlines their thoughts on what presents the biggest tail risk to their portfolios:



It is often instructive to look at where the crowd is. History shows over crowding often ends in tears as over exuberant 'group think' v real fundamentals inevitably sees the latter prevail. At the moment, with expectations of more rate hikes to come, the high USD low US bonds trade is very full.



That 'should be' negative for gold but as last night demonstrated, after an initial dip on Yellen's testimony, gold bounced straight back. It's like the market is happy to play the trade, but they also want their insurance or hedge in place for when it inevitably goes wrong and they mistime their exit. Enter exhibit 4 below

 

I always like seeing surveys results.

Hopefully when SS updates to a new forum it will have a poll function.

 

3 Big Warning Signs of a Crash

Fund trader Jeff Clark has a simple 3-pronged warning system to predict market crashes ahead of the 'pack'. This system saw him predict both the 2001 and 2008 crashes. Casey Research have recently passed on this system and the warning that this May should see the 3rd and final signal turn red, after the first 2 have already done so.

So lets summarise these 3 signals with a bit more flesh on more recent events. First of all he looks for spiking rates. Since Trump was elected bonds have been crashing and the flipside yields have been rising i.e. real interest rates. Last night's stronger than expected CPI figures and surging odds of a March rate hike add to that spectre. Rates have risen before without a crash and indeed we are still relatively low but we are guessing Clark's concerns are the steepness of the rise and the combination of that happening with all time record high debt levels.



Speaking of record high debt, that brings us to the his next signal, the 2nd, being margin debt on shares hitting a new high of over $550 billion. The herd is piling in and piling in with borrowed money. This is a contrarians dream as it clearly demonstrates euphoric greed in play. You can see the result in 2001 and the GFC.



And so we await the 3rd signal and that is a technical one in what they call the "devil's cross". This is their name for the occurrence of the S&P500 breaking down through its 20 month exponential moving average. As opposed to usual linear moving averages like we reported recently with the golden cross in gold, Clark's exponential MA weights more heavily to recent price moves (we're guessing to capture momentum characteristics). What the chart below shows might seem at first a little obvious as it looks a little 20:20 hindsight-ish, but we think it is important for this reason. There are analysts out there talking of a 10-15% correction coming shortly. That's not nice but its certainly not a big crash. What these analysts are saying however, is 'buy the dip' when that happens. As you can see below, if you had done so in the last 2 crashes you would have gone on to lose half your money as the crash continued after a little bounce. It is certainly one to look out for.

Clark, for reasons undisclosed is calling that 3rd signal to happen in May.



May would fit in with JP Morgan's chief equities analyst's fears as expressed to Business Insider last night:

"Business Insider asked the head of US Equity Strategy at JPMorgan what keeps him up at night.

His answer was loud and clear: An ongoing trend of US dollar strength.

"The dollar continues to strengthen," said Dubravko Lakos-Bujas in an interview with Business Insider. The dollar on a global trade weighted basis has increased by about 20-25% over the course of the last 2-3 years, he pointed out. And according to Lakos-Bujas, further strengthening in the dollar could come on the back of President Trump's corporate tax reform proposals like a border tax adjustment.

"If that trend persists, you could see the global economy getting further pressurized. Keep in mind that 60% give or take of the global economy directly or indirectly is linked to the dollar. The dollar plays a very important role."

After the dollar, Lakos-Bujas is worried about higher interest rates and trade.

"There's a good amount of leverage in the system, especially if you look at corporates," he said. According to Lakos-Bujas, leverage in US corporates ex-financials is in line with all time highs back to the 2007 levels. "There's less room for tolerating a significant amount of rate increases," as higher rates will make that corporate debt more expensive to pay back.

On the trade side, Lakos-Bujas looks toward the uncertainty around the US adopting significant changes on border taxes and other restrictive trade measures that could end up resulting in "significant" retaliatory effects from big trading partners like China.

So what can investors do to get a good night's sleep?

"If you believe that a strong dollar and rising rates are going to continue tightening conditions, don't be surprised if at some point the Fed turns marginally more dovish," said Lakos-Bujas. "This means that gold and gold miners might be an interesting hedge to an existing portfolio.""

So simply, Trump moves ahead with tax reform, the Fed could raise rates in March, the markets have a fit on the back of the subsequently rising USD, rates surge further, China uses the USD strength to devalue the Yuan and in turn send a retalitory message to Trump. Kind of fits huh.?