I would like to begin this week’s missive with what I would call a “confessional rant” that covers the current deification of a group of academics known as the Federal Reserve Board.
I have been plucking nose hairs from Fed Chairmen since the days of Alan Greenspan in the 1990s when this diminutive, rather unattractive economist rebranded himself to rock star status by way of a combination of Wall Street coddling, bank bailouts, easy monetary policies, all delivered through obfuscation, innuendo, and verbal camouflage.
One must always listen to what the Fed says in the written statements while doing one’s utmost to ignore the day-to-day color commentary.
His anointed successors, Bernanke, Yellen, and Powell, all learned the importance of the Fed's mission very early in the game, and contrary to popular belief, it has nothing to do with price stability or employment; all that matters to the Fed is credibility.
As a “government-sponsored entity,” the Fed has no power whatsoever if it loses its carefully-sculpted role as an influencer at the highest level.
While Elon Musk can lure people into buying shares in Tesla and paying US$8 for a blue Twitter check mark, Jerome Powell can lure entire generations into owning the S&P 500 at multiples of the gross domestic product.
"The Fed's Got Our Backs"
I had never heard the phrase “The Fed’s got our backs” until after the GFC in 2008, and it took 12 years of mantra-like repetition of stimulus in the form of TARP, Twist, QEI, II, III, and IV before an entire generation of novice investors fell victim to the intended seduction of “risk-free returns” delivered not by the quality of the investment selection but rather by the preordained intent of the Fed.
So, it serves as no surprise to this author/investor when I see podcasts with millennials crying in their pablum about the disappearance of “The Fed Put” because what bear market-induced scar tissue creates is an antenna that is acutely sensitive to shifts in Fed policy about which I was writing in Q4/2021.
I learned in the years at the Wharton that one must always listen to what the Fed says in the written statements while doing one’s utmost to ignore the day-to-day color commentary provided by its members in self-promotional speeches, all designed to guarantee future book deals or speaking engagements.
Markets reversed their bullish uptrends on Wednesday during the Powell press conference after a reporter asked him how the massive rally in stocks might affect policy. Powell’s shift in body language was noticeable, after which he reemphasized the importance of his message, that being that “inflation is too high and we have a lot more work to do and that 5% might not be the ceiling on the FF rate."
However, here is what the Fed announced:
“In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
That is quite a different message than the super-hawk comments delivered by Powell. The official statement says that they will be watching for signs that the rate hikes are slowing demand – period.
Now, more than a few innocent souls read that statement and said, “It ain’t so bad,” and went out and covered a few shorts and bought a few carloads of stocks, thinking that it provided a pretty good seasonality setup.
Then, through the color commentary of an unelected, former stock salesman, a personal temper tantrum at the charging stock market prompts a 600-point Dow reversal sending the confused traders to the sidelines.
I find it unfathomable that a single individual running an institution created by and for the Wall Street Banks carries the unbridled authority to knowingly torpedo Wednesday’s advance.
The stock advance on Wednesday afternoon had nothing to do with price stability or full employment; it did, however, countermand the megalomaniacal wishes of the standing Fed Chairman, who is desperate to leave a Volcker-type legacy in the history books. Yet, there was nary a peep out of anyone in the MSM . . .
A Fork in the Road
Three out of the first four days of the new month, the first of the “Best Six Months” period, started out under pressure, and as of Friday morning, markets are at a critical juncture, commonly referred to as a “fork in the road.”
My bullish stance has not faded one iota since late September. Subscribers were notified earlier this week that the line in the sand for near-term trading positions was the October 13th low at 3,495, but despite the Jay Powell hissy-fit on Wednesday, the best the S&P could do was 3,698.
With the non-farm payroll number coming in at a “beat” this morning, the overnight strength was quickly vaporized, but buyers magically surfaced, taking the S&P right back to 3,785.
If I get a close above 3,805 by the bell, it will bode well for the month and for the rest of the 2022 trading year.
Any way you want to cut it, I learned a great many margin calls ago that stocks that go up in the face of bad news are stocks that should be bought, not sold.
So, in light of the better-than-expected jobs number this morning, it marks the first time in ages that stocks have decoupled.
Most importantly, if we go out on a strong note for the week, it improves the odds of a 10-12-week advance, the likes of which will turn the masses back to the bullish mode, which in turn will set up the next down leg of the bear market.
Quite simply, the tape has a better “feel” to it.
A Delightful Update in Gold and Silver
Another delightful development today is that gold and silver have put in significant reversal days, with gold up 3.26% and silver up an unheard-of 7.78% for the session.
This chart shows just how brutal the year 2022 has been for the precious metals, with the bulk of the damage coming at the hands of the hostile Fed and rising bond yields.
It, unfortunately, makes a lot of sense because gold typically shines in periods of negative real interest rates, and with the rise in the 10-year yield from 1.5% to 4.15% in ten months, real rates are now in retreat.
Gold is up 3.28%. Silver is up 7.81%.
Market participants are avoiding gold and silver because of monetary policy, and the muting effect is having on safe haven needs such as gold.
That was, of course, until today. Gold is up 3.28%. Silver is up 7.81%.
Moves such as those seen today in the gold and silver pits are rare and it is from that rarity that emerges the predictive powers of the precious metals. If there was one move in the past six months that would suggest a shift in monetary policy, it is when gold and silver explode out of the starting blocks with little or no abatement.
To do so on a day when bond yields are still creeping northward, one might point to the weakness in the U.S. dollar index, but that was marginal at best. We had an event today that should have resulted in a “Freaky Friday” sell-off in gold and silver, but that did not happen, which is significant.
After today, I am placing the odds of a multi-quarter bottom now being in place for “risk assets,” but that said, sector selection is critical. After bear market maulings such as investors have experienced thus far in 2022, the rule used to be (prior to central bank price control) that the sectors that led the prior bull always lagged in the new bull. If that is the case, then commodities are definitely candidates for leadership moving into year-end.
Commodities, led by energy, topped in June (one month after my June puts expired) and, after a five-month decline, have turned northward and appear to be resuming the bull that began back in April 2020 when I put out the “Generational Buy” on oil.
Knowing full well that I have been early on a number of trades in gold or gold miners as well as two silver trades, I know how bludgeoned we all feel as we look at the list of private placements (and warrants about to expire) that all sounded really “awesome” when we first heard their really sexy stories.
What happens after markets top out is that the reasons for owning the position usually do not change. In fact, many times, the story improves but what needs to change for the story to be vindicated is the return of stable markets and risk appetites. The junior resource sector, being heavily linked to commodities, will catch a serious bid between now and year-end, and if I am correct, 2023 will be the beginning of a multi-year run in all of the commodities soon to fall into deficit. Rio Tinto Plc (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK)
Never underestimate the replacement power of equities within an inflationary spiral.
Again, if I am correct in my analysis, the new generation of investors that have tasted enrichment through Fed largesse from 2009 to 2021 are going to want to go back to the well once again, and when they do, they will move to the safety of historical performance but in sectors that benefit from fundamentals related to electrification (copper) and cheap, clean energy (uranium) as well as select battery metals (lithium).
Once the precious metals break free from the price suppression of the rampaging dollar, money flow will move to gold and silver in a torrent of insatiable demand, starting first with massive, short covering, then long entry.
The fork in the road is now directly in front of us and while I have no crystal ball upon which to glean irrefutable forecasts of certainty, what I will tell the readers of this missive is this: Start buying high-quality stocks in the commodities sector.
Use a two-day closing stop-loss parameter of 3,495 basis of the S&P with a view to double down on a close above 4,150 between now and year-end.
For example, Rio Tinto Plc. (RIO:NYSE; RIO:ASX; RIO:LSE; RTPPF:OTCPK) yields 9.15% at current levels and is a perfect proxy for the space because there is no better feeling than being paid over 9% on your money while you wait for the world to finally appreciate commodities.
Last point: Never underestimate the replacement power of equities within an inflationary spiral.
Want to be the first to know about interesting Gold, Silver, Critical Metals and Base Metals investment ideas? Sign up to receive the FREE Streetwise Reports' newsletter.
Michael Ballanger Disclaimer:
This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.
Charts provided by the author.
1) Michael J. Ballanger: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: All. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. As of the date of this article, an affiliate of Streetwise Reports has a consulting relationship with: None. Please click here for more information.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.
As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Rio Tinto Plc., companies mentioned in this article.