Barron's Cover

Big Money Poll: The Bull Will Be Right Back

America’s money managers say stocks will resume their climb after a short but needed time out, according to our latest Big Money Poll.

By Jack Willoughby           

October 18, 2014

It’s going to take a lot more than the past month’s 5%-plus selloff in stocks for America’s money managers to change their upbeat tune. That’s what they’ve been telling Barron’s in the past two weeks, ever since 59% of participants in our latest Big Money poll said they were bullish or very bullish about the outlook for U.S. stocks through the middle of 2015. That’s up from 56% in our spring survey, but below last fall’s bullish reading of 68%.
The nation’s professional investors aren’t blind to the alarming developments that have tripped up the market in recent weeks, including evidence of slowing economic growth in key parts of the world, spreading violence in the Middle East, and even a possible Ebola pandemic. They are also worried about a coming change in Federal Reserve policy after years of falling interest rates, which provided a huge tail wind for stocks and other risk assets.
Equities will outperform other assets in the next 12 months, and U.S. shares will do best. The Big Money managers expect financials, health care, and tech stocks to lead the market higher. Scott Pollack for Barron's
Indeed, two-thirds of Big Money managers noted in our survey that they expect a correction, defined as a 10% drop in share prices, within the next 12 months. Whether smart or simply lucky, they’re suddenly looking prescient.
Still, the pros expect decent growth in corporate earnings and moderate equity valuations to put a floor under the market. They believe the bull market that began in 2009 will resume after an unpleasant but arguably healthy time-out.
BASED ON THEIR mean forecasts in the Big Money poll, the bulls see the Dow Jones industrials topping 18,360 by the middle of 2015, and the Standard & Poor’s 500 index hitting 2173. While their targets, which imply a gain of about 12% for the Dow and 15% for the S&P 500, might seem aggressive after last week’s rout, their commitment to U.S. equities remains intact.
Andrew Slimmon, a senior portfolio manager at Morgan Stanley Global Investment, whose Chicago-based group manages $4.1 billion of equities, notes that Europe’s economic troubles sparked a selloff in U.S. stocks in 2010 and in 2011, just as concerns about another European recession are sending tremors through the market today. “The fear then was that contagion from Europe would cause a recession in the U.S.,” Slimmon says. “It came at a time when the U.S. economy was more fragile. Afterward, the market came back strongly. This time, the U.S. economy is on stronger footing. The magnitude of the decline likely won’t be as large, and the rebound could be greater.”

To Joel Tillinghast, co-manager of the $46 billion Fidelity Low-Priced Stock fund, the allure of stocks seems obvious. Money-market funds pay holders little to nothing, whereas stocks with decent dividends pay enough to compete with bonds—and offer the possibility of capital gains. The economics are particularly compelling given five or 10 years of compounding. “People will gradually realize that equities are a superior alternative,” he says.
U.S. equities are especially attractive, Tillinghast adds. “Numerical predictions will either be right or wrong,” he says. “I’d urge people to consider that the greatest growth opportunities come from American-centric industries, and that interest rates aren’t going up. People are freaked out now, but fantastic opportunities have been created by the fact that America is less dependent on imported oil, and is a leader in biotechnology and social media. America has one of the strongest economies in the world.”
Many biotech and social-media shares reside on the Nasdaq, and disproportionately influence the value of the Nasdaq Composite. The Nasdaq has slid 7% since Sept. 2, to a recent 4258, but our bullish respondents are enthusiastic about its prospects. They see a near-20% recovery in the offing that could leave the index near 5000 by the middle of next year.
“People see upside [in the Nasdaq] because they see the pace of innovation in Silicon Valley and biotechnology, even though valuations are starting from a higher price,” says Christopher Ailman, chief investment officer of the California State Teachers’ Retirement System, or CalSTRS, which oversees $186.4 billion.
As for the broader market, Ailman says, “This may indeed be the 10% correction I was anticipating. But we will have a discussion tomorrow and likely talk about buying opportunities, not selling, because the fundamentals of the economy haven’t changed. The GDP [gross domestic product] forecast still has a nice, positive trend. Corporate earnings aren’t growing as fast as in the past, but they are still growing.”
THE BULLS’ CAMP has drawn modestly this fall from the undecided, as 31% of managers now say they are neutral about stocks, down from 35% in the spring. The bears’ ranks are essentially unchanged at about 9%.
Notwithstanding the bullish tilt of our poll, 71% of Big Money managers consider the market fairly valued—or at least they did when the survey was e-mailed a few weeks ago and the Dow was closer to 17,200 than today’s 16,380. But this is less of a contradiction than it might seem. “Historically, markets don’t stop at fair value, but go past it,” says Robert Lutts, president and chief investment officer of Cabot Wealth Management in Salem, Mass., which oversees $550 million. “Prices are getting up there, but we have none of the excesses that marked the top of previous markets.”
Lutts thinks worries about a rate hike have been exaggerated, while the benefits of falling energy prices have been ignored. Crude oil prices have fallen more than 20% since mid-July, to a recent $83.02 per barrel, while gas prices have slipped below $3.30 a gallon at the pump.
“People don’t appreciate how much of a plus they get from lower oil and gas prices,” he says. “It’s like a tax reduction.”
Charles Lemonides, founder of ValueWorks, a New York hedge fund with $250 million under management, agrees. He predicts the price of oil will drop to $75 a barrel by mid-2015, spurring further reductions in gasoline prices and putting more money into consumers’ wallets. Nor did he see signs, before the market’s recent tumble, of the euphoria that typically signals a bull market’s end is near. Many stocks were “quietly” correcting while the averages marched higher, he notes. “The froth just isn’t the same as at previous peaks,” Lemonides says. “I’m more inclined to be buying today than I was six months ago.”
Chances are he won’t be alone. Eighty percent of Big Money respondents say they expect to be net buyers of stocks in the next 12 months; just 20% expect to be sellers.
PROFESSIONAL INVESTORS are more bullish these days than the people whose money they manage. Nearly 70% of Big Money managers say their clients are neutral about U.S. equities, compared with just 21% who claim their clients are bullish.
The managers regard geopolitical crises, earnings disappointments, higher interest rates, and a more sluggish economy as the biggest threats facing U.S. stocks in coming months. In the plus column, they cite rising corporate profits, higher GDP growth, better employment news, and any decision by the Fed not to raise short-term interest rates as the factors most likely to get stocks back on track.
More corporate merger and acquisition activity, a pickup in China’s economy, and steps toward U.S. tax reform also could light a fire under share prices, they say.
Despite the challenges ahead, or perhaps because of them, 70% of Big Money managers expect equities to outperform other asset classes in the next 12 months.
A distant 9% think that either real estate or commodities will be the safest haven. Looking out five years, 80% of managers favor equities, something to remember as you’re surveying the wreckage after last week’s storm.
More than 70% of Big Money respondents expect the U.S. to be the best-performing market in the coming year, but only 30% see America dominating equity markets in five years. Emerging markets could be ascendant again, as a rising middle class in developing countries controls a greater share of the world’s wealth. The global market has changed “dramatically” since 2008, says Joseph Parnes, founder of Technomart Investment Advisors in Towson, Md., who cites new sources of wealth emerging in Asia.
Even so, 84% of poll respondents say they’re bullish on large-cap U.S. stocks in the near term, while 94% say they’re bullish over a five-year horizon. U.S. small-caps also could win more fans as they start to recover. Joseph Ray, president of Dallas-based Gerald L. Ray & Associates, which manages $700 million, calls the U.S. “the best house in a bad neighborhood.” U.S. companies, he notes, have strong balance sheets and plenty of cash, and ample opportunities to grow by doing deals.
The managers are split on the near-term prospects for Europe and Japan, but nearly 60% favor emerging markets. They expect to develop more enthusiasm for foreign markets in the years ahead. They like cash more than they did last spring, at 37% bulls versus 21%, but gold doesn’t glitter for them. Only 24% of poll respondents are bullish on the 12-month outlook for bullion, although 38% favor gold over five years.
FINANCIAL STOCKS are the managers’ favorites these days, with 28% expecting them to lead the market in coming months. Rick Seto, managing director at Pasadena, Calif.–based Flaherty & Crumrine, which oversees $5 billion, gives thumbs up to Bank of America (BAC), whose litigation overhang, he says, has largely passed. BofA trades for $16.21, or about 0.8 times book value, versus a peer-group average of 1.2 times book. He thinks the stock could rally to $21 or so in the next 12 months as the U.S. economy continues to recover.
Health care and tech stocks also could lead the market, according to poll respondents. Utilities have the poorest prospects, in their view, followed by consumer-cyclical shares.
As for individual stocks, Apple  (AAPL) remains a hands-down favorite of the Big Money men and women. Some have been seduced by the company’s groundbreaking products—Apple recently unveiled a watch, a mobile-payment system, a new generation of iPhones, and new iPads and iMacs—and some, by the low valuation of the shares. At a recent $97.67, Apple fetches a mere 10 times estimated 2015 earnings of $7.33 a share, after stripping out the $28-a-share of cash on the company’s balance sheet.
Schlumberger (SLB), the Houston-based oil-services leader, is another Big Money pick (and the subject of a positive cover story, “Right on Target,” in the Aug. 18 issue of Barron’s). The stock has been hammered since June, falling 20% to $93.97. It trades today for 14.6 times next year’s expected earnings of $6.64 a share, and sports a dividend yield of 1.65%. Analysts are forecasting an 18% rise in 2015 earnings per share. Slimmon, the Morgan Stanley manager, expects oil-services companies such as Schlumberger to be early beneficiaries of the next upswing in oil prices.
The Big Money managers also espy plenty of overvalued issues, prominently including electric-car maker Tesla Motors (TSLA), (AMZN), and Alibaba Group Holding (BABA), the Chinese mobile-commerce giant whose shares went public last month in the largest new-issue offering in history. The deal priced at $68 per American depository receipt and the stock opened at $92.70. The ADRs were changing hands late last week at around $88, or 37 times future earnings.
The managers likewise said they consider Netflix (NFLX) overvalued. The stock plunged $86.89, or 19%, Thursday, to $361.70, after the video-streaming company reported disappointing third-quarter subscriber growth.
THE BIG MONEY POLL is conducted twice a year, in the spring and fall, with the help of Beta Research in Syosset, N.Y. The latest survey drew responses from 145 portfolio managers from across the country, representing some of the largest investment companies in America and many smaller firms. Barron’s has been conducting Big Money for more than 20 years to get professional investors’ read on the financial markets and the economy.
Even the Big Money bears are looking somewhat bullish after stocks’ latest slide. Their mean bearish forecast put the Dow at 16,600 by year end and 15,900 by June 30, 2015. But numerical predictions, again, don’t come close to reflecting their concerns or downbeat market perspective.
Marc Heilweil, founder of Spectrum Advisory Services, an Atlanta manager with $530 million in assets, had the lowest forecast in our fall survey. He expected the Dow to trade around 16,500 at year end, but plummet to 13,000 by mid-2015. “The earnings growth hasn’t been there,” Heilweil says. “Consumer-spending patterns aren’t ready to turn. And corporations increasingly are run on a financial basis, with an emphasis on buying back stock instead of spending to grow.”
Based on our poll, others agree. Forty percent of Big Money managers think capital spending is the best use of corporate cash today, while 42% favor dividend payments. Only 18% believe companies are spending most wisely when they buy back shares, although lower stock prices could make buybacks more attractive for a while.
Guy Scott, a portfolio manager at Janus International Equity Fund, a $1 billion-in-assets manager in Denver, also has been bearish of late. “The U.S. market is overvalued,” he said recently. “The S&P 500 has risen for five years in a row. Very rarely does it go up a sixth consecutive year. Also, China’s economy is slowing. The risk is that it slows more than people expect.”
Scott pegged the Dow’s year-end close at 16,300, although he expects stock prices to rise in the first half of 2015.
IF MOST BIG MONEY managers are bullish to neutral on stocks, they are overwhelmingly bearish on bonds—for the next 12 months and five years. Consider this 12-month tally: 91% are bearish on Treasuries; 86%, on U.S. corporate bonds; 81%, on non-U.S. bonds; and 68% on tax-free municipals. Only 3.5% of managers expect bonds to be the best-performing asset class in the next 12 months, which probably says more about their hostile view of equities.
Don’t write off bonds altogether, however, as 44% of managers expect their fixed-income portfolios to generate positive returns in the next year. The bond market continues to confound, as its safe-haven status is buoying prices and depressing yields even further. The yield on 10-year Treasuries slipped below 2% last Wednesday, before ending the week at 2.22%.
“Have any predictions proved more consistently wrong than the prediction since 2012 that interest rates would rise?” asks Peter Scholtz, founder of Scholtz & Co., a $140 million asset manager in Norwalk, Conn.
The Federal Reserve is scheduled to end its third and final round of quantitative easing, or bond buying, this month, provoking further anxiety among investors. QE and other strategies have kept interest rates at near-zero levels for the past few years, to allow the economy and banking sector to recover from the 2007-’09 financial crisis and recession. The central bank isn’t expected to start lifting the federal-funds rate, to which other rates are tied, until sometime next year.
Seventy-six percent of Big Money respondents look for the Fed to act in the second or third quarter of 2015, although 8% don’t see a rate hike coming until sometime in 2016. Four percent predict it will occur even later than that.
Weakness in the rest of the world might buoy the U.S. stock market as this year winds down, says Donald Sazdanoff, founder of Sovereign Asset Management in Mansfield, Ohio, with assets of $65 million. He predicts the Federal Reserve will raise rates with an eye to that weakness, doing so only gradually. “If the Fed raises rates next year, it will do so very slowly or incrementally so as not to disrupt the market,” he says.
By keeping short-term rates at 0.25%, the Fed is punishing savers and painting itself into a corner, Sazdanoff says. Federal Reserve Chair Janet Yellen will want to get short rates up, he argues, to be able to stimulate the economy when the next real recession hits. Otherwise, the Fed will be left without monetary tools, he says.
JUST OVER HALF of Big Money managers see 10-year Treasury yields sitting at 3% a year from now. Another 27% think yields will have climbed to 3.5%. Peering out five years, 70% see yields of 4% to 5%. But don’t look for the stock market to swoon when interest rates finally start to rise. Fifty-three percent of managers anticipate stocks will advance in the six months after the Fed starts raising interest rates, while just 31% expect the market to weaken.
Fed Chair Yellen gets resounding applause from the Big Money crowd, in the form of an 82% approval rating. While her predecessor, Ben Bernanke, set upon a course of unprecedented monetary easing as the global banking system nearly collapsed, Yellen might have the more difficult job of mopping excess liquidity to avoid inflation. “She’s trying hard to give clear guidance, while also allowing the Fed some flexibility, given the economic uncertainty,” says CalSTRS’ Ailman.
THE GLOBAL ECONOMY, whose health was called into question broadly last week, looks pretty sound to our respondents, 63% of whom expect it to strengthen in coming months. “All things are in place for global growth to accelerate,” says Robert Turner, chairman of Turner Investments, in Berwyn, Pa., which manages $2 billion. “The Japanese and European economies are getting better. We’re also encouraged by the possibilities of an investor-friendly India.”
The U.S. economy looks solid, too, with 58% of managers forecasting U.S. GDP growth of 3% to 3.5% in the next 12 months. “The public underestimates the trauma caused by the 2008 crisis,” says Thomas Luddy, manager of the $10.5 billion J.P. Morgan U.S. Equity fund. “The economy is still recovering from it. That’s why there is room for reasonable growth.”
Most managers expect the U.S. unemployment rate to settle in the 5.5%-to-6% zone; it was 5.9% in September, according to the Bureau of Labor Statistics. A smaller percentage than in the spring survey look for the housing recovery to continue—68% to 81%—and a greater percentage are concerned about the threat of inflation: 56% now, versus 51% in the spring.
The dollar has been the world’s go-to currency in times of turmoil, and the managers, by a wide margin, expect the buck to continue to strengthen against both the euro and the yen.
WHILE THE BIG MONEY managers are glued to the markets, they’re also keeping a close watch on Washington, where next month’s elections could alter the composition and priorities of Congress. Our seers, by a 91% margin, expect the Republicans to retain control of the House of Representatives. Sixty-three percent also predict the GOP will gain control of the Senate.
Yet, only 57% think Republican control of both houses will be positive for the stock market. Harlan Cadinha, chairman of Cadinha & Co. in Honolulu, which manages $1 billion, worries that the GOP’s aversion to spending might slow the economy’s gains.
This has been an active year for financial journalists, but hardly a winner for investment professionals. Just 49% of managers say they are beating the market professionally, while 54% confess that they’re doing so personally. If last week’s pullback is as healthy—and temporary—as the Big Money folks say, both the stock market and the pros could have a better 2015.


Bears, but no picnic

Fears of deflation may lie behind recent weakness

Oct 18th 2014

THE mood in financial markets has turned gloomy again. Equity markets are retreating, commodity prices are falling and investors are stampeding for the safety of government bonds (see chart).

Volatility has soared: the VIX, a measure of how much investors are willing to pay to insure against sharp market moves, has more than doubled since July.

Perhaps the most remarkable development is the strength of government bonds. At the start of the year, a survey of fund managers by Towers Watson, an actuary, found that 81% were bearish on government bonds. Many commentators were talking about the end of a 30-year bull market. But the yield on 10-year Treasury bonds (which moves in the opposite direction to prices) briefly dropped below 2% on October 15th, having stood at 3.02% on January 1st.

This fall in yields has occurred even though the Federal Reserve has been steadily reducing its bond purchases, just as it said it would. Private-sector buyers have been eager to step into the breach. After all, yields on Treasuries are substantially higher than those in most of Europe (German 10-year yields dropped to 0.72% on October 15th) and American inflation is low (1.7% in August).

But probably the biggest reason why yields have fallen is that global growth has been disappointing, with the partial exception of America (where GDP fell in the first quarter, but has since recovered).

The IMF recently revised down its global growth forecast for the year from 3.7% in April to 3.3%. Recent data from the euro zone have been particularly weak; industrial production fell 1.8% in August.

Worries about the euro area’s stability are resurfacing. Greece has been an exception to the government bond rally, with 10-year yields climbing back over 7%. The Greek stock market is down nearly 24% so far this year. Investors worry that Syriza, a left-wing opposition party, may take power next year and demand a reduction of the government’s debt.

A sluggish economy has also affected commodities. While oil has captured the headlines, food prices have dropped 15.5% over the last six months and industrial materials have fallen 3.4%. These drops are good for Western consumers (and help explain why inflation is so low), but are bad for commodity-producing countries.

Equity markets have wobbled three times this year in the face of disappointing economic news, not to mention the political turmoil in the Middle East and Ukraine. But those tumbles have so far been modest by the standards of past bear markets. Recent experience has taught many investors that good news can equal bad news: the more uncertain the outlook, the more supportive central banks are likely to be. The Fed may be reluctant to tighten monetary policy until the recovery is better established (markets are not now expecting a rate rise until March 2016) and the European Central Bank may feel obliged to loosen policy further.

The other big hope for equity investors is that profits will remain strong, despite economic weakness; after all, the cost of raw materials is falling, borrowing is cheap, and wages are subdued. The third-quarter results season is under way in America. Once again, analysts have gone through the charade of reducing profit forecasts (by more than four percentage points) ahead of the season so that companies are able to “beat” forecasts by a small margin. American companies are expected to report annual earnings growth of 4.5%, according to FactSet, a data company. But investors will probably concern themselves less with the details of firms’ performance in the third quarter, and more with what they say about the outlook, particularly for those with big foreign operations.

Investors’ underlying fear seems to be that the developed world is slipping into a deflationary spiral; hence the falls in commodity prices and a sharp drop in expectations of inflation, as measured by the Treasury-bond market. The recent weakness in the euro and the yen may be a sign that those regions are exporting deflation to the rest of the world, as their exporters cut prices to seize market share.

Deflation can cause severe pain in the corporate sector; a further sign of trouble is that the spread (or excess interest rate) paid by the riskiest bond issuers has widened by one-and-a-half percentage points since June. This deterioration is seen by Julien Garran, an analyst at UBS, as the “fourth horseman of the apocalypse”, signalling that deflation is on its way. If investors lose faith in the Fed’s ability to rescue them from that fate, the recent market weakness may be only the beginning.

World economy so damaged it may need permanent QE

Markets are realising that the five-and-a-half year recovery since the financial crisis may already be over, says Ambrose Evans-Pritchard


9:36PM BST 15 Oct 2014
Combined tightening by the United States and China has done its worst. Global liquidity is evaporating.
What looked liked a gentle tap on the brakes by the two monetary superpowers has proved too much for a fragile world economy, still locked in "secular stagnation". The latest investor survey by Bank of America shows that fund managers no longer believe the European Central Bank will step into the breach with quantitative easing of its own, at least on a worthwhile scale.
Markets are suddenly prey to the disturbing thought that the five-and-a-half year expansion since the Lehman crisis may already be over, before Europe has regained its prior level of output. That is the chief reason why the price of Brent crude has crashed by 25pc since June. It is why yields on 10-year US Treasuries have fallen to 1.96pc, and why German Bunds are pricing in perma-slump at historic lows of 0.81pc this week.
We will find out soon whether or not this a replay of 1937 when the authorities drained stimulus too early, and set off the second leg of the Great Depression.
If this growth scare presages the end of the cycle, the consequences will be hideous for France, Italy, Spain, Holland, Portugal, Greece, Bulgaria, and others already in deflation, or close to it. The higher their debt ratios, the worse the damage.

Forward-looking credit swaps already suggest that the US Federal Reserve will not be able to raise interest rates next year, or the year after, or ever, one might say. It is starting to look as if the withdrawal of $85bn of bond purchases each month is already tantamount to a normal cycle of rate rises, enough in itself to trigger a downturn. Put another way, it is possible that the world economy is so damaged that it needs permanent QE just to keep the show on the road.
Traders are taking bets on capitulation by the Fed as it tries to find new excuses to delay rate rises, this time by talking down the dollar. "Talk of 'QE4' and renewed bond buying is doing the rounds," said Kit Juckes from Societe Generale.

Gentle declines in the price of oil are typically benign, a shot in the arm for companies and consumers alike. The rule of thumb is that each $10 drop in the price adds 0.3pc to GDP growth over the next year.

Crashes are another story. They signal global stress, doubly dangerous today because the whole industrial world is one shock away from a deflation trap, a psychological threshold where we batten down the hatches and wait for cheaper prices. That is the Ninth Circle of Hell in economics. Lasciate ogni speranza.

The world is also more stretched. Morgan Stanley calculates that gross global leverage has risen from $105 trillion to $150 trillion since 2007. Debt has risen to 275pc of GDP in the rich world, and to 175pc in emerging markets. Both are up 20 percentage points since 2007, and both are historic records. The Bank for Settlements warns that the world is on a hair-trigger.

The slightest loss of liquidity can have "violent" effects.

Saudi Arabia has clearly shifted strategy, aiming to force high-cost producers out of business across the globe, rather than defend OPEC cartel prices by slashing its own output to offset rises in Libyan supply. Bank of America thinks the Saudis are targeting $85 a barrel, partly in order to squeeze three enemies, Iran, Russia, and the Caliphate.
If crude prices stay low for long, almost all the major oil producers will have to start dipping into their foreign reserves to fund their welfare states and military apparatus. The "fiscal break-even" price needed to cover the budget is $130 for Iran, $115 for Algeria and Bahrain, $105 for Iraq, Russia, and Nigeria, and almost $100 even for Abu Dhabi. The Saudis themselves are probably well above $90 by now.

This means that they will have to sell holdings of foreign bonds, assets, and gold to plug the gap. Russia has run through $7bn in recent days defending the rouble. The scale of this could be huge, and it comes at a time when China has stopped accumulating reserves for its own reasons, taking away the biggest global source of fresh purchases.
Nor does the chain reaction stop there. Lower prices chill the US shale industry, which has lifted US (liquids) output from 7m barrels a day (b/d) to 11.6m since 2008, and turned America into the world's biggest producer. Bank of America says the pain starts at around $75 for the most costly fields. "Shale oil output is very sensitive to price conditions," it said.

The US Energy Department says oil and gas companies have been amassing huge debts drilling for marginal output in ever more hostile regions. Net debt rose $106bn in the year to March, on top of $73bn of asset sales. Yet revenues were stagnating even when crude prices were above $100. The fossil fuel nexus has spent $5 trillion since 2008, and much of this is at risk. It has in itself become a systemic threat.
Yet the oil crash is not merely a supply story. "There has been a rapid collapse of demand,” said Edwin Morse from Citigroup. The International Energy Agency says demand fell by 50,000 b/d in France, and 45,000 b/d in Italy in August, below earlier estimates. China's oil demand is no longer rising by half a million b/d each year. It has slowed to a quarter a million.
The global slowdown has caught the global authorities off guard, as it always does. Above all, it has confounded the central banking fraternity. In thrall to "creditism", it insists that QE works by forcing down interest rates across the maturity curve. Ergo, Fed tapering does not matter so long as rates stay low. By the same logic, ECB policy is "accommodative" because rates have collapsed, a claim would have Milton Friedman turning in his grave.
Monetarists say this is a cardinal error, bound to cause serial mishaps. Indeed, Robert Hetzel from the Richmond Fed blames the Lehman crisis and all that followed on monetary overkill in early to mid 2008, arguing in his book "The Great Recession" that the Fed ignored the warning signs that M2 money was buckling.

We forget that the Venetian Grain Board regulated commerce over the centuries by altering the quantity of money, not interest rates. So did the Bank of England in the 18th Century, injecting liquidity when Easterly winds brought ships into London. The Bank continued to target the quantity of money in the early 20th Century when QE was known as open market operations. Quantity was Friedman's lodestar in his great opus.
Quantity is not doing very well. The Center for Financial Stability in New York says "Divisia M4" - its measure of broad money growth - has fallen to 2.5pc from around 6pc in early 2013. The US economy can perhaps handle some loss of dollar liquidity. The world as a whole cannot. There are $11 trillion of cross-border loans outstanding, and two thirds are still in US dollars. Emerging market companies have borrowed a further $2 trillion in dollars since 2008.
China is no longer tightening, but it is not loosening much either. It is actively steering down the growth rate of M2 money, even though house prices have been falling for five months, industrial output has stalled, and factory gate inflation has dropped to minus 1.8pc. President Xi Jinping seems resolved to break China's credit bubble early in his 10-year term, come what may. This will not be pretty. Standard Charted says debt has reached 250pc of GDP, off the charts for a developing economy.

Property curbs have been lifted. The central bank has injected small bursts of liquidity into the banking system. But this time China has not let rip with credit from the state banking system to keep the game going. "We cannot rely again on increasing liquidity to stimulate economic growth," said premier Li last month.

He is targeting jobs, not growth, willing to deflate the economy and purge excess capacity in the steel and ship-building industries as long as unemployment does not rise much above 5pc. This may be the right course for China, but it is an unpleasant shock for those across the globe who feed the dragon for a living.
China will eventually blink if the slowdown deepens, and so will the Fed in Washington. First the markets will have to learn the hard way that they have mispriced the reality of a broken global economy.

China Growth Seen Slowing Sharply Over Decade

Conference Board Report Sees Productivity Plummet, Leaders at a Loss

By Bob Davis

Oct. 20, 2014 12:09 a.m. ET

BEIJING—China’s growth will slow sharply during the coming decade to 3.9% as its productivity nose dives and the country’s leaders fail to push through tough measures to remake the economy, according to a report expected to come out Monday.

Such an outcome could batter an already fragile global recovery. But the report by the business-research group the Conference Board also finds that multinational companies in China would benefit. Lean times would give foreign firms more local talent to choose from.

Foreign companies and investors could also expect “more hospitable” treatment from Communist Party and government officials and a wider selection of Chinese firms they could acquire, according to the report, which was shared with The Wall Street Journal.

Foreign companies should realize that China is in “a long, slow fall in economic growth,” the report said. “The competitive game has changed from one of investment-driven expansion to one of fighting for market share.”

Officials representing China’s State Council, or cabinet, referred questions to its National Bureau of Statistics, which didn’t respond. Senior officials of the Communist Party are gathering in Beijing for a major policy meeting that opens Monday and is expected to discuss the slowdown.

The Conference Board forecasts that China’s annual growth will slow to an average of 5.5% between 2015 and 2019, compared with last year’s 7.7%. It will downshift further to an average of 3.9% between 2020 and 2025, according to the report.

China is scheduled to report its third-quarter economic growth on Tuesday.

The outlook for the world’s second-largest economy is one of the most important factors affecting the global economy. For the 30 years through 2011, China grew at an average annual rate of 10.2%, a record unmatched by any major nation since at least World War II.

That growth lifted hundreds of millions of Chinese out of poverty and turned the country into a major market for commodity producers in Asia, Latin America and the Middle East, and consumer and capital-goods makers from the U.S., Europe and Japan.

Since 2012, China’s GDP growth has decelerated. Economists say Chinese leaders will struggle this year to meet their growth target of 7.5%.

The New York-based Conference Board argues that productivity in China is declining, in part because investments in infrastructure and real estate don’t have the payoff they once did. Meanwhile, government and Communist Party officials who don’t give market forces a large-enough role are stifling innovation.

“The state is too present in the market,” said David Hoffman, managing director of the Conference Board’s China center.

China has kicked off its fourth plenum, a major four-day Communist party summit. WSJ's Ramy Inocencio talks to Cheung Kong Graduate School of Business professor Li Wei on what to expect.

The report says that China could ease the slowdown by reducing the role of the state and revamping credit markets so lending is done on the basis of commercial decisions rather than political ones. But the Conference Board is skeptical that China will make fundamental changes soon because they could slow short-term growth and cause political pain.

Nicholas Lardy, a China expert at the Peterson Institute for International Economics, said the Conference Board conclusions are too gloomy. “China is far from exhausting productivity gains,” he said. It would get a big lift, for instance, from opening for competition the oil, gas and other sectors dominated now by China’s big state-owned firms, he said.

The International Monetary Fund and World Bank also expect China’s economy to slow over the coming years, but at a more modest clip. The Conference Board forecasts are “eye-popping,” said David Dollar, a China scholar at the Brookings Institution who formerly ran the World Bank’s office in China.

He called the report “a pessimistic take on whether China will aggressively pursue structural reforms.” Given the Conference Board’s main audience—its membership includes 2,500 of the world’s largest companies—the report is likely to spark a debate about the direction of the Chinese economy and the leaders’ commitment to change.

Multinational firms should be able to weather a period of much slower growth better than their Chinese competitors, the Conference Board report said, because foreign firms are used to managing their business during recessions and expansions. Chinese firms have known only heady economic growth, it said.

The slowdown will also create opportunities for foreign firms, as China realizes it needs foreign capital and technology and better access to overseas markets.

Foreign firms will need to be savvy, though, to make sure they don’t enter deals that wind up giving away important intellectual property as they did in the past, the report says.

Chinese leaders say they remain committed to revamping the economy. “Just like an arrow shot, there will be no turning back,” Chinese Premier Li Keqiang told a session of the World Economic Forum in the Chinese city of Tianjin in September.

The Ebola crisis

Much worse to come

The Ebola epidemic in west Africa poses a catastrophic threat to the region, and could yet spread further

Oct 18th 2014

ON MARCH 25th the World Health Organisation (WHO) reported a rash of cases of Ebola in Guinea, the first such ever seen in west Africa. As of then there had been 86 suspected cases, and there were reports of suspected cases in the neighbouring countries of Sierra Leone and Liberia as well. The death toll was 60.

On October 15th the WHO released its latest update. The outbreak has now seen 8,997 confirmed, probable and suspected cases of Ebola. All but 24 of those have been in Guinea (16% of the total), Sierra Leone (36%) and Liberia (47%). The current death toll is 4,493. These numbers are underestimates; many cases, in some places probably most, go unreported.

This all pales, though, compared with what is to come. The WHO fears it could see between 5,000 and 10,000 new cases reported a week by the beginning of December; that is, as many cases each week as have been seen in the entire outbreak up to this point. This is the terrifying thing about exponential growth as applied to disease: what is happening now, and what happens next, is always as bad as the sum of everything that has happened to date.

Exponential growth cannot continue indefinitely; there are always barriers. In the previous 20 major outbreaks of the disease since its discovery in 1976, all of which took place in and around the Democratic Republic of the Congo, the initial rapid spread quickly subsided. In the current outbreak, though, the limits have been pushed much further back; it has already claimed more victims than all the previous outbreaks put together.

Grim reckoning
There are two reasons for this. Those earlier outbreaks were often in isolated places where there are few opportunities for transmission far afield—the transfer of the virus between a wild animal and a human that sets off all such outbreaks is more likely off the beaten track. And they were mostly recognised quickly, with cases isolated and contacts traced from very early on; one was stopped this way in Congo in the past few months. The west African outbreak has broken through the barriers of isolation and into the general population, both in the countryside and the cities, and it was up and running before public-health personnel cottoned on. There is no reason to expect it to subside of its own accord, nor to expect it to come under control in the absence of a far larger effort to stop it.

Trying to be precise about how bad things could get, absent that effort, is not possible. This is not just because the actual number of cases is not well known. The rate at which cases give rise to subsequent cases, which epidemiologists call Rο, is the key variable. For easily transmitted diseases Rο can be high; for measles it is 18. For a disease like Ebola, much harder to catch, it is lower: estimates of Rο in different parts of the outbreak range from 1.5 to 2.2. Any Rο above 1 is bad news, though, and seemingly small differences in Rο can matter a lot. An Rο of 2.2 may sound not much bigger than an Rο of 1.5, but it means numbers will double twice as fast.

And Rο is not a constant. It depends both on the biology of the virus, the setting of its spread (city or country, slum or suburb) and the behaviour of the people among whom it is spreading.

Over the course of the crisis the second two factors are bound to change as the virus moves to different places and as people start to adapt. Given high rates of mutation, which bring with them the possibility of evolutionary change, it is possible that the first could change, too. Peter Piot, one of the researchers who first identified the Ebola virus in 1976, stresses that the course of an outbreak does not always follow smooth curves; it can stutter and flare up. None of this complexity, though, offers much reassurance. While doubtless imperfect, plausible model-based extrapolations such as a recent one from America’s Centres for Disease Control and Prevention (CDC) suggest, in the absence of intervention, that there could be 1.4m cases in west Africa in the next three months.

Not that Ebola will necessarily be contained in west Africa. Despite it having infected health-care workers in America and Spain, and worries that one of those Americans could have passed it further, public-health experts are largely confident that outbreaks can be contained in countries with robust medical systems and the ability to trace contacts. But transfer to other places with poor health systems might allow the virus to take hold in new cities. Especially if it makes inroads into Nigeria, where one set of cases has been successfully controlled, the virus could travel on to India, rich in slums with poor health care, or China, where infection control in hospitals can be worryingly lax.

The steps to avert such a cataclysm are reasonably clear: cases must be identified quickly, patients isolated and their contacts traced; changes in behaviour which reduce transmission rates must be encouraged through education campaigns and community action. The difficulty is doing all these things quickly and on a large scale. Modelling suggests that getting 70% of the sick into settings that reduce transmission of the virus—clinics, treatment centres or safe settings for treatment in the community—would bring things under control. That is a tall order.

The three countries currently afflicted are all exceedingly poor and plagued by various levels of instability and dysfunction. Guinea, the only one to have avoided civil war following independence, has been plagued by military coups and civil strife. In Sierra Leone many public institutions had only just started to be rebuilt after the civil war that finished over a decade ago. The wounds of Liberia’s civil war are fresher and deeper. Foreign peacekeepers maintain public security; many institutions barely exist. At the start of the crisis the countries had only a few hundred doctors between them.

Many of those doctors, including Sheik Umar Khan, who led Sierra Leone’s response, have since died of the disease. In an echo of the way that, inside the body, it targets the immune system first, in the community Ebola hits health-care workers hardest.

Providing the infrastructure for a better response is thus a matter for outsiders. Some help has come from governments, some from non-governmental organisations such as Médecins Sans Frontières (MSF), an NGO which has provided about two-thirds of the isolation beds used to treat Ebola patients so far. Expansion moves apace. Beneath the looming Peninsula Mountains to the south of Sierra Leone’s capital, Freetown, the sleepy village of Kerry Town is the scene of frantic activity, as more than 200 construction workers sweat through the night to complete the first of six Ebola clinics to be set up in the country by the British army (some snatch a nap on the table in the morgue). Solar panels are being installed, a borehole drilled for water, a concrete access road laid to link up with the coastal highway. The centre will hold 90 beds, with an additional 12 set aside in a ward for the health workers. A military spokesman says the site should be completed by the end of the month.

For a few billion more
The 70-bed Ebola treatment unit in Bong County, Liberia, was built by Save the Children, an NGO; it took about four weeks to build. Chris Skopec of International Medical Corps, the NGO that runs it, describes it as “something in between a tent and a concrete structure”. But it has all the necessary features: quarantine rooms, decontamination areas and large toilet spaces (patients suffering from vomiting and diarrhoea may pass out). It is close enough to villages for people to reach, not so close for them to protest at its presence.

These efforts are impressive. Liberia’s capacity to treat Ebola victims has nearly doubled in the past two weeks, and America has promised to build 17 100-bed units in the coming months. However, thanks again to the power of exponential growth, if the number of beds can be doubled only at more or less the same rate that the virus doubles the number of cases, the disease’s head start will grow ever more overwhelming. For the caseloads predicted for late November and December, the 70% treatment level seen as needed to bring things under control corresponds to tens of thousands of beds.

For a sense of the resources required to raise the tempo, consider that the 70-bed facility in Bong cost $170,000 to build. It needs a staff of 165 to treat patients and handle tasks like waste management and body disposal. It is likely to go through nearly 100 sets of overalls, gowns, sheets and hoods per day. The monthly cost of running the unit comes out at around $1m, which is about $15,000 a bed. The WHO puts the costs of a 50-bed facility at about $900,000 a month. These figures suggest that a 100,000-bed operation would cost in the region of $1 billion-$2 billion a month.

Various countries have promised substantial aid, but not yet on that scale. America has pledged $350m and set aside another $1 billion to fund the activities of its soldiers in the area. Britain has committed $200m. The World Bank has set up a $400m financing scheme; the first $105m reached the governments of the affected countries in just nine days. The UN, of which the WHO is part, has taken in about a third of the $1 billion it says it needs to fund its own efforts in the region; all told, though, Ban Ki-Moon, the UN secretary-general, sees a need for much more than that—“a 20-fold surge” in assistance.

Money is of little use without staff. China has sent some 170 medical workers to the affected countries. Cuba, long focused on medical work overseas, has sent a similar number, and has plans for 300 more. Others have been less forthcoming. The facilities America’s soldiers are building will require a staff in the thousands; despite being trained for biological and chemical warfare American troops will not be among them. Last month MSF rejected a pledge of $2.5m from the Australian government, demanding Australian doctors instead. Australia demurred.

While there are medical volunteers from overseas, Ebola is a harder sell than other crises. David Wightwick of Save the Children says that in the aftermath of Typhoon Haiyan hitting the Philippines there weren’t enough seats on the planes for all of the international volunteers—but when he asked 28 logisticians to travel to the affected countries, 21 said no. Nevertheless, Bruce Aylward, who is overseeing the WHO’s response in west Africa, says an increasing number of NGOs and foreign governments are now looking to deploy staff to the region.

Funerals and friends
With the number of sick outstripping the capacity of the treatment centres, more care is being moved into the community—which requires a reliance on local people with rudimentary training that Dr Aylward says would have been considered heretical in earlier Ebola outbreaks. The isolation is needed because it is when people are at their sickest that they are at their most contagious. The virus is transmitted by direct contact with body fluids and excreta: the most infectious are blood, faeces and vomit, which are most likely to be contacted when the sickness is at its height.

The minimum basis for community care is to have two structures, which might be tents or shacks, set aside for suspected and confirmed cases. The carers would not be health workers, but trained community members with proper protective gear. People who have already survived the disease appear to have subsequent immunity and could be well employed in such settings; the dependability and duration of their immunity is not fully clear, and they would still need to follow safety procedures, but they would run less risk. The sick would be given only rudimentary care, not least because communities often lack reliable electricity or water supplies.

Most will go into such facilities with a fever brought on by something more common but less lethal than Ebola, like malaria; there are not yet tests for Ebola in the field that would keep such cases out. Some will die who otherwise would not; the hope is, though, that 70% will come out alive. If only people with Ebola went in, that figure would be more like 30%.

Such care units are being piloted in Sierra Leone and Liberia, and in many cases there may seem little if any alternative. Still, Christopher Stokes of MSF urges caution. If the locals are not properly trained, he warns, “you can amplify the epidemic, because they will feel confident in being around patients and they will catch it themselves and infect others.” The fact that the virus succumbs very readily to disinfectants such as bleach is welcome, but it will not help unless the disinfectants are used thoroughly and consistently.

Mr Stokes prefers decentralisation, “where you go closer to the community with smaller units [of about 30 beds], but with properly trained staff, which MSF has done in Guinea.” The approach worked well; at one point the outbreak in Guinea seemed almost to have been stopped. But economies of scale suggest that most new treatment centres will be a lot bigger, with some offering 100 beds or more.

Isolation reduces transmission. So can behaviour change, on which governments, lacking the wherewithal for much else, have concentrated their response, and which experts like Dr Piot see as the heart of the problem. Much of the focus to date has been on the burial of the dead. Those who have died remain, for a while, very infectious, and funerals can bring people from some distance. Six months into the epidemic a WHO study concluded that 60% of all cases in Guinea were linked to traditional burial practices that involve touching, washing or kissing the body. All the earliest cases of the disease in Sierra Leone appear to have been contracted at a single large funeral in Guinea, one which was also crucial in reigniting the epidemic in that country.

Now the traditions and beliefs that place such reverence on the treatment of the dead are being regretfully put aside by many; funerals that were once vibrant social events are in some places becoming practical exercises in the burial of body bags. “My aunt was taken away like a broken fridge and there was no other way,” says Charles Washington, a hotel worker in Liberia. But there are still traditional, dangerous funerals going on. There is more to be done through community engagement to reduce dangerous practices and to make rituals safer. Involving churches, traditional healers and the region’s secret societies more would bolster this and other interventions, such as those which help people to understand how the disease is transmitted.

Leaflets, placards and public-service announcements tell citizens in all three countries how to protect themselves through hand-washing and minimising contact with the ill. Sierra Leone went as far as locking down the country for three days during which officials and volunteers went house-to-house to educate people as well as search for hidden outbreaks. In Liberia and Sierra Leone, Ebola is a popular topic on the radio, which is how most people get their information. The broadcast advice is sensible and sometimes musical: “Ebola is Real” by F.A., Soul Fresh and DenG is proving popular in Liberia. Public buildings have temperature checks at the entrance; many also have chlorine baths for hands and shoes. People are aware of the danger surrounding them; many speak of little else.

Mobile phones also spread useful information—and may provide vital data to health workers. The CDC is tracking the location of people who call helplines in order to see where the disease is spreading. A Swedish NGO called Flowminder has captured people’s movements in the region using mobile-phone records.

Change in behaviour is real, but by most accounts it is patchy. Some people continue to believe that Ebola can be fought with animist remedies or witchcraft. Much to the frustration of a beleaguered cemetery keeper, people still wander through his graveyard in Freetown on their way to work, oblivious to the risks. Taxi drivers may disinfect their vehicles more, but in Liberia they chafe against new rules limiting passenger numbers. When livelihoods are at stake, onerous rules will be broken.

And crafting clear messages is hard. Dr Piot points to juxtaposed posters saying first that there is no cure and second that the infected should get to treatment centres. Despite such mixed messages, early fears that treatment centres would be shunned as death traps have not, in the main, come true; many centres are full. But this leads to another problem. Is it sensible to encourage sick people to take long journeys with no bed at its end? Progress depends not just on more beds, but on more local information on where to find them, and what to do if they are not available. Communities and the people from whom they seek advice need to be informed enough for such responses. They need to be involved in ways that help them decide how to reorganise their lives. Add that to the list of things easier said than done.

Veni, vidi, vaccini
Changing behaviour could slow the spread of the virus; a vaccine could potentially stop it. In large part because of worries that Ebola might be used as a biological weapon, vaccines that protect lab animals against the virus were already on the shelf when the outbreak began. Two are now being tested for safety in humans, and one of them could, if it is safe, be tested for efficacy quite soon, most likely in health-care workers in west Africa. Its maker, GlaxoSmithKline, could have 10,000 doses ready in a few months. Meanwhile thought is going into how to scale up production of any vaccine that proves successful. The ideal would be to come up with some mixture of direct payment to companies and guaranteed purchases that would mean copious stocks were available the moment the good news came through.

The other vaccine in trials might possibly, on the basis of animal tests, have the added benefit of helping those infected fight the virus as well as keeping the uninfected safe. At the moment there is a striking lack of such therapies: ZMapp, a cocktail of antibodies that has worked in animals, is of unproven efficacy and exhausted supply. A lower-tech alternative is to use blood serum from recovered patients, which contains the antibodies that helped them fight the virus. Such blood would have to be screened for other pathogens and matched to the recipients’ blood type, but WHO experts have been guardedly optimistic about the idea.

Even if treatment centres are hugely expanded, people’s behaviour changes radically and a vaccine proves effective, the damage already done to the region is huge. The patterns of work and food supply are already disrupted. Some farmers have abandoned their fields because they wrongly fear being infected by water in irrigation channels; some in cities are panic-buying. Salaries to public employees are not secure. The World Bank warns that Liberia’s rubber production, a big export earner, could fall drastically.

For now mounting deaths, understandable confusion and increasing economic dislocation have not caused widespread civil unrest. But many fault their governments for not protecting or preparing them better for the epidemic, and the grudges that animated past civil wars and coups sleep lightly. Few diplomats see a return to the bad old politics as out of the question; Filipino UN peacekeepers in Liberia have been withdrawn by their government. If civil order breaks down, the epidemic will get still worse.

Even if things do not fall apart, there is the most uphill of struggles ahead. Dr Piot cautions that an Ebola outbreak is an all-or-nothing affair; it is only over when the last patient is either dead or fully recovered. When it has struck on this scale, the challenges that remain after that will still be huge; whole public-health infrastructures will need rebuilding. But first there is a mountain to climb.

The Gold Market Is Going Insane

  • Market participants somehow fool themselves at inflection points.
  • What affect will QE4 - if it does come - have on gold?
  • Upcoming week's expectations.

Many quote the famous words of Winston Churchill "Those who fail to learn from history are doomed to repeat it." However, if one delves further into where this astute phrase originated, you are led back to George Santayana (1863-1952), who likely "borrowed" it from Edmund Burke (1729-1797), a British philosopher, who stated that "Those who don't know history are destined to repeat it."

As many of you know, I peruse the other metals articles on Seeking Alpha, as well as many other sites. And, to say that I am simply astounded by some of the things I am reading is probably an understatement.

With the strength of the dollar, and the correction we are seeing in the equity markets throughout the world, the hot topic is now how the Fed "must" do QE4. Now, I am not even going to discuss how this is akin to a cocaine addict needing its next fix. My issue is that there are many that are suggesting that such further stimulus is what will cause gold to skyrocket.

I am sorry for being so blunt about this perspective, or if it may insult some that believe in this perspective. But, I simply have to ask the question "have you been sleeping for the last 3 years?"

The definition of insanity is doing the same thing over and over, yet expecting a different result each time. And, I propose that those that are now trying to dust off the perspective that more Fed action will cause gold to skyrocket are nothing less than insane. So, let's look at a snapshot I provided here at Seeking Alpha several years ago of Fed announcement history. Once you read through it, you will see why those maintaining such perspectives are clearly not burdened by the facts, and you should not be drawn into their vortex of insanity.

I want to start by quoting something I wrote back in April of 2012, which I hope will remind you of the "correlation" between the Fed announcements and the price of the metals:

On February 23, 2012, I provided advance warning of an impending decline in silver to the Seeking Alpha readership, and also provided targets for the decline. On February 28, 2012, we issued a suggestion to members to exit short-term metals positions, and for aggressive traders to even short the market, as the Elliott Wave pattern off the lows had completed.

The very next day, on February 29, 2012, Ben Bernanke was in front of Congress providing his semi-annual report on the economy, and the precious metals market entered into what some termed a "flash crash." Some of our members made 500% returns in that one day.

However, all Chairman Bernanke did in front of Congress was reiterate the Fed's position on the economy, which was clearly stated on January 25th. He did not provide the market with any news it did not have before, and he did not deviate from the statement of the Fed which was published a month earlier. So, why would a reiteration of a previously published, widely-known position of the Fed be viewed by so-called experts as the "cause" of the termed "flash crash?"

I want to paint a picture for you about the common misconception regarding how news supposedly "moves markets," so you can make a determination as to whether you would be able to make a reasonable trade decision based upon such "news." We will then bring it full circle in order to identify where we currently stand regarding silver.

Fed January 25th Announcement - No QE3 - Silver Rises 10%

After the Fed's statement of January 25th, the silver futures rose strongly from the $31.50 region to the $34.50 region within several days, with the significant amount of that almost 10% rise occurring within the first 24 hours. At the time, many pointed to this Fed statement of the 25th as "causing" this 10% rise in silver, even though it was clear that QE3 was not being contemplated.

Fed February 15th Notes Release - No QE3 - Silver Rises 15%

The notes to the Fed meeting of January 24-25 were released on February 15th for all to read. Even though the public already knew the Fed's position, which was announced on January 25th, silver rose strongly from the $32.75 region to the $37.50 region, another 15% rise within a week.

Bernanke's February 29th Testimony - No QE3 - Silver Plummets 11% In One Day

So, on February 29th, while testifying in front of Congress, Mr. Bernanke once again reiterated the Fed's position, which was already presented on January 25th and February 15th. Now, if one were to engage in the standard linear analysis utilized by almost every economist and market analyst, then you would be buying silver expecting another double digit rise, which many people did. However, silver did the exact opposite - it fell by double digits.

If you may recall, it was at the end of the rise that culminated in our February 28th sell signal, when most market "gurus" were suggesting and entering long positions in the metals. In fact, a day or two before the top on February 29th, we saw some large option positions being initiated in the metals. The strong drop almost immediately thereafter, which has now resulted in a total 19% correction in the silver price, has left investors in this market scratching their heads. Why did the same position statement of the Fed, which "caused" two previous double digit rallies, now cause an almost 20% total correction? Well, let's take it one step further before we answer that question.

Fed April 25th Announcement - No QE3 - Silver Bottomed and Gained 5%?

On the morning of April 25, 2012, silver started the day with a small rise and topped at the $31.00 region early that morning, which we shorted in our Trading Room. Throughout the rest of the morning, silver declined a little over 3%. However, once the Fed issued its announcement in the early afternoon, which was simply a reiteration of the same position it has taken all year, silver seemed to have reversed hard to the upside and, by the next day, was trading even higher than the level from which it fell the prior day. By Friday, within 48 hours after the same statement presented all year by the Fed, silver had gained almost 5% from the lows hit just before the Fed announcement.

Again, this must be making precious metals enthusiasts scratching their heads in disbelief, while trying to figure out if there was a comma that may have been added in the latest statement, from which we may be able to glean a hint of QE3. But, alas, no such hint can been seen from the Fed's statement, which has been rather consistent all year with regard to no QE3.

So, I feel compelled to reiterate a very counter-intuitive position I have stated over and over again with regard to investing: Ignore the news, as it will only lead you astray! Rather, these markets are moved by sentiment, and such movements are patterned.

And, then again, right after QE-Infinity was announced, I reminded everyone to ignore this announcement, and to focus on sentiment:

In fact, just think back to when QE-Infinity was announced. Everyone not only thought, but was 1000% sure, that the metals were about to go parabolic. But, even before the Fed announced QE-Infinity, I made the bold call that, irrespective of what the Fed did, silver will turn back down from the $34.40 level in the futures contract. And, yes, this was based upon my analysis of market sentiment through patterns and Fibonacci mathematics.

Well, silver went to $34.49 (nine cents over my target), and then turned down and has not looked back since. In fact, it was right after that market call back in 2012, that I started warning all the Seeking Alpha readers that $22 was a strong possibility to be seen. And, while many of you scoffed at me and my analysis methodology, how many of you actually started to question what you think you knew about the metals as it has gone completely opposite the manner in which the majority of the market assumed.

So fast forward another year or two, and we now find the metals much lower than the "news-hounds" would have ever fathomed. Yet, these same "analysts" are now touting the end of the bear phase for the metals, simply because QE4 is being suggested. This is not only ignoring fact and history, it is almost insulting to those who know, and are honest about, this market's history. I believe this is nothing more than cheerleading or wishful thinking, and should be completely ignored by anyone who is a serious investor or trader in metals.

Now, I will say something that will shock you. I think there could be a scenario where a QE4 announcement would be a catalyst to the next bull phase to the metals. Yes, you heard me right. But, I say this with a major caveat: this is only assuming that sentiment has completed its bottoming process BEFORE such announcement is made. If it has not, then QE4 will seem just as ineffective for metals as all these others announcements and QE-Infinity have been. But, is that the same as saying that QE4 will "cause" the next bull run? I think not. It will be a final bottoming in sentiment which will cause the change in direction.

As far as where GLD is heading in the near term, I will be honest and say I am not certain. Based upon the close on Friday, I have no imminent downside set ups yet in GLD, and the upside set up is also quite questionable. So, for now, I will not be trading any short term bias until the market provides more clear signals. And, if push came to shove, I would almost have to say the market looks more poised for higher than lower in the immediate future. Yet, without a high probability set-up, I will likely remain on the sidelines until the market provides one. Remember, trading metals is not like the lotto - you don't have to always be "in it to win it."

So, as long as we remain below the 121 region, I am still thinking lower lows will likely be seen sooner rather than later, while a break out over 123 has me looking towards the 130-133 region before we head down to lower lows.

And, as I have been saying for the last week in our Trading Room at, I am going to suggest traders wait for a solid downside signal in gold before beginning to set up their next short trade to take us below the 2013 lows. This will avoid being whipsawed, which is what this market has done best to most market participants for the last 3 years. And, should this result in your missing a potential shorter term trade on the downside, I would not fret. The bigger moves over the next few years should be to the upside, which is where your focus should then turn once we see the next lower lows in the metals.