It's About Jobs, Jobs, Jobs

Doug Nolan

The Wall Street Journal referred to a “a milestone” - “a major shift in how [the Fed] sets interest rates by dropping its longstanding practice of preemptively lifting them to head off higher inflation.”

The New York Times went with “a major shift in how the central bank guides the economy, signaling it will make job growth pre-eminent and will not raise interest rates to guard against coming inflation just because the unemployment rate is low.”

The Financial Times underscored a note from Evercore ISI economists: ‘They view the shift as ‘momentous and risk-friendly’, saying it ‘takes the world’s most important central bank beyond the inflation targeting framework that has dominated global monetary policy for a quarter of a century’.” “A revolutionary change to its monetary policy framework” that “could have profound consequences for the price of pretty much everything,” was how it was viewed by the Financial Review.

August 28 – Australian Financial Review (Christopher Joye): “On Thursday night the world's most powerful central bank - the US Federal Reserve - ushered in a revolutionary change to its monetary policy framework because it believes it has consistently missed its core consumer price inflation target. This new regime, which will allow the Fed to keep borrowing rates lower for longer, and tolerate periods of what would have been unacceptably high inflation, could have profound consequences for the price of pretty much everything. It also reveals the central bankers' essential conceit: that they don’t want markets to clear, or asset prices to gravitate to their natural levels, in the absence of extreme policymaking interference.”

For the most part, equities took Powell’s Jackson Hole speech in stride. Stocks rose – but they pretty much rise whenever markets are trading. Understandably, bonds were a little edgy. Ten-year Treasury yields rose six bps on the announcement to 0.75%, a 10-week high. Investment-grade corporate debt was under notable pressure. The iShares Investment Grade Corporate Bond ETF declined 0.8%, trading to the low since July 1st (down 1.1% for the week).

There is certainly an element of “the emperor has no clothes” in all this.

We know from experiences in Japan, the U.S. and elsewhere that central banks don’t control the inflation rate. The shift to an “inflation targeting” regime was ill-conceived from the start.

Rather than admit to mistakes, the global central bank community will continue frantically digging ever deeper holes.

Can we at least admit that inflation dynamics have evolved momentously over recent decades?

Could we accept that technology innovation has led to a proliferation of new types of products and related services – profoundly boosting supplies of high-tech, digitized and myriad online products?

There has also been the seismic shift to services-based output, altering inflation dynamics throughout economies. Moreover, “globalization” – especially the capacity to manufacture endless low-cost technology components and products globally – has fundamentally changed the inflation axiom “too much money chasing too few goods.”

The above noted factors have placed downward pressure on many prices, altering traditional inflation dynamics and rendering conventional analysis invalid. This contemporary “supply” dynamic has worked to offset significant inflationary pressures in other price levels (i.e. healthcare, education, insurance, housing, and many things not easily produced in larger quantities) – putting some downward pressure on consumer price aggregates (i.e. CPI).

Moving beyond the obvious, can we contemplate that ultra-loose monetary policies work to exacerbate many of the dynamics placing downward on consumer price aggregates?

Clearly, the historic global technology arms race is a prime beneficiary – but cheap money-induced over-investment impacts many industries (i.e. shale, alternative energy, autonomous vehicles, etc.). I would further argue monetary-policy induced asset price Bubbles are a powerful wealth redistribution mechanism with far-reaching inflationary ramifications (CPI vs. price inflation for yachts, collectable art and such).

Let’s be reminded that central bank monetary management traditionally operated though the banking system, where subtle changes in overnight funding rates influenced lending and Credit conditions more generally. Central bankers these days continue to expand this momentous policy experiment in using the financial markets as the primary mechanism for administering policy stimulus.

Why is it reasonable to believe that monetary policy specifically aiming to inflate securities markets will somehow simultaneously ensure a corresponding modest increase in consumer prices? It’s not. As we’ve witnessed for years now – and rather dramatically over recent months – such a policy course foremost fuels asset market speculative excess and price Bubbles.

There’s a strong case to be made that this dynamic pulls finance into the securities markets at the expense of more balanced investment spending throughout the general economy. Moreover, increasingly aggressive policy support (i.e. zero rates, QE and other emergency operations) over time exacerbates speculative excess and associated market distortions. As I posited last September when the Fed employed “insurance” rate cuts and QE with markets at all-time highs, it was throwing gas on a fire.

For now, damage wrought to Fed credibility is masked by record equities and bond prices. In the wanting eyes of the marketplace, the “inflation targeting” regime is mere pretense. Bernanke didn’t punt on the Fed’s “exit strategy” due to consumer prices.

Below target CPI was not behind Yellen’s postponing of policy normalization in the face of strengthening booms in both the markets and real economy. And Powell didn’t abruptly reverse course in December 2018 because of lagging consumer price pressure, just as CPI had nothing to do with last fall’s “insurance” stimulus measures.

Any lingering doubt the Federal Reserve has adopted a regime specifically targeting the securities markets was quashed with the $3 TN of liquidity response to March’s downside market dislocation.

It’s tempting to write, “when future historians look back…”. My ongoing commitment to weekly contemporaneous analysis of this is extraordinary period is fueled by the proclivity for historical revisionism (and the associated failure to learn from mistakes).

Just this week a Financial Times article stated the Fed’s last September stimulus measures were in response to trade war worries – neglecting to mention the decisive role played by late-cycle “repo” market instability.

That said, I do believe skilled analysts will look back and point to the destabilizing impact of prolonged ultra-loose monetary policies stoking speculative finance, distorted asset price Bubbles, and general Monetary Disorder. The fixation on consumer price indices slightly below target in the face of such historic Bubbles will be a challenge to justify.

I have argued now for a long time that Bubbles and associated maladjustment are the prevailing risks – not deflation, as argued by conventional economists. And the greater Bubbles inflate the greater the risk of collapse unleashing deflationary outcomes.

The Fed has been working on a policy review for the past year, with the outcome seemingly preordained. But to announce preference for higher prices and tolerance for persistent above-target inflation in the current backdrop is not without risk.

At $7.0 TN, the Fed’s balance sheet has ballooned sevenfold in twelve years. A traditionally conservative central banker would never take a cavalier approach with inflation after an almost $3.0 TN six-month increase in M2 “money” supply.

I’m sticking with the view that we’re in the end game to these multi-decade experiments in finance and monetary management.

I understand how $3.0 TN in Fed purchases buys some bond market tolerance. But multi-Trillion federal deficits will not be a one-year phenomenon.

The Federal Reserve has accommodated a massive expansion of Treasury securities at ridiculously low yields. Does the Fed really believe it could then accommodate rising inflation without a market backlash? Do they appreciate how an unexpected inflationary surge would wreak absolute havoc in the highly leveraged markets and economies?

The Treasury yield curve steepened markedly this week. With 30-year Treasury yields jumping 18 bps to an 11 week-high 1.50%, the spread to 3-month T-bill yields rose to 141 bps (wide since June 9th). Ten-year Treasury yields rose nine bps this week to 0.72%, with benchmark MBS yields gaining nine bps to 1.44% (6-wk high).

The dollar index declined 0.9%, nearing the low since May 2018. The Bloomberg Commodities Index jumped 2.3% to the highest level since March.

Gold increased 1.3%, and Silver jumped 3.4%. Yet gains were notably broad-based. Copper rose 2.9%, Nickel 4.6%, Aluminum 2.0%, Coffee 5.8%, Corn 5.5%, and Wheat 2.6%. WTI Crude gained 1.5%, trading this week at the high since March.

Equities continue to go nuts.

The S&P500 gained 3.3% to an all-time high, increasing y-t-d gains to 8.6%. The Nasdaq100 jumped 3.8% to a new record, boosting 2020 gains to 37.4%. It was another brutal short squeeze week, with popularly shorted stocks again outperforming.

The Bloomberg Americas Airlines Index surged 14%, and the J.P. Morgan U.S. Travel Index jumped 8.8%. The NYSE Financial Index rose 4.3%, and the NYSE Arca Computer Technology Index advanced 4.2%. Tesla gained another 8%, pushing its market capitalization to $412 billion.

Ludwig von Mises’ “Crack-up Boom.” The Fed’s new “regime” is major, profound, momentous and more. It’s not the least bit surprising – yet it is nonetheless almost unimaginable to actually witness.

The Powell Fed has given up – thrown in the towel. They’ve spent a year essentially crafting rationalization and justification in anticipation of doing little more than executing “money printing” operations for years to come. I have argued they’re trapped - and they have apparently come to the same conclusion.

Acute fragility associated with speculative Bubbles and egregious leverage now prohibit any effort to unwind recent extraordinary stimulus, not to mention raising rates or tightening monetary conditions for the foreseeable future.

It’s as sad as it is frightening. Despite the lip service, they’ve deserted the overarching financial stability mandate. Speculative Bubbles are free to run wilder. Leverage – speculative, corporate, federal and otherwise – Completely Unhinged.

Listening to Chairman Powell’s speech, my thoughts returned to Secretary of State James Baker approaching the podium to announce the beginning of the first Iraq war: “The war is about jobs, jobs, jobs.”

How would the Bush Administration justify an expensive war in the distant Middle East (removing Saddam Hussein from Kuwait) to the American people? I viewed our government in a different light from that moment forward.

Chairman Powell: “This change reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities… The robust job market was delivering life-changing gains for many individuals, families, and communities, particularly at the lower end of the income spectrum.”

August 28 – Bloomberg (Devon Pendleton): “It’s been one of the most lucrative weeks in history for some of the world’s wealthiest people. The net worth of Inc. founder Jeff Bezos topped the once-unfathomable amount of $200 billion. …Elon Musk added the title of centibillionaire when his fortune soared past $100 billion fueled by Tesla Inc.’s ceaseless rally. And by Friday, the world’s 500 wealthiest people were $209 billion richer than a week ago. Musk’s surging wealth expanded the rarefied club of centibillionaires to four members. Facebook Inc. co-founder Mark Zuckerberg, the world’s third-richest person, joined Bezos and Bill Gates among the ranks of those possessing 12-figure fortunes earlier this month. Together, their wealth totals $540 billion…”

The Fed has capitulated on its financial stability mandate as well as the increasingly grave issue of rapidly widening inequality. The Federal Reserve’s culpability for deleterious wealth inequalities and attendant social strife have been exposed. Trapped by financial Bubbles, the Fed will pay only lip service. Actually, it’s worse: Going forward, the Fed will justify precariously loose monetary policies by pointing to its determination to assist the unfortunate.

The entire Federal Reserve system should carefully ponder Powell’s comments following his Jackson Hole speech: “Public faith in large institutions around the world is under pressure.

Institutions like the Fed have to aggressively seek transparency and accountability to preserve our democratic legitimacy.”

Bloomberg’s Lisa Abramowicz: “We are getting inflation in certain areas… Certainly asset prices have gotten incredibly inflated and continue to do so on the promise that the Fed will keep rates low. How concerning is this? At what point does this have to make the Fed take stock and raise rates?”

Former New York Fed President Bill Dudley: “I think they are a little bit uncomfortable with the fact that asset prices are so buoyant. But remember that is partly by design. The Fed basically did what they did in March, April, May to try to make monetary policy easy and financial conditions accommodative. And they succeeded. Now as the stock markets keeps going up and up and up, that will cause some anxiety about the Fed. But remember, stock markets go up - stock markets go down. The consequences for financial stability have historically actually been pretty modest. We had the stock market crash in 1987. Lots of economists anticipated there’d be a recession. There was no recession. So, I think buoyance in the stock market is probably less risky to the economy because there’s not a lot of people that use a lot of leverage to own stocks.”

Earth to Dudley: We’re today confronting a deviant financial structure unrecognizable to that from 1987. Have you already forgotten March’s near global financial meltdown? Why did a panicked Fed expand its balance sheet by an unprecedented $3 TN? Why has it capitulated and basically signaled to highly speculative markets that they are committed to looking the other way and just letting things run their course?

I could, once again, invoke the timeworn punch bowl analogy (spiked and overflowing endlessly). It no longer does justice.

I was thinking instead of late on Halloween evening when it’s easiest to just fill the big bowl with candies and leave distribution up to the trick or treaters. Yet most kids act responsibility, snagging one treat (OK, maybe a couple) and leaving the rest for their fellow treaters. But the thought came to mind of offering a huge bowl filled to the brim with five-dollar bills, with the instruction “Only One Per Family.”

It’s a superior metaphor for the Fed’s chosen course – but with the inviting note: “Help Yourself. First Come, First Serve – We’ll Fill the Bowl Whenever It’s Empty.”

An election to decide America’s place in the world

November’s contest will be as consequential for the world as any since Franklin D Roosevelt

Philip Stephens

Ingram Pinn illustration of Philip Stephens column ‘An election to decide America’s place in the world’
© Ingram Pinn/Financial Times

When Nancy Pelosi told the world to leave it to Americans to decide the 2020 presidential election, she had Russia and China in mind. The Speaker of the US House of Representatives noted that American intelligence shows Moscow and Beijing are already trying to interfere in the process. 

Washington’s adversaries are not alone in thinking they have a big stake in the outcome. Politicians and policymakers in just about every corner of the globe have been tuned into the campaign for months. With good reason. November’s contest will be as consequential for the world as any since Franklin D Roosevelt’s victories in the 1930s.

From a distance this looks like an election in two parts. In the first, Americans will choose who they want to govern them for the next four years.

In the second, the US will decide between engagement or retreat, whether it wants to sustain its global leadership or would prefer to look on from the sidelines in the face of rising international disorder.

If the sympathetic Fox News and the antagonistic CNN are any guide, the first part is all about the character of Donald Trump. Is he the authentic champion of the working class, or a dangerous demagogue threatening the founding principles of the republic’s democracy? The president, as mesmerising a figure for his opponents as for supporters, sets and resets the daily news agenda. You back Mr Trump or you abhor him.

If this sounds unfair on Joe Biden, the Democratic party’s presumptive nominee should not take it as so. Mr Trump is Mr Biden’s best chance of winning. True, not so long ago the economy looked set fair. It seemed a reasonable calculation that enough independent voters could sign up alongside Mr Trump’s white working-class base to get him over the line.

Line chart showing how Trump and Biden are doing in the US national polls

That was before coronavirus put up in lights Mr Trump’s trademark mendacity and incompetence and the uproar over police brutality against black Americans teased out the president’s worst prejudices.

Mr Trump lies about many things, but he cannot gainsay the tens of thousands falling victim to Covid-19 and the millions facing unemployment. Except for the ultra-rich, the answer in November to the fabled “are you better off” question will be a resounding “no”.

This week Mr Biden took a bold step by choosing California senator Kamala Harris as his running mate. The formidable Ms Harris is the first African-American woman to appear on one of the main parties’ presidential tickets. The Democrats’ policy platform will be on show at next week’s virtual convention. That said, I doubt that Mr Biden will worry too much if the campaign spotlight remains fixed on the question of Mr Trump’s fitness for office until election day. The president is flailing. Mr Biden’s route to victory is surely as no more or less than the solid, competent and moderate alternative.

The connection between this domestic debate and the second part of the election is at best tenuous. Foreign policy rarely looms large in such campaigns. This one seems unlikely to be an exception, even if Mr Trump thinks there are votes in ratcheting up pressure on China.

Vladimir Putin’s backing for Mr Trump is unsurprising. The US president seems infatuated with his Russian counterpart. China’s Xi Jinping is said to favour Mr Biden. By tradition Chinese leaders have preferred Republican “realists” over Democrats, who are more likely to pay attention to human rights. In this instance, Mr Xi may have concluded that anything is preferable to Mr Trump’s angry unpredictability.

America’s partners and allies have a bigger stake. For 75 years, most of them have prospered under a US security umbrella. Now, with the notable exception of a smattering of autocrats such as Turkey’s Recep Tayyip Erdogan or Saudi Arabia’s Mohammed bin Salman, most will cite any number of reasons for backing Mr Biden. 

Trump vs Biden: who is leading the 2020 election polls?

Use the FT’s interactive calculator to see which states matter most in winning the presidency

Mr Trump is careless of America's friends, has pulled out of the Paris climate change accord, torn up the nuclear deal with Iran, undermined Nato, and replaced trade diplomacy with tariff wars and extraterritorial sanctions. “America First” has been a repudiation of the leadership assumed by the US after the second world war.

This last point is the one that really matters — one that distinguishes this election from all the others. The Pax Americana has run its course. The redistribution of global power, notably to China, means that the shape of the order that eventually replaces it is, for now, contested territory. The US can act as the convener of the world’s democracies, or it can withdraw to watch the old system dissolve into disorder.

The last time America chose between isolationism and engagement was during the 1930s. The economic recovery launched by Roosevelt’s New Deal marked a slow, bumpy return to engagement. A decade or so later the Truman doctrine set the American goal as global leadership. The nation’s enthusiasm for foreign entanglements has waxed and waned ever since, but the organising assumption has gone unchallenged.

Now that assumption is on the ballot paper in November. Has Mr Trump’s “the world can go hang” foreign policy been a dangerous but short detour, or have Americans lost sight permanently of the many advantages they have made from international leadership? That is quite a question.

What's Driving Gold, Silver And What's Next

Peter Krauth


• Gold and Silver will head higher, but not before more consolidation, which is necessary to a healthy bull market.

• Gold mining is becoming more costly and more challenging. Along with a lack of new major discoveries, that bodes for higher prices ahead.

• The near-term technical picture suggests more time needed to work through this correction.

Gold's retreated from a record high above $2,000, and silver's off its own seven-year highs near $30.

Is that cause for concern? I doubt it.

These have been dramatic surges to new levels, brought on by a combination of low interest rates, historic money-printing raising the specter of inflation, a softer US dollar, and of course a global pandemic.

But that doesn't mean gold and silver have to continue higher in a straight line.

Instead, these gains have been so strong that a period of retracement and consolidation are not only expected, they're crucial to the continued health of this precious metals bull market.

There are several fundamental drivers that will help keep gold and silver pushing higher, which I'm going to detail for you below.

Then we'll look at these metals' prices from a technical perspective to gauge what to expect next over the near term.

Gold's Fundamental Drivers

Mining gold has never been more expensive. It's possible that costs will drop for 2020 as demand for oil has retreated, but all kinds of related goods and services that go into gold production have gone up with pandemic surcharges.

Via the Wall Street Journal:

A higher cost of production will push gold prices higher. The metal is not likely to ever be produced at a loss and, if it is, it won't be for very long.

Gold exploration budgets continue to shrink on a global basis, as gold miners suffer from recency bias. They need to see gold at its current high price for an extended period before committing more funds to find more gold.

That also pressures junior gold explorers. They've only started to enjoy a more buoyant market to raise money in the past year as gold prices have come back to life.

S&P Global Market Intelligence recently reported the industry has suffered a decade of underperformance for gold discoveries.

Major gold mines are being depleted, and there is a dearth of new discoveries being made to replace mined ounces. Those being found are lower in grade, meaning more effort is required to extract an ounce of gold.

This is all pushing explorers and miners into increasingly risky jurisdictions, which ultimately is likely to translate into higher costs as well.

While these factors all point to higher long-term precious metals prices, we still need to understand their recent action to gauge what to expect in the shorter term.

Precious Metals' Technical Picture

We can see from the gold price chart that the correction which started in August after gold peaked near $2,070 is not likely over.

Gold's RSI and MACD momentum indicators confirm the current downward trend. Initial support is likely to be around the 50-day moving average near $1,875. After that we're looking at the $1,800-$1,825 level, which is where the overhead resistance in early July meets with the rising support (green) line.

Meanwhile, GDX as a proxy for gold stocks shows a similar correction, with its RSI and MACD both confirming the ongoing correction.

For GDX, initial support is likely around the 50-day moving average near $39, then $37 which was support in mid-July and overhead resistance in mid-May.

As well, the Gold Miners Bullish Percent Index remains at an elevated level.

This indicator typically needs to get below 30, then turn upward to get a bullish signal for gold stocks. That's clearly a ways lower from the current level of 75. It suggests we need to see a considerable drop in sentiment for gold stocks before we see a Buy signal.

The technical picture for silver is similar to gold's.

Silver's downside targets are previous resistance at $24.50, $23, then $20.

Comparing the performance of silver stocks versus silver, using SIL and SLV, reveals some interesting insight.

In early August, when silver peaked, the silver stocks only moved marginally higher. That was a strong indication that silver was likely putting in a near-term peak.

Silver stocks, like gold stocks, are in a correction phase.

If SIL breaks down below $45, first support is likely to be at the 50-day moving average of $42.75, followed by $40 then $37.5.

In my view near term action for precious metals is likely to remain weighed down. I also think we could see some strength in the US dollar.

The US Dollar Index trended further downward from late July. Yet that's when the RSI and MACD started showing positive divergence they've been trending upwards since.

Meanwhile, the "smart money" Commercial Hedgers appear to be betting the US Dollar has little downside, and probably some reasonable upside ahead.


To recap, the longer-term view for precious metals remains bright. The lack of sizable gold discoveries, coupled with rising costs and lower grades bodes for much higher prices.

But the near-term technical picture continues to point to lower prices or, at best, a consolidation near current levels.

I still see gold reaching for $2,200 this year and silver to edge towards $34.


Chris Vermeulen
Chief Market Strategist


- Gold Found Support Near $1,945- Right Where We Expected

- Gold Setting Up A Pennant/Flag And Is Nearing The Apex

- Another Measured Move Is Setting Up – Targeting $2250 Or Higher

- Silver Should Rally To $36 Or Higher When Gold Breaks

Nearly every Precious Metals/Gold enthusiast that follows our work has been emailing or messaging us asking about the next rally phase for Gold. Thank you for all of your messages and supportive comments. 

If you have not been following along, please review our recent research on gold and silver price moves, the rally in platinum, and detailed 2020/2021 price forecasts for gold and silver.

After watching the VIX start to move higher last week while the S&P and Dow Jones pushed to new all-time highs, our research team has been actively studying the Pennant/Flag formation in Gold that has been setting up. 

Our “Measured Move” article suggests support near $1,945 will act as a launchpad for an upward price advance to levels near $2,150 or higher. As the momentum of this upside price move continues to build, as we’ve recently seen with the last upside price leg, we believe the $2,200~$2,250 could be the next real upside price target for Gold.

Over the past few weeks, Gold has confirmed our projected $1,945 support level by closing out near this level for multiple weeks (8/10: $1.949.80, 8/17: $1,947). We believe the ability of price to close above the $1,945 level, even though price traded below this level, shows how strong this support level really is. 

Now that Gold has started to rally near the Apex of the Pennant/Flag pattern, we believe the next upside leg could be starting.

This Daily Gold Futures chart, above, highlights the extended upward price trend and the recent downward FLAG/Pennant setup – flagging out near $1945. We believe the next upside price move could prompt a move to levels well above $2,200 to $2,250 as the momentum behind this move continues to build. 

Once Gold clears $2,200 on an upside price advance, we’ll clearly be in “new high price” territory and it will shock many investors that Gold continues to rally in the face of the US stock market rally. Something does not settle when one considers Gold suggesting massive fear underlies US stock market price levels near all-time highs. You may want to review our Dow Theory article to attempt to better understand what we believe is driving fear.

Be sure to sign up for our free market trend analysis and signals now so you don’t miss our next special report!

The Weekly Gold Futures chart below helps to pinpoint the upper price target range assuming momentum continues to build as the next breakout move takes place. Our research team believes this next leg may push up to levels just below $2,400 before stalling out again, then likely retrace to levels near $2,250~$2,275 where another sideways/flag pattern may setup. This time, the sideways/flag setup may be very quick in terms of completing, possibly only visible on intra-day charts.

We believe the next upside price rally will have begun once Gold closes above $1,985~$1,990 (near the Flag Apex). Get ready, this should be a very solid upside price move targeting $2,250 or higher.

Please pay attention to our research and how accurately our research team has deployed technical analysis over the past 3+ years tracking this move in Gold. Isn’t it time you learned how I and my research team can help you find and execute better trades? Our incredible technical analysis tools have just shown you what to expect 6+ months into the future. Do you want to learn how to profit from these huge moves? Sign up for my Active ETF Swing Trade Signals today!

If you have a buy-and-hold or retirement account and are looking for long-term technical signals as to when to buy and sell equities, bonds, precious metals,or cash then be sure to subscribe to my Passive Long-Term ETF Investing Signals to stay ahead of wild market gyrations!

Stay healthy, safe and strong!

 
Chris Vermeulen
Chief Market Strategies

- Dow Theory suggests indices must confirm each other and volume must confirm the trend.

- The new downward trend in the Dow Utilities Index suggests indices are starting to break apart in terms of trending in unison.

- Volume recently has been trailing lower, which suggests the momentum behind these new all-time highs is weakening.

- If the Utilities Index continues to move lower and we see increased volume in the selling trend, we will consider the Dow Theory Trend component “broken” and expect a major peak/top soon after.

We know some of you are Dow Theory enthusiasts and followers. We follow the Transportation Index as a leading indicator for potential major market trends almost exclusively because of what we have learned from Dow Theory. 

If you are unfamiliar with Dow Theory, we suggest visiting Investopedia’s summary of this technical theory for a quick refresher. You can also learn more about the primary indicator in Dow Theory here. The two most important aspects of Dow Theory that we are researching today are two components:

1.- Indices Must Confirm Each Other

2.- Volume Must Confirm The Trend

My researchers and I have identified that the Dow Jones Utility Index has started to break downward in trend, breaking the recent upside price trend. This breakdown in the Utilities Index suggests the Indices are starting to break apart in terms of trending in unison. 

We have not seen increased volume in the downward trending of the Utility Index yet and we are waiting for this technical trigger to confirm the Breakdown in Dow Theory Trending by watching for the Utility Index to potentially begin a broader downside price move with increased volume.


Our research team is focusing on the Dow Jones Industrial Average, the Dow Jones Transportation Index, and the Dow Jones Utility Index for this article. These three charts are key to understand the broader components of Dow Theory and how the technical and trending aspects of Dow Theory work. 

We’re focusing on the Utilities Index because it is diverging from the Industrials and Transports in a big way. We just need to see some Volume support this new downtrend in the Utilities Index to begin to raise some big RED FLAGS about a major market top setting up.

Let’s start by investigating the Dow Jones Industrial Weekly Chart, below. We’ve highlighted the broader Head-and-Shoulders pattern in MAGENTA as well as drawn a YELLOW LINE across the UPPER GAP range from the February COVID-19 market collapse. We believe these levels will be critical in understanding how the markets are poised to test and potentially break above these broader market resistance levels. 

Additionally, we’ve drawn an upward sloping CYAN trend line that shows you how diligently price has continued to move higher since the bottom setup in March 2020. There has been very little recent weakness in the advance of price as new highs continue to be reached.

Volume recently has been trailing lower, which suggests the momentum behind these new all-time highs is weakening. It appears many traders are sitting on the sidelines and not participating in this upside price rally out of fear or concern that it may not be sustainable.


A primary trend will pass through three phases, according to the Dow theory. In a bull market, these are the accumulation phase, the public participation (or big move) phase, and the excess phase. In a bear market, they are called the distribution phase, the public participation phase, and the panic (or despair) phase.

It is quite possible that we have moved past the accumulation and public participation phases and are now firmly within the “excess phase” .. Or what we call the “speculative phase”.
Now we will look at the Dow Jones Transportation Index, below, which is set up somewhat similar to the Industrials. We see an extended Head-and-Shoulders pattern setup with a high price level from the Right-Shoulder acting as current resistance. 

We also see a very solid upward price trend which has accelerated higher over the past 5+ weeks on diminishing volume. At this point, we should consider the Industrials and the Transports “in alignment” with one another. The only real concern related to a weakening trend is the diminishing volume on both of these charts.

Now, we add the Dow Jones Utilities Index, below again, which sets up the entire Peaking/Topping Dow Theory technical pattern. The first thing we see in this Dow Jones Utilities Weekly chart is that the recent price trend is moving lower. This contradicts the trends of the Industrials and Transports.

Next, we see a much clearer Head-and-Shoulders pattern set up in the Utilities Index – which suggests resistance near 850 may play a big role in future price activity. Lastly, we see diminishing volume in this recent downtrend of price – which suggests “capitulation” has yet to enter this downward price trend.

Our researchers believe the only thing missing from the Utilities breakdown, which would indicate a broader market peak is setting up, is increased volume while the Utilities continue to trend lower. Once this technical pattern sets up, we believe we would have enough technical confirmation of a breakdown of the Dow Theory Trend Alignment component to warn that a major market peak/top is very near (or already happened).

What this means for skilled technical traders is that you should start “hedging” against risk and considering how to protect your open long positions. If you have not already considered how to accomplish this, we would suggest Precious Metals, Miners, Bonds and possibly small positions in Inverse ETF (such as SDS or QID). 

Hedging is a very valuable tool for skilled technical traders when trends weaken or risks become more evident in the markets. Moving capital into positions that can help protect against loss can help to balance your portfolio and reduce exposure to risk factors.

In closing, we do not have confirmation of this Dow Theory technical pattern yet. All we need to see is for the Utilities Index to continue to move lower and to see increased volume in the selling trend. Once we see this, we’ll consider the Dow Theory Trend component “broken” and we believe a major peak/top won’t be too far away. 

We suggest all of you pay close attention to these three indexes and watch for a breakdown of the primary trends in the future. This is a great way for you to understand basic Dow Theory and the how broad market trends tend to work in “alignment” or “unison”.

Hedge accordingly. We could be in for a wild ride in this breakdown confirms with increased volume. If you want to survive the trading over a long period of time, then you learn fairly quickly how important it is to protect against risk and to properly size your trades. 

While most of us have active trading accounts, what is even more important are our long-term investment and retirement accounts. Why?

Because they are, in most cases, our largest store of wealth other than our homes, and if they are not protected during the next bear market, you could lose 25-50% or more of your net worth.

The good news is we can preserve and even grow our long term capital when things get ugly (likely soon) and I will show you how. We’ve recently issued a Long-term Investment Signal for subscribers of my Passive Long-Term ETF Investing Signals.

Stay safe and have a great weekend!

Economic Recovery Is Hardly in the Bag

New readings indicate U.S. economy remains at risk of faltering

By Justin Lahart

Job seekers waited for interviews in Omaha, Neb., last month. / PHOTO: NATI HARNIK/ASSOCIATED PRESS

The stock market might be logging new highs, but the economy isn’t close to being out of the woods.

Thursday’s data make that clear.

First, the Labor Department reported that the number of people filing new unemployment-insurance claims in the week ended Saturday rose by 135,000 to a seasonally adjusted 1.1 million.

Economists had expected the tally to continue to drift lower.

The increase is disconcerting given that the incentive to file for unemployment has been reduced with the expiration at the end of July of the supplemental $600 a week benefit to unemployed workers.

What is more disconcerting, however, is the simple fact that claims remain well above where they were following the 2008 financial crisis, or any other time on record. Even with the growth in employment seen over the past few monthly jobs reports, many people remain out of work and, the claims data suggest, many businesses continue to shed jobs.

With Congress and the White House so far failing to deliver the additional stimulus that many economists thought would be in place by now, risks are rising that economic growth will begin to flag again.

Underscoring that danger, also on Thursday the Federal Reserve Bank of Philadelphia said that its index of manufacturing activity, which surveys manufacturers in its area, slipped to 17.2 in August from 24.1 in July.

That is still in positive territory, and therefore signifying expansion, but economists had expected a more mild slowdown to just 20. That follows a report from the Federal Reserve Bank of New York on Monday showing that manufacturing in New York state, too, moderated more this month than economists had expected.

With the country still in the grips of the Covid crisis, and with the additional problem of home-based schooling putting constraints on parents’ ability to get things done, the economy probably hasn’t reached the point where it can enter a sustainable recovery without additional support.

But at this point it looks as if any stimulus package won’t be approved until sometime in September, if it comes at all.

In the meantime, investors’ ability to keep ignoring the risks to the economy could be tested.

Look North: A Short History of US-Colombian Relations

For 200 years the two countries have partnered in mutually beneficial projects on a range of economic and security matters.

By: Cole Altom

Colombia is among the United States’ closest allies in the Western Hemisphere. For the past 200 years, the two countries have partnered in mutually beneficial projects on a range of economic and security matters. Any disagreements they’ve had were short-lived and relatively easily resolved. The key to understanding this unique and lasting partnership is understanding the role geography plays in their relationship.

Located on the northern coast of South America, Colombia sits on the southern base of the Caribbean Basin. The Andes’ three distinct mountain ranges run the full length of the country, covering roughly half its territory. (The other half is composed of the Amazon and Orinoco basins.)

The mountains make east-west transport difficult and expensive, while the Amazon forest in the south discourages mass settlement and development. For this reason, Colombia’s population is concentrated in mountain valleys, in disconnected cities, and along rivers and the coast.

These disjointed parts of the country are integrated through the Magdalena River; indeed, it’s estimated that three-quarters of the population lives near this river or one of its tributaries, which also facilitate the transport of goods between the interior and the Caribbean port cities of Barranquilla and Cartagena.

Colombia has access to both the Atlantic and the Pacific oceans, and the construction of the Panama Canal only increased the value of its connection to both of the continent’s coasts.

Colombia's Geography

In the 1820s, Gran Colombia (composed of present-day Colombia, Panama, Venezuela and Ecuador) had the potential to dominate the region, as did Mexico and the United States. It dominated the Caribbean Basin’s southern rim and controlled the Isthmus of Panama as well as valuable sea lanes on the Atlantic, where much of the trade with Europe was conducted.

Mexico controlled the basin’s western coast, while the United States was well on its way to consolidating its control of the northern rim, having acquired New Orleans through the Louisiana Purchase in 1803 and Florida in 1819. (The short-lived Republic of Central America, composed of present-day Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Mexico’s state of Chiapas was weak and fractured.)

Gran Colombia (1819-1830)

However, Gran Colombia’s leadership potential slowly eroded after it experienced two strategically significant territorial losses. In 1830, Venezuela and Ecuador broke away to form their own countries. Gran Colombia thus lost control over a large portion of the Caribbean Basin and strategic depth on both its coasts.

Then, in 1903, Colombia lost control over the isthmus when Panama declared its independence.

During this time, the country also experienced frequent political unrest that forced the government to focus on domestic affairs rather than engage on global issues from a position of strength.

Colombia was therefore no longer positioned to dominate the southern Caribbean Basin. A weaker version of its former self, it needed to find a strong ally that could provide both economic and security support. It could look either to the north or to the south, but its geographic orientation dictated that a northern ally was the only real option. In the early 20th century, the Colombian government introduced its “respice polum,” or “look north,” doctrine, which called on the country to orient its foreign policy toward the north, particularly the United States.

Later, the “respice similia” doctrine emerged, advocating that Colombia adopt a more horizontal approach to foreign relations, with a greater focus on South America. Even so, Colombia has largely followed the respice polum doctrine.

The few instances where it aligned with other countries ended quickly as they offered Colombia limited benefit.

Even before the downfall of Gran Colombia, however, circumstances were pushing the United States and what would become Colombia together.

In the first half of the 19th century, the U.S. and Colombia wanted to reduce the influence of European powers, namely the United Kingdom and Spain, in the Western Hemisphere. From this emerged the first treaty the United States ever signed with another country in the Americas: the 1824 General Convention of Peace, Amity, Navigation, and Commerce, also known as the Anderson-Gual Treaty.

The treaty expired after 12 years, but an updated version that also ensured trade and mutual development was signed in 1846.

Decades later, another opportunity for cooperation arose. As a bicoastal country, the United States had long wanted to construct a transoceanic canal. In the 1870s it established the Interoceanic Canal Commission, which supported building a canal, and ultimately decided that Panama – then still part of Colombia – was the most practical site for the project.

France had already tried to build a canal through Panama in the 1880s but abandoned the effort, which had proved immensely costly in terms of both money and lives.

The Caribbean

Initially, in 1902-03, the United States tried to establish a contract with Colombia to take up construction of the canal. But an eleventh-hour decision in Colombia not to ratify the deal led the U.S. to support Panama’s movement to gain independence from Colombia.

But the rupture could not last. Colombia needed secure access to the canal to access its western coasts, and the United States did not want to make a permanent enemy of a large country that could threaten the canal and influence sea lane approaches.

Washington also could not risk Colombia's partnering with another great power. What followed was the Thomson-Urrutia Treaty of 1921, which restored bilateral ties.

The treaty permitted Colombia to transport military equipment and troops, agricultural goods and industrial supplies through the canal free of charge. In exchange, Colombia recognized the borders and independence of Panama.

The United States also paid Colombia $25 million (approximately $350 million today) in damages, which was used to industrialize and improve infrastructure throughout the country. The United States benefited from this investment, since it helped drive out competing and still formidable British investment.

Since this reconciliation, U.S.-Colombian relations have continued largely intact. In the 1930s, Colombia fought a brief war with Peru and faced credit problems, which forced it to invite in U.S. companies to develop its oil resources.

During World War II, Colombia’s alignment with the United States helped keep its immediate surroundings and the canal secure. During the Cold War, the Colombian government often sided with the United States and rejected Soviet influence.

In exchange, Washington increased security and intelligence cooperation with Bogota and funded development programs through the Alliance for Progress. The timing coincided with Colombia’s recovery from a decade-long civil war known as "La Violencia."

Relations dipped in the 1970s following a decade of political violence in Colombia and growing disenchantment with the U.S. partnership, but the emergence of drug cartels and other domestic militant groups pushed Bogota to seek greater security support and cooperation from Washington.

As Colombia’s domestic situation stabilized over the 21st century, it came to play a greater role in regional security efforts, such as offering anti-narcotics training, and it is a political leader against anti-American regimes in the region.

More recently, the head of the U.S. National Security Council announced this week an investment plan worth $5 billion over three years focused on the rural development of Colombia. Though Colombia is the direct beneficiary, the goal of rural development is to curb coca production and reduce the presence and influence of criminal gangs throughout the countryside.

These groups support the region’s drug trade, which props up the government of Venezuelan President Nicolas Maduro and creates security risks along the U.S. border and within the United States. More ambitiously, there is talk that such investment lays the foundation for moving U.S. companies from China and closer to the United States and other friendly territories.

Even now, economic and security interests, as well as the dangers of faraway powers, support the long-standing and mutually beneficial relationship between Colombia and the United States.

America’s New Debt Bomb

Like in World War II, the United States is piling on debt to confront a whole-of-society crisis, raising the question of who will foot the bill in the long term. But, unlike the post-war era, the underlying conditions for robust economic recovery today are less than favorable, placing an even greater onus on wise policymaking.

Todd G. Buchholz

buchholz3_sesameGetty Images_moneydebtbomb

SAN DIEGO – The United States today not only looks ill, but dead broke. To offset the pandemic-induced “Great Cessation,” the US Federal Reserve and Congress have marshaled staggering sums of stimulus spending out of fear that the economy would otherwise plunge to 1930s soup-kitchen levels.

The 2020 federal budget deficit will be around 18% of GDP, and the US debt-to-GDP ratio will soon hurdle over the 100% mark. Such figures have not been seen since Harry Truman sent B-29s to Japan to end World War II.

Assuming that America eventually defeats COVID-19 and does not devolve into a Terminator-like dystopia, how will it avoid the approaching fiscal cliff and national bankruptcy? To answer such questions, we should reflect on the lessons of WWII, which did not bankrupt the US, even though debt soared to 119% of GDP. By the time of the Vietnam War in the 1960s, that ratio had fallen to just above 40%.

WWII was financed with a combination of roughly 40% taxes and 60% debt. Buyers of that debt received measly returns, with the Fed keeping the yield on one-year Treasuries at around 0.375% – compared to the prevailing 2-4% peacetime rates. Ten-year notes, meanwhile, yielded just 2%, which actually sounds high nowadays.

These US bonds, most with a nominal value of $25 or less, were bought predominantly by American citizens out of a sense of patriotic duty. Fed employees also got in on the act, holding competitions to see whose office could buy more bonds. In April 1943, New York Fed employees snapped up more than $87,000 worth of paper and were told that their purchases enabled the Army to buy a 105-millimeter howitzer and a Mustang fighter-bomber.

Patriotism aside, many Americans purchased Treasury bonds out of a sheer lack of other good choices. Until the deregulation of the 1980s, federal laws prevented banks from offering high rates to savers. Moreover, the thought of swapping US dollars for higher-yielding foreign assets seemed ludicrous, and doing so might have brought J. Edgar Hoover’s FBI to your door.

While US equity markets were open to investors (the Dow Jones Industrial Average actually rallied after 1942), brokers’ commissions were hefty, and only about 2% of American families owned stocks. Investing in the stock market seemed best-suited for Park Avenue swells, or for amnesiacs who forgot the 1929 crash. By contrast, a majority of American households own equities today.

In any case, US household savings during WWII were up – and largely in bonds. But Treasury paper bore a paltry yield, a distant maturity, and the stern-looking image of a former president. How, then, was the monumental war debt resolved? Three factors stand out.

First, the US economy grew fast. From the late 1940s to the late 1950s, annual US growth averaged around 3.75%, funneling massive revenues to the Treasury. Moreover, US manufacturers faced few international competitors. British, German, and Japanese factories had been pounded to rubble in the war, and China’s primitive foundries were far from turning out automobiles and home appliances.

Second, inflation took off after the war as the government rolled back price controls. From March 1946 to March 1947, prices jumped 20% as they returned to reflecting the true costs of doing business. But, because government bonds paid so much less than the 76% rise in prices between 1941 and 1951, government debt obligations fell sharply in real terms.

Third, the US benefited from borrowing rates being locked in for a long time. The average duration of debt in 1947 was more than ten years, which is about twice today’s average duration. Owing to these three factors, US debt had fallen to about 50% of GDP by the end of Dwight Eisenhower’s administration in 1961.

So, what’s the lesson for today? For starters, the US Treasury should give tomorrow’s children a break by issuing 50- and 100-year bonds, locking in today’s puny rates for a lifetime.

To those who would counter that the government might not even be around in 50 or 100 years, it is worth noting that many corporations have already successfully auctioned long-term bonds of this kind. When Disney issued 100-year “Sleeping Beauty” bonds in 1993, the market scooped them up. Norfolk Southern enjoyed a similar reception when it issued 100-year bonds in 2010. (Imagine, buying century bonds from a railroad.) And Coca-Cola, IBM, Ford, and dozens of other companies have issued 100-year debt.

Notwithstanding the fact that many institutions of learning have been compromised by the pandemic, the University of Pennsylvania, Ohio State University, and Yale University also have issued 100-year bonds. And in 2010, buyers even grabbed Mexico’s 100-year bonds, despite a history of devaluations stretching back to 1827. More recently, Ireland, Austria, and Belgium all issued 100-year bonds.

To be sure, a longer duration will not be enough to solve the debt problem; the US also desperately needs to reform its retirement programs. But that is a discussion for another day.

Finally, what about the post-war experience with inflation? Should we try to launch prices into the stratosphere in order to shrink the debt? I advise against that. Investors are no longer the captive audience that they were in the 1940s. “Bond vigilantes” would sniff out a devaluation scheme in advance, driving interest rates higher and undercutting the value of the dollar (and Americans’ buying power with it). Any effort to inflate away the debt would result in a boom for holders and hoarders of gold and cryptocurrencies.

Unlike military campaigns, the war against COVID-19 will not end with a bombing raid, a treaty, or a celebrations in Times Square. Rather, the image we should bear in mind is of a ticking time bomb of debt. We can defuse it, but only if we can win the battle against policy inertia and stupidity. This war won’t end with a bang, but it very well could end in a bankruptcy.

Todd G. Buchholz, a former White House director of economic policy under President George H.W. Bush and managing director of the Tiger Management hedge fund, was awarded the Allyn Young Teaching Prize by the Harvard Department of Economics. He is the author of New Ideas from Dead Economists and The Price of Prosperity.