Waiting for the Russell 2000 to Confirm the Next Big Move

While we have recently suggested the US stock market is poised for further upside price activity with a moderately strong upside price “bias”, our researchers continue to believe the U.S. stock markets will not break out to the upside until the Russell 2000 breaks the current price channel, Bull Flag, formation. Even though the U.S. stock markets open with a gap higher this week, skilled traders must pay attention to how the Mid-Caps and the Russell 2000 are moving throughout this move.

As we continue to advise our clients that the upside pricing cycle in the U.S. stock market is being underestimated, see this research post: we also believe that increased volatility and price rotation will continue to drive larger rotations in price before the final breakout upside move takes place. We want to continue to warn traders that we still don’t have any confirmed upside breakout with price continuing to stay within this price channel in the Russell 2000. Eventually, when and if the price does breakout to the upside, we will have a very clear indication that continued higher prices and a larger upside move is happening. Until then, we need to stay cautious about the types and levels of rotation that continue within the markets.

Recently, volatility has started to increase as can be seen in this VIX chart. If the Russell 2000 is not able to break this trend channel with this current upside price move, then we fully expect continued price rotation in the U.S. stock markets and another increase in the VIX as this rotation takes place. The NQ recently rotated downward by nearly 4% while historical volatility continues to narrow. When volatility diminishes in extended price trends, we’ve learned to expect aggressive price rotation can become more of a concern. We expect the VIX to spike above 16~18 on moderate volatility as we get closer to the cycle inflection date near June/July 2019.

Volatility Index – VIX chart by TradingView

Overall, our researchers believe the upside price bias in the U.S. stock market will continue for another 30+ days as our research and predictions regarding precious metals and the longer term equities price cycles continue to play out. Skilled traders need to be aware that this upside price bias may include larger price rotation and volatility as we get closer to the May/June/July 2019 cycle inflection points. Stay aware of the risks as 4~6%+ price rotations should be expected over the next 30+ days throughout this upside price bias.

Do you want to find a team of dedicated researchers and traders that can help you find and execute better trades in 2019 and beyond? Please visit The Technical Traders to learn how we can help you prepare for the big moves in the global markets and find better opportunities for greater success in the future. Our team of researchers and traders continue to scan the markets for new trades and unique opportunities.

Chris Vermeulen

A Five Year Forecast: Is this a Tsunami Warning?

By John Mauldin

It is the time of the year for forecasts; but rather than do an annual forecast, which is as much a guessing game as anything else (and I am bad at guessing games), I’m going to do a five year forecast to take us to the end of the decade, which I think may be useful for longer term investors. We will focus on events and trends that I think have a high probability, and I’ll state what I think the probabilities are for my forecasts to actually happen. While I could provide several dozen items, I think there are seven major trends that are going to sweep over the globe and that as an investor you need to have on your radar screen. You will need to approach these trends with caution, but they will also provide significant opportunities.

There is a book in here somewhere, but I do not intend to write one today. In fact, my New Year’s resolution is to write shorter letters in 2015. Over the last decade and a half, the letter has tended to get longer. A little more here, a little more there, and pretty soon it just gets to be a bit too much to read in one sitting. That means I need to either be more concise, break up my topics into two sessions or, if further writing is necessary, post the additional work on the website for those interested.

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So I’m writing today’s letter in that spirit. Each of the major topics we’ll be covering will show up in other letters over the next few months. I would appreciate your feedback and any links to articles and/or data points that you think I should know about regarding these topics.

But first, this is generally the most downloaded letter of the year. I want to invite new readers to become one of my 1 million closest friends by simply entering your email address here. You can follow my work throughout the year, absolutely free (and see how my prognostications are turning out). And if you’re a regular reader, why not send this to a few of your friends and suggest they join you? At the very least, Thoughts from the Frontline should make for some interesting conversations this year. Thanks. Now let’s get on with the forecasting.

Seven Significant Changes for the Next Five Years

Let’s look at what I think are six inexorable trends or waves that will each have a major impact in its own right but that when taken together will amount to a tsunami of change for the global economy.

1. Japan will continue its experiment with the most radical quantitative easing attempted by a major country in the history of the world… and the experiment is getting dangerous. The Bank of Japan is effectively exporting the island nation’s deflation to its trade competitors like Germany, China, and South Korea and inviting a currency war that could shake the world. I’ve been saying this for years now, but the story took a nasty turn on Halloween Day, when the Bank of Japan announced it was greatly expanding and changing the mix of its asset purchases. The results have been downright scary, and a major slide in the JPY/USD exchange rate is almost certain over the next five years. I give it a 90% probability. All this while the population of Japan shrinks before our very eyes.

2. Europe is headed for a crisis at least as severe as the Grexit scare was in 2012 – and for the resulting run-up in interest rates and a sovereign debt scare in the peripheral countries. After all these years of struggle, the structural flaws in the EMU’s design remain; and now major economies like Italy and France are headed for trouble. In the very near future we will finally know the answer to the question, “Is the euro a currency or an experiment?” The changes required to answer that question will be wrenching and horrifically expensive. There are no good answers, only difficult choices about who pays how much and to whom. Again, I see the deepening of the Eurozone crisis as a 90% probability.

3. China is approaching its day of reckoning as it tries to reduce its dependency on debt in its bid for growth, while creating a consumer society. The world is simply not prepared for China to experience an outright “hard landing” or recession, but I think there is a 70% probability that it will do so within the next five years.

And the probability that China will suffer either a hard landing OR a long period of Japanese style stagnation (in the event that the Chinese government is forced to absorb nonperforming loans to prevent a debt crisis) is over 95%. To be sure, it is still quite possible that the Chinese economy will be significantly larger in 2025 (ten years from now) than it is today, but realizing that potential largely depends on President Xi Jinping’s ability to accomplish an extremely difficult task: deleveraging the debt overhang that threatens the country’s MASSIVE financial system while rebalancing the national economy to a more sustainable growth model (either through either a vast expansion of China’s export market or the rapid development of “new economy” sectors like technology, services, and consumption; or both).

This will not be the end of China, which I’m quite bullish on over the very long term, but such transitions are never easy. Even given this rather stark forecast, it is still likely (in my opinion) that the Chinese economy will be 20 to 25% bigger as 2020 opens than it is today; and every other major economy in the world (including the US) would be thrilled to have such growth. At the very least, though, China’s slowdown and rebalancing is going to put pressure on commodity exporters, which are generally emerging markets plus Australia, Canada, and Norway.

4. All of the above will tend to be bullish for the dollar, which will make dollar-denominated debt in emerging market countries more difficult to pay back. And given the amount of debt that has been created in the last few years, it is likely that we’ll see a series of crises in emerging-market countries, along with an uncomfortably high level of risk of setting off an LTCM-style global financial shock.

My colleague Worth Wray spoke about this new era of volatile FX flows and growing risk of capital flight from emerging markets at my Strategic Investor Conference last May, and he has continued to remind us of those risks in recent months (“A Scary Story for Emerging Markets” and “Why the World Needs the US Economy to Struggle”).

Now that Russia has tumbled into a full-fledged currency crisis with serious signs of contagion, Worth’s prediction is already playing out, and I would assign an 80 to 90% probability that it will continue to do so, as a function of (1) the rising US dollar and a reversal in cross border capital flows, (2) falling commodity prices, or (3) both. This massive wave is going to create a lot of opportunities for courageous investors who are ready to surf when countries are cheap.

5. I do not believe that the secular bear market in the United States that I began to describe in 1999 has ended. Secular bull markets simply do not begin from valuations like those we have today. Either we began a secular bull market in 2009, or we have one more major correction in front of us.

Obviously, I think it is the latter. It has been some time since I’ve discussed the difference between secular bull and bear markets and cyclical bull and bear markets, and I will briefly touch on the topic today and go into much more detail in later letters. For US focused investors, this is of major importance. The secular bear is not something to be scared of but simply something to be played. It also offers a great deal of opportunity.

If I am right, then the next major leg down will bring on the end of the secular bear and the beginning of a very long term secular bull. We will all get to be geniuses in the 2020s and perhaps even before the last half of this decade runs out. Won’t that be fun? Let’s call the end of the secular bear a 90% probability in five years and move on.

6. Finally, the voters of the United States are going to have to make a decision about the direction they want to take the country. We can either opt for growth, which will mean a new tax and regulatory regime, or we can double down on the current direction and become Europe and Japan. I’ve traveled to both Europe and Japan, and they’re both pleasant enough places to live, but I wouldn’t want to be a citizen of either Japan or the Eurozone for the rest of this decade. (I particularly love Italy, but it is beginning to resemble a basket case, with last year’s optimistic drive for reforms seemingly stalled.)

However, I would rather live and work and invest in a high-growth country, with opportunities all around me, a country where we reduce income inequality by increasing wealth and opportunities at the lower end of the income scale instead of trying to legislate parity by increasing taxes and imposing government mandated wealth redistribution, which slows growth and squelches opportunity for everyone.

A restructuring of the US tax and regulatory regime does not mean a capitulation to the wealthy, big banks, or big business. Properly conceived and constructed, it will allow the renewal of the middle class and result in higher income for all. Sadly, it is not clear to me that either the Republican or Democratic parties are up to the task of making the difficult political decisions necessary. They each have constituencies that tend to opt for the status quo. But I see hope on both sides of the political spectrum that change is possible. The course they set will give us an idea where we will want to focus our portfolios in the decade of the ’20s. It is a 100% probability that we will have to make a decision. It is less than 50% that we will make the right one – or at least the one that I think is the right one.

7.  We have entered the Age of Transformation. We’re going to see the development of new technologies that will simply astound us – from increasingly capable robots and other applications of AI to huge breakthroughs in biotechnology.

The winners are going to be those who identified the truly transformational technologies early on in their development and invested wisely. While riskier (potentially far riskier) than most of your investments should be, a basket of new-technology stocks should be considered for the growth part of your portfolio. I see the Age of Transformation as a 100% probability.

Just for the record, I also see a continuation of the global deflationary environment and a slowing of the velocity of money until we have some type of resolution concerning sovereign debt. Central banks will continue to try to solve the “crises” I mentioned above with monetary policy, but monetary policy will simply not be enough to stem the tide. Central banks can paddle as hard as they like into the waves of change, but they cannot reverse their powerful flow.

Now, let’s look further at each of the waves that are forming into a potential tsunami.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – please click here.

The article Thoughts from the Frontline: A Five-Year Global Financial Forecast: Tsunami Warning was originally published at mauldineconomics.com.

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Are you a "Future Bull"?

By John Mauldin

In a conversation this morning, I remarked how rapidly things change. It was less than 20 years ago that cutting edge tech for listening to music was the cassette tape. We blew right past CDs, and now we all consume music from the cloud on our phones. Boom. Almost overnight.

A lot has changed about the global economy and politics, too. Things that were unthinkable only 10 years ago now seem to be reality. What changes, I wonder, will we be writing about a few years from now that will seem obvious with the advantage of hindsight?

In today’s Outside the Box, my good friend David Hay of Evergreen Capital sends us a letter written from the perspective of a few years in the future. I find myself wishing that some of the more hopeful events he foresees will come true, and my optimistic self actually sees a way through to such an outcome. In that future, I will join David as a bull. But the path that he proposes to take to that more optimistic future is not one that most investors will enjoy, so on the whole it’s a very sobering letter and one that should make all of us think.

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I’m back from San Antonio, where I spent four enjoyable days with my friends and participants at the Casey Research Summit. I tried to attend as many of the conference sessions as I could, and I intend to get the “tapes” for some of the ones I missed.

I did a lot of video interviews while in San Antonio, too. And finished up a major documentary. Mauldin Economics will be making all of these available very soon. It’s hard to recommend one interview over another, but Lacy Hunt is just so smart.

And with no further remarks let’s turn it over to David Hay and think about how the next few years will play out. Have a great week.

Your wishing his crystal ball was clearer analyst,

John Mauldin, Editor

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Future Bull

By David Hay
Twitter: @EvergreenGK

“Money amplifies our tendency to overreact, to swing from exuberance when things are going well to deep depression when they go wrong.”

– Economist and historian Niall Ferguson

Future bull.  Let me admit up front that this EVA has been rolling around in my mind for quite awhile. Its genesis may be directly related to the fact that I’ve been desperately yearning to write a bullish EVA – besides on Canadian REITs or income securities that get trounced by the Fed’s utterances. In other words, I want to return to my normal posture of being bullish on the US stock market.

It wasn’t long ago, like in 2011, that clients were chastising me for believing in what I formerly referred to as “the coiled spring effect.” By this I meant that corporate earnings had been rising for over a decade, and yet, stock prices were much lower than they there were in 1999. Consequently, price/earnings ratios were compressed down to low levels, though certainly not to true bear market troughs. My belief was that stocks were poised for an upside explosion once the inhibiting factors, primarily extreme pessimism on the direction of the country, were removed. I even remember one long-time client dismissing my “Buy America” argument on the grounds that in my profession I had to be bullish (regular EVA readers know that is definitely not the case!).

Well, a funny thing happened to my “coiled spring effect” – namely, it became a reality. Additionally, the upward reaction was much stronger than I envisioned. But what really caught me by surprise was that it played out with virtually no improvement on the “extreme pessimism on the direction of the country” front. Perhaps I’m wrong, but I don’t think there has ever been a rally that has taken stocks to such high valuations (time for my usual qualifier – based on mid-cycle profit margins, not the Fed-inflated ones we have today) concurrent with such pervasive fears America is on the wrong track.

Undoubtedly, the pros among you who just read that last sentence are thinking: “That’s great news! All that pessimism will keep this market running. We’re not even close to the peak.” Not so fast, mon amis (and amies)! We’re not talking market pessimism here. As numerous EVAs have documented, US investors are as heavily exposed to stocks as they have ever been, other than during the late 1990s, when stocks bubbled up to valuations that made 1929 look restrained.

Further, please check out the chart below from still-bullish Ned Davis regarding investment advisor sentiment.  The bearish reading is the lowest since the fateful year of 1987, while bulled-up views are in the excessively optimistic zone.  (See Figure 1.)



It is my contention that there are currently millions of fully-invested skeptics. They aren’t bullish long-term – in fact, they believe the underlying fundamentals are alarming (with the usual perma-bull exceptions) – but they feel compelled by the lack of competitive alternatives to remain at their full equity allocation.

Disturbingly, professional investors are increasingly doing so even with money belonging to retired investors who need both cash flow and stability.

Okay, with all that history out of the way, let’s go the other direction  – into the future, to a time several years from now, when conditions are nearly the polar opposite of where they are today.

The Evergreen Virtual Advisor (EVA)

November, 201???

At long last, reforms! Do you remember back in 2014 when the stock market was as hot as napalm? When it just never went down? When millions believed the Fed could control stock prices by whipping up a trillion here and a trillion there?

Looking back from the vantage of today, it all seems so obvious. We should have known better than to believe that the S&P 500 had years more of appreciation left in it after having already tripled by the fall of 2014 from the 2009 nadir. The warning signs were there. But, before we rehash what went wrong, let’s focus on the upside of what some are calling “The Great Unwind” – the hangover after years and years of the Fed recklessly driving asset prices to unsustainable heights.

First of all, let me start with what I think is the biggest positive of all:  the end of the central banks’ era of omnipotence. While that might sound like a major negative, you may have noticed that with the crutch of binge-printing taken away, our nation’s leaders are finally getting around to implementing reforms that should have been enacted years ago. The history of our country is that we are energized by crises, and the latest is no exception. Our most recent financial convulsions have galvanized a bipartisan coalition to attack an array of long-festering problems that have hobbled our country since the start of the millennium.

Arguably, the most important was the recently enacted tax reform legislation. Skeptics believed the US could never move toward the type of simple tax system that has long been used in countries like Singapore, Hong Kong, and even Estonia. It took the realization by both parties that lower tax rates with almost no deductions would actually produce more revenue. Moreover, the elimination of incalculable and massive “friction costs” for millions of businesses and individuals, trying to adhere to and/or game that beastly labyrinth known as the tax code, is quickly catalyzing real economic growth. This is in contrast to the 2010 to 2014 counterfeit version that rolled off the Fed’s printing press.

By 2014, the US was ranked a lowly 32nd out of 34 countries in terms of tax fairness and efficiency. Yet, now, thanks to last year’s drastic tax reform, US corporations are no longer fleeing in droves to other countries, using such tax dodges as inversions (buying out foreign companies and assuming their country of corporate citizenship to access lower tax rates). They have even begun to repatriate their trillion or so of offshore profits since the formerly onerous tax rate of 35%, the highest in the developed world, has been reduced. And, thanks to the eradication of the aforementioned legalized tax dodges, corporate tax receipts are actually beginning to rise sharply, despite the fact that our economy is in the early stages of recovering from the latest recession.

As we all know, the rationalization of our national business model involves much more than even the essential aspect of tax code simplification. At long last, meaningful tort reform has been enacted. No longer will the rule of lawyers be allowed to dominate the rule of law. The enormous, but insidiously hidden, costs of a subsector of the legal system whose chief mission is to squeeze unjustifiable sums from the private sector is finally being reined in.

Similarly, regulatory overkill is also being addressed by the very entity that created this monster in the first place: the government itself. Absurd, overlapping, and often conflicting directives that hobbled the most essential element of the private sector – small businesses – have been abolished, replaced by a much simpler and unified set of rules.

Even America’s dysfunctional and wasteful healthcare system is being revamped using rational economic solutions, rather than by piling on more incomprehensible rules, requirements, and panels. Consumers can now easily compare prices among service providers thanks to technology as instituted by for-profit providers. Along with significantly improved visibility, they also now have far greater control over how their healthcare dollars are spent.  Medical outlays are now in a decided downtrend.

Incredibly, Congress is actually beginning to behave like a representative of the people rather than an ATM dispensing taxpayer money to the most politically connected. The intense implosions of the multiple bubbles the Fed intentionally inflated triggered a backlash of voter ire toward its legislative enablers. Since then, we’ve seen a dramatic House – and Senate – cleaning. This new “coalition of the thinking” is now following the proven path to recovery that numerous countries – such as Germany, Sweden, and Canada – blazed when their economic and financial systems hit previous roadblocks. As in those nations, moving away from excessive socialism, while simultaneously supporting the business community, rather than vilifying and hindering it, is already beginning to elevate America out of its long stagnation.

Collectively, these sweeping reforms are as dramatic as those seen in the 1980s and promise to unleash a growth boom equally as powerful as the ones that followed those overhauls. Yet, despite these dramatic and highly promising changes, investors remain hunkered down in their bomb shelters.

Fool me once, fool me twice, fool me thrice!  After the third devastating bear market since 1999, investor hostility toward stocks has reached a level unseen since the 1970s. Far too many were lured in by the last up-leg of the great bull market that started in the depths of pessimism in March of 2009. As the market resolutely climbed higher and higher, even beyond the five-year length of most bull cycles, millions of investors succumbed to either greed or complacency.



Indicative of the feverish conditions prevailing then—despite the widely disseminated myth that it was the most hated bull market of all time—headlines like those shown below, and graphics such as the one above, began to dominate the financial press.



Remarkably, at least to me, investors once again ignored warnings from the savviest savants, almost all of whom had waxed cautious about the tech and housing manias: Bob Shiller, Jeremy Grantham, Rob Arnott, John Mauldin, Seth Klarman, and John Hussman. As the esteemed Mohamed El-Erian had prophetically written in June of 2014, “In their efforts to promote growth and jobs, central banks are trading the possibility of immediate economic gains for a growing risk of financial instability later.”

Conversely, Janet Yellen didn’t do her legacy any favors by uttering these words in July, 2014: “Because a resilient financial system can withstand unexpected developments, identification of bubbles is less critical.” At the time, I was pretty sure she would come to regret that statement as much as Ben Bernanke did his equally ill-advised assurances back in 2007 that the problems in sub-prime mortgages were contained. Based on how fragile the “resilient financial system” turned out to be, I’ll say no more.

It did surprise me that despite having called out those previous bubbles, as well as several others including the 2008 blow-offs in commodities and Chinese stocks, I received such intense resistance from other professionals and even clients. After awhile, I was getting so much push back I started to feel like the nose of a commercial airliner being readied for take-off.

Ignorance wasn’t bliss. Another aspect of the late stages of the last bull market was how many investment professionals – who should have known better – dismissed Robert Shiller’s namesake P/E. To clarify, Shiller believes (as did Warren Buffett’s mentor, Ben Graham) that the stock market needs to be valued based on normalized earnings, not bottom- or top-of-the cycle profits. Despite the unassailable logic of this approach, a legion of perma-bulls repeatedly sought to discredit Shiller and his valuation methodology. Some even went so far as to deride his process as “Shiller Snake Oil,” notwithstanding Dr. Shiller’s Nobel Prize and, more meaningfully in my view, the fact that he had forewarned of both the tech and housing bubbles – unlike almost all of those throwing stones at him back in 2014.

The main criticism from those who were “hatin’ on” Shiller in 2014 was that his P/E had produced only two buy signals over a 25-year period. This was a valid critique but it missed an essential point: Despite the reality that the stock market from 1990 to 2014 traded at valuations far higher than it had in any previous quarter-century timeframe, the Shiller P/E accurately predicted future returns. In other words, when the Shiller P/E was very elevated – like in the late 1990s, 2007, and 2014 (so far) – stocks went on to generate extremely disappointing future returns (it also did so in decades going all the way back to the 1920s but this was not the era that the Shiller debunkers were criticizing). The graphic on the next page vividly illustrates this fact, even though it was created before the most recent bear market further underscored the danger of ignoring high Shiller P/Es. (See Figure 2.)



It also shocked and dismayed me at the time how many contortions Wall Street strategists, and even money managers, performed in order to dismiss concerns about the extreme variability of earnings. Somehow charts like the one below from Capital Economics were blown-off despite (or, perhaps, because) it so clearly highlighted the tendency of corporate profits to return back down to the long-term trend-line of nominal GDP growth, with stocks closely following. As we all now know, this time wasn’t different. (See Figure 3.)



The legions of market cheerleaders also ignored the heavy reliance on profits from the financial sector, a notoriously unstable source of earnings. This proved to be a disaster in 2007 and, unsurprisingly, was again once the Fed’s “Great Levitation” fell victim to gravitational forces. (See Figure 4.)



Even David Rosenberg, one of the few economists who saw the housing debacle coming, but who briefly flirted with drinking the Fed-spiked bubble-aid in 2014, noted that 60% of earnings growth from 2010 through 2013 came from share buy-backs. He calculated that the market’s “organic” P/E, backing out the influence from share repurchases, was over 20, even prior to normalizing for peak profit margins. Additionally, the reality that corporations buy the most stock at high prices, and the least at low prices, was forgotten – another costly oversight. (See Figure 5, above.)

It was also overlooked during this era of Fed-induced euphoria, that low interest rates – so often cited by bulls as a justification for lofty P/Es – historically coincided with lower earnings multiples. (See Figure 6.)



As Japan and Europe have repeatedly shown over the last two decades, when low interest rates are a function of chronic economic stagnation, P/Es actually contract, not expand. The fact that the latest recession has reduced America’s anemic 1.8% annual growth rate since 2000 to even lower levels is a key reason why stocks have been thrashed over the last couple of years, despite interest rates on the 10-year treasury note falling to 1%.

Another massive mistake was to overlook the strident warning from Evergreen’s favorite valuation metric, the price-to-sales (P/S) ratio. By the summer of 2014, the median stock in the S&P 500 was trading at its highest P/S ratio on record. Sadly, this attracted little attention. (See Figure 7.)



But perhaps the most egregious oversight of all was to forget the theorem from the late, great economist Hyman Minsky who long ago warned that stability breeds instability. As was the case from 2002 through 2007, the exceptionally low volatility of the years leading up to the latest crisis numbed market participants to the steadily rising risks. Even professional investors convinced themselves they could get out in time once conditions became unstable, an arrogance that has been severely punished, as well it should. Alas, we’ve had to learn Dr. Minsky’s lesson the hard way, once again.

But let’s close this EVA by focusing on the stunning opportunity for investors created by the Fed’s latest misadventure…...

Investors, start your engines! It is certainly understandable that US investors are thoroughly disenchanted with the stock market. The fact that the powers-that-be, or at least used-to-be, allowed securities trading to become so heavily dominated by computers was, like the tolerance of the Fed’s asset inflation, inexcusable. The influence of computerized, black box trading was unquestionably a huge factor in the speed-of-light-in-a-vacuum drop in stock prices. Also as feared, many ETFs poured kerosene on the fire as investors became terrified by the nearly overnight erosion in these prices, causing them to sell en masse. The plethora of ETFs holding illiquid underlying securities were particularly crushed, with many simply halting trading for long stretches. Now, instead of rapturous paeans about the wonders of ETF liquidity and low costs, the financial press is full of horror stories about their fundamental flaws (fortunately, higher quality and more liquid ETFs, performed as expected during the worst of the panic).

Further, based on the failure of the Fed’s desperate maneuver to stabilize stocks after their first big break, by launching another $1 trillion QE, this time directly buying US shares, investors have rationally lost faith in the Fed’s ability to make stocks dance to its tune. While QE 4 did cause a sharp counter-trend rally after it was initially launched, the supportive effects soon waned, as we all are now painfully aware. The resumption of the bear market after the Fed’s frantic triage effort was reminiscent of Dorothy, the Tinman, the Lion, and Toto discovering that behind the green curtain was a scared old man instead of The Wizard of Oz.

The extreme negativity by investors toward the stock market today is reflected in the high level of outflows being seen from equity mutual funds, including ETFs. Cash levels are high everywhere as institutional and retail investors, as well as corporations, have become excessively risk averse. This provides the rocket fuel for the next bull market which might just be much closer than almost everyone believes.

Rampant investor pessimism is also being manifested in the drop in the Shiller P/E to the mid-teens from 26 at the peak of the last bull romp.  As a direct result, future returns on stocks are now projected by the aforementioned Jeremy Grantham and John Hussman to be in the low double digits over the next seven to ten years.  Yet, no one seems interested. Even Warren Buffett’s ragingly bullish comments, which were considerably premature, are being attributed to the ramblings of a soon-to-be nonagenarian.

Naturally, I have considerable empathy for Mr. Buffett because, as usual, Evergreen was early to shift into bullish mode. We waited much longer than most people and actually did a fairly commendable job of cutting back into the Fed’s QE4 driven rally, after raising our equity exposure during the initial steep sell-off. But once stocks fell hard after that sugar-high wore off, we were guilty of our typical “premature accumulation syndrome.”

However, we did the same thing way back in October of 2008 when we published our client newsletter, “A Bull is Born” (and wrote a series of “buy the panic” EVAs), only to watch the market slide another 30%.  Yet, buying when almost the entire world was in liquidation mode, much of it forced, in the fall of 2008 proved to be extremely lucrative over the next two years. We are convinced the same will be true following this latest episode of market mayhem.

From a longer-term standpoint, a perspective most investors seem unwilling to take given their still-fresh pain and suffering, conditions look highly encouraging. In addition to the previously described remedies our policy makers are belatedly adopting, many of the key positive trends the bulls used to justify over-the-top valuations for stocks back in 2014 are still in place. Admittedly, the enthusiasm got ahead of reality but the energy renaissance continues apace in the US, despite the well-publicized fracking problems. Re-shoring of manufacturing, which has been slower than the uber-optimists forecast, appears to be now accelerating. Relatedly, robotic adoption is rapidly spreading through the US industrial base, supporting Evergreen’s belief that re-shoring is a reality, not a fantasy. Yet, there’s even more to like.

Nanotechnology and solar power innovators continue to provide breathtaking breakthroughs. Today, nanotech is becoming as ubiquitous as the microprocessor was a decade ago. Meanwhile, solar power, thanks to miniaturization advances similar to Moore’s Law, has achieved “grid parity,” or even lower, in over a dozen US states. Power is becoming increasingly cheap and abundant and that’s terrific news for humanity.

Finally, and perhaps most significantly, we are far closer to achieving that wondrous, if slightly scary, state known as “singularity.” As most us now know, this means that humans are becoming one with computers.

The proliferation of wearables has essentially elevated the intelligence of anyone who can afford to spend $150 for an iWatch or Google Glass, to the level of a supercomputer. We now take for granted being able to whisper a few instructions into our watches, like Dick Tracy, and have all the information of the Cloud at our disposal. (It may soon be feasible to actually have a computer implanted into our brains, possibly even curing Alzheimer’s.) Clearly, the implications for productivity are nearly limitless. Already, we are beginning to see this in the data and we believe we are in the very early innings of a true revolution – with no apologies to gloomsters like Northwestern University’s Robert Gordon who believed, and still do, that the era of radical innovation ended long ago.

One of the biggest challenges a professional investor faces is the tyranny of current prices. When they are relentlessly rising, as they were back in 2013 and 2014, clients extrapolate those indefinitely, and, for a long time, they are right to do so. The same thing happens on the downside in periods such as we are in right now.  But rising markets always turn down and falling ones always turn up. Those are unquestionable facts. We are getting closer to the point where this bear goes back into its cave for a nice long nap while a powerful young bull is ready to bust out of the pen it’s been cooped up in for what seems like an eternity. Get out your checkbook – it’s time to bet on the bull!

Back to the here and now. A wise man once said that if you are going to predict that something will happen, don’t be so foolish as to say when it will happen. You may have noticed, I’ve followed that advice, perhaps to an irritating degree, mainly because I truly have no clue when our current bull market, already so long in the horns, will succumb.

It also goes without saying, but I will anyway, that the sequence and details of future financial events are almost certain to be dramatically different than what I’ve suggested in this EVA edition. However, I believe the broad outline is likely to be roughly along these lines, including my exceedingly optimistic long-term outlook for America.

It dawned on me as I wrote the section about tax, tort, healthcare, and regulatory reforms that many readers were probably thinking: “Not in my lifetime – and I’m only 50!” First, of all, let me say that I’m jealous you’re just 50. Second, it is highly unlikely stocks will remain in a long-term bull market, or even continue to hover at such generous valuations, unless our country makes some truly dramatic changes. It can’t remain business as usual, persistently avoiding essential reforms, relying almost totally on the Fed.

Believe me, I will be a bull again, and likely a very lonely one at that. But it’s going to take a combination of lower valuations and a serious makeover of how this country operates. We can do it and I’m convinced we will do it. Hopefully, I’ll be able to convince some of you the next time fear is on the rampage.


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The article Outside the Box: Future Bull was originally published at mauldineconomics.com.

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WTI Crude Oil on the Move $112 Next Stop

The energy sector has surged during the last two months which can be seen by looking at the XLE Energy Select Sector Fund. If crude oil continues to climb to the $112 level, XLE will likely continue to rally for another few days or possibly week as energy stocks are considered a leveraged way to play energy price movements.

Another way to look at this info is through the USO United States Oil Fund. This tracks much closer to the price of oil. The only issue is that many ETFs that “try to track” an underlying commodity is in how the funds are built. They own multiple contracts further into the future which does not exactly provide us with the short term news/event driven price movements in the current front month contract as they should.

What does this mumbo jumbo mean? Well, it means funds like USO and the highly respected UNG, and VIX ETFs… (just joking about the highly respected part), fail to track the underlying commodity or index very well when it comes to short term price movements. This means, you can nail the timing of a trade, and the commodity or index will move in your favor, yet your fund loses money, or goes nowhere...

Let’s Focus on the Technicals Now….

 

WTI crude oil has formed a bullish ascending triangle pattern from March to May of this year. The breakout to the upside is bullish and should be traded that way until the chart says otherwise. This breakout and first pullback must hold, or I will consider it a failed breakout. So if price dips and closes 2 days below the breakout level, it will be a major negative for oil in my opinion.

The range of the ascending triangle provides us with a measured move to the upside which is $112. Typically the first pullback after a breakout can be bought. The first short term target to scalp some gains would be $109, and at that point moving your stop to breakeven is a wise decision. Trading is all about managing capital and risk, if you don’t, then the market will take advantage of your lack in discipline.

Looking further back on the chart, you can see the double bottom formation also known as a “W” formation. Once the high of the “W” formation is broken the trend should be considered neural or up.

Also note that the RSI (relative strength) has been trending higher for some time now. This means money is rotating into this commodity. This is in line with my interview this week with Kerry Lutz and my recent article talking about the next bull market in commodities and the TSX (Toronto Stock Exchange).

 

WTI Crude Oil Trading Conclusion:

 

In short, oil has some extra risk around it. The recent move has been partly fueled by news overseas. So at any time oil could get a lift or take a hit by news that hits the wires. I tent to trade news related events with much less capital than I normally do because of this risk.

Happy Trading,
Chris Vermeulen

WANT MORE TRADE IDEAS? GET THEM HERE: THE GOLD & OIL GUY.COM

 

Is it Time to Admit That Gold Peaked in 2011?

By Jeff Clark, Senior Precious Metals Analyst

Have you seen this “real price of gold” chart that’s been making waves? Among other things, it purports to show the gold price adjusted for inflation over the past 223 years. Notice the 1980 vs. 2011 levels.

The chart makes it seem that on an inflation-adjusted basis, gold has matched its 1980 peak in 2011, or nearly so. A mainstream analyst who still thinks of gold as a “barbarous relic,” a government official who doesn’t want people to think of gold as money, or an Internet blogger looking for some attention might try to convince you that this proves that the gold bull market is over, arguing that the 2011 peak of $1,921 is the equivalent of the 1970s mania peak of $850 in January of 1980.

The logic is flawed, however; even if it were true that gold has matched its 1980 peak in inflation-adjusted prices, it would not prove that the top is in this time. This is not the 1970s, the global economy is under very different pressures, and there’s no rational basis at all for saying the top this time has to be at the same or similar level as last time.

That’s even if it were true that gold has matched its 1980 peak—but it hasn’t.

Inflation-Adjusted Gold Has NOT Matched Its 1980 Peak

 

First, if you go by official U.S. Bureau of Labor Statistic numbers, $850 in 1980 is equivalent to $2,320 in 2011, when gold hit its peak thus far in the current cycle. (It’s $2,403 in 2013 dollars, as is said to be used in the chart.)

We don’t know what data the authors of the chart used, nor their inflation adjustment method, so it’s hard to say what the problem is, but at the very least, we can say the chart is very misleading.

But there’s more. As you probably know, the government has made numerous changes to the way it calculates inflation—the Consumer Price Index (CPI)—since 1980. So, even the BLS number we’ve given grossly underestimates the real difference between the 2011 and 1980 peaks.

For a more apples to apples comparison, we should adjust for inflation using the government’s 1980 formula. And for that, whom better to ask than John Williams of Shadow Government Statistics (AKA Shadow Stats), the world’s leading expert on phony US government statistics?

I asked John to apply the CPI formula from January 1980 to the $1,921 gold price in 2011, to give us a more accurate inflation adjusted picture. Here’s what his data show.

Using the 1980 formula, the monthly average price of gold for January 1980 would be the equivalent of $8,598.80 today. The actual peak—$850 on January 21, 1980—isn’t shown in the chart, but it would equate to a whopping $10,823.70 today.

The Shadow Stats chart paints a completely different picture than the first chart. The current CPI formula grossly dilutes just how much inflation has occurred over the past 34 years. It’s so misleading that investment decisions based on it—like whether to buy or sell gold—could wreak havoc on a portfolio.

This could easily be the end of the discussion, but there are many more reasons to believe that the gold price has not peaked for the current bull cycle…...

Percentage Rise Has Been Much Smaller

 

Inflation adjusted numbers are not the only measure that matters. The percentage climb during the 1970s bull market was dramatically greater than what we experienced from 2001 to 2011. Here’s a comparison of the percentage gain during both periods.

From the 1970 low to the January 1980 peak, gold rose 2,346%. It climbed only 535% from the 2001 low to the September 2011 high—nowhere near mimicking that prior bull market.

Silver Scantly Participated in the 2011 Run-Up

 

After 31 years of trading, silver has yet to even reach its nominal price from 1980. It surged to $48.70 in 2011—but it hit $50 in January 1980.

On an inflation-adjusted basis, using the same data from John Williams, silver would need to hit $568 to match its 1980 equivalent.

The fact that silver has lagged this much—when its greater volatility would normally move its price by a greater percentage than gold—further shows that 2011 was not the equivalent of 1980.

No Bubble Characteristics in 2011

 

I’ll get some arguments from the mainstream on this one. “Of course gold was in a bubble in 2011—look at the chart!”

Yes, gold had a nice run-up that year. It rose 38.6% from January 1 to the September 6 peak. Anyone holding gold at that time was very happy. But that’s not a bubble. One of the major characteristics of a bubble is that prices go parabolic.

And that’s exactly what we saw in 1979-1980:

• In the 12 months leading up to its January 21, 1980 peak, gold surged an incredible 270%.

• In contrast, the year leading up to the September 6, 2011 peak, the price climbed 48%—very nice, but hardly parabolic, and less than a fifth of the 1970s runaway move.

No Global Phenomenon in 1980 (Next Time It Will Be)

 

In the 1970s, the “mania” was mostly a North American phenomenon. China and most of Asia didn’t participate. When inflation grips the world from all the money printing governments almost everywhere have engaged in, there will be a much greater demand for gold than in 1980.

When that day comes, there will be severe consequences for those who don’t have enough bullion. Not only will the price relentlessly move higher, but finding physical gold to buy may become very difficult.

Comparable Price Moves? So What?

 

The argument we started with is really the clincher. It doesn’t matter how today’s gold prices compare to those from prior bull markets; what matters are the factors likely to impact the price today. Are there reasons to own gold in the current environment—or not?

First, a comparison: Apple shares surged 112% in 2007. After such a run up, surely investors should’ve dumped it, right? Well, those who did likely regretted it, since it ended that year at $180 and trades over $590 today. In fact, even though it had already risen dramatically and in spite of it crashing with the market in 2008, there were plenty of solid reasons to buy the stock then, not the least of which was the introduction of the iPhone that year.

So should we sell gold because it rose 535% in a decade? As with the Apple example above, that’s not the right question.

There are, in fact, several more relevant questions for gold today:

• What will happen with the unprecedented amount of money that’s been printed around the world since 2008?

• Why are economies still sluggish after the biggest monetary experiment in history?

• Global debt and “unfunded mandates” are at never-before-seen levels; how can this conceivably be paid off?

• Interest rates are at historically low levels—what happens when they start to rise?

• Regardless of your political affiliation, do you trust that government leaders have the ability and willingness to do what’s necessary to restore the economy to health?

If these issues were absent, maybe we’d change our position on precious metals. But until the word “healthy” can honestly be used to describe the fiscal, monetary, and economic state of our global civilization, gold should be held as an essential wealth-protection asset.

Today’s volatile world is exactly the kind of circumstance gold is best for.

The message here is clear, my friends. Regardless of the measure, gold has not matched its 1980 peak. And the reasons to own it have not faded. Indeed, they have grown. Continue to accumulate.

Learn about the best ways to invest in gold—how and when to buy it, where to store it for maximum safety, and how to find the best gold stocks—in the free 2014 Gold Investor’s Guide.

The article Time to Admit That Gold Peaked in 2011? was originally published at Casey Research

Check out our Advanced Study on Trading the Opening Gap in Crude Oil CL

Barbers and Taxi Cab Drivers are Talking Coffee...Is that the Top? JO JVA

One of the oldest trading cliches in the book. "When the TV pundits are talking about it, and the barbers and taxi cab drivers are talking about it...the top is in". But not in coffee this year. We think we are just getting started. And when we talk coffee we always check in with our favorite coffee trader Mike Seery. Here's what Mike is saying....

Coffee futures have been the big story in recent weeks due to the fact of a huge rally in the last 2 weeks caused by hot & dry conditions in central Brazil which is causing prices to move much higher as we have not seen a drought since 1989 and there are no rains forecast in the next 7 days which could push prices up even higher.

Coffee is trading above its 20 and 100 day moving average settling at 137.85 a pound in the May contract up about 1000 points this week with extreme volatility as Brazil's crop is estimated between 54 – 55 million bags and that could be lowered if this drought continues in the month of February and as I talked about in previous blogs the volatility is extremely high.

So I would look at bull call option spreads for the month of July limiting your risk to what the premium costs also allowing you to stay in the market without getting stopped out because there are days like Thursday when prices were down 700 points which is around $3,000 a futures contract as the volatility is here to stay and I do think higher prices are coming.

The 50% retracement from the recent high to the low is right around 130 so if you’re looking to get into a futures contract I would look to buy that level placing my stop at the 10 day low which currently is at 115 risking around $5,500 per contract.

Coffee is a very large contract and if you're right it will pay you off tremendously as I've gone through similar events in this market especially in 1994 when prices went from $.75 to 2.70 in a matter of months due to a frost and if this drought does continue expect coffee possibly getting up to the $2 a pound level as prices could really explode just like what happened in the grain market in 2012.

Current coffee trend: HIGHER
Current chart structure: TERRIBLE

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SP 500 Elliott Wave Forecast Unfolding As We Projected, What Is Next?

Back on January 15^th we wrote an article and also a elliott wave forecast for both the public and our subscribers showing a likely top at a maximum of 1868 on the SP 500.  We said that Elliott Wave Major 3 of Primary Wave 3 would top no higher than that level.  In fact, we can go back to September 4^th 2013 and we projected a Major 3 high as 1822-1829.  Turns out we were only about 1% off 4 months in advance of projecting that high, and once again we are on track here with Major 4 commencing from Major 3 highs.

Below is the Major 3 chart we sent out on September 12^th in public articles and private reports



We simply use Fibonacci analysis of wave patterns which are based on human behavioural tendencies that go back centuries. Elliott Wave Theory is often hard to put into practice, so sometimes it gets a bad name.  However, a bad steak at a restaurant doesn’t mean you never have steak again right? The practitioner must hone his or her skills over time and work to improve accuracy.

Our view is pretty simple in that the Major wave 3 was 583 points going from 1267 to 1850, the double top.
Below is the chart we did on January 15^th in advance of this top:



We now know in hindsight that we topped out at 1850.  So what we want to do is simply take the 583 point rally of 1267 to 1850 (major 2 lows to Major 3 highs) and compute a retracement.  We use 23.6%, 31.2%, and 38% Fibonacci figures to come up with estimates. Those come in at 1713 on the shallow end of a correction (wave 4) and 1628 on the lower end.  (See chart below)



Now, assuming we are on track… once this Major 3 completes we will see a Major wave 5 of Primary wave 3 taking us to all-time highs. This will then complete Primary wave 3 of this 5 primary wave bull cycle and then larger Primary wave 4 corrections will ensue from those highs.  We will know we are wrong in our degrees of wave counts if we pierce the 1628 level on the downside. That would indicate Primary 3 topped out 1850 and we are in Primary 4, which is not our current view.

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Gold and Silver Ready To Rumble Higher?

Let's check in with our trading partner David A Banister, does he think gold and silver is ready to rumble higher?

We have been writing about the bottoming process of the Gold Bear Cycle (Elliott Wave Theory) since December 4th 2013, and our most recent article on December 26th reiterated that the best time to accumulate the Gold/Silver stocks was in the December and January window. Specifically this is what we wrote:

“These types of indicators are coming to a pivot point where Gold is testing the summer 1181 lows…at the same time, we see bottoming 5th wave patterns combining with public sentiment, bullish percent indexes, and 5 year lows in Gold stocks. This is how bottom in Bear cycles form and you are witnessing the makings of a huge bottom between now and early February 2014 if we are right.

The time to buy Gold and Gold stocks is now during the next 4-5 weeks just as we were recommending stocks in late February 2009 with public articles that nobody paid attention to. This is the time to start accumulating quality gold miner and also the precious metals themselves as the bear cycle winds down and the spring comes back to Gold and Silver in 2014.”

Since that article a few of our favorite stocks rallied 40-50% in just 3 weeks or so from the December timeframe of our article. A recent pullback is pretty normal as we set up for Gold to take out the 1271 spot pricing area and run to the mid 1300’s over the next several weeks. By that time, you will be kicking yourself for not being long either the metals themselves or the higher beta stock plays.

A few suggestions that we have already written about we will reiterate here again. Aggressive investors can look at UGLD ETF, which is a 3x long Gold product that will give you upside leverage as Gold moves into elliott wave 3 up. Other more aggressive plays we already recommend a lot lower include GLDX, JNUG, NUGT and others. Picking individual stocks can be even better and we have recommended a few to our subscribers that are already doing very well.

What will trigger this next rally up is sentiment shifts to favor Gold and Silver over currency alternatives. The precious metals move on sentiment, much more so than interest rates or GDP reports or anything else in our opinion. Sentiment remains neutral to bearish as evidenced by the larger brokerage houses running around in January telling everyone to sell Gold, so we see that as a buy signal on top of our other indicators.

We expect the mid 1500’s by sometime this summer, but by then your opportunity will be long in the rear view mirror. Just click here to join us for frequent updates at from David Banister.

GOLD’s Elliott Wave Analysis Bear Cycle Coming to a Close in December

When it comes to the actual trading aspect in gold our trading partner David A. Banister Market Trend Forecast has been our go to guy. Very interesting what he is bringing us this morning.....Is GOLD’s Elliott Wave Analysis Bear Cycle Coming to a Close in December?


Our Last major Elliott Wave Analysis of Gold came in early September when Gold had touched the 1434 area, and in that analysis we called for a re-test of 1271-1285 levels. This was based on our Elliott Wave Analysis of the patterns involved since the 1923 spot highs in the fall of 2011. Our clients of course were updated on a regular basis since that public analysis and we have been looking for clues to a bottom in this Gold bear cycle from the 2011 highs.

Most recently, we noted that we are seeing patterns commiserate with what Elliott wave theory calls a “truncated 5th wave” pattern. All Bear cycles have 5 full waves to the downside from the highs, and we have been in wave 5 since the 1434 highs. The key then is determining how low that wave 5 will take you in Gold, and planning your investments and timing around that forecast.

To qualify for a truncated 5th wave, you have to have a very strong preceding 3rd wave to the downside. In this case, we had that as Gold dropped from just over 1800 per ounce to 1181 into late June 2013. As we approached the 1181 areas, we also put out a public forecast saying that Gold has indeed bottomed and should rally strong to the upside. Recently, Gold hit a bottom at 1211 spot pricing last week and that is when we began to consider a truncated 5th wave pattern.

We sent our clients about a week ago regarding this possible Elliott wave theory bottom:

If we fast forward a week later, we had Gold running up to 1261 which was the pivot resistance line we told our subscribers to watch for. We hit it on the nose and backed off to 1224 yesterday. We now expect that if GOLD holds the 1211 area, that we will again rally back up and over 1261 and then head to the 1313 resistance zone. We would like to see Gold get over 1313 and if so our targets are in the 1560 ranges for Gold in the first half of 2014.

Aggressive investors should be accumulating quality small cap gold producing and exploration, or Gold itself depending on your preference during these last few weeks of December as our Elliott Wave Analysis is signaling a bottom is near. We would again watch 1211 as a key level to hold for this possible truncated wave 5 to work out.

Click here to join Banister at Market Trend Forecast for regular Gold & SP 500 Elliott Wave Analysis updates

The Correction Isn’t Over, But Gold’s Headed to $20,000

By Louis James, Chief Metals & Mining Investment Strategist

In April of 2008, Casey International Speculator published an article called "Gold—Relative Performance to Oil" by Professor Krassimir Petrov, then at the American University in Bulgaria, now a visiting professor at Prince of Songkla University in Thailand. He told us he thought the Mania Phase of the gold market was many years off, which was not a popular thing to say at the time:

"In about 8-10 years from now, we should expect the commodity bull market to reach a mania of historic proportions.

"It is important to emphasize that the above projection is entirely mine. I base it on my own studies of historical episodes of manias, bubbles, and more generally of cyclical analysis. In fact, it contradicts many world renowned scholars in the field. For example, the highly regarded Frank Veneroso and Robert Prechter widely publicized their beliefs that during 2007 there was a commodity bubble; both of them called the collapse in commodity prices in mid-March of 2008 to be the bursting of the bubble. I strongly disagree with them.

"I also disagree with many highly sophisticated gold investors and with our own Doug Casey that the Mania stage, if there is one, will be in 2-3 years, and possibly even sooner... Although I disagree that we will see a mania in a couple years, I expect healthy returns for gold."

It turned out that Dr. Petrov was right. Five and a half years later, here's his current take on gold and the metal's ongoing correction…...

Louis James: So Krassimir, it's been a long and interesting five years since we last spoke… Gold bugs didn't like your answer then, but so far it seems that you were right. So what's your take on gold today?

Krassimir Petrov: Well, most gold bugs won't like my answer again, because I think we are still between six to ten years away from the peak of the gold bull. We are exactly in the middle of this secular bull market, and a secular bull market is usually punctuated or separated by a major cyclical bear market. I think that the ongoing 24-month correction is that typical big major cyclical correction—a cyclical bear market within the context of the secular bull market.

Thinking in terms of behavioral analysis, most investors are very, very bearish on gold. People who are not gold bugs overall still dismiss gold as a good or even as a legitimate investment. That, too, is typical of a mid-cycle. So as far as I'm concerned, we are somewhere in the middle of the cycle, which may easily go for another 10 years.

I expect that this secular bull market for gold will last a total of 20 to 25 years, dating back to its beginning in 2000. Some people like to date the beginning of this secular bull market at the cyclical bottom in 1999, while others date it at the cyclical bottom in 2001. I prefer to date it at 2000, so that the secular bottom for gold coincides with the secular top of the stock market in 2000.

L: That's interesting. But I'm not sure gold bugs would find this to be bad news. The thing they're afraid to hear is that the market has peaked already—that the $1,900 nominal price peak in 2011 was the top, and that it's downhill for the next two decades. To hear you say that there is a basis in more than one type of analysis for arguing that we're still in the middle of the bull cycle—and that it should go upwards over the next 10 years—that's actually quite welcome.

Petrov: Yes, it's great news. But we're still not going to get to the Mania Phase for at least another two, but more likely four to six years from now.

Now, we should clarify what we mean by the Mania Phase. Last time, it was the 1979 to early 1980 period. It's the last phase of the cycle when the price goes parabolic. Past cycles show that the Mania Phase is typically 10% or 15% of the total cycle. So it's important to pick the proper dates for defining a gold bull market. I prefer to date the previous one from 1966 as the beginning of the market, to January of 1980 as the top of the cycle. That means that the previous bull market lasted 14 years, and it's fair to say that the Mania Phase lasted about 18 months, or just under 15% of the cycle.

So I expect the Mania Phase for the current bull cycle to last about two to three years, and it's many years yet until we reach it.

In terms of market psychology, we still have many people who believe in real estate; we still have many people buying and believing in the safety of bonds; we still have many people who believe in stocks. All of these people still outright dismiss gold as a legitimate investment. So, to get to the Mania Phase, we need all of these people to convert to gold bull market thinking, and that's going to be six to eight years from now. No sooner.

L: Hm. Your analysis is a combination of what we might call the fundamentals and the technicals. Looking at the market today—

Petrov: Let's clarify. When I say fundamental analysis, I mean strictly relevant valuation ratios. For example, according to the valuation of gold relative to the stock market, i.e., the Dow/gold ratio, gold is extremely undervalued, easily by about 10 times, relative to the stock market.

Fundamental analysis can also mean the relative price of gold to real estate—the number of ounces necessary to buy a house. Looked at this way, gold is still roughly about 10 times undervalued.
Thus, fundamental analysis refers to the valuation of gold relative to the other asset classes (stocks, bonds, real estate, and currencies), and each of these analyses suggests that gold is undervalued about 10 times.
In terms of portfolio analysis, gold today is probably about one percent of an average investor's portfolio.

L: Right; it's underrepresented. But before we go there, while we are defining things, can you define how you look at these time periods? Most people would say that the last great bull market of the 1970s began in 1971, when Richard Nixon closed the gold window, not back in 1966, when the price of gold was fixed. Can you explain that to us, please?

Petrov: Well, first of all, we had the London Gold Pool, established in 1961 to maintain the price of gold stable at $35. But just because the price was fixed legally and maintained by the pool at $35 doesn't mean that there was no underlying bull market. The mere fact that the London Gold Pool was manipulating gold in the late 1960s, before the pool collapsed in 1968, should tell us for sure that we already had an incipient, ongoing secular bull market.

The other argument is that while the London Gold Pool price was fixed at $35, there were freely traded markets in gold outside the participating countries, and the market price at that moment was steadily rising. So, around 1968 we had a two-tiered gold market: the fixed government price at $35 and the free-market price—and these two prices were diverging, with the free price moving steadily higher and higher.

L: Do you have data on that? I never thought about it, but surely the gold souks and other markets must have been going nuts before Nixon took the dollar completely off the gold standard.

Petrov: Yes. There have been and still are many gold markets in the Arab world, and there have been many gold markets in Europe, including Switzerland. Free-market prices were ranging significantly higher than the fixed price: up to 10, 20, or 30% premiums.

There's also a completely different way to think about it: in order to time gold secular bull and bear markets properly, it would make the most sense that they would be the inverse of stock market secular bull and bear markets. Thus, a secular bottom for gold should coincide with the secular top for stocks. And based on the work of many stock market analysts, it is generally accepted that the secular bear market in stocks began in 1966 and ended in 1980 to 1982. This again suggests to me that it would make a lot of sense to use 1966 for dating the beginning of the gold bull market.

L: Understood. On this subject of dating markets, what is it that makes you think this one's going to be a 25-year cycle? That's substantially longer than the last one. We have a different world today, sure, but can you explain why you think this cycle will be that long?

Petrov: Well, based on all the types of analyses I use—cyclical analysis, behavioral analysis, portfolio analysis, fundamental analysis, and technical analysis—this bull market is developing a lot slower, so it will take a lot longer.

The correction from 1973 to 1975 was the major cyclical correction of the last gold bull cycle, from roughly $200 down to roughly $100. Back then, it took from 1966 to 1973—about six to seven  years—for the correction to begin. This time, it took roughly 11 years to begin, so I think the length of this cycle could be anywhere between 50 and 60% longer than the last one.

Let's clarify this, because it's very important for gold bulls who are suffering through the pain of correction now. If we are facing a 50-60% extended time frame of this cycle and the major correction in the previous bull market was roughly two years, we could easily have the ongoing correction last 30 to 35 months. Given the starting point in 2011, the correction could last another six, eight, or ten more months before we hit rock bottom.

L: Another six to ten months before this correction hits bottom is definitely not what gold investors want to hear.

Petrov: I'm not saying that I expect it, but another six to ten months should not surprise us at all. A lot of people jumped on the gold bull market in 2008, 2009, 2010, 2011, and these people haven't given up yet. Behaviorally, we expect that these latecomers—maybe 80-90% of them—should and would give up on gold and sell before the new cyclical bull resumes.

L: Whoa—now that would be a bloodbath. Can we go back to your version of fundamental analysis for a moment and compare gold to other metrics? You mentioned that gold is still relatively undervalued in terms of houses and stocks and some things, but I've heard from other analysts that it's relatively high compared to other things—loaves of bread, oil, and more.

Petrov: Let's take oil, for example. We have a very stable long-term ratio between oil and silver, and that ratio is roughly one to one. For a long time, silver was about $1.20, and oil was roughly $1.20. At the peak in 1980, silver was about $45, and oil was about $45. Right now, silver is four to five times undervalued compared to oil, so in terms of oil, I would disagree for silver. The long-term ratio of gold to oil is about 15 to 20, depending on the time frame, so gold may not be cheap, but it's not overvalued relative to oil either.
But suppose gold were overvalued relative to other commodities—which I doubt, but even if we suppose that it's correct, it simply doesn't mean that gold is generally overvalued. The other commodities could be even more—meaning 10, 15, 20 times—undervalued relative to the stock market, or real estate, or bonds.

There is no contradiction. In fundamental analysis, it is illegitimate to compare gold, which is largely viewed as a commodity, to other commodities. We should compare it as one asset class against other asset classes.
For example, we could compare gold relative to real estate. By this measure, it is easily five to ten times undervalued. Separately, we could evaluate it relative to stocks. When you compare gold to stocks in terms of the Dow/gold ratio, it's easily five to ten times undervalued. Separately again, we could evaluate it relative to bonds, but the valuation is much more complicated, because we need to impute a proper inflation-adjusted long-term yield, so it's better not to get into this now. And finally, we could evaluate it separately against currencies. More on that later.

Now, I believe that when this cycle is over, we are going to reach a Dow/gold ratio far lower than in previous cycles, which have ended with a Dow/gold ratio of about 2:1 (two ounces of gold for one unit of Dow). This time, we are going to end up with a ratio of 1:2—one ounce of gold is going to buy two units of Dow. So, if the ratio right now is about 8:1, I think gold could go up 16 times relative to the stock market today.

L: That's quite a statement. Government intervention today is so extreme and stocks in general seem so overvalued, I can believe the Dow/gold ratio could reach a new extreme—but I have to follow up on such an aggressive statement. What do you base that on? Why do you think it will go to 1:2 instead of 2:1?

Petrov: If I remember correctly, we had a 2:1 ratio during the first bottom in 1932; the Dow Jones bottomed out at $42 and gold was roughly about $20 before Roosevelt devalued the dollar. That was also the beginning of the so-called "paper world," when we embarked on the current paper cycle.

The next cycle bottomed in 1980; gold was roughly 850 and the stock market was roughly 850, yielding a ratio of 1:1. Now, if we look at it in terms of the "paper" supercycle, beginning in the early 20th century and extending to the early 21st century, you can draw a technical line of support levels for the Dow/gold ratio. If you do this, you end up with Dow/gold bottoming at 2:1 (in 1932), then at 1:1 (in 1980), and you can project the next one to bottom at 1:2.

Another way to think about it is that we are currently in a so-called supercycle—whether it's a gold supercycle or a commodity supercycle—and this supercycle should last 50 to 70% longer than the previous one. It will overcorrect for the whole period of paper money over the last 80 years.

From a behavioral perspective, I could easily see people overreacting; we could easily see that at the peak we're going to have a major panic with overshooting. I expect the overshooting to be roughly proportional to the length of the whole corrective process.

In other words, if this cycle is extended in time frame, we would expect the overshooting of the Mania Phase to be significantly larger. It should be no surprise, then, if we get a ratio of 1:1.5 or 1:2, with gold valued more than the Dow.

L: That's a scary world you're describing, but the argument makes sense. How many cycles do you have to base your cyclical analysis on, to be able to say that the average Mania Phase is 15% of the cycle?

Petrov: Well, gold is the most complicated investment asset. It is half commodity, and it behaves as a commodity, but it's also half currency. It's the only asset that belongs in two asset classes, properly considered to be a financial asset (money) and at the same time a real asset (commodity). So, even though gold prices were fixed in the 20th century, you can get proper cycles for commodities over the time period and include gold in them. If you look into commodity cycles historically, there are four to five longer (AKA Kondratieff) commodity cycles you can use to infer what the behavior for gold as a commodity might be.

L: So would it be fair, then, to characterize your projections as saying, "As long as gold is treated by investors as a commodity, then these are the time frames and the projections we can make"?

Petrov: Right.

L: But if at some point the world really goes off the deep end and the money aspect of gold comes to the forefront—if people completely lose confidence in the US dollar, for example—at that point, the fact that gold is a commodity would not be the main driver. The monetary aspect of gold would take over?

Petrov: No, not exactly, because you will still have a commodity cycle. You will still have oil moving up. Rice will still be moving up, as will wheat, all the other commodities pushing higher and higher, and they will pull gold.

Yet another important tangent here is that in commodity bull markets, gold is usually lagging in the early stages. In the late stages of a commodity bull market, as gold becomes perceived to be an inflation hedge, it begins to accelerate relative to other commodities. This is yet another very good indicator that tells me that we are still in the middle of a secular bull market in gold. In other words, because gold is not yet rapidly outstripping other commodities like wheat, or copper, or crude oil, we're not yet in the late stages of the gold bull market.

L: That's very interesting. But if I remember the gold chart over the last great bull market correctly, just before the 1973-1976 correction, there was quite an acceleration, such as you're describing—and we had one like it in 2011. Gold shot up $300 in the weeks before the $1,900 peak.

Petrov: Absolutely correct. This acceleration before the correction is exactly what tells me that the correction we're in now is a major cyclical correction, just like in the mid-1970s. The faster the preceding acceleration, the longer the ensuing correction. This relationship is what tells me that this correction will be very long and painful. Yet another indicator. Everything fits in perfectly. All of these indicators confirm each other.

L: Could you imagine something from the political world changing or accelerating this cycle? If the politicians in Washington are stupid enough to profoundly shake the faith in the US dollar that foreigners have, could that not change the cycle?

Petrov: Yes, that's a possibility. This is exactly what a gray swan is; a gray swan is an event that is not very likely, that is difficult to predict, but is nonetheless possible to predict and expect. One example of a gray swan would be a nuclear war. It's possible. Another could be a major currency war, à la Jim Rickards. There are a number of gray swans that could come at any time, any place, accelerating the cycle. It's perfectly possible, but not likely.

Now, going back to your question about monetizing or remonetizing gold—the monetary aspect of gold taking over that you mentioned. The remonetization of gold wouldn't short-circuit the commodity cycle; the commodity cycle would continue. Actually, you'd expect the remonetization of gold to go hand in hand with a commodity bull market.

You also need to understand that the remonetization of gold would not be a single event, not a point in time. Remonetization of gold is a process that could easily last five to ten years. No one is going to declare gold to be the monetary currency of the world tomorrow.

What will happen is that countries like China will accumulate gold over time. Over time, gold will be revalued significantly higher, and there will be global arrangements. The yuan will become a global currency, used in international transactions. Many institutional arrangements need to be in place around the world, including storage, payments, settlements, and some rebalancing between central banks, as some central banks have way too little monetary gold at the moment.

L: I agree, and see some of those things happening already. But I don't expect any government to lead the way to a new gold standard. I simply expect more and more people to start using gold as money, until what governments are left bow to the reality. I believe the market will choose whatever works best for money.

Petrov: Indeed, and that's a process that will take many years. Getting back to gold in a portfolio context, relative to currencies, gold is extremely cheap. Historically, gold will constitute about 10-15% of the global investment portfolio relative to the sum of real estate, stocks, bonds, and currencies. Estimates suggest that right now gold is valued at roughly about one percent of the global investment portfolio.

L: That implies… an enormous price for gold if it reverts to the mean. Mine production is such a tiny amount of supply; the only way for what you say to come true is for gold to go to something on the order of $20,000 an ounce.

Petrov: Correct. $15,000 to $20,000. That's exactly what I'm saying. In a portfolio context, gold is undervalued easily 10 to 15 times. On a fundamental basis, gold is undervalued relative to stocks 10 to 15 times, and relative to real estate about 10 times. When we use the different types of analyses, each one of them separately and independently tells us that we still have a lot longer to go: about six to 10 more years; maybe even 12 years. And we still have a lot higher to rise; maybe 10-15 times.

Not relative to oil, nor wheat, but gold can easily rise 10 to 15 times in fiat-dollar terms. It can rise 10 times in, let's say, stock market terms. And yes, it can go 10 to 15 times relative to long-term bonds. (We have to differentiate short-term bonds and long-term bonds, as bond yields rise to 10 or 15 percent.)

So, portfolio analysis and fundamental analysis tell me that we still have a long way to go, and cyclical analysis tells me we are roughly mid-cycle. It tells me that from the beginning of the cycle (2000) to the correction (2011) we were up almost eight times, from the bottom of the current correction (2013-2014) to the peak in another six to ten years, we are still going to rise another 10 times.

Whether it's eight years or 12, it's impossible to predict; whether it's eight times or 12, again, impossible to predict; but the order of magnitude will be around 10 times current levels.

L: You've touched on technical analysis: do you rely on it much?

Petrov: Well, yes, but in this particular case, technical subsumes or incorporates a great deal of cyclical analysis. It's very difficult to use technical analysis for secular cycles. We usually use technical analysis for daily (short-term) cycles, or weekly (intermediate) cycles, or monthly (long-term) cycles. We use them as described in the classic book Technical Analysis of Stock Market Trends by Edwards, Magee, and Bassetti.

If we apply technical analysis to our current correction, it doesn't appear to be quite over yet. It could still run another three to six months, possibly nine months. But when we talk about the secular cycle, we need to switch from technical to long-term cyclical analysis.

L: Okay. Let's change topic to the flip side of this. Can you summarize your view of the global economy now? Do you believe that the efforts of the governments of the world to reflate the economy are succeeding? Or how does the big picture look to you?

Petrov: The big picture is an austere picture. Reflation will always succeed until it eventually fails. The way I see it, the US is going down, down, and down from here—the US is a very easy forecast. The UK is also going down, down, and down from here—another easy forecast. The European Union is going to be going mostly down. However, most of Asia is in bubble mode. Australia is in a major bubble that's in the process of bursting or is about to do so; it's going to go through a major depression. China is a huge bubble, so China will get its own Great Depression, which could last five to ten years. This five- to ten-year China bust would fit within my overall 10-year forecast for the remainder of the secular bull market in gold.

I see a lot of very inflated and overheating Asian economies. I was in Hong Kong in January, and the Hong Kong economy is booming to the point of overheating. It's crazy. I was in Singapore just three months ago, and the Singapore economy is clearly overheating. Last year I was teaching in Macao for a few months, and the economy is overheating there as well—real estate is crazy; rents are obscene; five-star hotels are full and casinos crowded.

Right now I'm teaching in Thailand. It's easy here to see that people are still crazy about real estate—everyone's talking about real estate; we still have a peaking real estate bubble here. Consumption is going crazy in the whole society, and most things are bought on installment credit.

Another easy forecast is Japan; it too will be going down, down, and down from here. Japan has nowhere to go but down. It's been reflating and reflating, and it hasn't done them any good. Add all this up and what I actually see is a repeat of the 1997 Asian Crisis, involving most Asian countries.

L: So your overall view is that reflation works until it doesn't, and you believe that on the global scale we're at the point where it won't work anymore?

Petrov: Not exactly. We're at the point where reflation doesn't work anymore for the US, no matter how hard it tries. It doesn't work for the UK; not for most of Europe; not for Japan—no matter how hard they try. But reflation is still working in China. Reflation is still working for most of Asia and Australia. As I see it, Asia is overheating significantly, based on that global reflation.

Even the Philippines was overheating when I was there two years ago. Malaysia is overheating big time—consumerism at its finest—and I'm hearing stories about Indonesia overheating until recently as well. Maybe we have the first sounds of that bubble bursting in countries like India, Malaysia, and Indonesia. The Indian currency is weakening significantly; so is the Malaysian currency. If I remember correctly, the Indonesian currency is weakening significantly, and I know well that their money market rates are skyrocketing in the last few months.

So we may have now the beginning of the next Asian Financial Crisis. Asia is still going to be able to reflate a little longer, another year or two, maybe three. It's very hard to say how long a bubble will last as it is inflating. The same thing for Australia; it will continue to reflate for a few more years. So for Asia and Australia, we are not yet at the point when reflation will no longer work. Very difficult to say when that will change, but we're there for the US, UK, Europe, and Japan.

L: Why won't reflation work for the U.S. and its pals?

Petrov: Reflation doesn't work because of the enormous accumulated economic distortions of the real sector and the labor market. All the dislocations, all the malinvestments have accumulated to the point where reflation has diminishing returns.  Like everything else, inflation and reflation have diminishing returns. The US now needs maybe three, four, or five trillion annually to reflate, in order to work. With each round, the need rises exponentially. The US is on the steep end of this exponential curve, so the amount needed to reflate the economy is probably way more than the tolerance of anyone around the world—confidence in the US dollar won't take it. The US is at the point where it is just not going to work.

L: I understand; if they're running trillion dollar deficits now and the economy is still sluggish, what would they have to do to get it hopping again, and is that even possible?

Petrov: Correct. The Fed has tripled its balance sheet in a matter of three to four years—and it still doesn't work. So what can they do? Increase it 10 times? Or 20 times? Maybe if they increased it 10 or 20 times, they could breathe another one or two or three years of extra life into the economy. But increasing the Fed's balance sheet 10 or 20 times would be an extraordinarily risky enterprise. I don't think that they will dare accelerate that much that fast!

L: If they did, it would trash the dollar and boost gold and other commodities.

Petrov: Yes, that's clear—the bond and the currency markets would surely revolt. That's a straight shot there. The detailed ramifications for commodities, if they decide to go exponential from here, are a huge subject for another day. For now, we can say that they have been going exponential over the last three to four years, and it hasn't worked.

Also, we know well from the hyperinflation of the Weimar Republic that they went exponential early on, and it stopped working in 1921. For two more years, they went insanely exponential, and it still didn't work. I think the US is at or near the equivalent of 1921 for Weimar.

L: An alarming thought. So what happens when Europeans can no longer afford to pay the Russians for gas to heat their homes? Large chunks of Europe might soon need to learn Russian.

Petrov: Not necessarily, but Europe is going to become Russia's best friend and geopolitical ally. The six countries in the Shanghai Co-op are already close allies of Russia. So is Iran. So Russia has seven or eight very strong, close allies. European countries will, one by one, be joining Russia. Think about it from the point of view of Germany: why should Germans be geopolitical allies of the US or the UK? Historically, it doesn't make any sense. It makes a lot more sense for them to join the Russians and the Chinese and to let the Americans and British collapse. So that's what I expect, and Russia will use all its energy to dictate geopolitics to them.

L: Food for thought. Anything else on your mind that you think investors should be thinking about?

Petrov: Well, it's fairly straightforward. First, I do expect that the stock market is going to lose significant value over the next five to ten years. Second, I believe that real estate is still grossly overvalued; as interest rates eventually rise, real estate will fall hard—overall, it will not hold value well. Third, I also believe that bonds are extremely overvalued and that yields are extremely low. I expect interest rates to begin to rise and bond prices to fall, so I strongly discourage investors from staying in bonds. Finally, I expect that governments will continue to inflate, even though it doesn't work, and that currencies will devalue.

I strongly encourage investors to stay out of all four of these asset classes. Investors should be staying well diversified in commodities. They shouldn't ignore food—agriculture. They shouldn't ignore energy. But their portfolios should be dominated by precious metals.

L: That's what Doug Casey says, and that the reason to own gold is for prudence. To speculate for profit, we want the leverage only the mining stocks can give us.
Thank you very much, Krassimir; it's been a very interesting conversation. We shouldn't let this go another seven years before we talk again.

Petrov: [Laughs] Okay. Hopefully a lot sooner. Hopefully you'll be prepared when the gold bull market reaches the Mania Phase… and hopefully you are taking advantage of the low gold price to stack up on your "hard money" safety net.

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