Economy, SPX, Long Treasury

US Economy Comment
By the indicators, the US economy steadily lost growth momentum potential from mid-2014 right
into 2016. My weekly leading economic indicators have been rising since Feb. of this year, and
now monthly leading and coincident measures are rising. As well, my future inflation pressure
gauges have been advancing since Feb. after a number of months of decline. The US industrial
base fell to low, near recession levels going into 2016 but appears to be firming modestly. The
weakening economy from mid-2014, aided and abetted by a bust in the oil price, has lead to
a significant decline in profitability and earnings, too. Lead indicators suggest profits may soon
start to do better. The Fed badly misjudged the negative impact the cessation of QE would have
on economic activity and compounded the error by raising short rates in late 2015. With ongoing
decent private sector liquidity growth, the economy may finally be righting itself after a fallow
period. Indications of stronger growth could turn out to be a flash in the pan, but if not, then
the real economy and recovering pricing power will put downward pressure on the excess liquidity
which has sustained the capital markets for many months.

Stocks and Bonds
Since late 2014, as profits  prospects and inflation pressures waned, the smart bet was to prefer the
long Treasury over the SP 500. $USB vs. SPY High quality bond prices have firmed as the economy
slowed, inflation pressures abated, and the Fed was forced to put a cap on further tightening. Even
though forward economic and inflation measures have strengthened since earlier in the year, players
have been interested in giving the edge to bonds on a trend basis despite the volatility. So much so,
that even the 30 yr. Treasury at a 2.15% yield is trading inside the yield on the SP 500.

Viewed longer term, both the S&P and the long Treasury price are overvalued. However, if the
economy is indeed regaining some sustainable traction, stock players will fret over future
monetary policy, but long Treasury buyers may even have more to worry over.

Closing
Ever since the Fed announced it would taper and then close out its huge QE 3 program as 2014
wound up, I have been concerned how well the US economy would fare without the very large
large tailwind. Here we are 18 months later, and the best I can do is cross my fingers that the
economy can progress decently with private sector funding support. If it can, the ballgame will
change markedly in various markets.

SPX Daily -- Setting The Stage Anew

The argument here for several years has been that when the Fed has turned off the spigots
following several years of massive inflation of its balance sheet and the monetary base, the
results are not happy for the economy and the stock market. There have been only a few
instances of this kind of activity, and based on over 100 years of history, the economy and the
market have not done badly so far, as private sector funding has been sufficient to keep a slow
recovery going as well as bids under the stock and bond markets. But, when the Fed does not
have our back with liquidity flow as now, it can be difficult for the stock market to advance
strongly and volatility can rise substantially. Note how the market has behaved since the end of
the QE programs in late 2014. SPX Daily

1. The Brexit sell - off has blown the 2016 rally out of the saddle and taken the market below
 short term support as well as the 200 day m/a.

2. The market is a significant 4% below its 25 day m/a, and is showing as oversold on the short
term RSI measure. That is enough damage to get at least a few traders interested in nibbling
long as might the very high volume.

3. The SPX is not yet close to hitting the kind of deep oversold that I think is most interesting in
a market without Fed liquidity backing and in a more volatile setting. Check out the MACD and
the momentum panels in the lower portion of the chart. This strategy would not suit many but I
have done well with it.

Gold -- Trading Up On Safe Haven Merits Now

Most of the favorable price action in gold for 2016 reflects a rather mild improvement in cyclical
fundamentals. For the short term, the fundamentals have faded slightly and now gold is advancing
on the Brexit news, with traders anticipating Brexit will trigger heightened uncertainty over the
global economic outlook and tack - on geopolitical instability in the EU with the perceived
possibility that other members, angered by the large influx of migrants to Europe, may look to
exit the union to gain greater sovereignty and get away from the gnomes in Brussels. Could be.
After all, years of weak local economies in the Eurozone, abetted by local austerity programs,
all coming in the wake of Europe's serious recession and God awful slow recovery, have had
withering effects on the political order in any number of localities. Hell, if a well established
democracy like the UK can have political upheavel, what can be said of the lesser lights?

The died-in-the-wool gold bugs are on the long side of the trade, but so are a bevy of momentum
traders and short term hedgers and this suggests that most of the players will need a steady diet
of bad news about economic and financial stability to re-inforce the long side order flow. I would
argue that with the world already six years into a slow and uneven economic recovery that the
odds favor negative surprises. But, without strong cyclical pro - inflation impulses in place, liking
gold as a safe haven only is a risky proposition. I would prefer to see a return of rising commodities
prices, a weaker US dollar and signs of faster global economic output growth in support of gold
than speculation about the effects of possible heightened political disorder. The latter is just too
tough to get a handle on to set strategy.

The weekly gold chart shows the metal is still in advance mode, has broken important resistance
at $1300 oz., has the support of a rising 40 wk. m/a and is again flirting with overbought territory.
Gold Weekly

SPX -- Weekly

Another rally above SPX 2100 was cut nastily short this week as the Brits voted by a modest
margin to exit the EU. Plainly, as the vote approached, players were zigging, blissfully unaware
that British voters were set to zag. In my view, the EU has been enough of a flop over the past
ten years that the Brits were warranted in no longer wanting to remain. But the timing of the
exit was bad as the EU, off its own bat, had not yet done enough damage to the UK to draw a
sizable majority of seething voters. The comparatively thin margin of 52 -48 plus the obvious
demographic divide of old vs. young captured in the vote is going to leave acidic recrimination
and contempt in its wake and it will put enormous pressure on England's righty old farts to show
clearly how Brexit will be a major blessing in disguise for the young. PM Cameron gets the 2016
Talleyrand Award, for he made not just a mistake, but a blunder instead.

It could easily take a few more days for both traders and investors to ransack the news to assess
whether the further unwinding of pro - remain bets will set off additional destabilization in the
markets and to come up with working assumptions about the after - effects of the vote for the
global economy and the markets in the months ahead.

It is worth noting that Friday's rout of the SPX stopped around 2016 support in the 2040 area.
SPX Weekly

The top panel of the chart shows the VIX or volatility index. A sharp rise in this measure often
reflects both instability and fear in the markets and a boost in the VIX above the 20 level
signals enough trader apprehension to warrant concern of more market price downside ahead.

Note also the MACD indicator. It is on the verge of the first negative "cross" since the rally
began in Feb.

The SPX has made powerful progress since its 666 low in Mar. 2009. It commands a p/e ratio
above 20x. It doesn't owe us anything. Gains from this level are gifts from the Gods and not
to be squandered.

You should show up on Monday to see if the bloodletting is complete.

Long Treasury -- Steaming Toward Overbought

US financial liquidity has been growing faster than the sluggish economy. Short rates remain at
nominal levels and the CPI has averaged less than 1.0% for months. So, bond market players,
both large and small, have been pushing the bond price ever higher with speculative interest
running very strong. The market is unsettled this week as traders await the Brexit vote on the
23rd. The bond price remains in a clear uptrend from the end of the Fed's QE program, although
momentum has moderated.  TLT

The TLT bond equivalent has recently broken out to new high ground, and a substantial inter -
mediate term overbought is developing. By long run parameters the Treasury market is vastly
overvalued, and further price progress hinges on a continued slow global economy with player
concerns occasionally heightened by real and contingent crises which could roil the world's
markets. Long Treasury investors are offered 2.5% currently to cover longer term interest rate
and inflation risk as well as future supply and currency risk. It would be presumptuous to say
that a top is right at hand, but history will eventually show that the market has entered a major
topping zone.

SPX -- Daily

Last week, I was guilty of damning the market with rather faint praise. Since, the SPX has rolled
over and has once again fallen through difficult resistance at 2100. The strong momentum of the
winter rally died out in mid - Apr. and a second but weaker wave up carried the SPX up into
early Jun. near 2120 before the trend connecting it with the Feb. low broke. The market has dipped
into slightly oversold territory and near term support for the SPX stands at 2040.  SPX Daily

No one thought the Fed would raise the FFR% at today's FOMC meeting, and with the economy
appearing to do better in this quarter and some modest improvement in business pricing power too,
fundamentals were not bearish, although the SPX remains indeed expensive.

More attention is being paid to the BREXIT issue. With no raft of economic positives to attend
an exit from the EU, and given some socio - political inertia, I would have thought the Brits
would opt to stay in, but the 'leave' crowd has apparently picked up some steam in surveys,
thereby tilting equities market players toward perceived safer havens.

As well, the oil price, which should be in a sharp seasonal downtrend in Jun. has started to waver
some, which in turn dampens the outlook for energy shares, a development bullish stock traders
now aver. For what it is worth, oil has actually held up pretty well so far.

Since my shorting days are over now that I progress further into my dotage, I have no interest
in taking a flyer on the stock market unless  a much deeper oversold condition comes along. It
has been my view that this is the way to own equities in this environment.

SPX -- Daily Chart

the consensus continues to build that the Fed will defer raising short rates for a while longer as
the US economy remains sluggish. Thus, the US dollar has been weak in Jun. so far and this has
worked to push the oil price and the commodities market higher. The continued strength in the
oil price leaves the market in a clear counter - seasonal advance. Presumption of a less restrictive
monetary policy by traders coupled with the still ongoing rally in oil are working to  push the
SPX higher and leaves it above the prior strong resistance line at 2100 and closing in on the
previous record high set last year in May.  SPX Daily

The SPX is expensive, is extended on a long term basis, and is backed by shorter run speculation
about monetary policy for the months just ahead. The rally off the Feb. 16 low is being extended
and the market is not yet flashing material overbought. Since sentiment has tended toward
bearish all year, players are hardly ecstatic. Still, you are on your own here, and if you're long,
review your risk tolerance.

One sneaky political point needs to be made as well. With the Obama administration in control
of much of the economic data flow here in this election year, the 'natural' tendency will be to
save the stronger readings until later in 2016 wherever there is discretionary leeway. Thus, if you
like the lower US dollar, it may have your back for a while longer.

SPX -- Weekly

Fundamentals
The weekly leading economic indicators have been suggesting a decent rebound in output this
spring, but the degree of positive response in the broad economy has been only slight so far.
Inventories are coming under control, but remain high. As well, the household survey of civilian
employment has flattened out in recent months despite an improvement in total business new order flow.
Plainly, as 2015 wore on, business geared up for stronger economic performance, and progress
has been very slow instead. Consumers have been lacking in inspiration and more company owners
and managers are uncomfortable in a sluggish global environment. Productivity has suffered as
companies are geared now for higher levels of business. The US plainly needs to pick up the pace
soon before a more lingering malaise develops.

Valuation
SPX return on equity at market (earnings yield) is running around 4.7% and the dividend yield is
about 2.2%. Thus, the SPX remains at a premium to cash equivalent and the 10 yr. Treasury, but
this is thin gruel especially since operating earnings remain under pressure and the p/e ratio on
last 12 months net per share is 21x. Investor patience, remarkably, has not yet worn that thin.

Technical
The market remains in an uptrend but has dropped into consolidation mode following the terrific
Feb. Apr. upside run. Short term support has now risen to SPX 2040. The market still correlates
well with the direction of the oil price this year, although now less so than earlier. Equities players
need to pay heed to the fact that June is a period of seasonal weakness for the price of oil (See
the WTI crude chart in bottom panel).

Once again, the SPX sits at the 2100 resistance level.  SPX Weekly

The Greatest....

I met Muhammad Ali in Chicago in the latter 1960s. He had already been stripped of his title,
and strongly rebuffed by whites for his objections to fighting in the Vietnam War, was camped
out in Hyde Park near both the University of Chicago and not far from the mosque led by Elijah
Muhammad, the dean of Islam in the US. I was a Phd candidate at U. of C and I was standing
on Kenwood Ave. with a colleague of mine. As he approached on the sidewalk, my friend, who
would go on to be president of a major west coast seminary and divinity school and was a gifted
orator even then, opened his arms and said in a crisp voice, "Hey champ...You know as far as
we're concerned you're still champ." We got the brilliant smile, saw the shoulders relax, and a
warm nod and hello. He was truly a larger than life guy. Tall, broad shouldered as you would
expect, handsome with flashing eyes. It was very tough for him then, but he gave us about twenty
minutes, ever gracious. We talked not about boxing but about the war and the great damage it
would do.

He liked the idea that just two white guys on the street knew his predicament in detail and welcomed
him anyway. We had notepads with us but never asked for an autograph. We shook hands and off
he went. These were good moments in what was to become a very difficult time for the US. And
through it all, Ali kept his dignity and eventually won back his championship and so much more.

Stock Market -- Long Term Issues #1

It can be mighty important to gain roughly correct perspective on the long term potential for the
stock market. Looking back over the past nearly half century, I have been prescient at times and
other times I have been well off base. I have had the good fortune when I have been in the wrong
to correct the view before the errors became fatal. I do not think I have a strongly held view of
the future this time out. There are only issues instead. If you are the indulgent type, read along and
see how the series of several posts on the long term outlook planned for the next few weeks strike
you.

I am not uncomfortable with the idea that 2009 marked a generational low for the stock market.
Stocks have been bought for growth primarily since the end of WW 2. The chart coming up shows
the SP 500 since 1950. ^GSPC  (Chart is in log form. Some of you may have click off "linear.")

The tops on the chart form a nice trend line until the 1990s when a quantum rise in the p/e ratio
took the SP 500 into large bubble mode for the first time since the 'roaring twenties.' If the trend
line from the tops in the 1950s and 60s is extended all the way to the present day, you will observe
a 'bubble echo' for the 2003 - 07 period which was followed by a deeper bust in 2008 - 09. That
bear market was the worst in many years and, lo and behold, the subsequent bull run has brought
the market again above the top of the trend line from the 1950s.

Thus, on a long run basis, the market is again hyper - extended, although less so than in 2007, and
very much less so than in 2000. The long term history of the stock market going back 200 hundred
years shows that buying hyper - extended markets, even dinky ones, is not a rewarding strategy.

The first longer term outlook issue then is that we have a very expensive market to cope with.
Secondly, there has been a significant trend break in the bull market running off the 2009 base.
SPX

There has been near term support at SPX 1800 and the rally this year has been strong enough to
reverse a downtrend and leave the market in limbo. Last year's rollover in the MACD measure
(second panel) also not a good omen at least in view of recent history.

In the next post in this series, figure we'll put some fundamental meat on the bones of the charts.
Interesting here as lead in is that the SPX has come off a lengthy period of net per share growth
that has been well above the long term average.
 




 

SPX -- Weekly

Fundamentals
A low risk / high return profile for the stock market comes along when the Fed fosters strong
liquidity growth and suppresses short term interest rates. Such was the case from early 2009 through
year's end 2014. Last year marked a transition period when liquidity growth slackened as the Fed
kept Fed Bank Credit and the Monetary Base flat and the Fed ended the year by raising short term
interest rates. These developments send fundamental stock market risk substantially higher and
diminish the potential for high returns. The stock market can still rise during such periods, but now
players must realistically address their individual risk tolerance as the economic expansion grows
more mature.

The best guess now is that business sales and profits are set to reverse downtrends and resume
positive direction. The price earnings ratio of 20x + is nearly fully discounting improving business
sales volume growth and modest but strengthening pricing power. So, to get fairly strong positive
lift from the current SPX 2100 level over the next year or so is  going to require good fortune on
the earnings front and some speculative zeal from market players.

Technical
The SPX chart is positive based on the indicators but is about to become more pricy. SPX Weekly

Gold Price

As outlined in an Apr.13 post on the gold price, gold fundamentals have, on balance, turned mildly
positive. There was a nice long gold trade late in 2015 as fundamentals transitioned to positive, but
the price soon became strongly overbought, and it was reasonable to question whether gold had
come up too far too fast given the very mild improvement in the underlying fundamentals. It was
also mentioned that should the gold price break above $1,300 oz., we might have a very interesting
situation. $ Gold Daily

The chart shows the evolving powerful short term overbought position on gold and the negative
price reaction at important overhead resistance at $1,300 just as the USD (bottom panel) went
into rally mode, all at the beginning of May. Dollar players have been wagering that the dollar
will continue to strengthen should the Fed elect to raise the level of short term rates at the Jun.
FOMC meeting, if not maybe at the following one. I like the USD longer term, but its fundamentals
have not improved enough to support  a value above the high 80's in my view. That is a minority
position these days, but with the gold price  now approaching an oversold situation, gold is
on the radar screen for the next few weeks to see if it can rally off the oversold.

Oil Price

Oil supply and demand have come into reasonable balance in 2016. Unlike prior periods when
there has been an oil price bust, spare capacity at the well head is rather small, although the
Sunni Arab states are working to boost production. The production surge of 2015 has produced
an outsized global crude inventory position, but continued global economic expansion will work
slowly to reduce the overstock.

There has been a vigorous debate for months by oil price observers about the proper direction
the price should take, but given that the glut is largely now related to inventory rather than
production vs. demand, I have based my trading strategy primarily on the seasonal price pattern
for oil. Better lucky than smart is the trader adage that applies in this case.

Oil continues in a strong seasonal uptrend underway since Feb. The 50 day m/a is nicely positive
and has moved above the 200 day m/a and the oil price has been exceeding both. Oil is now
moderately overbought against its 200 day m/a, a situation not observed for quite some time. The
price is also short term overbought on MACD and RSI, although these triggers have yet to work
because of the strength of the positive trend. WTIC Daily

The oil price is now vulnerable on a seasonal basis until the latter part of July when another
period of seasonal strength would be set to begin. Springtime price vulnerability is usually not
that severe, and some players will simply hold on through this interval if basic fundamentals
continue through.

SPX -- Daily

The overbought readings for the SPX in both Mar. and Apr. have begun to yield some
 selling pressure. SPX Daily

This seems to be a normal development following such a strong run up in the index from the
Feb. low. The issue now is how deep the sell off will run. The chart shows short term support
around SPX 2040. A breech of that level would suggest some more pain may be on the way.
It is also worth noting that a still rising oil price is not now supporting the uptrend of the SPX
(WTIC is in bottom panel of the chart).

It is entirely possible that players may be growing apprehensive here in the face of stronger
economic and inflation data coupled with Fedspeak calling a short rate increase for June a
'live option'. Straight off, the fundamental case for hiking the FFR% in June is simply not there,
so should the FOMC elect to boost rates again, it would be about as unwarranted as was the
Dec. 15 hike. Speaking editorially, such Fedspeak, particularly from non-voting members of
the Board, only adds to market uncertainty and volatility.

If the economy can maintain a faster pace of expansion, profits will begin to recover nicely
and another 25 or 50 basis points up in short rates should not change valuation parameters
materially. I am hoping for this and do not see a compelling reason to get into a tizzy about
share prices. But since market sentiment has been growing more bearish for quite some
time, I could wind up eating those words. (Scroll for May 8 post on sentiment.)

30 Year Treasury Yield -- Early Warning Signs

Fundamentals that suggest the direction of long bond yields are falling into place to support higher
rates (and weaker bond prices). Cyclical factors turned weak in the latter portion of 2014 and
signaled the onset of a declining trend in the $TYX.

This year there have been upturns in the manufacturing PMI and in industrial commodities prices.
The recovery in the PMI has been modest with the exception of % of companies with a rising new
orders book, which has been strong.Weekly data on physical output is experiencing a mild positive
reversal and future inflation pressure gauges have been turning up after nearly 18 months of decline.

It is important to note however, that the mild upturns in cycle pressure are coming off a very
cyclically depressed base. My Cyclical Business Strength Index, which is a broad measure of the
components of production with heavy emphasis on plant utilization, reads a low 128. In the past,
when the economy was running flat out at effective capacity, the index could register up to 145
or over 13% above current levels. History also indicates that it was often only when the index
reached upwards of 135, that the Fed would turn aggressive in tightening monetary policy. So,
the current upturn is still well 'under the radar' when it comes to measuring cyclical pressure.

Bond traders operate on such a 'hair trigger' when it comes to dumping long maturities when
cycle pressures are on the rise, that it is interesting that the recent rally in bond prices has
continued even though pressures are inching ahead. Trader reluctance to reverse course may
well reflect a consensus conviction that faster output growth is not sustainable and that it is
not worth getting whipsawed in the process. Could be, but stronger data will likely dispel
consensus convictions in a hurry.

Stock Market Sentiment

I prefer real money down measures to study sentiment and my favorite is the all-equities put / call
ratio. A very low P / C ratio indicates the market is overly bullish and a high P/C implies players
are too bearish. A good measure to capture this portrait of sentiment is a 13 wk. m/a of the CPCE

The powerful advance in the SPX from late 2011 through mid - 2015 saw a sharp downtrend in
the CPCE that carried to very low levels by late 2014 and signaled traders were too bullish on an
intermediate term basis. The low in the 13 wk. P / C ratio coincided with the end of the gigantic
QE program by the Fed. Since then, sentiment has gradually turned less positive as the P / C ratio
trend worked persistently higher into the early autumn of last year following the first sharp sell-off
of a market correction that carried into Feb of this year. With the subsequent rally, bearishness
has eased somewhat but still remains fairly high. Note too, that the bearish trend of sentiment has
yet to reverse course but remains hanging in the balance.

The takeaway here is that from a contrarian perspective, the market has more upside to it down the
road, but that in the absence of a reversal of the P / C trend, players need to acknowledge the
potential for another sell-off  before the corrective process of the market may be fully behind us.

The bottom panel of the chart shows the NYSE TRIN indicator. This is a measure of buying vs.
selling pressure, with a high TRIN signaling selling pressre and a low TRIN indicating net buying
pressure. The heavy selling pressure in evidence since the first significant corrective hit to the
market over Half '2 '15 has tapered off substantially since then, with direction of pressure now
neutral over the past couple of months.

Presidential Politics & The Markets

The US will have a newly minted President come this Jan. The first day of full time work for any new
President involves getting together with top staff and advisors to begin development of a re-election
strategy. In getting the plan together, the key sin to be avoided is to have the economy in trouble
during the last 15 - 18 months of the first term. You want the economy humming along as best it
can during the protracted lead-in to the next election. So this means taking stock of the economy
after the inaugural festivities and delving into whether it  can be kept relatively comfortably
afloat throughout the forthcoming four years or whether there are excesses in the system best dealt
with earlier during the President's tenure. Since the markets will be aware of these excesses and how
troublesome they may become, the early going of the first term will feature strong investor focus
on official Washington.

On the assumption the US economy will drift along positively into early 2017, it will likely be the
case that the new administration will confront stronger but still mild inflation and relatively full
employment, at least on the surface. Many in the workforce now hold more than one job and as
official part timers have few benefits. Early 2017 is likely to see that there is still significant
facilities over-capacity and plenty of liquidity in the banking system. So, unlike in many post
election years, the argument to allow the economy to run out the string with the aid of perhaps
additional fiscal stimulus in the expectation that excesses can be more fully redressed after the
next election will prove far more tempting than normally. If this preliminary assessment proves
correct, it may not make that much of a difference who wins the 2016 election, at least in the very
early going.

As investors and traders we can get caught up in the election battle in the months ahead however
we may, as long as we keep in mind how quickly the re-election campaign begins.

looking at the 2016 landscape, we find a four way political spectrum situation for the first time
really since the 1912 election. As with Eugene Debbs then, we have a newly emergent left wing
in Bernie Sanders. There is a left-of-center contingent behind Hillary Clinton. Then we have the
hardcore GOP, now captained by House Speaker Paul Ryan and a new, less plutocratic GOP
running with The Donald. To make this case, Trump will need to tell Ryan to stuff it and not
give in to the Ryan ultimatum. That little twist is ahead along with perhaps several others as
we move on to the big day.

SPX -- Daily

It has been obvious for a couple of weeks that the SPX was overbought in the short run, and now
we are again seeing some price weakness. Traders of course have taken note that the market did
fail to take out resistance again at 2100 just the other day. SPX Daily.

It is hard to quarrel with the idea the market is due a rest or even a minor pullback after such a
feverish run since Feb. Moreover, the SPX remains rather expensive based on current earning
power which continues to trundle along at around $100..With inflation and short term interest
rates at nominal levels, I will be raising my fair value target range for the SPX in Jun. to 1990-
2160 from the current range of 1870-1990. This implies that through 2017, business sales and
profits need to advance appreciably with both stronger volume and pricing power to drive higher
results. The leading economic indicators I most rely on have turned higher in the short run, and
I am reluctant to turn bearish as long as future fundamental trends are nicely positive. So, if a
big selloff is in the cards for the next couple of months, I am likely to miss it. Importantly, if
the advance indicators start to flatten or weaken at some point later in the year, basic reassment
would be in order, because the question would naturally arise whether longer term earnings
growth potential is too liberal for the times we are in. Since such a judgment might have major
negative for how stocks should viewed, I am not anxious to pre-judge the issue.

You might take note that with a weaker US dollar, some equity money might shift to play the
oil, PM and commodities markets more directly as they have positive momentum currently.
Noteworthy also is whether the oil market can retain some positive direction over the next
few months, as a period of seasonal consolidation is in order.

Liquidity Cycle

The liquidity cycle is moving into its latter stage when funding for the economy and the capital
markets is more strongly dependent on private sector credit. The Fed's balance sheet and the
monetary base have been flat for the past 15 months. The growth of the basic money supply has
been decelerating from very high levels since late 2011, and is now around 5% yr/yr. Thus, M-1,
though shrinking, remains a source of support the economy. Total private sector funding growth
remains around 5% yr/yr. It exceeds the demands of the real economy which, in sum, has been
growing at about 3%. So, excess liquidity is being generated, which with negligible short term
interest rates and inflation, continues as a source of support for both equities and bonds so long
as investor confidence is not seriously shaken.

It appears that when the Fed raised short rates late in 2015, it triggered a very temporary liquidity
squeeze as fixed income managers of varied stripes went to vault cash to avoid losses on cash
equivalent securities. The monetary base wound up shrinking by about $350 billion in Jan. of the
current year. The funds have subsequently been re-placed. Only God knows who may have made
money on these stunts, and sadly enough, it may have made the sell-off in equities in Jan. worse
than it need have been. It will be interesting and important to see whether folks 'bury' funds again
the next time the Fed pushes up rates. Bonus compensation programs can add excitement to the
game. No?

It is important to note that when the Fed freezes its balance sheet and the monetary base, both
economic and stock market risk rise. The collapse of the oil price notwithstanding, the stock market
and the economy have struggled since late 2014, when the huge QE 3 program ended. The
transition away from monetary-driven liquidity to credit-driven has been difficult. Hopefully,
the recent rise in the short term leading economic indicators signals a brighter time ahead.

Silver -- The Crash Dummy Abides

The silver price is venturing off its second major crash in the past 35 or so years. Silver Monthly
Price bottoms of $5. oz. were not uncommon historically, but over the past decade, silver price
lows have lifted, as the cost of mining the stuff has ascended steadily, with breakeven probably
somewhere near $14 oz.

Silver fundamentals are akin to gold, but silver is also more sensitive to commercial and industrial
demand. The silver weekly chart compares its price to that of industrial metals in the top panel of
the foregoing. Silver Weekly

There has been a blowout in the commodities sector since the spring of 2011 as large supply /
demand imbalances developed mainly because of a strong deceleration of global production
growth with China's rapid descent leading the way among sizable economies. The painful process
of rationalizing supply via shutting in production is now well underway. US short term leading
economic indicators have been improving so far this year and China industrial output has
strengthened with a weaker currency. The US dollar has also stabilized after a very sharp rise
starting in 2014, the oil price has strengthened and inflation potential, albeit modest, is on the rise.
So, there has been a recent bounce in the silver price as traders speculate this heavily oversold
market may finally see some sunshine. The improvement in silver fundamentals has been modest,
and economists are very concerned about just how well the global economy will hold up this
year. Silver is modestly overbought, but is clearly in play for now.