The Bond market is Indicating that The Rate of Inflation is not an issue in 2017
Bonds should have continued to plunge, but notice that bonds bottomed in April and have started to trend higher. After the July rate hike, bonds should have taken out their April lows, but they did not. Instead, they went on to put in a series of higher lows; higher lows are usually indicative of higher prices. Furthermore, the stock market hardly reacted to the last rate hike; after a very mild reaction, it has continued to trend higher.
We tend to focus more on the technical and psychological outlook, and both are indicating that inflation is still not an issue. The Gold market is also indicating that inflation is not an issue. Last July Gold traded past $1400; at that time rates were lower and the US dollar was trading at higher levels. But today rates are higher today, and the dollar is trading lower than it was in 2016, but Gold instead trading at or above $1400 can’t even trade above $1300 for a sustained period.
Mass Psychology seems to support the theory that US inflation is not a big problem
The psychological factor does not support higher prices; the economy is not doing well as the consumer is not spending wildly. Consumer confidence is increasing, but consumer spending is not marching in tandem with consumer confidence. Income growth is weak; the rise in incomes and net worth has primarily benefited high income and high net worth households. These are the same individuals that have the most money invested in the stock market which has tripled since its March 2009 lows.
We have listed a plethora of factors that illustrate that inflation is not an issue; at least not yet.
Even James Bullard, president of the Federal Reserve of St Louis went seems to be in agreement
“Low inflation has been the major surprise of the era,”
He also went on to state that he was still waiting for inflation to return to the 2% ranges and would not support any increases in the Fed’s benchmark rate until 2018 to allow inflationary forces to recover. He might have to wait a lot longer than that. AI and technology, in general, are going to continue to fuel lower prices. The retail sector is in freefall; the remaining players battle it out, and price wars will continue for the foreseeable future. Food prices are going to plunge due to the price war that new entrants like Lidl and Amazon have triggered.
The bond market is not supporting the higher inflationary outlook, in fact by all measures the bond market appears to be building momentum to trend higher.
US Jobs Report misses the mark
The unemployment rate edged up to 4.4% and wages barely grew. Only 156,000 jobs were added as opposed to the 180,000 consensus number.
The retail sector continued to get hammered; retailers shed 9,00 jobs, while the public sector shed another 9000 jobs.
“In months where there are anomalies like this, we look at the three-month average, which is 185,000,” said Michael Gapen, chief United States economist at Barclays. “The labor market is healthy, but we still have the conundrum that solid employment gains haven’t translated into faster wage growth.”
One wild card in the second half of 2017 will be gasoline prices. The surge following Hurricane Harvey’s devastation in Texas will leave less money for consumers to spend on other goods and services.
“For the economy, it’s steady as she goes, but for the markets, it’s Goldilocks,” said Torsten Slok, chief international economist at Deutsche Bank, referring to the not-too-hot, not-too-cold August payroll increase. NY Times
The markets are holding up well and trending higher as we stated they would all along in 2016 and now in 2017. Until the sentiment turns bullish the markets are expected to trend higher.
A contrarian investor focuses on the facts and not the noise
We are going to use the precious metals to illustrate some of the Psychological principles of being a Contrarian investor. Keep in mind that most contrarian investors are not real contrarians but fall under the category of Fashion contrarians.
Contrarian investing is based on taking a position that is opposite to that of the masses. In general contrarian, investors get in an investment too early as their analysis is based on doing the opposite of the masses. In contrast mass psychology dictates that you wait for the emotion to hit a boiling point, euphoria or panic before a position is taken. Mass psychology involves the actual study of what the masses are doing as opposed to just determining that their current action is wrong and using that information to take a position in the opposite direction.
A contrarian Investor takes a position that is contrary to the Masses
Contrarians only take a position that is contrary to the masses and that about wraps up the ideology of being a contrarian today. Very few of today’s contrarians are true contrarians; they fall into the category of fashion contrarians.
Investors that adopt the doctrine of mass psychology correctly look for something more. Mass psychology takes the principle of contrarian investing and then pushes it to the next level.
Mass psychology focuses on extreme situations
Students of Mass Psychology look for extreme type situations. In other words, sentiment should not just be bullish before an opposing strategy is put into play, it should be at the boiling point and only then will the student of mass psychology look for an exit and attempt to take an opposing position to that of the masses. To illustrate this point, we will use the following example.
The commodities sector has several components to it, two of them being the Gold and Silver. Throughout 2002 and early 2003, the hate and disgust for both these sectors were extremely high. Fast forward to 2004 and Gold was being mentioned everywhere; even CNBC had a little ticker that stated what the price of Gold was throughout the day. The hate or disgust for both these sectors was no longer there, and even though both these sectors have a long way to go before the masses fully embrace them, they did not provide a psychological basis for taking an opposing position to that of the masses in 2004.
Gold went on to soar to untold heights, heights that most would have deemed impossible in 2003. All along the way we continually stated that Gold would continue to trade higher and higher until 2011. We warned our subscribers to bail out of Gold very close to the top.
A Contrarian Investor pays close attention to what the masses are doing
Even though the masses have still not fully embraced Gold, this concept does not matter in the long run. A more important criterion would be to find out what % of investors has taken positions in these sectors or not. Next one would try to find out what the Gold bugs (the most bullish individuals ever created on earth) are doing. If all the Gold bugs are bullish, then based on the contrarian rules of investing you should take a contrary to a neutral position because all the individuals in your group are now optimistic.
Do not pay attention to the masses; they know not what they are doing when it comes to investing
Should one care what the masses are doing that much or focus on the Gold bugs (the group) that are emotionally tied up with Gold? The masses in general, will not embrace Gold fully until it becomes fashionable and by then a large portion of the Bull Run will be a thing of the past. In the last Gold Bull Run, the masses did not even know what was going on, let alone take a position in this sector.
So one measure would be to determine if all the people who believe in Gold have already taken positions if they have then the market has become saturated. The only way the market can continue its upward run is for momentum players to jump on the bandwagon. These players have very short time spans of concentration, and thus, they jump in and out very fast. Once they decide to bail out the corrective phase could be very painful as was the case of precious metals topped out in 2011. The housing collapse and internet bubble serve as two stark reminders of what happens once momentum has run its course.
A Good Contrarian Investor understand the core principles of Mass Psychology
Mass psychology is the constant analysis of the playing field to determine how the game is being played. Are the rules changing, are the players become more aggressive or docile, is the playing field soft, rocky or worse yet on extremely high and treacherous ground. One has to take measures at different levels and then compare it the pattern you have already established from past observations.
In this sense, mass psychology is dynamic compared to the methodology most contrarians put into play. Contrarians do not measure their position relative to those of other contrarians; they only measure their position relative to that of the masses, and therefore, they fail to obtain a vital piece of data. This usually results in pain, misery and taking on substantial losses In, other words; they do not measure the intensity of emotion in their camp.
The gold bugs are a classic example of contrarian investing gone wrong. They moved from the Euphoric phase to the having found religion period, to the gnashing of teeth and pure misery phase, as they watched Gold plunge from 1800 ranges down to the 1000 ranges. They still cannot fathom why this happened, especially as trillions of more dollars have been created since 2011.
The Internet boom lasted one-year longer after all the TA and contrarian indicators were in the extremely bearish zones. Euphoria for this sector was running sky-high. If one had shorted the markets based on these contrarian factors only one would have lost one’s pants and well as underwear. In other words, you would have most likely lost a small fortune.
Gold bugs should have banked some of their profits. Instead, they continued to plough money into Gold, and as it pulled back, they jumped in joy and added even more. Once the correction moved from the mild to the wild phase, they panicked and started to pray. Today the sentiment is almost as bearish as it was in 2003. From a long term perspective, a great buying opportunity could be at hand.
Be A true Contrarian Investor and not a fashion contrarian
Most so-called contrarians were caught flat-footed when the Equity markets mounted this huge rally from Oct 2004. Their contrarian indicators suggested that taking a short or neutral position was the right thing to do. Only 10% of the investors can win at any given time. The moment the number surges past this level (no matter what side of the fence they are on contrarian or the masses side); the markets will adjust to bring this ratio back to its norm.
Investing based on psychology amounts to not only taking a position against the masses but also against the fashion contrarians. Once sentiment has reached the boiling point, one should go into cash; risk takers can consider shorting the markets. Finally, less attention is being given to the precious metals sector, so establishing a position now could be viewed as a prudent long term investment.
On the same token, most investors and experts expected the Market to Crash after Trump won and we stated that it would create a buying opportunity just as Brexit did. In fact, since 2013 we have been stating that a stock market crash was a long way in the making and that all strong pullback should be viewed through a bullish lens.