Market Trek

with Brian Whitmer

  • Market Turmoil: Why Is Liquidity Drying Up?

    Hey guys, Brian here. I hope your week’s going great.

    The markets have obviously been wild this week. I’m recording this on Thursday morning, August 8.

    The press really loves to latch onto storylines when markets get volatile. Three big ones have popped up. I’ll talk about in this video: the yen carry trade, the Sahm Rule Indicator, and Berkshire Hathaway’s cash position.

    To spoil the punchline here — none of these things are actually causing the sell off. But I think they are important for other reasons.

    Stay with me.

    Alright guys, welcome back. First up, the yen carry trade.

    Traders borrow in Japanese yen. They convert the yen to dollars. They invest those dollars in higher yielding assets. Carry trades are nothing new.

    This one had been especially popular because (1) it costs virtually nothing to borrow yen; (2) the dollar had been strong, so there was no problem reconverting and paying back the loans; (3) higher yielding investments have been everywhere.

    The money from this trade has made its way into bonds and stocks, and primarily a handful of tech stocks. All of this has begun to unwind now. Rates have been slowly rising in Japan. The yen suddenly rallied against the dollar. I’ll put up a chart here illustrating the huge move in forex last week. And the tech darlings have hopped, right? This chart of the Magnificent Seven shows what could very well be a long-term peak.

    Many people say that yen carry is causing the equity selloff. I get the reasoning. It created all this liquidity. It pushed stocks higher. Now that liquidity is drying up, forcing stocks lower. I get the argument.

    It misses the point, though, because the foundation for liquidity is optimism and confidence. The source of that liquidity is kind of immaterial. It could be yen carry, it could be QE. Regardless of the source, the liquidity spigot gets turned off only when optimism and confidence go away.

    That’s what’s happening now and, not to add to the fear mongering here, but this really has all the vibes of Long-Term Capital Management in the late ’90s. If you’re young, read up on LTCM. It would not be surprising at all if a major investment house or two or three is trapped underwater right now.

    Now, speaking of liquidity, Berkshire’s cash position. This one’s been all over the press. Second quarter filings show Berkshire basically sold half its position in Apple and piled into treasuries. Now, Buffett obviously invests on the fundamentals. It clearly works for him.

    As a market technician and as a wave analyst, I think this pattern in Berkshire’s cash position is very compelling. For one, just the sheer volume of cash confirms that the best value investor in the world cannot find any value. That’s very much aligned with our own thinking.

    The more important part of this graph is what it suggests about coming equity values. This is a fairly classic five-wave advance. So, the next draw down should be the largest of the entire pattern. That’s larger than Wave 2, larger than Wave 4. Those buying sprees took place during the ’08 meltdown and following the 2020 crash.

    So now, let’s just say this cash position comes back inside the trend channel. That alone is a couple hundred billion [dollars]. If we got back to the previous fourth wave low, that’s a buying spree of nearly $300 billion.

    So, our view is that equity prices need to come down a lot before Berkshire goes shopping for stocks on that kind of scale. So let’s see what happens.

    Now, last thing to mention is the Sahm Rule Recession Indicator. It got triggered with the jobs report in early August. This one’s been all over the press. Claudia Sahm, American economist. She discovered a link between recessions and changes — specific changes — in the unemployment rate and introduced the idea in 2019. But it has been back tested.

    You’ve likely seen this graph in the press. It has signaled the start of every recession since the 1970s. I think this is super interesting. Sahm found a pattern in the data that appears to be a useful signal.

    One thing to realize, however, is that the Rule has not been predictive. It has signaled recessions when they were already beginning. The other problematic narrative is that this triggering of the Sahm Rule has caused stocks to sell off.

    Completely disagree here. Investors didn’t wake up in August and say, “Oh, Sahm Rule’s triggered. Better sell stocks.” Investors were quietly selling this market long before the Sahm Rule was triggered. Dow Transports for example, peaked back in 2021. Utilities peaked in 2022. Even the Industrials and the S&P and the NASDAQ, those indexes peaked in mid-July, which was before the Sahm Rule got triggered.

    The way we would describe things is that optimism has been receding. That negative mood trend was first reflected in stocks. Now it’s showing up in economic data. If it persists, the economy will eventually contract, and that contraction could be quite large, depending on the size of the bear market. That is the socionomic take.

    Let me know what you think in the comments. Thanks for watching. and I will see you in the next video.

    For worldwide coverage of trends in stocks, bonds, gold & silver, cultural trends and hot topics, check out Global Market Perspective.

  • What Happened to All the Stock Market Short Sellers?

    Hey guys, Brian here. I hope your week’s going great.

    Quick video today to talk about short sellers. This is a segment of investors who, to my eye, have capitulated entirely to the bull market. This has happened in the past.

    I’ve got a few charts that I think are telling us something important about sentiment. Stay with me.

    All right guys, welcome back. Let’s just set the table here with some recent statistics on short selling. So, we’re talking about borrowing and selling shares to profit from a decline. I found some of these to be fairly incredible.

    Hedge funds dedicated to short selling: There were 54 in 2008. Now just 14 as of June this year. Funds with a short bias, right? Assets down to 4.6 billion. It was 8 billion in 2008. So, nearly cut in half. Short interest in a typical S&P 500 company: lowest in more than two decades.

    This, by the way, is not just a U.S. phenomenon. Financial Times in the U.K., just reported on so-called activist campaigns. So, these are funds that actively try to find flawed companies and bet against them. Slowest pace of growth in a decade. One U.K. fund executive said, “Shorting any UK mid-cap right now is insane, literally insane.” That’s a direct quote.

    So personally, my ears perk up any time we see widespread capitulation, long or short. And we can see this capitulation with a few charts here. Steve and Pete published these two in the latest Financial Forecast (subscription links below).

    Top graph here, short interest in the S&P tracking ETF: lowest in at least six years. Just dipped below 20% of shares outstanding. Same trend, more or less, for the NASDAQ tracking ETF. Short interest down below 9% of outstanding shares.

    Like I said before, it’s not just U.S. traders that are terrified of getting caught short. Europe, too. This is the Euros Stoxx 600 on the top. Bottom graph is short-loan values as a percent of market cap in Europe: lowest since at least 2014.

    Now, obviously this is not a perfect indicator of tops or bottoms. But notice here, Wave 3 back here in 2015. Top when short loans dropped below 20%. Wave 5, same thing. And right now, we see the lowest value of short loans, lower than those previous tops. So, the shorts have gone extinct.

    Don’t take my word for it, by the way. Bloomberg said the same thing in a recent headline. You may know Jim Chanos, right? Famous short seller, got very famous when he bet against Enron 20-plus years ago. For 40 years, Chanos has made money on the short side during both bear markets and bull markets. That’s not easy. He says last year he was forced to shut down his fund, and the way he put it on a recent podcast, investors have just given up on the short side.

    So, very possible that the business of shorting is due for a revival in a long period of out performance. I don’t know.

    Let me know what you think in the comments. Thanks for watching. and I will see you in the next video.

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  • Stocks vs. Commodities and “Hard Assets”: What 124 Years of History Show You (Video)

    Hey guys, Brian here. I hope your week’s going great.

    We have talked about gold in my last few videos. I showed some stock markets priced in terms of gold, and I showed where gold was in terms of its own Elliott wave structure. Got some great feedback on those charts. So, I want to expand on that perspective a bit.

    In this video, we’ll look at stock prices, not just in terms of precious metals, but in relation to the entire commodities complex. Stay with us.

    All right guys. Welcome back. Let’s just start with an overview here, using the Bloomberg Commodity Index.

    So, this is just futures prices. It’s a basket of commodities back through the lows in 2020. Big picture. Five up, three down. That’s painting with a broad brush, I know. If we want to get a little more detailed, I’d say it’s a very good-looking five up and a messy three down.

    There are other ways to count that decline. But we are in a previous fourth wave. We have turned back up. We have seen higher lows and higher highs. I’d say if we maybe break 110 or so on the upside, pretty good confirmation that the trend is back up.

    Now, some individual sectors supporting this perspective. This is the S&P GSCI Grains Index, so just a benchmark for corn and soybeans, wheat, all of the grains market. It is more or less the same look, right? Five up, three down over the past four or five years. So, here we get a little more confidence that we’re on the right track.

    I also talked to some of our commodity guys in Pro Services, and they have had a great run with corn this year. For whatever reason, the waves have been especially clear. So, if you trade commodities and you want to check out their services, I’ll put a link in the comments.

    Now, for the generalists — myself included — I think it’s important to get a perspective of the value of hard assets. Where are hard assets going relative to financial assets? That’s what we’re trying to do today.

    This is Dow CRB back through the 1900s. So, it’s just stocks priced in terms of commodities. The inset of weekly prices here shows that the top was 2020, right? The ratio is falling. So, even though stocks remain strong, financial asset values are falling relative to hard assets, and we think that’s an important trend that will continue.

    Now, one final chart. This is just a European version of the same thing. It’s a euro-denominated commodity index, but now we’re dividing it by the Stoxx 600.

    So, here the ratio drops when investors get excited about financial things, and it rises when financial things fall out of favor. You can see the dot-com bubble, the financial bubble in ’07. On the other end, there’s the dot-com bust in ’03. There’s the global financial crisis, there are European sovereign debt crises.

    What’s compelling to me here is, again, we see that five up, three down on the right side since 2020. We don’t always see Elliott waves in ratios like this. But this pattern is fairly textbook. And if it’s operative, this ratio is going higher.

    Maybe that means stocks fall, maybe it means commodities rise. Don’t really know. Maybe it’s a little of both. But that is the picture. Essentially, hard assets getting more valuable relative to financial assets.

    So, let me know what you think in the comments. Thanks for watching. Thanks for reading, and I will see you again in the next video.

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Brian Whitmer

Global Markets Strategist
Editor, European Financial Forecast

Brian Whitmer was a civil engineer in another life, so he’s got a good sense of how things are constructed. Applying that skill set, he deconstructs today’s sundry financial vehicles, like CDOs, meme stocks, subprime mortgages, SPACs, et al, and contextualizes them for his subscribers. He edits the monthly European Financial Forecast and contributes the European stock section of our monthly Global Market Perspective.

Brian’s also got a bit of wanderlust, so he gets a first-hand, boots-on-the-ground feel for what’s really going on around the world.

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