Bubbles and Bottoms 23 June 2019

Let`s start this newsletter with a bottom. Silver has been declining since 2011, but seems to have formed a bottom around 14.9 USD, which it has touched many times over the past 4 years. It is now at a point where it is both touching the long term upwards channel, as well as being at the point of breaking out of the falling resistance.
Looking at the historic performance on this chart from Chris Kimble, breaking out of this resistance can mean a years long bull market. 


This week the Federal Reserve decided to not increase their interest rates, while many people even thought that they would decrease their rates. Donald Trump openly voiced that the FED should lower their interest rates to boost the U.S. economy. 

The FED stood their ground, and decided not to cut the rates. This resulted in the S&P 500 briefly hitting all time highs, after which it dropped about 1%.
After the FED news, the expectations for the FED to cut interest rates during their next meeting, increased to 100%, which means that the expectations are fully priced into the stock market.


This July rate cut would come despite near record lows in the unemployment rate, and an interest rate that is not even at half the level it was before the great financial crisis. Now here`s a little interesting statistic from Sven Henrich: Every time the FED cut its rates when unemployment was below 4%, a recession immediately started and unemployment shot up to 6-7%.


Other recession indicators? How about the yield curve inversion. Every time the 5 year yield vs the 3 month yield spread inverts for longer than 3 months, a recession started within 12-18 months.



In general, 75% of the time over the past 50 years when the FED decided to cut rates, a recession followed soon after.


Can we already see signs of a recession? The New York FED Empire State Index, which reads the general business conditions, posts its biggest monthly fall on record, and is now in negative territory since Oct. 2016.


Singapore`s electronics exports have crashed, with general exports at its lowest point since 2013, which can often be seen as a good indicator for the health of worldwide trade. The electronics exports were expected to go down 19%, while it actually plunged 31%!

What does this mean for the stock market? If the small caps (Russell 2000) is any indicator, it means that the S&P 500 is doomed to go down. When the S&P 500 made new highs, the Russell 2000 was not even near such a level.



Thank you for reading, and don`t forget to stay positive!


Robbert-John Sjollema



The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.


Bubbles and Bottoms 11 June 2019

It took 5 days to recover 19 days of losses. If we continue in this direction, we hit 3000 on the S&P 500 in no time!

This increase in market value comes on the back of another batch of terrible news for the economy, starting with the ADP employment report which showed a difference in the actual released number compared to the median of the employment survey, that was the largest since December 2008.

The market is yet again in a state where bad news is good news, as this big miss indicates that interest rates will be cut by the Federal Reserve soon, which is good for the markets.



These misses have cause the Citi Economic Surprise Index to stay below the zero level since early 2018, indicating a big decline in economic growth.



This in turn has caused the probability of an interest rate cut to spike to 85%, despite the fact that umeployment is still at record lows and markets are at record highs. This would normally not be an environment wherein the Federal Reserve would cut rates.



Speaking of unemployment. Everything looks well in theory, with the unemployment rate being at record lows, but when you`re looking at delinquent auto loans, which normally follow the curve of the unemployment rate (less unemployed people = less auto loan delinquencies), one can see that the two started diverging since late 2014. The question is: which of these two indicators is speaking the truth?


Meanwhile, the probability of a U.S. recession is extremely high, almost reaching levels from the last recession, with a 36% chance of a recession in one year, according to the treasury curve (the relationship between interest rates in the short term, compared to long term securities. Normally short term interest rates are lower, because there is less uncertainty over what could happen in 3 months, compared to what could happen in 10 years.)

Looking at the above, it would make more sense for the Federal Reserve to cut rates, so that they can avoid a recession. Inflation wise we also don`t really have to worry, as the U.S. inflation rate is extremely low, and the European inflation expectations are the lowest on record!



The biggest problem with low interest rates is always that cheap money goes to bad ventures. You can see that very well in the chart below, which shows that the market value of AAA rated corporate debt is now lower than BBB rated corporate debt.


So now that we are very close to a new rate cut, inflation is extremely low, and unemployment is near record low levels, we should jump into the S&P 500 head first, right?
Not so fast. Below you can see that if you really want to put your money into the stock markets, you should look at Europe instead of the U.S., as the relative price performance of the S&P 500 compared to European stocks is currently at a 2.2 standard deviation! That`s higher than 97% of the time!


So if you`re smart, you should look at European stocks. But if you`re really smart, i`d suggest you to look at commodities. The S&P 500 vs the CRB commodities index is at new all time highs, and i personally think that these all time highs won`t last very long. You can see that it tends to move in cycles that can last for more than a decade, and the current outperformance of the S&P 500 is already 11 years old.


Which commodity in particular should you choose? i would suggest to just pick a basket of commodities, like the CRB index, but if you`re interested in metals, then perhaps you want to have a look at the following:


the gold to silver ratio is at a high last seen in 1993. Basically you can buy 1 ounce of gold with 90 ounces of silver currently, while in 2011 for example, you could get an ounce of gold with just 32 ounces of silver! I`ve spoken a lot about this ratio in my previous newsletters, and i still think that silver is one of the best commodities to invest in right now. The great thing about this metal is that it also has a lot of industrial use, so unlike almost only institutional and consumer demand of gold, silver also has corporate demand.


Thank you for reading, and don`t forget to stay positive!


Robbert-John Sjollema




The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.




Bubbles and Bottoms 4 June 2019


We are in a global recession, it has not been officially announced yet, but with the Purchasing Managers` Index being below 50 (indicating a contraction) in South Korea, Japan, Taiwan, Malaysia, Russia, Poland, Turkey, Czech Republic, Italy, Germany and the UK, we can be assured that the world is in trouble.

As central banks all over the world have used up all the tools in their toolbox to avoid the last crisis from spiraling out of control, they have no more buffer to absorb declines from any future recession. This means that the upcoming recession might turn into an all out depression, where each individual, each company and every government will have to tighten their belts.

The main tool that has been used is of course the money printer, inconspicuously called "Quantitative Easing" or any other term that central banks have used to distribute as much money as possible.
Why does the man on the street still feel poor? because this money ended up in the hands of private and public companies, and it created something that can be described as miraculous: The Greek 10-year bond yields have dropped below 3% for the first time ever!

Investors are so hungry for yield in a world of zero interest rates, that they only see a 3% chance of Greece defaulting on its debt. Even though history shows that since 1800, Greece has spent half of its time in default!




Before the crisis, Germany`s stock market capitalization was about 3.8% of the worldwide market capitalization. Currently this is sitting at 2.6%, even though Germany accounts for 4.6% of total global economic output. Is this an opportunity? is the German stock market highly undervalued? or will the rest of the world catch up to Germany on the downside?



Last week i showed you a great chart, depicting all the IPO`s that have taken place recently, and the massive losses that they have incurred over the past year. The following chart compares the recent IPO`s to the ones over the past 2 decades, and one can see that even around the dotcom mania, companies were not as loss making before their IPO than that they currently are. It`s truly a different world today!

The IPO madness can also be seen in the S&P 500 index, where record valuations have been hit. It does look like it hit a wall recently, with a double top forming. As the amazing Northmantrader shows below, there`s a lot of similarity to the 2000 and 2007 tops. For example the declining RSI with an increasing index price, a bottom in the unemployment rate, and a break of the multi year trendline.



Will this be a copy of 2007? Looking at the below chart, you would think so. You can see a strong rise with low volume, a double top, a sharp decline in between those tops, and what the future will bring... well if we follow the path of 2007, it won`t look good for us!



The summer slowdown is now well underway, but with the US-China trade tensions, i don`t think we should rest on our laurels! Look at what happened in the last two weeks of December, which should have normally been slow weeks... it surprised us all, and gave many of us a very red Christmas!


Thank you for reading, and don`t forget to stay positive!

Robbert-John Sjollema




The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in this publication is that of the publisher and is subject to change without notice. The information in this publication may become outdated and there is no obligation to update any such information.