On March 12th- just over one week ago- the Swiss National Bank announced that strength in the franc represented an ‘inappropriate tightening of monetary conditions’ while it intervened to sell francs against both the dollar and euro. The franc fell from around .86 down to .84. Yesterday it ended close to .89.
The point? The U.S. dollar can only decline if other currencies rise and there are very few central banks out there that are interested in accepting an ‘inappropriate tightening of monetary conditions’ at this time.
In any event we start out today with a chart comparison between the ratio of the Canadian stock market (S&P/TSX Composite Index) to the U.S. stock market (S&P 500 Index) and 10-year U.S. Treasury yields (TNX).
The argument is that long-term yields trend with the Cdn/U.S. equity markets ratio. If conditions are so weak that yields have to decline then- fair enough- the Cdn stock market will fall on a relative basis. If, on the other hand, cyclical growth is alive, well, and expanding as one might assume from the recent strength in commodity prices… then long-term yields will resolve higher.
We have argued (often) that while commodity prices had declined to the base support line we were not looking for a rising trend to begin until the second half of the year (around August). The idea was that the equity and bond markets had been trading since last December as if cyclical growth was going to improve but in periods of extreme pessimism actual cyclical strength tends to lag by around 8 to 9 months.
In any event if the markets are going to swing back to the strong commodity price theme we would expect to see the Australian dollar roaring ahead relative to the euro. In other words the inverse of the trend for the CRB Index would be the euro/AUD cross rate. The chart argues that unless the cross rate breaks up to new highs the down trend for the CRB Index shifted into a flat trend towards the end of last year. Not a positive trend, of course, but simply a flat trend.
We are going to do something a bit different today. This is an argument that we do not believe that we have made in the past. It has to do with our attempt to understand what is going on with the trend for gold prices.
Obviously if most or all central banks are attempting to play beggar-thy-neighbor through currency depreciations ‘something’ has to rise in response. The ‘something’, of course, has been gold.
Below is a chart comparison from 1999- 2001 that includes the stock price of Yahoo! (YHOO) and the stock price of General Electric (GE).
We have argued that 2000 represented a period of peak cyclical strength. It wasn’t as much Nasdaq, internet, or tech/telecom as it was ‘cyclical asset prices’. We have pointed out, for example, that President Clinton threatened to release heating oil inventories in late 2000 in an attempt to push energy costs lower. Cyclical is cyclical after all.
The first point is that 2000 marked a huge peak for cyclical asset prices including everything from the Nasdaq to crude oil. However all asset prices did not top at the same time. Yahoo, for example, reached a high at the start of the year, the Nasdaq topped out in late March, the share price of General Electric topped in September at the same time as both copper and crude oil.
If Yahoo marked the start of a negative trend for cyclical asset prices then GE represented the reality of the decline. Between the top for YHOO in January and the final bit of lagged strength in GE about 9 months or 3 calendar quarter elapsed. Put another way YHOO represents a few chunks of snow sliding down the slope while GE stands for the actual avalanche.
The basis for this chart-based argument began with the observation that while commodity prices turned lower at the start of last year’s third quarter gold prices- which in almost all cases trend with commodity prices- were still pushing higher. When two markets that trend together diverge to this extent chances are that one of them is ‘right’ while the other is ‘wrong’.
So- for the sake of argument- let’s assume that Crude oil today is similar to YHOO back in 2000 while gold is similar to GE.
The idea is that trends tend to change around the start of a new quarter. Just as YHOO’s share price did not peak until the end of 1999 we find that crude oil prices reached a peak in early July last year. Just as GE’s share price had to push upwards until the end of September in 2000 we will argue that gold prices have come roaring back based largely on money trying to maximize a quarterly return.
The argument would then be that while GE and YHOO both traded lower for two months following the cycle peak for YHOO at the start of 2000 the initial break for crude oil prices last July pulled gold prices lower into September. This would then suggest that the strength in gold prices is merely a lagged response to the old positive commodity price trend and that the ‘driver’ for lower gold prices would be renewed weakness- perhaps to new lows- for crude oil as we move into April. For what it is worth, of course.