Summer of Our Discontent in Markets - Part 3

Summer of Our Discontent in Markets - Part 3

This is the third in a three-part series on the growing likelihood of a major transition in major markets. Part 1 focused on Macro Event Risk and Cycles. Part 2 discussed the application of popular complex systems Early Warning Signals (EWS) to assess a possible “critical transition” in the S&P 500. This post, Part 3, examines recent price action in equity, oil, and gold markets.

Since the first post in this series, equity markets have rallied strongly, bouncing upward off key price memory levels toward other important levels above. The next several days will be instructive. Of note, during this time, WTI Crude Oil has continued to drop and Gold has rallied modestly. A sustained drop below $50/barrel in Oil and above $1400/ounce in Gold is likely if global markets are experiencing a major transition.

Stock Indexes

Where Are the New Highs?

Last winter, a dramatic drop in equities between October and December was met by a head-spinning ascent in early 2019 which saw the S&P 500 and NASDAQ trade to new all-time highs on May 1st and April 29th, respectively. The relief of this rally obscured relative weakness in every other major market index across the globe (the Sensex being the notable exception).

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Over the last two days, equity markets have rallied off of May 31 lows, as rumors of trade talk progress and dovish remarks by various Fed officials have placated traders. These moves seem rather representative of the reactive market action since the fall. Confirmation of new highs by a broader range of the indexes would be validation that equity markets have significant upside from here.

Big Tech Has Antitrust Fever and a Trade Cold

Somewhat quietly, many of the major names that have driven so much of the broader market ascent over the last several years are in or approaching bear market territory. This includes US and Chinese tech giants who are now embroiled in multi-front wars with governments on issues ranging from national security to antitrust.

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As I wrote in my 2019 Outlook here, and again here in May, regulation of Big Tech is coming, with a unique flavor of bipartisan consensus in Washington.

Republicans are frustrated with the perceived tech liberal bias as well as implied incursions on freedom of speech. Democrats are frustrated by unequal distribution of wealth, the loss of jobs from automation, and treatment/pay of workers by the likes of Amazon.

In my May 10th post on this issue, I cited 15 statements by leading politicians about Big Tech competitiveness/antitrust, just this year. Since then, the following has happened:

  • The Federal Trade Commission and the Department of Justice, ostensibly led by Republican-allied bureaucrats, have apparently determined a course of action related to investigating and/or regulating Facebook, Google, Amazon, and Apple
  • The House Judiciary Committee, led by Democrats, is launching a wholesale antitrust probe
  • Former VP Joe Biden (D) said he is open to the idea of breaking up Facebook
  • Sen. Elizabeth Warren (D-MA) has a campaign billboard in San Francisco calling for the breakup of Big Tech
  • Sen. Bernie Sanders (I-Vt.) backed a call to break up Facebook
  • Sen Amy Klobuchar (D-MN), laid out a broad vision for technology that includes overhauling antiquated antitrust laws to make them more applicable to today’s Big Tech companies
  • Sen. Klobuchar and Sen. John Kennedy (R-LA) introduced a Senate bill on Monday that would temporarily exempt publishers from antitrust laws, to support their negotiations with Big Tech platforms
  • A Senate Judiciary Committee hearing about data privacy and competition policy in late May showed a divided front in the GOP on issues of antitrust
  • Democratic presidential candidates are being urged to shift their campaign rhetoric from socialism to antitrust

Crude Oil

The current sources of global tension, including the US-China trade war, tensions with Iran, Fed policy questions, the dismantling of post-WW2 structures, even the evolution of Big Tech, are all being absorbed in the Crude Oil market. The market is telling us something, we need to figure out what that is. . .

Oil Stockpiles are Huuuuge!

On May 31st, US total petroleum stockpiles registered the largest number of barrels growth and 3rd largest percentage growth since 1990! This is not a market in a general state of supply and demand equilibrium.

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Old War With the Middle East, New War With the Middle Kingdom

Back in April, the Trump administration announced that that it would not renew six-month exemptions previously granted to China, Greece, India, Italy, Japan, South Korea, Taiwan, and Turkey to continue buying Iranian oil. These exemptions included negotiated caps. The exemptions run out the later of May 2nd or when a country reaches its negotiated cap.

The stated goal is to force Iran to the negotiating table, or perhaps to destabilize the regime toward extinction. While many of the countries have reduced or eliminated new purchases, China has voiced significant opposition to the ending of waivers and may be actively buying more Irania oil.

The activities of a single oil tanker, the Pacific Bravo, which US officials claim is owned by the Bank of Kunlun (a holding of the state-owned China National Petroleum Corporation) is being tracked by industry watchers.

Pacific Bravo was spotted loading oil in Iran’s Kharg Island as well as the Soroosh offshore oilfield. Notably, just two days ago, the Bank of Kunlun announced that it does not own the tanker. Just like the trade, its anyone’s guess who is telling the truth.

Price Memory in Crude

I’ve written previously about how price has memory and markets tend to gravitate back to important price levels from where major moves occur. At these levels, buyers, sellers, or nonparticipants relive the pleasure, pain, or regret they experienced, driving a new round of price action. I also believe that this implicit human bias is built into many of the algorithms that now drive investment decisions, given their reliance on historical data.

The oil market seems to have strong price memory as discussed in November. Certain key levels serve as strong attractors for the market. Post the 2016 drop, WTI Crude Oil has consistently rallied after testing prices around $50/barrel. There is no reason to expect anything more than a sharp downturn toward that price level, followed by a rally. A sustained break below $50/barrel would support the broader economic slowdown thesis.

Inflation-Adjusted Monthly WTI Crude Oil Prices 2014-2019 (log scale)


Is it Interest Rates or a Slowdown?

There is a popular belief that falling interest rates are correlated with higher Gold prices since the opportunity cost of holding non-yielding commodities such as Gold goes down. This correlation has been generally debunked by rigorous studies. It is also widely assumed that Gold does well in periods of economic uncertainty, as an alternative to stocks. The recent 5% bounce in prices, from a low of about $1274/oz on May 21st to over $1340/oz as of this writing, suggests that a combination of these factors are driving demand, at least in the short-run.

Price Memory in Gold

Since 2013, Gold has traded in a range between $1200/oz and $1400/oz. Inside of that range, there have been numerous short-lived rallies and drops. Only a concrete break of $1400/oz would suggest that buyers are betting on interest rate cuts and possible economic disruption. Anything short of that is just another exhausted rally to be followed by a drop back into the low $1300s or 1200s.

Inflation-Adjusted Monthly Gold Prices 1990-2019 (log scale)


Any opinions or forecasts contained herein reflect the personal and subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. The accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.