The Reflation Trade Isn’t Dead and Evergrande Isn’t Lehman

Just hear me out. You think it’s merely a capitulated bear talking (it is), but I bring you some charts and not simply my severed, emotionally burdened heart (though I bring that, too).

We often make comparisons between the events of the last year and a half and the Great Financial Crisis (hallowed be thy name) because deleveraging events seem to be needed in an era when everything seems so god damned levered up, and so when a great shock struck (I wrote that so your mental tongue would hurt) our economy, which was followed by a great recovery—at least on paper—we have our doubts about that recovery because those of us who are not twelve won’t allow ourselves to be fooled twice in the same lifetime if we can get away with it.

However, packaged neatly into that arrangement is the very evidence we may need to cast doubt on the whole thing: perhaps it was not as much the excess leverage in the system as it was our (lack of) preconceptions about the imminent dangers of that leverage that caused the deleveraging event. And so today, worried to death that we will travel down that same path again, maybe we won’t, because worrying wasn’t a feature of that path.

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Here’s Why I Doubt We’re Near A Major Market Top

Now, Dear Reader, do not get me wrong: yes, I know that the indexes are expensive; yes, I know we are miles above many long-term moving averages; and yes, I still enjoy trying to solve my own psychological problems germinating from my profound unhappiness by watching things burn to the ground.

None of these variables has changed. However, it’s just that those things aren’t always very good predictors of major market tops. Do I think we may be getting close to some delicious corrective action? It’s absolutely possible: and in fact, it’s my preferred analysis. But as far as, let’s say, seeing anything more than a ten or twelve percent decline, I am skeptical of that here and I wanted to share my evidence for that all in one article. And even if we do get some corrective action, that may also still be a ways ahead of us though I am open to the possibility that it could come at any time. Hell, I’d love it if we just fell apart right now.

There are several things I like to watch that very often help us to measure the risk off sentiment of the big players in the market:

  1. Oil – Obviously as growth slows, energy demand does too, and oil often leads equity markets lower.
  2. Copper – Same as oil, the decelerating use of copper as an industrial metal will very often lead the markets lower, so effectively so at times, that we’ve come to refer to it as “Dr. Copper” in recognition of this metal’s ability to ascertain market health.
  3. Yields – Yields falling of course implies that the safety of shitty returns is being highly sought. Since the big boys don’t have mattresses large enough to stick their cash into, they like to park it here.
  4. The dollar – Though not always perfectly correlated, dollar weakness can often be tied to equity strength.
  5. Credit – In the great debt black hole that has become the world financial clown show, an expanding economy necessarily requires an expansion of credit. A slowdown in credit expansion (or heaven forbid, an outright contraction of credit) is the canary in the coal mine that can alert us to the onset of Bear Paradise.
  6. LEI – The Conference Board’s “Leading Economic Index” has an uncanny ability to often, ahem, lead the markets lower and alert us to recessionary forces.

Let’s look at each one in turn.

I have two preferred ways to count $OIL. The first one is as a nested 1-2-1-2 (pink, then orange).

OIL

If this count is correct, oil stands to make significant gains over the coming many months. This would imply some admixture of growth and inflation ahead. The count seems to me to have “a good look” in terms of both price and time. But let us not be obnoxiously bullish because that feels silly. And so, we can move a couple of things around and assign a different bullish-but-less-bullish count to oil thusly:

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