Classic Sign of a Market Top

From CNBC on a rare occasion it actually performs financial journalism:

With stocks near all-time highs, investors are taking on record levels of margin debt, something that could accelerate a decline if the market turns south.

Margin levels, or the amount borrowed to purchase securities, climbed to a new record of $401 billion in September, according to NYSE Euronext data released this week. The monthly increase of 4.78 percent was also the largest gain since January. The NYSE figures represent the margin accounts of member firms.

"Investors love going on margin in a rising market environment, but when the market declines, it can be extremely painful" says Paul Hickey, co-founder of Bespoke Investment Group. "Don't forget that if you go on margin you also have to pay interest on that loan, and some brokers charge pretty high rates, so you are already starting in the hole."

So far this year, the S&P 500 is up 23 percent, while other major indexes such as the NASDAQ and Dow Transports have spiked 30 percent and 32 percent, respectively.
Prior to the financial crisis, debt margins peaked at $381 billion in July, 2007, three months before the S&P 500 hit an all-time high.

Currently, the Federal Reserve's Regulation T allows investors to borrow up to 50 percent of the price of a securities purchased on margin. The Fed has not changed the margin requirements since 1974.

Even if high levels of margin sound alarming, they do not necessarily signal a red flag. Dan Greenhaus, Chief Global Strategist at BTIG, highlights that peaks in margin debt coincided with peaks in stock markets. "However, there's nothing to say that today, tomorrow or the next day is ultimately the peak. Like stock prices, we only know in hindsight," he said.

Just to put this into a greater context, compare other periods of margin highs with subsequent market drops. In this graph, the margin balance is calculated slightly differently but is illustrative never the less. The blue line is the market and the red area is shown as the negative (margined) credit balance up to September:

"Earning Zero is the Best Investment"

When is earning zero the best investment? When you're expecting the US stock market to reverse by 40%. Mark Spitznagel doesn't believe there needs to be a "catalyst" like the end of QE or even a tapering (which will likely never come).

As Bartiromo mentions, Spitznagel had 100% return in 2008 while markets were down by a third. He also recognizes that people in cash feel "foolish" as the market heads higher. But he also recognizes the gains are illusory. Few will have the timing to get out before the market sours and sentiment changes.

Being positioned in cash will allow you the extraordinary opportunity to go on a discount shopping spree when there are ten sellers for every buyer. These are the times that long lasting wealth is created. Retail investors should watch SDY, an ETF made up of large blue chip US companies with proven track records of steadily increasing dividend payments. As of today, its yield is 2.45%. When it starts to approach 5% in a sell off (The yield rises as the price goes down) it will be a good time to buy

Its is exactly these times of crisis that Warren Buffet has stepped in with his cash rich insurance fund to buy at deep discounts. This will also be the time that retired Americans who have suffered under the Fed's financial repression will finally be able to buy investments, including stocks, with high yields to fund their retirements. Few will be ready.

Incredible Interview with Jim Rickards

Readers of this site will recognize many of the themes Rickards discusses. Still, its amazing to hear it from him. Those themes are:

• Long term interest rates will not be allowed to rise.
• We are in a depression, not a recession.
• Depressions require structural reforms not more liquidity.
• Fed policy (QE) is following Japan's previous decades with the same results.
• The Dollar as a world reserve currency will not last.
• A rise in gold will happen eventually with either inflation or deflation.

Marc Faber: QE Will Not End, Could go to $1 Trillion Per Month

China Knows America is Broken

As an American is saddens me to watch this. We are going down a dark path,

Alasdair Macleod via GoldMoney.com,
 
China is now overtly pushing for the US dollar to be replaced as the world’s reserve currency.

Xinhua, China’s official press agency on Sunday ran an op-ed article which kicked off as follows:

“As U.S. politicians of both political parties are still shuffling back and forth between the White House and the Capitol Hill without striking a viable deal to bring normality to the body politic they brag about, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world.”

China does have a broad strategy to prepare for this event. She is encouraging the creation of an international market in her own currency through the twin centres of Hong Kong and London, side-lining New York, and she is actively promoting through the Shanghai Cooperation Organisation (SCO) non-dollar trade settlement across the whole of Asia. She has also been covertly building her gold reserves while overtly encouraging her citizens to accumulate gold as well.

There can be little doubt from these actions that China is preparing herself for the demise of the dollar, at least as the world’s reserve currency. Central to insuring herself and her citizens against this outcome is gold. China has invested heavily in domestic mine production and is now the largest producer at an estimated 440 tonnes annually, and she is also looking to buy up gold mines elsewhere. Little or none of the domestically mined gold is seen in the market, so it is a reasonable assumption the Government is quietly accumulating all her own production without it becoming publicly available.

Recorded demand for gold from China’s private sector has escalated to the point where their demand now accounts for significantly more than the rest of the world’s mine production. The Shanghai Gold Exchange is the mainland monopoly for physical delivery, and Hong Kong acts as a separate interacting hub. Between them in the first eight months of 2013 they have delivered 1,730 tonnes into private hands, or an annualised rate of 2,600 tonnes.

The world ex-China mines an estimated 2,260 tonnes, leaving a supply deficit for not only the rest of gold-hungry South-east Asia and India, but the rest of the world as well. It is this fact that gives meat to the suspicion that Western central bank monetary gold is being supplied keep the price down, because ETF sales and diminishing supplies of non-Asian scrap have been wholly insufficient to satisfy this surge in demand.

So why is the Chinese Government so keen on gold? The answer most likely involves geo-politics. And here it is worth noting that through the SCO, China and Russia with the support of most of the countries in between them are building an economic bloc with a common feature: gold. It is noticeable that while the West’s financial system has been bad-mouthing gold, all the members of the SCO, including most of its prospective members, have been accumulating it. The result is a strong vein of gold throughout Asia while the West has left itself dangerously exposed.

The West selling its stocks of gold has become the biggest strategic gamble in financial history. We are committing ourselves entirely to fiat currencies, which our central banks are now having to issue in accelerating quantities. In the process China and Russia have been handed ultimate economic power on a plate.

The US Dollar and a Rising China

From the Economic Collapse Blog:

On the global financial stage, China is playing chess while the U.S. is playing checkers, and the Chinese are now accelerating their long-term plan to dethrone the U.S. dollar.  You see, the truth is that China does not plan to allow the U.S. financial system to dominate the world indefinitely.  Right now, China is the number one exporter on the globe and China will have the largest economy on the planet at some point in the coming years. 

The Chinese would like to see global currency usage reflect this shift in global economic power.  At the moment, most global trade is conducted in U.S. dollars and more than 60 percent of all global foreign exchange reserves are held in U.S. dollars.  This gives the United States an enormous built-in advantage, but thanks to decades of incredibly bad decisions this advantage is starting to erode.  And due to the recent political instability in Washington D.C., the Chinese sense vulnerability.  China has begun to publicly mock the level of U.S. debt, Chinese officials have publicly threatened to stop buying any more U.S. debt, the Chinese have started to aggressively make currency swap agreements with other major global powers, and China has been accumulating unprecedented amounts of gold.  All of these moves are setting up the moment in the future when China will completely pull the rug out from under the U.S. dollar.

Don't Freak Out: Gold, the Debt Crisis and Janet Yellen

I just wanted to write some quick notes about the last week and the issues involved with gold reaching its lowest point since July of 2010, Janet Yellen replacing Ben Bernanke and the US government shutdown and the impending debt ceiling and what it means and does not mean.

I will likely come back and update this post to expand in the coming days so you may want to revisit it Sunday or Monday.

The government shutdown and debt ceiling.
This subject is never really explained well by media or is explained poorly. In addition, some politicians are out right misrepresenting what will happen for political purposes to scare citizens into action.

The previous spending bill agreed to by Congress and the President has now expired. When they cannot agree on a new spending bill we get a "government shut down". What that means is that discretionary spending cannot continue but essential services are continued. Since two thirds of government spending are made up of entitlements like Medicare, Medicaid and Social Security, that part is unaffected. The rest, either continues or not depending on whether they are essential services or not. One example is most military spending. So as of today's writing about 80% of the normal level of government is still operating unchanged.

The debt ceiling is something different.

Getting to ONE: the Dow / Gold Ratio

I've written about the Dow / Gold ratio several times noting that there seems to be a long term cycle where the ratio hits one or nearly one. We were quickly moving back toward a ratio of one when the Fed embarked on Quantitative Easing to reflate the Dow and then in 2011 began to intervene in the gold markets to keep the dollar relatively strong and the gold price week. Though the economy wallows in low growth recession/depression the Fed has been successful in reflating the Dow and knocking down the price of gold. But Fed intervention loses its efficacy the longer it drags on requiring ever larger amounts of dollar printing to keep the prices from reverting to their natural equilibrium.

Its my belief, this is unavoidable and eventually either the forces of inflation will over power gold's manipulation or the Dow must decline towards its intrinsic value once the collective minds of the market admit there is no recovery. Today I examine commentary from Jim Rickards and Richard Russell who are both legends in their own right. One examines gold and how it gets to $5,000 and one who examines the Dow and how it reverts to 5,000. In essence, together, how the Dow/ Gold ratio gets to one

A Reminder of the US Debt Limit and its Correlation with Gold

As Washington fight over the upcoming debt limit, I thought it would be time for a good reminder of the historically high correlation between the US national debt, the debt ceiling and the price of gold.