Last week the markets became very volatile and sold off. The carnage wasn’t just domestic, it was global. China had a terrible week that culminated with investors protesting losses (tee-hee). The MSCI EAFE index was off 6.19%, while the MSCI emerging markets (EEM) were off 7.14%. That compares to 5.1% for the S&P 500 (SPY) (VOO) and Nasdaq’s (QQQ) 5.01%. See JP Morgan’s Weekly Market Recap.

The rise of volatility is not something we should take lightly. The bond market in particular seems to be telling us something. The idea that everything is great in the markets and the global economy is pie in the sky thinking. We are near the end of some very powerful cycles that have overshot and will revert to mean – eventually, as always.

I put this into the oil article, but really think about what Paul Tudor Jones said, because I completely, 100%, all the way, agree:

If I had a choice between holding a US Treasury bond or a hot burning coal in my hand, I would choose the coal. At least that way I would only lose my hand…

For those of you not old enough to remember, one of the most popular phrases of the 1970s and 1980s was ‘crowding out.’ Get used to it as it describes the detrimental effects excessive public sector borrowing has on the economy, which will become more popular as time progresses. This is all simply breathtaking. It is incredible that at full employment we have passed a tax cut that will push our deficit to 5% of GDP. Can you imagine what will happen to the deficit and debt in the inevitable downturn? This is what the dollar is sensing.

The dent in the Petrodollar that is coming is a big deal. Don’t ever doubt that the dollar being essentially the only global reserve currency for over four decades was the biggest financial free ride for a nation since the age of empires.

Q & A

From MikeC@35 Feb 11, 2018 9:35 PM at MOSI

Kirk, if I only buy one or the other… Pioneer Natural Resources or Encana, which is the top shelf choice? Also, are you familiar with Diamondback Energy (FANG)?

Pioneer is a safer bet by a bit and will start throwing off greater income, but Encana has more upside for capital appreciation.

Yes, I know Diamondback. 25 PE due to being bid up by investment letters and chasers. Good company though.

From omfan Feb 12, 2018 2:03 AM at MOSI

Hi Kirk, SWIR at 16,00 (-13,93%). Starting building 2% position? Same goes for AAPL? Closed 156,41 near low price range. Or wait for Spy near 220s?

monterrosa replied the topic: Sierra Wireless – SWIR 09 Feb 2018 09:55 #2520

This stock is getting crushed!! Below buy range. Is it a buy?

I am looking to sell cash-secured puts on SWIR. It has rallied Monday, so I’ll wait for a pullback with some limit orders. 

I think AAPL is worth a nibble, but scale in slowly in case we get another 1000 point down day because those have to be led by big stocks on the way down.

It jumped before I could buy, so I am setting up limit cash-secured put option orders. I’ll post those later tonight.

And, as with any stock’s buy range, that is not an automatic buy area, it’s a lets double check our research area and then decide if we should buy because this might be a value price area.

From rhood Feb 12, 2018 8:09 AM at MOSI

Hi Kirk, lots of questions here, but I’m curious to know what you think about Bridgewater’s huge short bet against european equities (Ray Dalio’s Bridgewater Quadruples Shorts on European Union Stocks)?

I have said in several articles that I think Europe will never grow more than population growth ever again. In other words, no excess growth. So, selling into their false hope rallies is always a good idea. There are very few European stocks I like.

Interesting to me his biggest short is Total (TOT). I think he might be colored by this very green glasses. That said, Total isn’t nearly as beat up as it could be and I’d like it below $50 to buy as I’ve said.

The bets against the Italian banks might be something we have to find our way in on.

From Ole123ole 09 Feb 2018 06:01 #2519 at Fundamental Trends

Hi
Should we start buying this dozen now when they are in range or we wait for your signal when
Is clear where is the market heading.
Thanks 

That’s always an up to you decision. Do you think the market corrects further? Do you have the risk tolerance and financial stamina to weather a storm? I will be buying a little at a time across the board and spreading out cash-secured puts. I think this is a sell the rips market, not a buy the dips one. I won’t change my mind on that until we see 2200ish on the S&P 500 and remember, ultimately, I think we make a run at 1600 on the S&P 500 as interest rates and inflation rise.

From Nitschkite 10 Feb 2018 07:22 #2522 at Fundamental Trends

I lost track of the location of the petrodollar/geopolitical thread, so I’m entering this here. Yesterday the WSJ reported the following in the ENERGY JOURNAL:

“China, the world’s biggest importer of crude oil, is set to launch its own crude futures contract at the end of March on the Shanghai International Energy Exchange, the China Securities Regulatory Commission said Friday.

Chinese regulators first announced plans for the contract nearly five years ago, as part of the country’s efforts to create a rival benchmark to London’s Brent crude futures and New York’s West Texas Intermediate futures. The contract is also an opportunity for China to raise the status of its currency, the yuan, and challenge the supremacy of the U.S. dollar.

For decades, oil traders have used dollars to buy and sell barrels of oil, both in the physical market and in crude futures. China is looking to change that as it overtakes the U.S. in oil consumption. A successful China-based crude-futures contract would make the yuan one of the world’s important currencies.”

As others have noted, it took decades for the world currency mantle to pass from pound sterling to the USD, from roughly the British invasion of Mesopotamia during WW1 when the British government took on enormous debt, to the Bretton Woods agreement in 1944. Nevertheless, China transacting oil futures in the yuan looks like an important incremental macro development.

See the new article on oil. I talk about China’s oil exchange and impact on the Petrodollar. I’ll have a full report soon. In short, inflation is coming and oil will do well.

What people have to understand is that since the early 1970s, the rest of the world was compelled to buy dollars before buying oil because OPEC only took dollars. As that changes, the demand for dollars decreases, meaning a weaker currency and less ability to borrow. The U.S. is in for a rude awakening when it has to balance its budget. I completely believe that we do a one time helicopter money drop of several trillion dollars – TRILLIONS – in the 2020s during the next financial crisis. We’ll bail out banks, pensions, Medicare and if we have any brains students. That will cause a one time jump in inflation, however, remember, the things I just detailed trickle into the economy over many years, so it will really be an offset to the global deflation we still haven’t completely acknowledged and faced down. A lot more on this to come.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a Registered Investment Advisor – https://BluemoundAssetManagement.com – however, publish separately from that entity for self-directed investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.