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Equity & Commodity
Fulcanelli Report
Paul Mylchreest Email: paul.mylchreest@admisi.com Tel: +44 20 7716 8257
25th March 2015
1
Selling Time
Central banks arcially lengthened me horizons in nancial markets and the real economy by distorng me preference. There is evidence that me horizons are now shortening, e.g. weak capital investment, aening yield curves, dollar strength &
physical
gold demand. Perhaps the tsunami of global speculave capital—a result of extreme “nancialism”
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is geng nervous and seeking safer havens. Historically, volality in currency markets has led to destabilising ows in speculave capital which have subsequently impacted other nancial assets. One way to “sell me” is, paradoxically, buying long
-
term Treasuries and, therefore, “bond
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like” equies, such as nancially strong Consumer Staples and Ulies companies. For equies in general, we found two indicators which gave well
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med sell signals at the last two peaks in the S&P 500 in 2000 and 2007. Both of them – Treasury yield curve (7s10s) and “adjusted” MACD
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are geng close to giving the rst sell signals in nearly eight years.
Can you arbitrage me? Central banks made the whole world “buy me”. There are signs that we’re beginning to sell it
ADM Investor Services International Limited is authorised and regulated by The Financial Conduct Authority. Member of The London Stock Exchange. Registered oce: 4th Floor Millennium Bridge House, 2 Lambeth Hill, London EC4V 3TT. Registered in England No. 2547805 a subsidiary of Archer Daniels Midland Company. Risk Warning: Investments in Equities, CFDs, Futures, Options, Derivatives and Foreign Exchange can uctuate in value, investors should therefore be aware that they may not realise the initial amount invested, and indeed may incur
Equity & Commodity Strategy
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Fulcanelli Report
Paul Mylchreest Email: paul.mylchreest@admisi.com Tel: +44 20 7716 8257
2
Contents
Execuve Summary
3
Time, Debt and Central Banks
7
Shortening Time Horizons
14
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Japan
14
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Real economy
16
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Financial markets
20
Global Speculave Capital
29
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Financialism and the scale of global speculave capital
29
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Volality and the turning point in mid
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2014
34
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Key risks: divergent central bank policy and dollar liquidity
41
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Exter’s Pyramid and capital ows
51
ADM Investor Services International Limited is authorised and regulated by The Financial Conduct Authority. Member of The London Stock Exchange. Registered oce: 4th Floor Millennium Bridge House, 2 Lambeth Hill, London EC4V 3TT. Registered in England No. 2547805 a
Equity & Commodity Strategy
-
Fulcanelli Report
Paul Mylchreest Email: paul.mylchreest@admisi.com Tel: +44 20 7716 8257
3 3
Execuve Summary
Can you buy and sell me? We think that you can from the perspecve of me horizons
. In our view, nancial markets are operang on the wrong me horizon – one that is too long (thanks to central banks ZIRP/NIRP and credit creaon)
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although there are signs that this is beginning to change. We are in a global debt bubble and
debt has a “me funcon” given its ability to bring forward con-sumpon from the future into the present
. Debt essenally “buys me” and the world has bought a (hell of a) lot of me. The “present” is inexorably catching up with what was the “future.”
Time preference reects the relave valuaon placed on goods at an earlier date versus a later date
. While current goods (including cash) should always have a higher valuaon than future goods, me preference declines as an economy becomes wealthier, i.e. the
proporon
of income devoted to cur-rent consumpon falls versus that devoted to saving/capital accumulaon.
Since the crisis,
central banks have sought to address “under
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consumpon” (how many people do you know who voluntarily under
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consume?) by distorng me preferences in the real economy and nancial markets
via zero interest rates and excessive credit creaon. Negave interest rates are an-other step in this direcon. At the heart of their policy, however, is a fundamental contradicon.
On one hand, their policies seek to increase current consumpon, at the expense of long
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term saving & capital accumulaon, in an over
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leveraged world. This increases
me preference
and would normally equate with higher interest rates, shortening me horizons and diminuon in wealth.
However, by forcing down interest rates, the substuon of savings (real wealth) by cheap credit and by supporng nancial markets, they have created an impression
that me preference is lower than it really is
. This lengthens me horizons, implies that current/rising consumpon lev-els are more easily sustainable and induces incorrect spending decisions. While arcially increasing me preference fundamentally weakens an economy, there is no immedi-ate concern unless there is evidence that businesses, consumers and investors are recognising that me preference is too high and are responding accordingly. We detect
signs that me horizons are shortening
in both the “real” economy and nancial markets. In real economy terms, this already looks well advanced in Japan, which is the cung edge of the cur-rent monetary experiment (spending, investment and saving are all weak). However, we are much more concerned about the weaker
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than
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expected levels of capital investment. This has been apparent for months on an almost global basis.
The global producon chain for manufacturing and services can (also) be thought of in terms of a term structure or me series. It begins with “higher orders” of producon, e.g. natural resources and capital goods which are furthest from the nal consumer, and ends with producers of goods sold directly to consumers. Investment in upstream producon has a posive eect which cascades down through the economy as a whole (implicit in Say’s “Law of Markets”).
If the ability of central banks to lengthen me horizons in the real economy is fading, you would expect to see cutbacks to new investment and asset write downs in upstream sectors
. This is what we’ve been witnessing in Oil & Gas and Mining.
In the nancial markets, there is
evidence of shortening me horizons in the aening of yield curves and a shi of capital into the most “marketable” assets
such as:
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