Sample CIOs Macro View

Phase 3 In Play and Accelerating

The above chart of the VIX shows that Phase 3 actually commenced in June, and has double bottomed in a wave 2. From here we expect to see a sharp increase in volatility.

1.0 The Big Picture

Our suggestion that the quiet period over the past weeks was in reality the pause before significant movement, has indeed proved to be correct.Indeed during the past week, my Phase 3 scenario has moved into high gear.

The core element is that the Dollar's weakness has unleashed itself with acceleration to new lows on the year in a dynamic trend. Significantly this has been lead by the Dollar Index and Euro moves. However, of note is that Dollar Yen is moving lower in a major risk-off signal and Cable is on the cusp of a multi-year break out. The Bunds and especially T Notes have all broken upwards on their way to a last negative yield rally, before moving into a sovereign debt crisis. Whilst Gold and Silver moved into a higher gear as the broad market realises that they are a safe haven. Silver especially has way more upside as an industrial metal once more becomes a financial metal.

Of great significance is that the stronger equity markets have reversed downwards whilst the Dollar has been weakening, reversing the correlations over the past few months and thus one of the signs that we have been looking for to confirm phase three is in play. In Europe the EU Rescue fund is too little too late and as such its arrival marked the high of the Phase two correction in the stronger European equity indices. For those that choose to buy the EU bond issue they should be asking themselves what recourse will they have when the EU fractures?

Meanwhile, the weakest equity markets like the FTSE and Spain 35 have been building up a head of steam to break sharply lower. I would conjecture that if the FED had not put so much money into the market then the US stock markets would have looked like the FTSE in a best-case scenario. My view continues to be that we will see Phase three descend lower than the March lows to 70-80% of the value in February, by the year-end or at the latest Q1 2021.

Charts of The Dollar Index, Silver and FTSE in which we have been running max sized positions which are now deep in the money

 

2.0 The Five Crises of American Decline Driving Phase 3

Notably, I expect an acceleration of pandemic numbers in the US. Most of all I believe that with the perception of the Fed PUT making investments an apparent dead cert, everyone is max long and only a few smart investors are boldly short. The longs are in my view the walking dead as is Trump's presidency. Note the risks of a stock market crash decline are extremely high, as delusion and reality meet. As for the reason as to why stock markets should turn lower, one must be reminded that the five crises of American decline are all in play and any one of them may accelerate from a festering sore into a crisis from nowhere.

• The Accelerated Hegemonic Challenge by China: Chinese aggression has been breathtaking. Whilst as expected and described in  Here Comes Americas Pushback . Trump America and Britain are now all pushing back, which will create a major crisis economic and political crisis in the months ahead Thus the polarisation levels will inevitably become increasingly aggressive.
• The Crisis of Leadership: Trump now, Biden later. Honestly, neither can be considered as capable. As per our prediction from January 2020, that Trump would not be re-elected, the poles are now showing that Trump is miles behind Biden. This is a gap that I expect will increase in the months ahead. At some stage, the equity markets will wake up to this inevitable transfer of power to the democrats as part of the phase three decline. As the socialist tendencies of the next four years, will not favor the US Dollar, bonds, or stock markets in the future.
• The Crisis of the Pandemic: The current first wave continues to accelerate. I believe we will have secondary and tertiary waves to follow. Notably, I expect the acceleration of pandemic numbers in the US to be significant. This will inevitably force a second lockdown in many of the worst-hit states, which will in turn carry major economic impacts. One of the inevitable consequences will be a wave of state defaults and bankruptcies that will, as the numbers increase, shine the light on over-leveraged Federal finances.
• The Economic Crisis soon to manifest into a Financial and Market Crisis: We are facing a 1929 style depression, but worse, that is currently masked by the stock market resilience driven by Government money printing. This has created the perception of the Fed Put, making investments an apparent dead certainty. As a result, everyone is max long. Only a few smart investors are boldly short. Notably, the risks of a stock market crash are high, as delusion and reality meet.
• The Crisis of American Social Unrest: This is an expression of increasing poverty and desperation. This will only increase in intensity as the poverty factor increases in the months ahead.

 

3.0 Outlook on Market sectors

3.1 Bond Markets

Are on the cusp of breaking to the upside in price in Bunds and US T Notes. This will be a dash to negative yields from the current 0.6% to -0.3% as the reality of the US  economic collapse hits home. Note the bond market is much smarter than the equity market. However, once yields have gone negative the next phase will be a sovereign debt crisis due to the massive debt levels incurred by the response to the pandemic compounding the already high debt burdens. The only concern we have is the timing of the Chinese selling of their US bond holdings in tit for tat action over America's response to the annexation of Hong Kong. At present, I think the move to negative yields could take place in the next months before Chinese bond selling.

Ten Year Bond Trade rational

1. The American and European economies are in a state of depression and negative growth.
2. In America, the 10-year yield is still positive at 0.62% so there significant room for compression to negative rates driven by equity switches.
3. In Europe, although already in the negative  yield zone Bunds  will become more negative as a safe haven play but there is greater upside in US T Notes due to the potential yield compression 

 

3.2 Gold and Silver

Have both broken higher before  Bonds and coincident with the Dollar. After a period of lateral corrections, these two metals have accelerated to the upside as per my expectations and have a long way to go as the trend accelerates.

Gold and Silver Trade rational

1. Gold is a safe haven asset in both in the deflationary asset scenario ahead, and the inflationary scenario in 12 months' time.
2. With the massive printing of paper money, we expect a return to the gold standard within three years. Our targets’ are $4000 and possibly $8000
3. Silver has similar if not equity-like properties to Gold. However, it is currently migrating from industrial metal to a potential financial metal as there will not be enough gold to back the major currency’s. Upside target ate 50$ and then $100.

 

3.3 The Dollar.

Has accelerated to the downside as I expected. Especially as the move to negative rates removes and Dollar carry advantage. Dollar Canada is our favorite risk off-trade and is close to its key break out levels at 1.3600. Note that the Empire pair i.e Dollar Yuan has broken lower and is a refection of Chinese repatriation of Dollar assets. Going forward with the  Bifurcation we have been predicting for 12 months. China will be forced to reduce its exports and thus can allow its currency to strengthen allowing it to buy raw resources at a lower price for its increasingly domestic economy and arms building program. Meanwhile, Cable is close to a very significant breakout that will quickly reach 1.50 to 1.60.

Short Dollar  Trade rational

1. America is a declining Hegemony under a challenge from China with the following manifestations
2. A bifurcation of the trading world into spheres around China and America reducing the size of the economies that consider the dollar to be the world reserve currency.
3. Its debt burden continues to expand at an accelerating rate
4. Its maritime supremacy is under threats in the western Pacific from China
5. It has a crisis of Leadership, with Trump and Biden.
6. It has failed to contain the pandemic, and in so doing exposed it poor federal and state government process.
7. This is the final leg of the long term dollar decline that targets the region of 60-70 on the dollar index, some 30% to 40% lower from here.

 

3.4 Emerging Markets

The MSCI along with other EM stock markets has been very correlated to the SP500 and similarly is ready to decline from current levels in the Phase 3 decline. What is fascinating is that the Dollar/EM currency pairs turned earlier than the stock markets complex by a week and have been coiling for a major upside break (EM currency weakness) to new highs.

Short EM indices and FX  Trade rational

1. The global depression will hit the EM nations the hardest. Demand for raw resources will be relatively low in the next 12 months, but will then pick up suddenly.
2. The pandemic will have a greater impact on the less wealthy nations with fewer health resources.
3. Local currency will depreciate when they have high debt burdens, only exacerbating the economic crisis.
4. EM nations will be caught in the cold war between America and China and there will be proxy conflicts that flare up with dire economic consequences.

 

3.5 Commodities

Have been behaving like equities with coincident timing and oil especially has put in a high and should fall down to sub $30. Natural gas has already dropped and is on its way to a final low well below current levels. I expect all the base metals to see dramatic drops in the months ahead as demand collapses again.

Short Commodities Trade rational

1. The Kondrative cycle is due to make it final low of the B wave correction that started in 2011 -2014, before entering into a hyperinflationary phase into 2025-27 initially caused by a shut down in production, whilst demand rises in the economic recovery.
2. The drop in demand due to the global depression, triggered by the pandemic, which then accelerated the end of the global bifurcation into a cold war.
3. We expect to see new lows on the year, followed by a massive generational buying opportunity.

 

3.6 Equities.

Our scenario that the Phase 2 high was on 9/10 June in all but the US Tech Indices, looks stronger this week after the Nasdaq blow off high. In the weaker indices, we have seen coils of 1,2 build energy that I expect will uncoil to the downside. Notably, the DJI is weaker than the SP500 index. We are also short the Asian indices, and our favourite is Hong Kong. Expect weeks ahead with the price accelerating to the downside as it progresses. Note the risks of a crash decline are extremely high, as delusion and reality collide.

 

Short Equity Indices Trade rational

1. The Western economies have been in decline with respect to real unleveraged productivity for over two decades. Governments have compensated for lower growth by using massive leverage to produce apparent growth since the 1998  LTCM crisis. The pandemic has revealed this reality, and the accelerated it to unsustainable levels
2. Manipulation of stocks markets has also maintained a positive  collective social mood and covered up the real decline of Western power and wealth
3. The loans provided by governments to companies, that have very little future growth prospects, means that the equity holder's value has been all but wiped out,(Boeing is the perfect example) although the current collective delusion prevents this reality from manifesting in market prices.
4. The drop in demand due to the global depression, triggered by the pandemic, has accelerated the end of the global trading system with bifurcation into a cold war. Investors realise that the American Chinese tensions are a permanent feature or our new world, leading to the end of the global trading system as we knew it. Consequently, economic expectations for future growth will fall as will share indexes globally.
5. Trump will lose the election as the electorate will demand wealth distribution policies to compensate for the depression. Biden will be perceived as less market-friendly to the stock markets.
6. When the delusion pops and reality takes hold, we expect to phase 3 move to new lows on the year, followed by a massive generational buying opportunity.
7. My strategy in the phase 2 bounce has been to sell the weakest indices like Spain, FTSE and DJI and not try to pick highs in the strongest stocks which are undoubtedly gripped by a mania of similar proportions to the tech bubble in 2000.

 

3.7 Individual Equities.

We are keen on three sectors.

1. Long gold and silver stocks as they are set to sore so max positions here.
2. Short the banking sector will suffer very heavily with the negative rate move.
3. Short oil stocks will have a powerful drop as oil falls once more to below break evens.

Of note is that Tesla looks to have made a high and reversed (we are short) and all the strong US stocks that drove the corrective rally are now reversing.

 

 

4.0 Arkent Five stage Road Map

Our Arkent roadmap is once more proving very accurate. To summarise we have completed phases 1 and 2 outlined below. Which means that we are now in phase 3. This is where the delusion that the world is going back the way it was, is dissolved and price and reality ultimately converge.

 

Part 1 Deflation - The Fall Of The Old

Phase 1 The First Drop

• • Wuhan virus spreads from the Far East to the whole world - and stops the global economy that is already fractured and fragile.
  • Commodity markets as led by oil, drop to new lows as global demand goes into a full stop and stays there.
  • Equities drop.
  • leveraged blowouts in Hedge Funds drive falls of 30% from highs.
  • Long bonds rally to negative yields in US-final 5^th wave, driven by capital switched from equity, right out of the 2008 playbook.
  • Repatriation of capital
  • Safe havens are sold such as gold for margin calls and repatriation.
  • The Dollar rallies are driven by company’s needing the capital to shore up their  balance sheets.
  • Sell Sterling as assets liquidated clean and dirty from London go home to shore up falling petro regimes.
  • Central banks change rules and governments change Laws to limit market activity considered destructive. i.e shorting bans
  • Credit crisis part one; as corporate bonds and credit markets blow out to drop 50%

 

Phase 2 The Correction

• • Massive government and Central Bank intervention Government promises to save the day.
  • US and western governments provide loans to critical infrastructure businesses like airlines and transport etc. But fail to support the smaller entrepreneurial business
  • All borrowing rules broken.
  • Smart companies raise all the cash they can.
  • Equity markets are positioned longer at end of this correction that it was at the February highs.
  • Correction ends with the general perception that everything might work out ok, in the end, and the lockdowns will be lifted soon. Trump's delusional leadership feeds into this collective delusion.

 

Phase 3 The Main Drop June 2020 –December 2020

• The Dollar reverses and falls dramatically (-30%) as the reality the American Empire has fallen hits home. Expect major falls against the Yen, Sterling, Swiss Dollar Index and Yuan. But continues to strengthen against EM currencies.
• Gold and silver rally through this period. Note silver will become a financial metal again as there will not be enough gold to go round the central banks
• Commodities will fall to new lows. Oil will fall to NYMEX  $15 along with all other industrial commodities that will make new lows on the past 10 years.
• The Prospect of recovery within 3 months (the V bottom) extends to a (U bottom) and then to (rectangular bottom) as the impact of the economic damage of the virus hits home economically on a global scale.
• Equities start their second leg down, first breaking the phase one lows and then moving to new lows as the decline accelerates. Even with Limits on Short selling, long-only holders drive prices down 60% down from the top of phase 2 in the US markets and lower in the weaker markets, to 10% of value approx lows of 2009. As realisation dawns that companies will be owned by the state as the duration of the crisis extend.
• Initial flows into US Bonds compress yields to -0.3% in T Notes. At that point, the high will be in place. Bunds will not make a new high an Italian BTPs will be accelerating to the downside.
• There is the realisation that even G7 governments are bankrupt and that bonds are not a safe investment; Italy’s bonds fall along the path to  default and ultimately so does the US (the UK might be the only country left standing in the West)
• The Chinese decide to strategically sell their 18% treasury holdings, bonds fall with the Dollar
• Credit collapses in the second wave another 50%
• House prices and other illiquid asset prices collapse and most homes go into negative equity - the government steps in and owns house mortgages books
• By the time the lows are reached in 6 months, the government will own all of the strategic business in the economy, totally destroying shareholder value.

 

Part 2 Inflation - The Rise of the new

Phase 4 – Hyperinflation and the build-out

• the global equity Market complex bottoms out.
• Hyperinflation is the inevitable product of helicopter money.
• Commodities rising due to lack of supply and completion with China.
• Introduction of gold standard?

 

Phase 5 – The East-West Arms Race

• The world falls into the shadow of impending conflict with China