Journal of the Plague Year - Let the Sun Shine in, the Sun Shine in

It's good for you. Not just for the Vitamin D.

Violence! Death! Blood! Gold! Copper!

Let's check on the chaos in the market.

The chaos is proceeding splendidly. It will be some time before order can be restored.

First of all. I have to rescind my predictions of this post. As I stated in the post, it was early to make a prognostication, but the violence of the earlier move convinced me to make one anyway. That move has reversed sharply, blasting out of the deflationary channel in a disinflationary direction.

The graph of the gold-copper ratio shows the rapid deterioration of the real economy--by which I mean the part that buys copper and builds refrigerators. Typically the gold-copper ratio increases when the economy goes bad, which in our second graph would appear as a move to the right--something still underway.

In fact, the current situation is even worse than it appears, because in order to calculate the rate of change, I have to subtract the two calculated gold-copper ratios, and I avoid using trailing averages. So the above chart is one week behind reality, where the current ratio is closing in on 700. This is higher than any weekly closing GCR in the past ten years. Looking at monthly closing ratios, only twice since 1977 has the ratio been higher: in September 1980 (717); and in September 1986 (711).

What I think we may see going forward is more chaos. I think we are in a bear market, and the work of a bear market is to make the biggest downward move dragging the most money down with it. Money on the sidelines needs to be drawn in bit by bit until it is all destroyed.

In the long term, The World Complex is a fan of gold. It's always worth buying, but it's important to avoid leverage and keep cash available, because the cash calls always happen at the most inopportune moment.

New charts - northern hemisphere Arctic sea ice maxima

A recent publication has highlighted the importance of the maximum extent of seasonal ice cover in the Arctic Ocean to the stability of the over all sea-ice system. So I have acquired data from NOAA of the daily sea ice extent since 1979, which I have used to find the maximum annual extent and the date (expressed as a Julian Day - so March 1, 2019 would be day 60, but March 1, 2020 would be day 61). These data sets will be studied in the usual manner, if appropriate. (I used the five-day trailing average, by the way).

The maximum sea-ice coverage has declined since 1979

The graph suggests that the maximum extent of ice coverage has declined more or less constantly over the observation period. There are a few ups and downs. In fact, something popped out at me. In the graph above, what do 1998, 2001, 2008, 2012, and 2020 have in common? They all represent years where sea ice extent increased - presumably due to cooling. They were also years with somewhat trying economic circumstances, at least for some people. Coincidence? Probably--but maybe it means there was an agricultural trigger to some of the economic crises of the past few decades.

There has been an idea that as global warming proceeds, the timing of certain important events will change, becoming either earlier or later. Investigating the above graph for a trend in the timing of the ice extent maximum each year tells me . . . nothing. If there is a trend, it is very weak.

Below we have the 2-d reconstructed state space portrait of the annual maxima sea ice extent, using the time-delay method with a 2-year lag. 

The state space reconstruction shows three regions of stability. The S1 and S2 correspond roughly to the major area of stability in the sea-ice minima phase space, which may actually be two separate such regions, one larger than the other. S3 corresponds with the most recent low-area sea-ice minima.

As with the sea-ice minima plots, there is not enough data to determine the long-term future of this system. It is possible we are in a declining phase of a century-scale cyclical system. Alternatively, we could be on a decline to zero. We may even be in a biased cycle, where the natural cycle is being influenced by global warming. The problem is that the data are not sufficient to tell us which is the correct interpretation.

Journal of the Plague Year - part 1: Chinese ex-girlfriend oracle says "Situation cloudy"

Here I am, watching myself for Covid-19 symptoms, having braved the crowds of PDAC earlier in the month. I only went on the Sunday, but there were plenty of opportunities for mingling with crowds, particularly during the reception at the Peruvian exhibit, the Argentinian exhibit, the Chilean exhibit, and the Brasilien exhibit (not to mention repeatedly visiting their coffee machine, which was on the fritz). The crowds at those events were quite close.

News of course came a few days later that someone who had been at the convention later showed symptoms--and a Kinross exec claims to have gotten the virus there. Seeing as there were over 20,000 people there, I'm sure that won't be the end of it.

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Roadblock in one of Jiaozuo's many villages

I contacted a couple of ex-gfs in China to ask about the progress of covid-19. It isn't easy to get accurate information otherwise, as I never know whether or not to believe news about China that is reported here, but I also don't completely believe Xinhua news or equivalents. Somewhere in there, there may be some truth.

And last night, a third ex-gf contacted me to ask how the virus was proceeding in Canada. She even asked if I had masks! I told her no, we don't believe in those here.

Anyway: Ex#1 is originally from the Wuhan area, and is currently working in Zhengzhou, the capital of Henan province. She had been in her village last month, but it never seemed to be completely isolated from the rest of Hubei province. She tells me she is back at work in Zhengzhou now, and when I asked about activity in businesses around her, she told me that as far as she can tell, businesses and institutions are nearly back to normal.

 

There she is - at left, on her bicycle in Wuhan about three years ago - at right, how the government sees her.

All the stories floating around over here, about hundreds of thousands of people left to die in Wuhan apartments; massive numbers of corpses burned in crematoria around the country; even the story about the disease either originating in a Chinese bioweapon lab or an American lab and inflicted on the Chinese--should all be rejected as fake. In her case, if there were huge numbers of deaths in Wuhan, she would probably know it through relatives and relatives of friends. As for the combustion signals, remember that the Chinese have had to destroy nearly a hundred million pigs due to pig ebola

The other two exes are having different experiences. They are both from a city near Zhengzhou called Jiaozuo--but are both from different villages. Both of them are still trapped in their respective villages. One of them is from the village with all the roadblocks that I posted on twitter last month. She manages a restaurant in Zhengzhou, where I imagine business isn't too good. She did remind me that I should drop in at the restaurant upon my return to Zhengzhou. Then she immediately posted our conversation on social media and boasted about her English. The second one tells me she doesn't know what is happening. There is a rumour that there are still two people in her village with the virus, and the whole place is locked down. She doesn't know when she will return to Zhengzhou.

So, depending on where you are in China, things are close to normal, or not.

PS - I just checked, and the top picture I posted on Feb. 5. So poor Pan Pan has been trapped in her village for six weeks! I would add that her village is not the most interesting village in China

The possible coexistence of inflation and deflation

One comment came up a lot in the recent posting. Well, the comments were all on Zerohedge. Which was to dispute my conclusion of a switch to an inflationary setting.

In the biggest picture, we have had deflation for at least the past twelve years.

Sorry, haven't updated this one in the past few months. But on this scale, very little has changed. The long-term trend of rising gold price and rising USDX index that has been active for the past twelve years would still look the same as in this graph.

I remember Richard Russel, long before 2008, advocated for deflation, saying that the way to play it was 50% gold, 50% US dollar. So the deflation isn't really a surprise--it's a reflection of the excess levels of debt, and will remain until the debts disappear.

Yet on a year-by-year basis, we don't have continuous deflation at all. There have been year+ long cycles of inflation and disinflation which have resulted in deflation (the first year or so,  2011 to 2013, and 2016-2018). For this reason, it can be difficult to remain invested for deflation for the whole last twelve (and more) years.

The inflationary impulse that we may have embarked on (it will be safer to call this in a few weeks, assuming it continues) could be another event like we witnessed in 2011, which saw gold fall just short of $1900, with the US dollar falling sharply. And this was followed by the 2013-2013 period which saw sharp drops in the price of gold. 

Going forward, I think the next decade will be dominated by deflation (a rise to the upper right in the graph). But in the next year, we may see inflation (falling down and to the right in the graph) before disinflation (rising to the left) possibly ending up a little higher and to the right of our current position.

What's a prudent investor to do? Well, I'm not offering any advice. We may be starting an inflationary cycle. But then, I've thought that, and been wrong, before.

Brace for impact

What a week we just had in the precious metals market.

From a huge drop last Friday--which in the past would have presaged further declines the following week--to a significant rebound in the gold price, coupled this time with a major drop in the US dollar--which I will argue may be the signal for a switch to inflationary conditions.

First the chart

We see the nice deflationary trend of the past 18 months looks to have been decisively broken by last week's action. Although it will be a few weeks before we can be absolutely sure, last week suggests that we are about to embark on another bout of inflation, no doubt as carefully calibrated by the Masters of the Universe as they can fill a shot-glass of whiskey from a pool of liquidity the size of a football field. Either, like a small child pouring very carefully, they have poured only too much, or they have sloshed out enough whiskey to fill a large swimming pool, and we are about to see what happens when it all lands in a shot glass.

Now, why the need for some liquidity?

Another chart:

This graph plots the gold-copper ratio against its rate of change. I typically interpret this ratio as an indicator of the real world preference between bricks and mortar and financials. When the ratio is low, it's a sign that people would rather make refrigerators than chase derivatives. Rate of change is the vertical axis. Near the top of the chart means that the plot is shifting towards the right at high speed. Currently, the system is moving toward the right (ratio is increasing) at the fastest rate in the last couple of years. To me, this means the real economy is degrading very quickly.

Thus the Fed may feel pressured to pump out some liquidity.

If we are moving into an inflationary cycle, then one consequence, according to this recent post, is a decrease in the gold-silver ratio. Given that moves tend to get larger as liquidity sloshes around the system, the gold-silver ratio could hit a significant low, implying a new all-time high for the silver price (in fiat terms).

Normally I would wait a few weeks to have greater certainty, but if there is a swimming pool full of whiskey heading for a shot glass I want to get as close to ground zero as possible with a bucket.