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The Fourth Turning by William Strauss and Neil Howe (pg. 258)

When the society approaches the climax of a Crisis, it reaches a point of maximum civic power. Where the new values regime had once justified individual fury, it now justifies public fury. Wars become more likely and are fought with efficacy and finality. The risk of revolution is high–as is the risk of civil war, since the community that commands the greatest loyalty does not necessarily coincide with political (or geographic) boundaries.

The Fourth Turning by William Strauss and Neil Howe (pg. 256)

  • A Crisis era begins with a catalyst–a startling event (or sequence of events) that produces a sudden shift in mood.
  • Once catalyzed, a society achieves a regeneracy–a new counterentropy that reunifies and reenergizes civic life.
  • The regenerated society propels toward a climax–a crucial moment that confirms the death of the old order and birth of the new.
  • The climax culminates in a resolution–a triumphant or tragic conclusion that separates the winners from losers, resolves the big public questions, and establishes the new order.

Bullish SIL

Global X Silver Miners ETF

In the long-run, I am essentially bullish Gold and Silver related plays across the board, but if you were looking for an entry point for a Silver trade, then here it is.

Below, is the Gold/Silver ratio. This ratio tells you how many ounces of Silver it takes to buy one ounce of gold. When the ratio is high, it means that Silver is cheap relative to Gold.

Historically, when this ratio comes down, it marks bull markets for the precious metals. I view Silver as a leveraged investment to Gold, so if it is getting more attention than Gold, then that means that people really think that Gold will go up, and are willing to speculate on its more volatile partner.

From the chart below, one may infer from my viewpoint that the precious metals play is historically hated as people have apparently no interest in Silver relative to Gold. From a value standpoint, Silver is at least historically cheap relative to Gold.

If we zoom in on this ratio, then we see that it has been bouncing off ~20 year overhead resistance the past few weeks, but it appears to have reversed. This suggests Silver may begin to outperform Gold, and this reversal is further confirmation that the bull market in precious metals may be upon us.

If we view Silver alone, then the move becomes more visible. I have provided 2 different charts of Silver with differing timeframes for you to view the current move.

A run to $16 appears imminent, and a breakthrough of $16 would be very encouraging to further confirm that the precious metals move is on.

January 11, 2016 to July 4, 2016 – Silver moved from ~$14 to ~$20 (~+42%)

January 11, 2016 to July 4, 2016 – SIL moved from ~16 to ~47 (~+194%)

I believe this is a nice time to build a position in SIL due to the recent breakout in Silver. SIL is a basket of silver mining companies. Miners tend to move multiples of their respected commodity due to rapidly increasing margins.

I would exit the position of SIL if Silver falls below $15.20. For long term investors, this position should play out in due time, and short-term fluctuations will be irrelevant. Hopefully, the move is now though.

The Fourth Turning by William Strauss and Neil Howe (pg. 237)

Lacking any guarantee that slow-but-steady, follow-the-rules, and trust-in-the-future behavior will ever pay off, 13ers tend to view the world as run by lottery markets in which a person either lands the one big win or goes nowhere. They have constructed a flinty ethos of self-determination in which being rich or poor has less to do with virtue rather than with timing, salesmanship, and luck. What people get is simply what they get and is not necessarily related to what they may or may not deserve.

The Fourth Turning by William Strauss and Neil Howe (pg. 236)

Unraveling-era 13ers, males especially, have been hit with a one-generation depression. From 1973 to 1992, the real median income for young-adult males fell by 28 percent, more than it did for the entire nation from peak to trough of the Great Depression. (During those same two decades in which youth incomes were plunging, real median income for seniors rose by 26 percent).

Bullish EMLC

VanEck Vectors J.P. Morgan EM Local Currency Bond ETF

The June Fed meeting essentially let markets know that the US central bank officially was changing to an “easing bias.” This was the “technical decision-maker” for which way the market for the dollar (DXY) would break out of its ascending triangle pattern. Typically, this is a bullish continuation pattern, but in this instance we had a false breakout to the upside on 2 prior occasions, and then ultimately broke out of the bottom.

The EMLC call is one intended to express the bearish view that technically the dollar is breaking down. This is also fundamentally confirmed by the Fed pivot to the “easing bias.”

The “easing bias” is apparent from the dive to 0% in the probability that the Fed Funds Rate will remain at 2.25-2.5% at the July 31 meeting.

https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

To gain perspective on what to expect from EMLC under a bearish condition of the dollar, let us explore how it reacted under a bullish condition.

From July 2014 to March 2015, the DXY moved from ~80 to ~100. This was about a 25% rise. During the same time period, EMLC fell from ~49 to ~39. This was about a 20% fall. The negative correlation is clear.

The idea from the beginning was to exhibit a bearish dollar play via emerging market assets. Government bonds were chosen as a safeguard to potential economic slowdown and as the end route for “yield seekers.”

Essentially, the world economy is slowing. This is shown below in the JPMorgan Global Manufacturing PMI.

This means that emerging market equities may still be at risk due to economic slowdown taking more toll on emerging market company profits.

The second reason for the choice of emerging market bonds over emerging market equities is that this fund (EMLC) currently averages over a 6% interest rate between all of the ETF’s underlying bond holdings. The high interest rate of emerging market bonds is due to the extra risk associated with emerging market assets, but investors will be more willing to take on this risk as alternative options dissipate. This dissipation of alternatives is occurring as we now have over $13 trillion in negative yielding debt in the world. This comprises 24% of the total global investment-grade bond market.

The bullish case is laid out. I will be entering on a pull back within my technical marker or upon a breakout. I have marked fibonacci lines from the all-time high in 2011 to the bottom in September 2018.

With every trade there are risks. For this trade, it is basically all a dollar story. If the dollar turns up, then this trade will not perform well. This risk is muted though, since the world cannot afford a stronger dollar. More importantly, Trump cannot afford a stronger dollar, therefore the dollar’s upside is limited in my opinion. The reason being is that a stronger dollar will result in a lower U.S. stock market. This is due to the entire world essentially being short dollars.

From April 2018 to August 2018, the dollar (DXY) rose about 8%. This caused, on a lagged-basis, the US Stock market to enter into an official bear market (fell greater than 20%), and also caused the Fed to begin the shift to the “easing bias” due to inability for the US Stock market to handle a stronger dollar.

In conclusion, EMLC could be bought on a pullback below $33 or a breakout above $35. In calculating this position’s total return, do not forget about distributions (interest payments) that will occur in holding this bond ETF.

Should the DXY break out above 99, I would look to close the position.