Thursday, September 19, 2013

Irrational Survival

With one tiny omission to their script - the Fed shot the gorilla in the room, broke the dollar's back and gave credence to our summation that participants this year had reflected a composite character with all the brains and emotions of 2004 - and the heart of 1995. Seems fitting, considering this beast rests at the foot of the Fed, which for all intents and purposes has nurtured the creature with a creator's irrational love and proctor's occasional stern hand. In either case, we've enjoyed the show and look forward to the next scene - which as we alluded to has a decisively more inflationary tone. Irrational Exuberance Part II? Could be... but perhaps the truth lies much closer to actually - Irrational Survival. 


Click to enlarge all images

Although the performance this year has kept up with the last Meridian upside break, unlike 1995's Madoff-esque smoothness, this year's volatility profile has been remarkably close to 2004 - thanks in large part to the Fed's taper-tantrums.  
Like 2004, emerging markets were hit swift and deep when the Fed first motioned it was considering pivoting away from peak accommodative monetary policies. Now that the goalposts have been moved even further apart, inflation expectations - as well as those markets disproportionally hit during the first half of the year - have reflexively surged. 
A similar dynamic also developed in the precious metals market, which from our perspective also remains one of the brighter spots for outperformance going into 2014.  
As we occasionally do from time to time, we fitted the current tape to the comparatives next pivot based on shifts in its momentum profile. 
Outstanding of (although buttressed by) our 2004 comparatives in the precious metals sector, we have viewed the most recent bear market as a successful retest of the 2008 crisis lows in gold, silver and their respective miners. This concept and relevance with the banks was explained in more detail (Here & Here & Here) in our previous notes. 

Needless to say, the anxieties and reluctance expressed in the sector - reflects a brittle participant whose respective confidences have been eroded and reduced by a large and volatile range. We expect Donald Rumsfeld might have summed it up, "A retest of a retest - is certainly uncertainty to a higher power." 
 Convergence with silver and the Aussie paid in spades yesterday. 
Exuberancia irracional? No - la supervivencia irrational.  
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*  All stock chart data originally sourced and courtesy of www.stockcharts.com 
*  Subsequent overlays and renderings completed by Market Anthropology