We all know the mainstream consensus is wrong, but what about the non-mainstream consensus? Maybe it’s equally misguided.
There are a variety of consensus views floating around the Mainstream Media and the blogosphere. The two sets of consensus don’t align on much, as might be expected: the financial MSM is still spouting the Federal Reserve/Wall Street’s “happy story” about how the recovery is weak but muddling forward with “uneven growth” (i.e. someone else got laid off, you still have a job) but corporate profits (the only metric of “growth” that counts) will still be rising forever (as usual).
The financial blogosphere consensus is more or less that the fiscal-stimulus/Fed-goosed “recovery” is obviously rolling over here, and since inflation and fear are baked in, gold will continue its steady climb towards $3,000 an ounce and beyond. Oil, meanwhile, is poised to rise as suppliers either lose production to depletion or ratchet production down to support prices.
We all know about confirmation bias, the tendency to seek evidence which supports our views after they have hardened into conviction.
Seasoned traders practice the opposite: they actively seek out arguments against their current views. If these “Devil’s Advocate” arguments are more compelling than their current convictions, then they change their minds and their trading positions (or at least slap on a nice thick hedge).
Which leads me to play Devil’s Advocate: what if both consensus camps are wrong?
Again, this is a thought experiment which traders go through to avoid confirmation bias.
1. What if the economy rolls over hard? The Fed and mainstream economists are expecting a “soft patch” based on “mixed data,” i.e. the top 20% are still “consuming” while everyone below the top 20% whithers on the vine.
Expect a hard rollover to show up all over the place in July and August data: container shipments, gasoline consumption, retails sales, auto sales, Christmas orders, tax collections, etc.
2. If the dollar rises substantially, then corporate profits will tank. Much of the big jump in corporate profits came not from actual net but from overseas sales converted into a weakening dollar.
Zero Hedge presented an excellent technical case by John Noyce for the dollar rising as the euro falls to 1.15 or lower: The Charts That Matter Next Week.
Recall that the DXY dollar index is essentially a see-saw, with the USD on one end and the euro on the other, and the other currencies adjusting to the primary trend in the see-saw.
Does anyone seriously expect the euro to rise from here? Based on what? A rescue of Greece by Alpha Centaurians bearing quatloos?
3. Gold is looking kinda heavy here (technical pun intended). Gold is in a long-term uptrend, but it has occasionally swooned for long chunks of time without threatening the long-term trendline.
We might ask: what happened in 2008 when the whole bogus fraud-ridden scheme of leverage, debt, propaganda and risk-trades imploded? Both oil and gold also tanked as debtors with margin calls or equivalent scurried out to unload whatever assets still retained some value, with a preference for selling those which retained the most value, i.e. gold and oil.
If all the world has done is push the cleansing that started in 2008 forward three years, then December 2008 is a pretty good model of what to expect going forward as the exact same forces will eventually unleash their creative destruction again, only this time with greater force and at higher levels of non-linearity.
Depending on what you look at technically, there are some major divergences popping up in gold’s chart as MACD, RSI and other indicators have been sagging even as price held on until recently.
4. Oil and gasoline are also looking toppy. The consensus is watching the shaky supply situation and seeing all sorts of reasons for supply to decline, but if the global economy rolls over hard, then demand could fall faster than supply, pushing prices off a cliff.
One feature of the “oil curse” is that the oil exporters have no other revenue stream to fund their regimes and welfare states. Saudi Arabia has enough other investments in the West to weather a downturn, but the rapid rise in the cost of extraction, population and welfare has pushed up the fiscal pain point even for the Saudis.
Iran and other exporters have a wafer-thin fiscal break-even point: if oil slumps to $50/barrel, the Iranian government budget is in serious shortfall.
As I noted in Oil: One Last Head-Fake? (May 9, 2008), despite brave talk to the contrary, exporters have no choice politically but to pump and sell every barrel they can, as oil revenue is the foundation of the government’s spending and legitimacy.
As demand crashes in a global rollover, oil plummets below fiscal break-even for exporters, who must then pump even more to keep revenues from destroying their domestic legitimacy and power base.
Supply won’t drop as fast as demand, and that will push prices down hard at the margin, where prices are set. And as the U.S. dollar shoots up, then oil will cost a lot more in weaker currencies. That will further suppress demand and thus price.
Those two dynamics will reinforce each other in positive feedback loops, pushing prices down lower than the consensus thinks possible.
“Impossible”? Where have we heard that before? Lehman going belly-up was impossible, as I recall, and so was the housing bubble bursting, to name but two previously “impossible” financial events.
Confirmation bias has its own positive feedback called the herd instinct. When the herd reaches a consensus, it’s hard not to follow along with what is “obvious.”
Sometimes what’s obvious isn’t “obvious” at all.