Posted by on October 29, 2016 2:26 pm
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Categories: Bear Market Bond British Pound Central Banks Crude Crude Oil Deutsche Bank Economy Elliott Wave Equity Markets ETC European Union france Funding Gap George Soros germany Greece High Yield italy Market Crash Meltdown Middle East Portugal Recession recovery Stagflation Technical Indicators Trading Strategies Unification Yield Curve

First introduced to the financial markets in 1979, Eric Hadik is a trader and analyst who has been intimately involved with commodities and investing for over 35 years. His work gained wide recognition from the outset, where throughout the late-1980’s Eric worked closely with and provided market analysis to major institutions such as BP, Arco, Occidental, Royal-Dutch Shell and Chase Manhattan as well as AMAX Gold and Handy & Harman. In the early 1990’s Eric laid the groundwork for what is now INSIIDE Track Trading – founded in 1994.  In that capacity, Eric publishes research, analysis and trading strategies with the expressed goal of teaching, educating and sharing his insights with thousands of individual and corporate traders around the world. His articles and interviews have been featured in major financial media over the years, including CNBC, Forbes, Inside Wall Street and Investor’s Daily.

E Tavares: Thank you for being with us again today. Last time we spoke we discussed some stock & commodity market calls you had made in terms of timing and magnitude which seemed to go against consensus and yet were remarkably accurate. You have recently followed suit calling for a major gold price correction, beginning in July 2016 at a time when the charts and indeed many renowned investors were suggesting that it was going higher. Before we get into the main topic, can you briefly remind us again of your methodology for trading the markets?

E Hadik: My approach to analyzing and trading the markets is a multi-stage process that begins with the more subjective cycles and indicators and then moves through to more specific and objective indicators that repeatedly hone this analysis and ultimately formulate it into a usable trading strategy.

I believe in approaching trading like a business, not a mere speculation or coin flip. Here are the building blocks of the strategy I have developed over 35+ years of trading commodities:

Foundation:  My cycle research (as well as some basic Gann and Elliott Wave techniques) provide the foundation for the rest of the analysis. They set the stage for the event that is expected to unfold, but that is only the first step and I constantly warn NOT to trade just off of the cycles or those other approaches.

First Stage:  Corroborating those cycles is the inclusion of my first stage of technical indicators – those that determine culmination in the evolving (waning) trend, the trend that is maturing, and setting the stage for an impending new trend. These are very specific indicators that first show when a move has reached an extreme and then when it is primed for a reversal. Those two phases – reaching an extreme and the ultimate reversal – are usually different and are best illustrated by the Elliott Wave Principle and the peaks of the ‘3’ and subsequent ‘5’ wave. (I should stress that these clarifying indicators are NOT Elliott Wave in nature although they do help filter wave counts.) The ‘3’ wave is usually the dynamic and accelerated move that pushes a market to an extreme – the penultimate peak. Once that occurs, a market usually pulls back before retesting the highs (the previous extreme, if referring to an uptrend). That retest, and or spike high, is the ‘5’ wave peak – the ultimate peak. 

Second Stage:  Those indicators help me to exit remaining (long) positions and then prepare for the possibility of new (short) positions in the future. That is when my second phase of indicators kicks in: after a top has taken hold (or after a bottom, if a downtrend has just reached fruition). Indicators like daily and weekly 2 Close Reversals TM, Double-Key Reversals TM and 2-Step Reversals TM signal reversals from those peaks. They are the initial triggers.

Third Stage:  In a valid, larger-degree reversal, those indicators will soon be reinforced by the next phase of indicatorsthe confirmation (lagging) indicators. These include my daily/weekly trend indicator (a proprietary pattern), 21 MAC and intra-period trends.

Final Stage:  Finally, the acceleration indicators should kick in and signal the impending escalation of the new trend – a time when the underlying market is expected to powerfully validate the cycles and preceding indicators and ultimately spur a drop to extreme downside objectives. These include specific applications of Hadik’s Cycle Progression (when it signals a shift from highs to lows), of the daily or weekly 21 MARC and of the daily/weekly trend pattern.  In many cases, I will wait for this time to enter a trade since I am looking to enter positions when the greatest synergy of factors are working in their favor and hoping to have my capital working most efficiently (as opposed to sitting idly while a lengthy topping or bottoming process plays out). It has often been observed that markets trend about 20–25% of the time and congest or consolidate (effectively trading sideways) the remaining 75–80%. I want to be in during the 20–25% of the time when a convincing and directional move is unfolding and out (but into other markets) when a market is choppy and volatile – often frustrating the majority of traders and consuming or distracting a lot of valuable focus and mental/emotional energy. In many cases, 70–80% of a market’s price move will occur in a very short period of time (sometimes 10–20%) within a given trend and that is when these culmination indicators should begin to materialize… toward the end of that accelerated move. 

Every market and every trend goes through these stages and analyzing them in this manner helps me to pinpoint some forthcoming moves. At each of the transition phases – from trigger signals to confirmation signals, etc. – the risk and money management factors shift, narrowing risk points and/or trailing stops in the prevailing trade. The culmination indicators also help identify when and where to begin exiting a position (taking profits) so that those funds can then be devoted to a new trade (in a different market) that is poised to enter a new trend or accelerated trend.

Sorry, that was probably not what you would call ‘brief’ – even though it is only a basic outline of my approach – but I wanted to give enough information to at least begin to grasp the approach. I strive to begin with the theoretical and subjective and then move that to the practical and objective – where the rubber meets the road, so to speak.

ET: The charts below come from a recent IMF report on the massive increase in debt around the world, in absolute terms and also as % of GDP. We note that since 2008 government debt has been the major driver of that increase, particularly in the developed world. Pursuant to your analysis of this debt super-cycle, what comes to your mind when you look at these graphs?

Note: “AE” means Advanced Economies, “EMEs” means Emerging Market Economies and “LICs” means Low Income Countries

EH: The first thing that jumps out at me is a perfect illustration of what I just described. The debt surge in 2007–2009 is like the accelerated or dynamic ‘3’ wave advance, in an overall wave structure. It is when debt surged to unprecedented extremes. However, it is NOT the ultimate peak, it is merely the penultimate peak. The debt levels subsequently consolidated in 2009–2014 before resuming their uptrend and heading to new highs. 

Those charts corroborate what I have been discussing and why I believe 2017–2021 will represent the end and reversal of that multi-decade trend – as the debt bubble bursts and bond markets begin to crash. They also validate what I have been emphasizing in recent years – the parabolic phase of the 40-Year Cycle and how it is portending an intensified battle between hard money and fiat currency (which is rapidly deteriorating in value, due to this governmental debt orgy).

Every 40 years – since the founding of America – this battle has raged. It began with the Continentals (America’s first experiment with fiat currency) – that quickly plummeted from 1776–1781 – and then moved ahead to 1816–1821 (2nd Bank of US charter, quickly followed by Panic of 1819). From there, it was on to 1856–1861 (devaluing and then suspension of silver and gold currency), to 1896–1901 (Election based on battle over Gold Standard, followed by re-implementation of Gold Standard), to 1936–1941 (affirmation of gold confiscation and subsequent loosening, then tightening of credit – leading to 1937 crash), to 1976–1981 (Jamaica Agreement, delinking all major currencies from gold; led to skyrocketing inflation as the corresponding value of US Dollar plummeted). 

2016–2021 is the next phase of this uncanny 40-Year Cycle and promises to resurrect this battle (intensifying in 2017) as the debt bubble bursts and the backing of fiat currencies evaporates.

ET: Focusing on those imminent long term cyclical changes, today there are over $10 trillion worth of bonds around the world trading with negative yields. Of course this is not sustainable. As such, the longer negative yields remain in place the higher the likelihood that a growing number of investors and financial institutions will lose money here, possibly badly, once there’s a recovery in yields, even a small one. Do you agree? And looking at yields specifically, are you anticipating any cyclical reversal to the massive decline we have seen over the last 30 years?

EH: Yes and yes. The negative yields are a perfect confirmation that this trend has reached an extreme: an uber-extreme.

This reaffirms that we are in the parabolic phase of a mania, very near the peak. However, just because a market has reached an extreme does NOT mean the trend will immediately reverse. It usually takes time. I have described long-term cycles – including the ubiquitous 40-Year Cycle AND a 70-Year Cycle (as well as a sequence of descending cycles) – that all project the culmination of a MAJOR bull market in Bonds, and bear market in rates and yields, for 2016/2017. I will then be looking for specific reversal signals – and corresponding evidence of a fundamental reversal – in the months and years that follow.

I am still convinced that one of my other primary outlooks – for an inflationary surge in commodities, metals and oil from 2017–2021 – could be the impetus behind that reversing trend as governments and policymakers are forced to bump up interest rates in reaction to those rising prices. Since the markets are built on perception, it would only take a convincing threat of that potential for the markets to unwind.

There is one specific year based on the greatest synergy of cycles in and out of the markets when I believe the accelerated phase will take hold… which is also when the debt bubble is most likely to burst. It represents the tipping point in almost all of my cycle work (not just in bonds).

ET: Let’s review some of those catalysts. We recently discussed how a major food crisis may be looming in the not too distant future, where you outlined an 80 year cycle that has governed such crises with stunning regularity. While our grain situation globally appears to remain healthy for now, this could change very quickly because of weather, water, diseases, human disruption or any combination thereof. And if indeed it does, what sort of magnitude move could we see and could this translate into higher inflation around the world?

EH: The Food Crisis Cycles are certainly one of the factors I am watching. But, I think that those cycles are likely to be fulfilled with a combination of natural and man-made stresses. That has often been the case, with a perfect example being the 1930’s – when worldwide drought and crop challenges like the Dust Bowl created shortages but governmental policies (in the USSR) led to one of the 5 worst famines in history in terms of lives lost – the Soviet Famine

A different form of global Food Crisis emerged in the 1970’s, exacerbated by the manmade debacle of fiat currency chaos (Nixon Gold Shock of 1971, the collapse of Bretton Woods in 1973, oil weapon and then oil de-facto backing of US Dollar in 1973–1975 and Jamaica Accord of 1976). Multiple global droughts in the early-1970’s culminated with California’s worst drought (until recent years) in 1976–1977.

Combined with a collapsing Dollar, all that sent food prices skyrocketing with many commodities doubling and tripling in price… in 1–2 year periods.

2016–2021 is the next phase of that recurring 40-Year Cycle of Food Crises that I have documented back to the 1770’s and even earlier and the corresponding cycle of commodity inflation. Ironically, or not so much, this natural cycle dovetails perfectly with the economic and currency crises cycle I just described.

So, whether it is Dollar/currency-triggered (man-made) or crop stresses (natural; including droughts, floods and/or freezes, disease or super-pests) or bothwhich I believe is the most likely scenario – the resulting, escalating price movement should be the same. And, yes, that is likely to impact interest rates.

To compound my assessment, there are other long-term natural cycles that are likely to play a role – including sunspot/solar storm cycles and volcanic eruption cycles. And they, too, focus on that one year when I believe acceleration is most likely… even though preceding and ensuing events are cyclically probable as well. It is a Perfect Storm of multi-year, multi-decade and multi-century cycles converging.

ET: Food crises tend to affect emerging economies the most for various reasons. However, we could see something different this time. Western Europe is already buckling under a mass migration influx, and a severe food supply disruption could expand it several fold. This would further deepen societal and economic impacts all over the Old Continent, particularly at the core. How would you view a food shock impacting both developed and emerging markets this time around?

EH: You touch on the manmade aspect of these recurring food crises. Complicating it is the evolving banking debacle throughout Europe, ranging from Spanish and Italian banks to those in Portugal and Germany. Some of those banking crises are so near the tipping point that they could actually represent one of the triggers for the debt bubble bursting – and also exacerbate a potential food crisis. Greece got a small taste of this potential in 2014/2015.

Historically, banking, economic and/or currency crises have repeatedly spurred massive strikes and social upheaval that could disrupt the distribution of food and other necessities, if the pattern is repeated. But that is just one possibility. I do NOT want to sound like I am yelling ‘the sky is falling’, because I am NOT, but I am also not willing to stick my head in the sand and ignore some ominous developments across the globe. Intensifying cyber-attacks could provide another contributing factor as they have already done on a smaller-scale and shorter-lived basis.

Paraphrasing the immortal words of Patrick Henry, I don’t want to listen to the song of the siren until she transforms us into beasts. I would rather recognize the threats looming on the horizon and to prepare for them.

ET: What about an energy shock? Do you see any cyclical factors that could spark a massive crude oil price rise and thus also cause a spike in inflation? The disinvestment in new production infrastructure resulting from the recent significant price correction could play a role, along with increased economic instability.

EH: Eventually, I do expect a new energy shock… but not just yet. Oil prices plummeted to downside extremes – in early-2016 – but were/are expected to undergo a 1–2 year bottoming process before a sustained uptrend is expected. One particular energy market is projecting a multi-month peak for late-Oct.–late-Nov. 2016 and that could usher in a final decline (a type of ‘5’ wave to the downside) – leading into early-2017.

Ultimately, I expect the oil markets to corroborate – and probably lead – Middle East Unification Cycles that I have discussed the past 10–15 years. Those cycles come into play in 2018–2021 and are expected to lead to some form of Arab or Middle East Union, as has been attempted a few times in the past century. I discuss that in related articles and reports.

ET: There is an important economic interplay here. When we talk about the 2008 financial crises we often forget that the large spike in crude oil prices beforehand certainly helped to flip over the world economy. A recession normally keeps yields in check, but there are some cyclical factors that suggest otherwise this time around. The graph below shows historical US corporate funding gap as % of GDP (smoothed) and high yield bond yield spreads (versus AAA credit rating) on a quarterly basis. We can clearly see that the former tends to lead the latter by some quarters, and as such we should expect higher spreads going forward at this juncture. Does your analysis support this?

EH: At this point in time, my analysis does not support OR contradict it. It is ambivalent. Until trigger signals are activated, it is hard to determine the expected width of the yield curve. Due to other analysis – in other arenas – however, I suspect that could be the case. I am just not comfortable giving any definite answer at this time.

‎ET: The modern financial system and its interplay with the wider economy are inherently deflationary. As long as there is some slack production, logistical and financial capacity anywhere in the world there will always be arbitrage that mitigates some of these price increases. This could help manage any transmission effects into the bond markets via higher inflation (except if these occur in the form of a shock of course). However, national trade balances and related currencies could be severely affected. What are your thoughts here?

EH: The relationship between currencies and bonds is certainly expected to play a key role. However, the question becomes more of a ‘chicken or the egg’ syndrome… which comes first and/or which leads the other. I have very distinct expectations for currencies – particularly the Euro and US Dollar – but I always analyze each market on its own before assessing any possible causal relationships.

Once I have reached specific conclusions on individual markets, I will certainly consider the potential correlations but it can be dangerous to become too tunnel-visioned on one specific correlation (since it often blinds us to recognizing a more imminent and ominous – but unexpected – correlation). The markets are notorious for throwing curveballs, which brings up an important point.

Out of 11 Trading Axioms (in my Tech Tip Reference Library), the one I quote most often – and the one which I emphasize most frequently to my readers – is the Axiom on Market Correlations (which I can make available to anyone who contacts me via my website). The crux of that Axiom is that inter-market correlations are fickle and ever-changing and should not be relied upon as the primary signal for trading. There is always a new and more urgent correlation right around the corner that ends up usurping or overtaking the first one and pushing related markets in unanticipated directions.

ET: You also talk about another recurrent crisis cycle which relates to the European Union and also the UK. ‎And this one may already be upon us. How does this relate to a possible bond market crash in light of what we discussed above?

EH: For the last decade I have laid out the case for why I expected a developing and intensifying Euro Crisis (and EU crisis) from 2008, more so from 2011, even more so from 2014 and that reaches a tipping point in 2017 (note the 3-Year Cycle that has governed the Euro). My conclusion has been that Europe was destined to undergo multiple crises that would push the EU to the brink and force dramatic concessions from the nations that would ultimately be a part of the (new) EU moving forward.

I identified 2018–2021 for the time when I believed the EU would undergo a Major transition and a re-unification that yields a significantly different EU than what it was in 2008. Leading into 2016, and right up into June 2016, I explained how an uncanny 8-Year Cycle was projecting another meltdown in the British Pound and how that was likely signaling that Brexit would be approved. That was projected to be the next ‘straw’ flung on the back of the staggering EU.

That ‘8-Year Cycle of Pound Pummeling’ timed Sterling crises in 1968 (8 years after France and Germany surpassed the UK as the economic leaders of Europe), 1976 (Britain forced to go to IMF for Pound bailout), 1984, 1992 (George Soros sunk the Pound and forced the UK out of the EU Exchange Rate Mechanism), 2000 (inflationary meltdown in Pound led to fuel crisis and brief food rationing) and 2008 (35% plummet in 14 months). The Pound was projected to do the same in 2016, stretching into 2017.

Sure enough, Brexit was approved, the Pound plummeted and the Euro is under renewed selling pressure (even as other nations seriously contemplate their own EU-exit). At the same time, Europe is plagued with intensifying banking crises – in Spain, Italy, Portugal and Germany – with Deutsche Bank recently named (by the IMF) as the greatest risk to a global crisis. 

Considering the enormous levels of debt, and the rapidly deteriorating value of that debt, one can envision a scenario where a crashing debt market enters the fray and the EU is thrown into chaos – at least for a time.

ET: If indeed we see that major bond price correction, if not outright crash as everyone runs for the exits at the same time, could central banks absorb it for instance by purchasing a huge amount of bonds? Any type of bonds, even equities at that point perhaps. They certainly seem omnipotent these days…

EH: The big problem is that they are already doing that. They print more money to buy debt and then repeat the process… over and over. The culmination of Draghi’s debt-buying binge keeps getting extended but there is a tipping point in the future (perhaps the not-so-distant future) reinforced by the deteriorating value of the Euro throughout this process. It is nothing more than a giant, debt-based Ponzi scheme. The last ones in are really going to regret it.

The deflationary environment is one thing masking this craziness… as are the consolidating equity markets. But, there are slowly developing signs of that transitioning as well. Since early-2015, I have explained why I was convinced that US equity markets would enter a 15–18 month topping process (with sharp 2–3 month drops and strong 1–3 month rallies) before entering a serious bear market in late-2016Nov./Dec. 2016 has been my primary focus for that shift… and we are almost there!

So, what happens if/when the next shoe drops in global equities and then some price inflation returns shortly after?! It could be a form of ‘Stagflation’… and is not a pretty picture.

ET: So what should investors do? If the bond market goes down hard this will affect everything, starting right in the financial institution where they deposit their cash. How can you protect yourself in that event?

EH: First of all, I should stress that we are not at the acceleration phase. First, we have to complete the culmination phase (which is expected to reach fruition in Dec. 2016/Jan. 2017). I suspect that a final spike high could be a flight-to-quality if equity markets see a sharp sell-off in late-2016/early-2017.

Then, we have to go through the initial trigger phase. And then, eventually, we get to the acceleration phase. Here again, I am looking at one specific year when I believe that acceleration is most likely… but we have a little time. I do think that gold and hard assets play a key role in that protective approach but there are complicating factors, this time around. 

In the interim, I think 2017 is going to see a battle between deflationary forces (as paper assets like stocks and bonds begin to rollover to the downside) and inflationary forces (as deteriorating currency values and natural resource challenges steadily push commodity prices higher) – the next stage of this multi-generational seismic shift.

ET: Final question. Do you have any plans to publish a book with your methodology one day, or will you just keep on focusing on and your INSIIDE Track and Weekly Re-Lay publications?

EH: I do have the skeletons of two books compiled – one on cycles and one on my trading approach – but time is the elusive factor. Ultimately, yes, that is my goal. But I cannot tell you when that goal will reach fruition. In the interim, I do provide a ~100-page trading manual (Eric Hadik’s Tech Tip Reference Library) as a bonus with several of my subscription packages. That explains the 11 Trading Axioms I cited earlier, as well as detailing the published indicators I use and key aspects of my cycle approach. (There are a couple proprietary indicators, whose calculations are not revealed.)

ET: Eric, as always many thanks for sharing your thoughts. Fascinating how you bring so many technical, historical and inter-market factors together.

EH: It’s my pleasure. Thank you.

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