Liquidity crisis: SPDR financial sector, VanEck Gold Miners ETF down sharply



Wall Street analysts think “Dr. Copper” is a great indicator of the health of the economy, and I can’t disagree. Academic studies have proven a very positive correlation between major changes in copper prices and the direction of the manufacturing economy or stock market. From my 35 years of trading experience, when copper rises rapidly to new 52-week highs, the US economy generally does well over the next year or two. Conversely, when copper crashes, as it has since the spring of 2022 (-40%), more often than not a severe economic downturn or recession is approaching.

Banking and gold assets down sharply

Perhaps much more worrying for financial markets, banks/brokers and gold/silver miners rarely fall in tandem. These two market sectors, essentially the critical lending and hard money industries, are the BEST indicators of liquidity in our economic system. Below are 2-year charts of the major ETFs that track these important sectors, namely the Financial Sector Select SPDR (XLF) and VanEck Gold Miner Vectors (GDX). You can review their steep “simultaneous” price declines over the past three months below.

What surprised me was the rapid fall in gold/silver and related mining stocks since the beginning of June. This shouldn’t happen if the stock market was primed and ready to rise. The significant deterioration in the value of hard money against the dollar is likely a signal that the Fed may overtighten monetary policy as it puts additional pressure on the economy to slow it down, all in an effort to contain rates. inflation rates that are approaching uncontrollable status. Honestly, the majority of 20% bear markets in stocks usually see gold miners in a rising defensive trade position. Watching both banks and gold/silver decline in unison is exceptionally rare in our world of fiat money printing.

So that’s the main concern of mine. Over the past 15 years, a sharp 3-month nominal price decline of -15% or more for XLF and GDX over the same period has only occurred in a total of 6 months. It’s 3% of the time. Surprisingly, the ONLY time the two groups sell together to this degree is during a liquidity crunch, which often leads to a recession. I have graphically represented the idea below, using red arrows and boxes to identify the two previous instances of (1) August-November 2008 during the Great Recession and banking crisis [including the idiotic Fed decision to allow Lehman Brothers to fail], and (2) March 2020, the month of the COVID-19 pandemic crisis of economic shutdowns. The next instance started a few days ago.

YCharts by SA

YCharts – Author Reference Points

YCharts by SA

YCharts – Author Reference Points

YCharts by SA

YCharts – Author Reference Points

Unfortunately, both of these ETFs are new inventions with a limited history. Not shown, but also important to contemplate, other examples of weak banks/brokers and tandem gold miners existed for parts of 1981-82, the span Fed Chairman Volcker raised short-term interest rates to double digits, causing a deep recession to stop entrenched inflation; late 1983 before a 20% stock market decline in 1984; the stock market crash of October 1987; early summer 1990, just before the Gulf War recession between Iraq and the United States; fall 1998 Long-term capital management selling tied to the bailout of US equities; fall 2000 dotcom bust beginning; and, in late summer 2002, the end of the initial technology crash and related recession. Since 1980, these are the only examples of this 3-month bank/gold sector double-hit sell condition. Interestingly, many of these durations also experienced an inverted Treasury yield curve, similar to July 2022, as the economy slid into recession.

Final Thoughts

Gold should lead the stock market higher when the final bottom is reached. I discussed this typical pattern at major turning points on Wall Street in my late May article here. The early 2009 peak and April 2020 gold boom preceded sharp increases in US stock averages. I expect this cycle pattern to be no different.

There is a small 10-15% chance that the major decline in banks and gold mines is more of a coincident indicator of a contraction in money creation, rather than a “main” signal of trouble for the markets financial. The best example of this is the stock market crash of 1987. Gold miners didn’t fall to -15% three-month lows until the day of the infamous 20% crash, with the next open trading session proving the hollow. However, gold bullion prices were in an upward trend at the end of 1987, before and after this monumental panic. Right now, gold is in serious decline. In 1987 Fed Chairman, Greenspan engaged in emergency money printing between major banks to support the economy. Today, the Fed is locked into another modern record short-term rate hike at the end of July to halt inflation. My suggestion for timing a dip on Wall Street is to keep your eyes peeled for a rebound in hard metal prices.

I decided on Thursday to liquidate my 40% position in stocks via my 401(k) plan, and am now sitting at 100% cash (same as January 1), awaiting a better re-entry point. Friday near the close, I bought SPDR S&P 500 ETF (SPY) put options to hedge the rest of my “long” market exposure in a regular brokerage account, so I could sleep at night for the rest of July.

In the mid-June linked here, I explained that a final downward move for stocks this summer was likely. It looks like the most drastic drop in market prices in my scenario #2 of this effort is about to happen. I’d much rather own beat tech names in the long run, and many of my articles since the spring have focused on this group. I would absolutely avoid cyclical and commodity plays like oil/gas the rest of the year. A severe recession in the second half of 2022 could resemble the liquidity crisis of the Great Recession of 2008. I explained in my article at the beginning of July here how the commodity boom of the first half of 2022 could repeat the scenario of 2008 of turning straight into a straight decline in an environment of weak demand and recession.

Due to the YOY CPI print of 9.1% this week for June and dramatic unexpected weakness in Gold/Silver, I am moving my worst-case scenario down 10%-20% to the months for the S&P 500 index. Unless the market crashes before the next Federal Reserve meeting on July 26-27, I think the world’s main central bank will have to raise rates from 0, 75% to 1% more to maintain its credibility in its fight against inflation.

The real bad news is historically after a stock market tank of 25% over six months (like 2022), with the economy sliding into recession (which is the current period The current GDP of the Atlanta Fed forecast), interest rates have generally peaked and reversed in some sort of decline to support a world collapsing into financial crisis. We have to go back to the stagflation period of the 1970s and early 1980s to find another example of rising interest rates despite negative “real” GDP.

GDPNow – Atlanta Fed

My conclusion is that today’s liquidity crunch and pressure on stock quotes will continue into the summer, until it becomes clear that we are in a recession and/or panic selling. If the economy holds up and the stock market does not fall significantly, the Fed will not be able to start a new round of banking easing. In this scenario, ever-higher interest rates and the depletion of liquidity in the fall will continue. To some extent, we are now trapped. Either we get a mild recession now or a deeper recession later in the year. Choose wisely. Hint: optimists and opportunists should expect a big drop in the stock market sooner rather than later. I wish I had a better outlook to report as I was relatively optimistic at the May low in stock prices. If you’re looking for a silver lining, Wall Street could be bracing for a significant rebound next year. Still, trading can be a bit wild for another month or two. Buckle up is my suggestion.

Thanks for reading. Please consider this article as a first step in your due diligence process. It is recommended to consult a registered and experienced investment adviser before carrying out any transaction.


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