Fear Forms Bottoms

It would be silly to expect every bear market to turn into the Great Depression. It would be equally wrong to expect that a fall from overvalued, to more fairly valued, couldn't badly overshoot on the downside. - Seth Klarman

The market has traded down ever since Fed Chair Powell was at the conference in Jackson Hole. The Ivory Hill RiskSIGNAL is still red (since January) and we are sitting on roughly 70% cash, and we'll likely raise more cash as our technicals dictate. This is a trader's market, short and simple. Volatility is in chop mode, which means going long on anything can be risky if you do not have a process for this market. If you are shorting stocks or ETFs here, you have lots of room to get chopped up as bear markets make fools of bulls and bears.

If you're trading in this market, you'll need to move quickly and take small wins. We have a substantial amount of cash on hand, and in volatile markets, patience is a virtue.

We are barely holding any bonds right now. In the past, when the stock market was performing poorly, bonds were a terrific area to hide, as you could make money while protecting your downside risk. The 20-year Treasury ETF (TLT), which holds bonds backed by the US government, is down 30% from its all-time highs. When the Fed signals that it is halting interest rates, which could take some time, bonds at the longer end of the curve will be a terrific location to start layering into before equity markets turn up. Since the market is usually way ahead of this, I would expect to start seeing a positive movement in Treasuries before the Fed pauses rates.

Bitcoin is down, and it might retest support in the 18200 area. If this area of support is broken, you could see Bitcoin sell off to the 12500ish area, and I would not at all be surprised if this happened. This has been a heart-stopping fall from the 67000 highs, to where it is now at the 19500 level. We do not own any Bitcoin currently, and when we have, we have used ETFs and been very quick to take profits. This is not the right time to own bitcoin right now. The entire crypto "asset class" is fueled by leverage and excess liquidity, and that is being taken away by the Fed. Fun fact, there is actually more debt taken out (leverage) to buy crypto than there is actual cryptocurrency in the market place, and too much leverage always leads to an inevitable demise.

Before we dive in, I would like to address a question that I have been getting lately. In my experience, if one person asks me a question, then there are usually others thinking the same thing.

Someone told me silver was a great investment right now. What are your thoughts on it?

That was a question from a business owner who was encouraged by a friend to purchase physical silver bars and coins. And given yesterday’s 2.09% drop in silver and the more notable 2.17% drop in gold, which hit a fresh 52-week low, I thought it would be timely to include my take on that question.

My response: First of all gold and silver investment enthusiasts can be very compelling in their reasoning, but like all investments one must stay focused on fundamentals, and fundamentals are not in favor of precious metals right now. Additionally, when dealing with physical metals dealers, you have to be weary of high commissions that raise the basis price that they may have initially been marketing.

As I write this the current price of silver is at 19.03/oz. and a quick google search brought me to a website to purchase a 1 oz. American Eagle Silver Coin for $33.28. Obviously you can expect a markup because you are purchasing something from a dealer and there was some labor involved in minting a gold coin but it doesn't stop there. Owning physical gold and silver anything can be extremely cumbersome and expensive to own. After purchasing a large amount of bars or coins (let's say $50,000+) it usually doesn't make sense to keep them under your mattress so you would typical store this at a metal depository vault, where you would pay an ongoing fee for rent and also insurance. Insurance companies limit the amount of product you can store in the vault so you may have to pay rent for multiple vaults. Now, when you go to sell these items, you have to time all of this perfectly as you unwind your investment and more times than not I see people end up eating most if not all the profit they expected to get in return.

The issue with precious metals right now is that real interest rates are turning positive across duration curves and historically there is an inverse correlation between real yields and precious metals as they’re all considered traditional safe-haven "stores of value." Fun fact, by definition, nothing is a store of value these days after we moved from the gold standard. Since the Fed is committed to getting inflation under control by raising short-duration rates, and gold and silver are obviously "yieldless" assets, its much more appealing to put money in T-Bills that have a positive real yield now, than physical precious metals (or synthetic products like futures or ETFs). The dollar sitting at new highs does not help the bull case for precious metals either.

"Gold is the best hedge for inflation" No its not. It's down 20% and officially entered a bear market.

For someone who is stubbornly convicted on buying silver despite the historically bearish dynamic of positive and rising real yields, it would be prudent to layer in to a position over time rather than just adding a big chunk during what most would agree is one of the most uncertain time periods in modern market history.

Offering a contrarian, bullish perspective, there are industrial capacities for silver including the electric car industry, general and technology-focused manufacturing, and solar panel production which could trigger a demand-driven rise in price in the YEARS ahead. But most of those applications are fairly cyclical and given all of the traditional and historically accurate indicators I watch to forecast recessions, the clock is ticking.

Now, I am not saying that precious metals including gold and silver will not rally meaningfully from current levels over the longer term (most assets will be higher in three years than they are today). But looking at the traditional fundamental influences that have typically dictated the price of precious metals there are significant headwinds for both gold and silver here.

Moving forward, I will look for improvement in the fundamental backdrop which will need to include a reversal lower in the dollar and a peak in real rates followed by a renewed trend lower, eventually back to negative territory before we get convincedly bullish on gold and silver. On the charts, gold could fall as low as $1,300/oz. from its current value of $1,665/oz. in the medium to longer term based on the price action on the weekly time frame while there is a downside target range of $14 to $16 in silver. Based on the technicals, those two respective price zones would be much more appealing entry points for new long positions in the two most popular precious metals compared to current levels.

Given that we are sitting on a lot of cash it doesn't surprise me that people are looking to put money to work in alternative assets. Since the start of the most recent secular bull market (starting in March of 2009) alternatives and hedge funds have not performed because index funds basically only went up but given current market conditions this might be their time to shine. If you are interested in learning more about alternatives, I do have a short-list of alternative investments that might make sense for you and your situation. I also have a short list of private investments for qualified accredited investors. Shoot me an email for information (kurt@ivoryhill.com) or drop me a line to prepare this for our Q4 review meeting.

Now, let's dive in.

The S&P 500 is holding at dual pronged support above last week's lows and a key multi-month uptrend line as of yesterday.

If these levels are broken in the days a head, you can expect violent selling.

The August inflation report was pretty much the opposite of what the market was hoping for. The headline print came in above expectations, but perhaps more concerning is the core number. It jumped from 5.9% to 6.3%, suggesting that prices outside of food and inflation are not declining at all. The headline rate is more important to consumers since energy and food prices are most visible (you notice the price increase), but the Fed looks at core price changes. I think this number effectively locks in a 75 basis point hike this month, but may put a 100 basis point hike on the table as well even though it is unlikely. There is a pattern of the Fed leaking early news to the WSJ so I am sure we will see this hit the wires Tuesday or Wednesday next week.

Here's my hot take. Wall Street will try to convince you that this is a terrible thing, but it may not necessarily be the case. Here's my justification. The Fed's dual mandate is to support economic expansion while controlling inflation. In order to address the latter, it will have to give up the former. With inflation coming in higher than anticipated, the Fed may need to act more quickly and forcefully to control inflation. Therefore, a recession is more likely to occur and can last longer than anticipated as a result. A recession will destroy inflation much more quickly than anything the Fed can do.

To be direct, I believe that this could be advantageous for Treasuries in the long run. The Fed's activities will continue to be reflected in the short end of the curve. However, as Tuesday's price action shows, the long end may be getting ready to rebound. In response to the CPI report, yields increased once more this week, but this also raises the possibility of more economic decline. Investors will eventually start treating Treasuries like a safe haven investment. If conditions continue to tighten both domestically and internationally, default risk will start getting priced into asset prices. In such case, long-term Treasuries begin to rise while stocks and junk bonds start to plunge. I am aware that I have anticipated this scenario in the past, and I am still annoyed by how government bonds behave, but this will eventually change because it has to change because the global financial system depends on it.

Let's take a tactical pause and look at what the next six to twelve months could look like.


The possibility of a soft landing had been anticipated by the markets. It wasn't entirely irrational to hold that opinion. With a strong labor market and robust consumers, there was still reason to believe that the U.S. economy could endure this high inflation period while maintaining GDP growth rates at least somewhat close to the breakeven point.

I have been consistent in saying that a "soft landing" is highly unlikely.

How Does This Stock Market Rally Ultimately End? 10/27/2021

I now am very confident that a hard landing is more likely to occur. A week ago, the Fed Funds futures market was pricing in a Fed Funds rate of between 375 and 400 basis points at the meeting in June 2023. The range today is 425–450. Since the Fed has been responding to conditions in the past slowly and tentatively, some people have been reluctant to believe the Fed's message that inflation comes first. Investors, in my opinion, are now beginning to accept the Fed's explanation. The Fed's potential tightening through the middle of 2023 will be extremely detrimental to markets.

The Fed funds futures have the terminal rate at 4.25% - 4.50%, and it needs to stay there for the S&P 500 to hold the September lows.


According to the generally accepted definition of a recession, which is two consecutive quarters of negative GDP, a recession is already underway when only looking at quarterly GDP data. There has been discussion of this turning into a "growth recession," when GDP growth may halt, but conditions feel less like a classic recession due to low unemployment and above average pay increases. Whatever terminology or explanation you want to use, I believe we are approaching a position where a recession is almost certainly unavoidable.

It was going to be difficult to prevent it before, but if the Fed tightens more firmly and for a longer period of time than anticipated, it will hasten the recession's progress and may even deepen it. In an effort to support the economy, central banks typically infuse liquidity at this time. It will be acting in the reverse this time. To be crystal clear, given current economic conditions the Fed would "normally" be reversing course right now by lowering rates or pumping more money into the system but it is doing the exact opposite right now because they are trying to control inflation. Let's not forget that starting in September, the Fed will allow a maximum of $95 billion a month to leave its books. A severe liquidity shortage is about to occur and that matters.


A still-rising core inflation rate is the main issue I see here. Even worse, it is doing so as energy prices are declining. The rate of core inflation is far more persistent. Even once other inflationary factors fade, these losses are much less likely to be recovered. Once a tenant commits to a rental rate, landlords are hesitant to change it (especially when occupancy rates are close to 95%). There is little reason for healthcare providers to start lowering their prices. This is especially true in recessions when increased prices translate to higher profit margins. That lessens the impact of a slowdown in the economy.

It is difficult to conceive that the headline inflation rate will decline significantly if the core inflation rate is not coming down. Even if prices remain unchanged at this point, it will take another six months until the inflation rate drops to just 3%-4%, which is still much higher than the Fed's goal for an inflation rate of 2%. No matter what happens, it won't persuade the Fed to slow down its pace of tightening any time soon. It is also an election year...


High yield credit spreads are still in historically average area, so we don't need to panic just yet. On the other hand, that widens the difference between the current level of spreads and the level at which they usually reach during recessionary periods. We are easily looking at the likelihood of another 10–20% decline in corporate debt if spreads break out from here.

Contrarily though...


The main lesson here is this. When inflation spiked or the Fed increased interest rates during 2022, Treasury yields typically followed. but, Look at what occurred on Tuesday.

Given the historical trend, the drop in long-term Treasury prices of approximately 1% at the open was not all that unexpected. However, the stock/bond correlation changed from positive to negative during the second half of the trading day. Although stock declines accelerated in the afternoon, Treasuries recovered all of their morning losses and ended the day on an upward trend. In my opinion, this might be the time when bonds stopped pricing in inflation and began pricing for recessions, defaults, or anything else that might go wrong.

Additionally, this wasn't a one trick pony. Long-term Treasuries have continued to outperform the S&P 500 in terms of relative performance.

Ratio of 20 Year Treasuries divided by the S&P 500


No bear market has ever bottomed with the VIX below 45, and we are still below 30. It's unlikely that this market bottoms without at least one limit down day. A limit down is a decline enough to trigger trading restrictions like circuit breakers. Remember, fear forms bottoms. Few people know what is actually going on so the storm of retail traders is not hesitating to buy every dip. I also know that my wealth management colleagues are still throwing every one of their clients into the market fully invested as they stick to their bear market narrative of "this is long-term money and will go up over time."

While it's not fun to think about, below is a graphic on how the S&P 500 circuit breakers work. When you see this hit the wires, we are finally starting to get close to a bottom. I think this is the most anticipated major market correction in history so it could take a while until we get there. Everyone still has PTSD from 2018 and the COVID crash. A lot of investors and long only fund managers who normally wouldn't be in cash are moving out of the market. I guarantee this will take longer than anyone has the patience for.

Markets can stay irrational longer than you can stay solvent - John Maynard Keynes

I don't mean to scare anyone here but I try to set expectations on where the puck might be going.

Over the previous few months, market watchers have done a very good job convincing themselves (echo chambers) that things weren't really THAT bad. After the August inflation report, I think investors are finally accepting that this could potentially be really bad after all.

The bottom line is fear is starting to sink in. We have gotten to the point where intra-day bull traps are forming. Stocks are not holding a daily rally and investors are selling into any small rally they see which whipsaws the market back down. As I have been saying since January, these market conditions are as bad or worse than 2000 and 2008 but only time will tell.

We are going to be patient and sit on our pile of cash and take small nibbles at macro opportunities until the Ivory Hill RiskSIGNAL tells us where the bottom is.

And remember – the one fact pertaining to all conditions is that they will change.

Feel free to reach out to me and use me as a sounding board.

Best regards,

Kurt S. Altrichter, CRPS®

Fiduciary Advisor | President

Direct: 952.828.5336

Email: kurt@ivoryhill.com

—Written 09.16.2022