The World According To Garp
Posted on Thu, 12 Apr 2007 @ 08:43:28 PDT by Captain_Hook
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(Originally published in Subscriber's Articles Mon March 19th, 2007.) Many of you will have either read the book or seen the movie starring Robin Williams through which the great John Irving attempts to stimulate alternative thought. And although the dry nature of financial matters will not allow us to employ the same comedic license Irving utilizes in bringing the more profound messages in his work to life, the words on these pages are designed along similar lines – to stimulate the mind. What’s more in this regard, our story is also not isolated to suburban USA. No – what we are talking about here is ‘the world according to Garp’ seen through the eyes of Goldman Sachs (GS), because what they are not running in the financial world already, they will be if allowed. Let’s hope the Chinese see the light before it’s too late.
Why is this happening? Well, according to them, and like T.S. Garp, they simply know better through ‘hard experience’, along with having our best interests at heart. In this respect, more recent ‘pearls of wisdom’ espoused by their unbiased experts who are now running the financial world have centered on the unfolding sub-prime lending debacle that according to them is ‘manageable’, and ‘largely contained’. Of course what Paulson (a GS kingpin), is really saying here is ‘don’t worry – be happy’ because ‘hell or high water’ we will find another bubble for all those fiat dollars. And as long as I am in charge of the Treasury no measures are out of the question in ensuring all the balloons remain in the air. Oh – and again, don’t you worry about the sub-prime mess, even if it spreads a bit more as we attempt to take commodities down in coming weeks, because we’ll find other balloons to blow up in front of the election next year. Don’t you worry about that! As a side note, and out of character for a supposedly unified price management group, we find it interesting not all share this view. But of course Fed Governor Susan Bies is retiring next month for some reason.
“The global money supply has come to have little to do with interest rates, or so it would seem. Some three-quarters of all liquidity comes in the form of derivatives and securitized debt, as the analysts at Independent Strategy have observed. And if raising rates did nothing to slow it, the bubble in money might just start to deflate even if short-term rates now get clipped back towards zero.”
Is the monetary base set to begin contracting, as suggested by Mr. Ash and his friends? Not in my books if this chart is any indication. And of course let’s not forget why, with all the backdoor inflation coupled with what foreigners are doing, which is further evidenced by both raw commodities and input prices remaining stubbornly resilient, effectively sponsoring the most pronounced case of stagflation since the 70’s. Of course this will need to be pushed in one direction – recession / depression – or the other – that being hyperinflation. Gee – let me think. Which alternative will the banker boys choose – inflation – meaning they continue to live fat for as long as possible – or deflation – where they will be forced to answer a bunch of questions from some very upset people? If one has to think about that question for long you have not been doing your homework, because history has taught us if bankers only know how to do one thing well, which is in fact the case, it’s debasing the currency. They are experts at that, as proven time and time again. Just ask Garp (GS). They’ll tell you how it’s to be.
And this is why the more likely resolution to the current stagflation picture is not the same as the 70’s, as some people think. Nope – we are not in a situation like that of the 70’s at all. Back then people had savings, debt payments were manageable, and real wages were enjoying the fruits of newly accelerating inflation at the time. So you see the economy back then was actually very strong in relation to our present credit based / bubble experiment. And it’s because of this authorities are in no position to dish out the hard medicine (think 20% interest rates) seen back then in order to regain the respect of credit markets, whatever that means today. Be that as it may, this is why one should expect continuously rising inflation no matter what the Fed heads are talking about in the media. They are simply attempting to jawbone out of control commodity markets with words, but all the while, they continue to provide plentiful liquidity hoping it doesn’t spill over into rising costs. Unfortunately for them, this is not the case of course, where at some point both the feds, and unfortunately all of us as well, will get caught for allowing such lunacy. But for now however, it’s very important for you to understand that anyone talking about deflation and falling prices of any kind, including that of the stock market, as per our comparative analysis sited here many times now, should be ignored. These people simply know not of what they speak. How’s that for some ‘proper English’?
But, what if inflation efforts fail? Is this what will be necessary for precious metals to take off? Will the panic associated with such a development mark the ‘official turn’ into hyperinflation? The answer to the second and third questions is ‘yes’ in my opinion, where the reasoning behind the logic is found in answering the first. Here, if for some reason prices begin to fall, and threaten a sequence much like that seen in the year 2000 with the unwinding of the tech bubble, while scary at first, until proven otherwise, the educated investor must assume monetary authorities will attempt to stay ahead of the curve. In this respect one should note nothing meaningful has happened yet to the aggregate credit bubble associated with real estate, but that when it does, rates will drop quickly in response. What’s more, if the wider measures of prices were to unexpectedly begin to fall, because up to this point authorities have been attempting to avoid this while at the same time attempting to knock select input prices down, they would be forced to hit the gas pedal hard, completely reversing current policy measures, perfidious as they may be. And it could be argued we are very close to this point now, where the possible ‘island bottom’ put on the ‘yield curve’ (just click the icon labeled Yield Curve) would be a first indication monetary policy is expected to return to ‘easy street’ soon. Here is the current snapshot of the long-term chart we are running on the yield curve, where as you can see odds heavily favor the next move of consequence being higher in what we will label wave III of a larger sequence. (See Figure 1)
Figure 1
And this is not the only chart showing ‘easy money’ policy is likely a lot closer than some may be thinking. Of course if you are in the sub-prime mortgage business, you probably think the Fed is behind the curve. Unfortunately for these people, they fail to realize they will be labeled another ‘failed experiment’ in Fed annals, with the result being hyperinflation. Here, the thing to realize is the NASDAQ bubble was small potatoes compared to the developing real estate debacle. This is of course why more and more ratios, which indicate the markets see the need for easy money, are already showing ‘the need for speed’ in monetary debasement rates, effectively giving monetary authorities the nudge to react accordingly with official policy. The yield curve pictured above is key in this respect. And there are many more both officials and investors watch for policy clues, with this next one being of particular interest to the latter group in attempting to jump ahead of official policy. (See Figure 2)
Figure 2
The key variables here appear to be whether diamond support on RSI or Fibonacci / flag resistance give first, which in turn will determine whether precious metals shares breakout against the broads (an important inflation signal), or not. If not, the resultant correction could be quite severe this time around, so keeping an eye on things over the next week or so is important, because failure here would indicate the market sees monetary policy as being either behind the curve, or possibly even deficient in terms of ability to maintain pressure in the pipe. So, we want to see a breakout this week in the above, along with support holding in the below considering gold’s very strong correlation to this ratio. (See Figure 3)
Figure 3
Of course in terms of the ‘big picture’, and as per above, this would act as ‘the scare’ to loosen official monetary policy up ‘big time’. Again, this is what the yield curve is telling us to expect soon. And it doesn’t end here in terms of relationships that are painting pictures suggestive a degree of caution and patience (in terms of increasing positions) should be exercised in coming weeks, where it appears although indicators on the Gold / CRB Ratio plot are bullishly predisposed, prices are having difficulty pushing through ‘swing line’ resistance. Again however, this week may prove ‘pivotal’ in this respect as well. (See Figure 4)
Figure 4
Many are thinking commodities should decline in sympathy to a plunging stock market that swoons once again quite soon. And while I do think there is the possibility of some minor losses over the next few weeks, in the end commodities should remain quite firm considering supply profiles across the entire gambit ranging from the grains, with droughts now emerging world wide, to crude (demand too) at the forefront considering its multidimensional importance, along with the inverse head and shoulders pattern in the trade. Of course a rally in crude would do wonders for gold here as well considering it’s new found propensity to outperform. (See Figure 5)
Figure 5
And if that isn’t enough to get you aroused regarding bullish prospects for the metals, then perhaps this will tickle your fancy, especially if you are a shareholder. Since publication of my article back on February 9th, Golden Star Resources (GSS) has continued to move higher, where at present it needs to see volume pick up to confirm the trend is higher. This is the only concern right now, that being volume, as evidenced by the fact the On-Balance-Volume (OBV) indicator is right on support at present. (See Figure 6)
Figure 6
Here, if relevant theory has a place within the investing game however, and if Martin Armstrong’s Economic Confidence Model is to be considered ‘relevant theory’, then one should not be surprised if this support holds. Or in other words, one should not be surprised if increasing capital is shifted into both GSS as a leader for the group given it’s a go-go stock, along with the larger group in turn. What’s more, the message its ratio against the group should not be surprising to anyone either, as seen below. This chart is screaming ‘buy me’, so I suggest if you have not already done so, and your portfolio planning will allow for it, this would be a good time to add GSS to your holdings on an intermediate to long-term basis. Of course once all this is known, it’s always best to buy on weakness, so let’s hope we see such an opportunity over the next week or two, but I wouldn’t hold your breath in this regard. (See Figure 7)
Figure 7
Thus, it should not be surprising to anyone then that the daily gold chart possesses a bullish predisposition from technical perspective, which of course fits like a glove with the growing positive fundamental backdrop. And along these lines we could of course get into a lengthy discussion regarding Gold’s intrinsic value, along with it’ role as real money, but we will save these topics for another day. We should mention however that along with all the other positives mentioned above, we are in fact now at an important long-term time line bottom for gold not many know about. So while there is still a risk gold fails from the current test of the ‘swing line' at $655, it should not fall past last week’s lows if this signal is as important as it has been in the past. (See Figure 8)
Figure 8
And if it did, as mentioned, then stochastic influences associated with the monthly plot could grip the price action causing a bit more of a rout than we are currently expecting. Now it’s very important to understand this is not our forecast in terms of anticipated price action in coming weeks, but again, this is possible for reasons we will get into detail further below. Before we do that however, take a look at this Canadian $ Gold Chart. From a technical perspective, gold in C$’s is very close to triggering a sell signal. Further to this, and moving into the stocks now, take a gander at the monthly XAU. RSI is on long-term support, PPO is set to break trend line support, the MACD is picking up speed on the downside as it’s approaching support, and all this is married to stochastic support still being some distance away. Thus, any weakness past this point will not only breach trend line support in the key indicators, such weakness may signal we should in fact expect more. And I have to tell you, my technical analysis studies have taught me to respect such occurrences, which is also likely what’s holding a lot of others back as well. They see deflation coming triggered by problems in the sub-prime market.
Yes, but what about seasonal influences and such? Answer: None of the ‘standard rules’ apply anymore. Why? Because it’s the ‘World According To Garp’, meaning Goldman Sachs as it were. So, no time for a rest, it’s onward and upward to those multimillion-dollar bonuses again this year, even if this will be the last party of its kind for quite some time. And how do they plan on accomplishing this with mature economies in a state of stagflation? Well, besides the obvious answer, China is still busting at the seams it appears, having to raise rates overnight for the third time in a year. Does this sound like they are worried about the carry trade, or anything from a growth perspective? Certainly not to the speculators in Shanghai, who are flagging stocks into new highs this very moment in discounting continued expansion. And can you blame them? Just the infrastructure tab alone associated with the Beijing Olympics is at $40-billion, and counting. Can you say inflation anyone? Now you know why Mr. Paulson spends so much time over there.
In focusing on the near-term however, while the Fed meeting this week may keep prices buoyed in nervous tension, ultimately the reasons cited last week for a weakening of the equity complex into month’s end should grip the trade sooner or later. And as mentioned previously, this is the ‘buying opportunity’ we have been waiting for knowing of these impending pressures on the equity complex, not that prices will go lower given some of the signals issued over the past few days. In talking with Dave, from a wave related perspective, prices should effectively consolidate in a tight trading range in coming weeks before taking off higher. The fact his view matches my own so closely, which of course is in large part a product of the above study, is now compelling me to remove my cautionary stance on accumulating more positions at this time, meaning we returning to a bullish official outlook across the board for both the metals and their related equities.
Does this mean we think the metals will go screaming higher from here? Answer: Absolutely not. In fact despite the fact stock market futures and overnight price action in the foreign markets are signaling a buoyant open in the US, which of course will not hurt the aggregate inflation profile, as mentioned, given the confluence of factors talked about above, don’t be surprised if prices weaken up one more time into month’s end. And it’s this buying opportunity that should prove to be the last accumulation opportunity to top up portfolios we do not want you to miss out on. So you see, as explained previously, this change in our official view is not so much a ‘sector call’ as it is a signal to accumulate aggressively. Again, let’s all hope it’s into weakness.
After writing this, we check out the short sales positions on the New York Stock Exchange where low and behold, the public numbers surged to a new all-time high last week, substantially above any other reading in history. This of course has quite profound bullish implications for stocks as the public is seen as the ultimate contrary indicator by the pros. Thus, even if put / call ratios come in on the low side this week, not that their influence will be felt until closer to next month anyway, the shorts should keep prices buoyed until this occurs. This of course cements the bullish inflation case moving forward, where of course we were bullish on inflation to start with, but not like this. So, act accordingly, as this means higher prices are likely coming sooner than later, where topping up those metal and energy positions with extreme prejudice appears to the recommended course of action at this time.
Good investing all.
Captain Hook
Special Note: This is just a reminder I will be fishing with some buddies for the rest of the week. This should recharge my batteries, where you can expect to see me back at it next week, as per usual.
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