Posted on Wed, 05 Mar 2014 @ 10:42:36 CST by Captain_Hook
Originally published as a subscriber-only article on 13 August 2013
Still as poignant as ever in capturing the essence of an increasingly debased reality of life in an unbridled (fiat currency) economy, we have Being There, Jerzy Kosinski’s masterpiece, first published in 1970, and then made into a film starring Peter Sellers in 1979. Along this line of thinking, one cannot help but be struck by the parallels to present times, with an aging plutocracy seemingly searching for wisdom in all the wrong places in an effort to maintain the status quo, both then and now, unfortunately found in simple-headed wisdom learned from watching too much television. Because people are too busy to read apparently, if they can read at all (Chance was not a reader), so they depend on television not just for their entertainment, but also for their education and news. So what you get is a bunch of dummies listening to unscrupulous talking heads who will literally say anything to forward their agendas, clinging onto absolute non-sense because such views meld with their own distorted views of the world – all looking to either defraud or for a free lunch – or both.
To say we’ve come along way in this regard is an understatement. To say we have moved away from embracing the true state of the economy, as Chance the gardener correctly (viva laissez faire) recommends, is an understatement. Indeed, even the kleptocracy (and certainly Orwell) pictured in Being There, which was representative of the bureaucracy of the time, would look at the measures their present day counterparts are taking (think fraudulent information and coercion) in an effort to maintain the status quo and think, ‘these guys are nuts if they think this can go on forever’, as extremes in the lunacy seem to reach new heights daily. (i.e. tyrannical fascists now run America.) Every day is a bigger challenge in this regard and it will continue to accelerate until the economy, markets, and spirits of the manipulators are broken, which will come once the USDollar($) loses reserve currency status as reflected in the necessity for meaningfully higher interest rates in order to maintain any value what-so-ever.
Because no matter how much they want you to believe things are getting better they are not. The rising stock market does not mean things are getting better, it just means it’s becoming more leveraged. In fact, and ironically, the rising stock market means currency debasement rates are accelerating, and in a mature fiat currency regime this reflective of control loss and end game dynamics, which is definitely the case as this pertains to the US, the $, and empire profligacy. Again, no amount of lying will prevent the inevitable, it will only distort and delay things, which in this case means further debasement of the currency (because of diminishing returns), increasing instability, and more profoundly hollowed out economy. What’s more, the scuttlebutt of all this is it’s all for naught, because as discussed previously, when fiction meets reality we will essentially end up in the same place – mass insolvency – whether it be by hook (deflation) or by crook (extreme inflation).
In the meantime however, it appears stock investors think we are in the summer of our lives, with the retail crowd now going all in, providing the set up for a ‘winter of discontent’. And if you study the reasons why stocks are higher, with increasing money printing, credit growth, and financial repression main ingredients in the cocktail, one would know present conditions are more ‘bubble like’ than any other time in history because central authorities have gotten better at it, tweaking things ‘just right’ daily, along with using mass psychology and obfuscation to the max. That’s what all the taper talk is – obfuscation – where whether they actually taper or not (not to mention timing is uncertain), this cannot be considered a ‘true tightening’. Make no mistake in this regard, despite everything else you may hear or read, the bottom line is central authorities cannot reduce currency / system debasement rates for very long considering our mature situation – because they must keep the credit and $ bubbles inflated.
This is likely to prove a daunting task however (although not impossible), unless banks start letting out those enormous reserves they control. Of course if the Chinese example is the test case in this regard, then the deflationists may have it right, especially considering how the stock market and bank balance sheets have ballooned since 2009. What’s more, and to go along with this, one must also recognize that margin debt levels are also at historic highs, making the stock market highly susceptible to yet another crash (the multiple expansion needs correcting), which again, will make such a task very difficult indeed, at least until after such an event. Afterwards however, if the Fed stops paying its commercial banks for holding deposits on reserve with them we may witness the mother of all ‘crack-up booms’ running into decade’s end. (i.e. because commercial banks will forced to lend reserves out to make a return.) At least that’s what gold is telling us with its pause now, and anticipated resurgence into 2021. (i.e. with the Fibonacci number ‘21’ expected to define the numbers of years in the bull market.) (See Figure 1)
Figure 1 – Click Chart For Sharper Image
As you can see in the chart above, and while no guarantees can be made, in a prefect world from a technical perspective, if gold were to hit $1100 sometime in coming months and bounce impulsively off channel and Fibonacci resonance related support(s), such an outcome would go along way in suggesting an important bottom had been put in place. What’s more, and in terms of other important technical / inter-market indicators that gel with this convergence zone ($1100), perhaps it’s no coincidence then that such an outcome is also our ‘base case’ (since May) for where the Dow / Gold Ratio should top out in its present cyclical rebound, which would put the Dow closer to16000 with gold at $1100. (i.e.16000 / 1100 = 14.5 = 233 month exponential moving average [EMA].) Such an outcome would be quite bullish for gold and bearish for stocks if it occurs into ‘crash time’ this Fall. Please note the Dow / Gold Ratio is on an important time line turn at present as well. (See Figure 2)
Figure 2 – Click Chart For Sharper Image
And technical analysis can be employed here once again to establish that indeed the stocks are at a minimum, overbought, not that this means much in heavily manipulated markets positioned in an increasingly desperate bureaucracy addicted to crack. Along this line of thinking one would likely do well within the full measure of time to realize the risk adjusted S&P 500 (SPX), using the CBOE Volatility Index (VIX) to define risk, is only a stone’s throw away from a double top once again, nothing a few days trading couldn’t cure. And that’s what the penitent man should expect in the not too distant future, a double top, if not more quite possibly. Why more? Because broadening top(s) in the major US indices should have more work to do on the upside if our observations above have merit, not too mention the observation speculators are still quick to hedge long exposures at the first sign of trouble, telling educated observers the ‘wall of worry’ is still alive. (See Figure 3)
Figure 3 – Click Chart For Sharper Image
Naturally with corporate profits under pressure and most of the gains witnessed in stocks over the past year due to multiple expansion (see attached above) the probability of such an outcome occurring should not be viewed as ‘high’ (especially given increasing instability in stocks); however, at the same time, who could be surprised if they see stocks continue higher given what has already happened this year. I can tell you open interest put / call ratios are still at the highs for NDX, RUT, and XLF (secondary markets have been leading the broads), which is why they continue to outperform, and are largely the reason the broads get squeezed to ever-increasing highs as well. (i.e. along with VXX open interest put / call ratios hitting consecutive new lows.) Of course once speculators in these markets become exhausted and put / call ratios drop things could get interesting quickly, where even the Fed is warning of a crash risk associated with ETF’s. (See Figure 4)
Figure 4 – Click Chart For Sharper Image
Now I am not ‘predicting a stock market crash’ this fall, however one cannot ignore the fact liquidity risk is significant, and key risk adjusted indexes are either at new highs, meaning the desire for risky stocks has never been higher (see Figure 4), or very close. (See Figure 3) What’s more, one must realize the effort on the part of price managers required to keep stocks going up is becoming untenable, where it’s now taking aggressive VIX related repression of idiot hedgers / speculators, pushing prices ever lower, in order to pull this off. For example, with the open interest put / call ratio for VXX plunging as speculation increases a correction is on the way (the seasonal Fall correction), the VIX was actually down yesterday along with stocks, giving the message stocks are going higher the next day. And sure enough, futures are higher this morning.
On a risk adjusted basis however, this is very bearish from the perspective one more push higher in the SPX / VIX Ratio will bring values back to 2007 levels, which as you may remember, was the beginning of the end for the financials first, and then the broads. Add to this every day stocks remain buoyant should be considered ‘borrowed time’ when considering the 1987 analog comparison, and again, while I am not predicting a crash this fall (with so many looking for one evidenced in high put / call ratios), at the same time you better keep a close eye on ‘true sentiment’ (open interest put / call ratios), because when concern wanes (dropping the ratios), so will stocks. This is of course why it may take until the Fall passes, or into early 2014, before any kind of a meaningful fall in stocks occurs. After the crash season passes one would think some speculators will naturally conform to positive seasonals, allowing open interest put / call ratios on the broads and key ETF’s fall. Combine this with Fed tapering relief, and stage could be set for quite a fall.
Speaking of seasonals, and returning to precious metals, one could not help but notice the multiple breakouts in the sector yesterday (in gold, silver, and related equities), where such price action should not be surprising from the perspective August and September are the strongest months of the year historically. The reason for this is of course the inverse correlation with stocks, correspondingly weakest in the Fall, in coordination with a traditional slump in the credit cycle this time of year (coming out of holiday season), spurring the need for accelerated currency debasement. So, from this perspective, yesterday’s strong performance is not surprising.
One must be careful past recent gains however, because although open interest put / call ratios on key precious metal sector measures have been on the rise (GLD, GDX, NUGT, and XAU), with the exception of XAU they have not been rising aggressively, and in the case of silver speculation, as measured by SLV and AGQ, ratios have been plunging, meaning aggressive speculators never lost their appetite for the go-go elements of the sector, which in turn means there has not been a capitulation in the sector yet. This likely means that although further gains in the sector should be expected given the totality of factors bearing down on the situation, at the same time these gains will likely be more tepid than most are expecting, followed by new lows in the larger corrective sequence eventually.
Still, gold for example, could be up an additional $100 plus from here before it’s all over given gains in September should be greater than those already witnessed. The 233-weekly EMA is the key metric to keep an eye on in attempting to gauge future potential, presently at $1383. If gold can make it past this all-important Fibonacci measure it could extend to the higher reaches of a retracement of this year’s losses, with $1484 being the signatured 50% possibility before gravity takes hold once again. Once recent highs at $1350 are breached, just north of $1400 is the minimum anticipated retracement, that being the 38.2 % mark.
So again, while one needs to be careful, perhaps using lower position limits and / or stops (not recommended), at the same time more gains must be expected given the overall situation. Again, while not expected, if stocks begin to slide next week with options related support from the next series (September) at its lowest, precious metals could gain more traction (as the short squeeze in Chicago gold accelerates), especially considering silver speculators influence will be lower as well.
And of course for the well grounded, buying bullion for the long-term is always a good idea, especially because it removes all the paper market risks (stock market crash, exchange closure, confiscation, etc.), which is where the frauds are running rampant these days. (i.e. with New York bankers unleashed.)
Because ‘being there’ in gold (and silver) is undoubtedly a good idea for the long term.
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