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Posted on Mon, 29 Dec 2014 @ 17:37:26 CST by Captain_Hook

Originally published as a subscriber article on 26 Aug 2014

Looked at in the appropriate light, the world has embraced the essence of the movie Videodrome in many respects since its release in 1983, with a hollowing out of our morality (corresponding to the economy), Orwellian mind control, and living televisions perhaps the most salient parallels. Well, at least it seems like the televisions are alive – and they certainly control how most people think these days. To this end, I would postulate that even the surging stock market has morphed into a pseudo video game, almost completely removed from the real world we live in everyday, controlled by an increasingly debased morality (think increasing fraud), talking head circus barkers (empowered by the debasement), and a runaway fiat currency bubble (the root of the debasement).

We have become Videodrome.

Of course this is not the first time this sort of thing has gripped the human condition, just never on such a vast scale, eclipsing other instances from ancient Rome to the Third Riche by a mile. And this is also not the first time such subject matter has appeared on these pages either, where some may remember my first warning on how the ‘rise of the machines’ in Welcome My Son – Welcome to the Machines back in July of 2010 appeared to be both unstoppable, and dangerous. Fast-forward to today, and here we are with a volume-less stealth (managed) mania in stocks that is indeed ‘bending people’s minds’ – accelerating debasement trends, dangerous behaviors, and ultimately real world consequences at some point.

And this is of course the question of the day. When will ‘it’ hit the fan again? When will it become more widely understood by the middle-class (who are not viewed by the oligarchs, bankers, and bureaucrats as people or citizens, but instead taxpayers, consumers, and bag holders) that their disenfranchisement / destruction is accelerating too? Big questions that only you can answer by making enquiries like reading these pages and being honest with yourself. Unfortunately, most will never do this and end up like the already disenfranchised, living day to day in a disillusioned nightmare that never ends. This then, is why you have incidents like Ferguson, and why you can expect the discontent to spread and grow more profound.

All we need is to have the stock market slip and this will become reality for the hoards of ‘pensioners’ that are presently deluding themselves everything will be just fine. As alluded to above, and as discussed many times throughout the years in attempting to chronicle the reality of an increasing surreal world, the stock market (all markets) has become nothing more than a sentiment / liquidity driven video game, controlled by price managing machines preying on people’s fears. And there is much to be fearful of in the real world, from rising tensions in the Ukraine and China, to accelerating debt bubble worries, to worsening Wall Street fraud like the planned US junk bond IPOs coming up, which marked the turn at the last credit crisis if you remember. (i.e. it was foriegn buyers of US junk debt / derivatives that marked the top in 2007, like today.)

Oh, and we must not forget an apparently out-of-control ebola epidemic that could shut down much of the world’s economy if unchecked. Of course this is just all fun and games to the bureaucracy’s price managers, just more reasons for unsuspecting speculators to buy puts (and short stocks), only to be squeezed out of their positions in perpetually. Because if it isn’t one thing, it’s another, that is used to spark a rally. This week it’s purely structural, because stocks usually go up into month’s end due to hedge / mutual / pension fund related window dressing. And next week it could be anticipation associated with the Alibaba IPO, or ISIS being bombed, or whatever. It doesn’t matter, because with no sellers in the market (exacerbated with Labor Day holidays approaching), interest rates falling (for the same market rigging reasons stocks are rising), and money supply growth rates still buoyant (see Fed Credit) – it doesn’t take much with the Fed’s prop desk, corporate buybacks, and foreign capital supporting stocks.

Unfortunately for just about everybody however, these stock buybacks and government subsidized propping activity will eventually have to be paid for, meaning these practices have unwittingly thrown corporate America into a debt induced suicide mission, which will become evident when interest rates begin to rise. People think because the Fed is cutting back on QE that inflationary forces are subdued. However, as indicated above, money supply growth rates are still rising, and they will accelerate if the banks ever decide to start lending reserves again, which is the plan in case you didn’t know. Because the Fed can’t let the stock market crash now, as it’s just too important in maintaining the illusion that everything is under control. How would it look if stocks were crashing right into mid-term elections? Bad is the answer – so expect a concerted effort to keep them buoyant into November on this account no matter how bad the internals diverge.

As mentioned in previous commentary, such an outcome would produce a seasonal inversion (the opposite to established seasonals) that could potentially set-up something nasty going into Christmas this year when nobody expects it. In this highly speculative climate, if not for sheer financial and emotional exhaustion prior, one should actually expect such an outcome. That being said, as discussed previously, sentiment has already shifted considerably in favor of the bears over the past month or so, putting the onus on the bulls, and their handlers, to keep the bubbles inflated. Unfortunately for these types, because the move in stocks has gone parabolic, with increasingly shallow pullbacks (the last only 4% on the SPX); time is running short in this regard, even if the blow-off lasts another two-months. Such an outcome would be surprising, and I am not calling for a seasonal inversion, however in knowing who we are dealing with, one should also not be surprised if it occurs. (See Figure 1)

Figure 1

As it appears the S&P 500 (SPX) may push above 2000 on a temporary basis, one must keep all this in mind that eventually, once bearish speculators in the bond market are burned off, a channel break in long-term rates, as measured by 30-Year Treasuries (same chart for 10-Year Treasuries) (see above) may occur, popping this bubble rapidly, likely before the Fed can respond. Right now speculators continue to be net short futures to the extent this has become a self-supporting mechanism for the market. Again, at some point however, this should change, especially if inflation fears (and rates) begin accelerating higher unexpectedly, something the bureaucrats will not be able to prevent. Of course if this chart turns out be an accurate analog low rates are here to stay, just not the bubble(s) in stocks.  

So, it’s possible the bond market in the end that finally pops the larger speculative / fiat currency based bubble(s), if long-term channel support indicted in the monthly plot above gives way, but there is no guarantee in this will happen given official proclivaties. If the Japanese experience is any indication however, all the debt and derivatives will matter at some point anyway. One should look to the junk bond market(s) for a signal in this regard, as rates should begin to rise here first, which is why price managers have taken advantage of lower summer-time volumes to jam prices back up to the top of the range, as has been the case with stocks. Like stocks, indicators will be putting in noticeable negative divergences this time around however (see attached directly above), making further attempts to paint the tape increasing difficult, especially with the higher volumes that should be expected as the holiday season passes.

The SPX / CBOE Volatility Index (VIX) Ratio (see Figure 1) could close the month at 192, which would be a top defining moment. Therein, this does not mean stocks won’t go higher in September as the seasonal inversion blow-off accelerates (not likely but possible), but it does mean intra-month highs should be the top, with October registering losses, much to the surprise of the consensus. Again, if a seasonal inversion is on the menu, with September historically the worst month of the year, stocks should continue to rise most of the month, possibly into the highly awaited Alibaba IPO tentatively scheduled for September 16. Capital flows into the US should begin to abate at some point once excited money managers around the world blow their collective load(s) during this quasi-orgasmic episode. (i.e. a blow-off top has similar psychological features compared to a sex act.)

The Nasdaq 100 (NDX) / Dow Ratio remains contained at present, however all it would take to change this, especially around Alibaba IPO time, is for a few big hedge fund managers to get a feather up their collective, driving the put / call ratios on the NDX and QQQ up, enabling a final blow-off in tech stocks higher. And who knows, maybe Nasdaq 5000 will be breached once again, as impossible / improbable (a bubble top like 2000 has never been tested before) as this might be. Such an outcome could see the SPX vexing 2100, or higher intra-month, as the blow-off accelerates into next month. The script should see gains the remainder of the week as the low volumes (lack of selling) continue to perpetuate a melt-up; again, with any luck, producing a monthly close on the SPX / VIX Ratio of 192.

I say ‘luck’ because at least we will have the track to run on outlined above, not that a repeat of ’29 (a top next Tuesday) is out of the question. The fact traders know about the potential ’29 top parallel decreases the odds considerably (because too many traders act on things they read at Zerohedge); but again, it’s a possibility that matches many technical (the count) and fundamental (too numerous to mention) aspects present right now. Up until now, the bureaucracy’s price mangers have been able to manage the stock market (and bonds) using subterfuge, meaning it’s essentially nothing more than a sentiment based video game, increasingly removed from fundamentals and regenerative multipliers outside of increased money printing. Again however, this is set to change as speculators and hedgers finally burnout on the negative behavior of betting bearish, breaking the chain in the perpetual short squeeze.

It’s natural for somebody, even a supposedly disciplined hedge fund manager, to bet negative on an outcome when the understood fundamentals point to such a result, which is the tendency price managing bureaucrats exploit in propping up the markets (via perpetual short squeezes), aided by unlimited funds that can be created out of thin air. (i.e. fiat currency.) Aside from the employment of unlimited QE in support of prices, again, this should have an effect on both stocks and bonds eventually (soon) due to diminishing returns, which is something the markets must reflect at some point as long as any degree of true price discovery remains. Many believe this is no longer the case, which is why traders / investors continue to pile into securities devoid of value. 

Such reckless behavior is the primary precondition to a crash when an uncontrollable variable / factor pops up, like an ebola epidemic that shuts down much of the larger economy, especially if the rigged market mechanism (described above) is vulnerable. People buying stocks (junk bonds, derivatives, etc.) right now are rolling the dice none of this will continue to matter. History is suggestive, while the present mania can indeed continue, the odds are not in favor of such an outcome.

See you next week.

Captain Hook

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