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The Liquidity Trap
Posted on Wed, 12 Oct 2016 @ 15:58:10 CDT by Captain_Hook

Originally published as a Subscriber Only article on 15 Feb 2016

Have you noticed? Stocks don’t go up anymore unless they announce a multi-billion dollar buyback program, and then the gains don’t last. What’s worse, it should be realized by investors that these buybacks will need to increasingly curtailed as stocks fall with the financialized economy so dependent on asset prices now. So while the high flyers like Amazon are still able to tap the credit markets to continue the Ponzi, as the rot of the collapsing colossus (better know as the economy) continues to spread, these types will be forced to cease this insanity as well, and then we will see the true meaning of the term ‘liquidity trap’ applied to the stock market.

Definitions of the term first coined by Keynesians have changed throughout the years, but the basis of the condition is money printing becomes ineffective in stimulating the economy, where in a ‘conventional sense’, we are already there. This is of course why the economy continues to be increasingly financialized, meaning increasingly desperate measures become necessary to get people to invest / spend money. Negative rates are being attempted right now, but as such measures continue to fail, it will soon be realized you can’t taper a Ponzi, and that what is needed is QE for the people in order to delay wholesale collapse a few more years. (i.e. because of hyperinflation.)

Because the bankers aren’t (completely) stupid, they know that if you give the people money they will spend it unlike greedy rentiers / oligarchs who will use the free money to squeeze unsuspecting lower classes. They know that QE for the people will eventually bring untenable price increases in scare resources, however it appears this is what we are going to get if Bernie Sanders continues to dominate the Presidential election scene. And make no mistake about it; this is a revolution on the part of disenfranchised young people. So unless they completely rig the election (even the bought and paid for Superdelegates can’t stop him), expect big change next year. (i.e. this is what the surge in gold despite its rigged condition is telling you.)

Returning to the above, in more recent years, as theory becomes reality and the excesses of prolonged neo-Keynesian economic policy around the world are seen, the definitions of the term ‘liquidity trap’ have morphed to adapt to conditions and attitudes, where Cullen Roche has done an excellent job of delineating this in the attached. The first quote in the attached highlights the concept of diminishing returns, and the proverbial ‘pushing on a string’ in terms of conventional monetary policy once interest rates hit the zero bound in a deflationary environment, and the second highlights the need for new alternatives, as follows:

after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest.”
 This is what the charts are telling you, not the least of which being the Gold / Oil Ratio, at its highest level since the Great Depression of the 1890’s. This indicator has never been wrong, and is not so this time as well, although you may not be aware if one still has a good job and believes mainstream propaganda. If one is grounded in reality because of disenfranchisement however, or common sense heaven forbid (or is not a sellout), it’s not difficult to see, where in fact it could be argued we are facing the biggest crisis in mankind’s history moving forward, where our very survival is at stake within the full measure of time.
In bringing scope back in however, the matters at hand are the markets and economy, with both looking increasingly tenuous by the day. (See here, here, and here.) The ratios continue to tell the story in this regard, with the S&P 500 (SPX) / Gold Ratio pictured below, where it’s plain to see even if this month closes with a bounce from current levels, still, it will have penetrated the all-important 233-month exponential moving average (EMA) in all likelihood, which would be a ‘big deal’ in terms of forecasting the future. Further to this, and as can be seen below as well, it should be noticed that this turn lower is still in its initial stages, with stochastics just turned down hard, implying momentum in the decline should continue to accelerate. (See Figure 1)

“A liquidity trap may be defined as a situation in which conventional monetary policies have become impotent, because nominal interest rates are at or near zero: injecting monetary base into the economy has no effect, because base and bonds are viewed by the private sector as perfect substitutes.”

Loss of control is the big message in the above, which is definitely the case based on gold’s performance not just last week, but more profoundly, since the year 2000. This is why conventional monetary policy (and even not so conventional) has not worked, and will not work moving forward and why something new, like QE for the people (A Check in Every Mailbox) will be necessary to get the economy rolling again. It’s either that or wholesale debasement of the currency(s) right up front, where at least by monetizing the people, such a result can be postponed for a few years. Deflationary collapse and something akin to the Dark Ages should come after that – so enjoy all the good times as long as you can.

Figure 1 – Click Chart For Sharper Image

Some may say, ‘ya but won’t the Fed come in to save the day before things get out of control – especially in an election year?’ Such thinking does not take into consideration that not only is the Fed between a rock and a hard place policy wise, because if they go dovish gold and commodities will really zoom higher as the dollar($) falls off a cliff; but more, you have to wonder if they want stable markets with the likes of Donald Trump and Bernie Sanders making big pushes on the political scene considering they are both looking at defrocking them. So one must wonder how far the Fed will let things go before it steps in with more QE, negative rates, etc. Letting stocks crash would show people just what life would look like by voting for rebellion. (See Figure 2) 

Figure 2 – Click Chart For Sharper Image

This is why the smart money is selling tech now, despite all the propping and support it gets from the status quo every day. Again here, and as can be seen above, the NASDAQ is now breaking down, where again, as long as a big bounce is not witnessed going into month’s end, ‘trouble’ is the word. (See above) The only question is pattern. Does the NASDAQ fall further here to the risk adjusted target indicated the monthly chart below before it bounces, or does it bounce here because US price managers are able to keep things glued together for a few more weeks – that’s the question at this time – that and how long they will be able to maintain the positive relationship with oil and the broads. (See Figure 3)

Figure 3 – Click Chart For Sharper Image


Why could stocks keep falling from here even though many charts are suggesting a bounce? The answer to that question lies in another. How can anybody short stocks at these levels knowing just how desperate the maniacs in charge are at this point? That’s why open interest put / call ratios keep falling here, because who in their right mind (after watching the desperation / greed levels over the past few years) can short stocks at these levels. The fact broad market put / call ratios remain low and declining (see here) answers that question – not many. Not many are willing to get screwed over by the bankers again. This of course throws a gigantic money wrench into the perpetual short squeeze for stocks, and puts a tailwind behind precious metals.

And one should note that as postulated on these pages last week, open interest put / call ratios on some key precious metal ETF’s are in fact following prices higher, especially in the case of the NUGT, and down in DUST (the inverse of NUGT), which means the most aggressive speculators have it all wrong yet again. This means they are ‘hedging’, or making outright negative bets on precious metal shares. What are the implications of this? It means precious metals can rally into options expiry this Friday if these idiots keep it up. I’m not sure if we want to see this pattern in desiring a strong monthly close, which might put this in jeopardy, however China is coming back on line today after a week off, so anything is possible. (i.e. currency devaluation, world war, you name it.) 

Jamie Dimon was out Friday with some insider buying in an attempt to buffalo the buffoons once again. He’s been successful at this in the past, which is why he’s doing it again, but this time might not go so well if the banking cartel (status quo) is disenfranchised in the November election. Therein, if it becomes apparent that even a rigged election won’t save them this time around (so get out there and vote you young people), an overly confident status quo will be forced to sell later in the year or risk all on the benevolence of Trump or Sanders – which is likely not a good idea. And to top that off,  bankers are not exactly trusting people. So do the math in terms of implications for stocks, currencies, and precious metals.

In terms of precious metals, we remain of the opinion a pullback is likely before further gains, especially after seeing last week’s COT Report, however, if World War III (WWIII) is just around the corner, along with a stock market crash, fading gold and silver anytime may become a far more dangerous endeavor compared to last year – that’s for sure. Last week’s price action should leave little doubt in you mind that the official turn higher in precious metals has occurred. We are just looking for pullbacks now to add to positions and not over think it too much. And again, we should get one at some point in the not too distant future with any luck. In not, it will be straight up for at least another month like in 2001.

The WWIII scenario would facilitate such a move. Barring that however, with the eclipsing of last month’s lows in stocks last week, giving us the larger degree bearish count in the averages discussed also last week, in theory stocks are set to go higher for up to a month, which should cause precious metals to correct at some point. Again, this week would be best in everyway, allowing for a possible resurgence into month end. Certainly the ETF put / call ratios and COT data allow for such an outcome. There’s only one problem – that would be too easy. So, all we can do is watch the put / call ratios (every day) and act accordingly.

In terms of strategy given what we know at this point, again, one might do well targeting pullbacks to 200-day moving averages (MA’s). For the Gold Bugs Index (HUI) that’s just below 130, so the 120 to 130 range seems appropriate for accumulation. For smaller individual shares (see here), use the HUI as a compass. Looks like the S&P/ TSX Venture Exchange (CDNX) has bottomed at 470 before hitting the maximum measured target at 400, for a total loss of 86% from 3400, so accumulation of sound junior precious metal companies looks appropriate.

Thing is, many of these companies can still go under if gold and silver don’t zoom higher back in to the vicinities of all time highs (in order to conjure new interest in the group), so remember to attempt to buy ‘quality’ balance sheets and / or small producers in case the process is drawn out. The problem is this is what speculators have been doing, so the good ones (PG, FR, etc.) are already expensive. Nobody said this would be easy – right? But again, if we see pullbacks soon, of say 30% plus, they might prove to be interesting speculations.

In terms of gold, we would be buyers on a pullback to the 200-day MA at 1140ish for sure (on a spike?), however it may not get down that far because of structural support at 1180 now. With the COT situation (see above) being what it is however, combined with ETF put / call ratios (see above), it would be very surprising if a multi-week correction did not set in soon, so again, it’s difficult buying at these levels (even for nimble traders) unless something like a stock market crash or WWIII breaks out, either not impossible given respective backdrops. (See here, here, and here.)

For silver, it should be pointed out the Gold / Silver Ratio put in a weak reversal doji last week, bringing forth a low possibility it will finally begin outperforming, which is of course one of the chief hallmarks of a bull phase in precious metals. This is bad news for the bulls because we need all sector related ratios to turn on a lasting basis. This leaves the possibility of higher highs in the cards, which is sector bearish. So the 200-day MA for silver comes in at $15.11, however a drop back below $15 would not be out of the question given this observation, where the COT managers (bankers) might cause unwary paper silver market(s) speculators to puke up their positions again by unleashing the machines on them.

This tactic has worked fabulously since 2011.

We will know more in this respect by Wednesday obviously, so we will have more to say on this possibly disturbing condition then.

Captain Hook

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