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December 01, 2008

Inflated Egos Next Bubble To Deflate
by Captain Hook

The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, November 18th, 2008.

As a follow-up to last week's commentary on the chronic complacency that has gripped the investing public, a population that thinks 'big daddy' will bail them out of all troubles forever apparently, once its realized by the masses this belief is a falsehood, a sense of panic will enter the collective psyche, and the issue of our inflated egos will finally be addressed. Of course in the meantime the bureaucracy is doing a great job of keeping the mob's attention off of real issues, much in the spirit of Rome's bread and circuses so long ago now. In knowing this the question begs, 'have we not progressed past the failings of our forefathers in matters of society?' Based on the brutal nature of the way present day moneyers are helping themselves to public coffers, and the grand moral decay such activity sponsors in the larger population, the answer to this question is definitely 'no', however at least it can be said we are not subjecting innocents to the vulgarities of a gladiator filled spectacle - right? We are more civilized about how we do things today - right?

This is certainly a view shared by the 'collective mind' in my experience, where at the center Western bankers have used this 'higher than thou' attitude to rape, pillage, and plunger the world through the issuance of fiat currency (a currency based on unfounded confidence) via the IMF, part and parcel of a world enslaved by US Dollar ($) hegemony dominance. Naturally then, and tying into the larger understanding we are attempting to convey here today, it's logical to contemplate that as individual egos are deflated in our society due to loss of wealth, eventually a profound swing will occur in the 'collective mind', and this change will spread around the world causing a mass abandonment of corrupt present day fiat regimes. Of course the $ will be at the lead in such a move as it loses reserve currency status, where a beaten population finally says to the bankers enough is enough, no more usury, and we've had enough of your inflated egos too. This is when the decentralization process will swing into 'high gear', characterized by well-grounded regionalized currencies, and a return to country values.

Of course while all this will eventually provide the foundation for ubiquitous stable money policy around the world, policy that will be centered in some form of gold cover clause, first the political will for such a dramatic change needs to fostered, and this will not happen until the politicians have been stripped of power. How will they be stripped of power? You are seeing it now. Their bailouts are not working. And when it's seen they are outright failures next year as a meltdown in the bond market keeps equities under pressure, a new sentiment will be born and feed on itself, one of practicality in terms of being able to facilitate international trade amongst failing economies. Here, it's important to understand politicians / bankers will not bring back an international gold standard unless it's a 'last resort' in facilitating trade because it robs them of the unbridled power a fiat currency system provides, so it will be avoided for as long as possible. As their power is eroded by the markets / trust they have now destroyed, such a move will be unavoidable however, with non-discredited individuals taking over for the discredited that are now seeing their power fading away. More egos being deflated you see.

Now some would counter such an assessment as being 'alarmist', and suspect on the basis trust is returning to the inter-bank system based on declining LIBOR rates. And while this might be true, sponsored by blank-check government assurances within domestic transactions, it should be pointed out that with respect to international trade nothing has changed just yet as measured by fiat currency exchange rates. What's more, no significant changes should be expected moving forward either until the equity markets stabilize, which will not happen until a great deal more leverage is removed from the system if I an reading things right. In this respect Charles Biderman of TrimTabs put it succinctly when he stated that the stock market will continue to have trouble because the flow of money coming in is down dramatically, $700 million in 2007 dropping to $300 million this year. In thinking about it then, if it were not for investors being so desperately bullish on stocks, the market would likely be much lower, leaving a vacuum at current prices. This is essentially the understanding Martin Armstrong arrives at in his recently released paper on the geometry of markets. What geometry is measuring here is the nature of money flows in and out of markets - rates and timing.

And this is what the 'crash signatures' discussed on these pages many times now are measuring as well. As with Carl Swenlin's observations relating to the various Rydex Ratios he follows, these 'crash signatures' in the US stock indexes we cover are measuring the discrepancy, or divergence, between investors attitudes about stocks, which are generally bullish as measured by out-performance in accumulation / distribution patterning, set against ability to pay, where on-balance-volume (OBV) indicators continue to lead lower as the deleveraging process impairs the bull's available funds to invest. As explained previously, the bulls wish (the stubborn buggers are attempting to insist stocks higher) the stock market to go higher because they need the money (this applies to mutual / hedge fund managers and individuals alike), along with being conditioned by the financial services industry and bubblevision that stocks always rise given time. So now, the net effect is they have arrived at a state of delusional / permanent bullishness towards stocks. This is of course why the stock market is doomed, because it appears the above conditions will not change for some time, potentially long enough to sponsor a Grand Super-Cycle Degree correction / meltdown in global stock markets. (i.e. down 90% or so.)

One of the more profound ironies about the situation moving forward is it's surprising how dire warnings by highly respected authorities on the subject are being so easily ignored by the investing public, when historically, with circumstances 'manageable', unfounded warnings were generally well heeded. But this is what the 'moral hazard' sponsored by unfretted central banking will do after long enough, where complacent attitudes on the part of investors will continue to compound the situation as equity prices continue to fall. And fall they will if our observations from yesterday prove correct, where we would like to switch over to a more technically oriented discussion at this time, essentially continuing to explore the implications of all the crash signatures present within the trade these days. Therein, and as you will see below, these crash signatures extend past the US indexes we have been focusing on, existing within individual stocks and foreign / commodity based markets as well. The bad news associated with respect to commodity-based markets is the deflation signal such an outcome would imply.

Taking such thinking a step further, one could ask, 'is this why the Baltic Dry Index (BDI) has crashed, down some 90-plus percent', because the global economy and demand for commodities is imploding for real? And, 'does this mean no substantive recovery can be expected?' Good questions, no? Tough questions - where the answers don't look good right now. Let me show you what I mean in continuing to look at the charts, where as alluded to above, we will pick things up where left off yesterday with yet another look at the S&P 500 (SPX). The reason I am showing you this panel however is not to highlight the crash signature, but to point out that in going back to the origins of the larger debt based rally in stocks that took hold in the early 80's it should be noticed that the 61.8% Fibonacci retracement coincides with the flag related measured move (MM) we discussed yesterday (attached above), which when put together with our prognosis for the stock market, implies a very big test is coming down the pike, and we may get there sooner than people care to imagine. What's more, and an understanding encapsulated within the fact the Aroon Indicator just flashed a 'sell signal', implying the party is just getting rolling in this regard, if I had to guess, this test will fail, with the SPX possibly suffering up to a 99% retracement of the move from 1982 in the end. (See Figure 1)

Figure 1

Impossible? As you should know from the above discussion on sentiment, and how it will continue to drive price action in this very mature market environment, it's attitudes like this, where the specter of such an outcome is 'too much' for people to contemplate, is why is can happen. Again, let me show you more specifically what I mean. It's all in the charts if you know where to look, with the monthly plot of Citigroup (C:NYSE) from the Chart Room particularly instructive in this regard. Why is this the case? As you can see, what eventually happens to markets sporting crash signatures in the trade is they crash, where based on the fact the Accumulation / Distribution Indicator still has not bottomed, likely means C's stock price will continue lower, which is not surprising considering it just slash 52,000 jobs, eventually losing 90-plus percent of it's value, and implying we should have the same expectation for any market sporting a crash signature. (See Figure 2)

Figure 2

Does this understanding apply to indexes, to be more specific? You bet, where once one possesses an understanding of the sentiment related discussion above, a realization of just how far prices are likely to fall comes to light for those who dare to look. If you do dare to look you will see pictures like the one of the Nasdaq Composite below, where implied in the still young crash signature, is a probability the 'counter bubble' target denoted will be vexed after the present channel break related testing process is complete, and lower, taking prices right back to 1982 levels. (See Figure 3)

Figure 3

Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our continually improved web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.

And if you have any questions, comments, or criticisms regarding the above, please feel free to drop us a line. We very much enjoy hearing from you on these matters.

Good investing all.

Captain Hook
TreasureChests.info

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

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