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November 06, 2005

To Be Or Not To Be - That Is The Question
by Captain Hook

Aubie Baltin was out recently with a good piece on the present hyperinflation cycle, where if he would have finished up with a discussion of how Greenspan"s policies are working to flatten / invert the yield curve at present, it would have been close to perfection in terms of being a comprehensive overview. Be that as it may, he does a very competent job of outlining where we are in the sequence, where in his estimation, which we happen to agree with by the way, we are right at the doorstep of an accelerating inflationary sequence that will eventually lead to hyperinflation, and then deflation / depression, of course.

In this respect, it"s quite a bold statement to come out and suggest you think we are on the very cusp of such a bad time, as this evokes painful emotions most people prefer to avoid, but as you know, this is the reality of current economic circumstances. Then there are those who would question the validity of our thought process, with the vast majority of officialdom falling into this category no doubt. To these people we say, how else does one explain the juxtaposition of failing asset prices laid on top of the credit bubble that has taken us to these lofty heights, where based on the picture below, it should be readily apparent to all it"s "inflate or die time." (See Figure 1)

Figure 1

Chart courtesy of The Chart Store

That is to say the above picture is telling us if a good head of steam in not maintained in the pipe (economy) right now, which in theory should keep credit growth humming, prices, as measured the S&P 500 (SPX) will start falling. Undoubtedly, this is part of the reason for all the "make work programs" government fosters / adopts these days. The question then begs, "are they enough?" The answer to this question so far is "yes", and although many of the things governments have been undertaking / manufactured in the past few years in terms of "make work programs" may repulse you, it could be argued the economy would be a heck of a lot worse off today if economies were progressing on a more "natural course". Of course this is with the understanding we would not be in this situation if central planners (think bankers) had not forced inflation down our throats, but that"s a discussion for another day. For today, the point we wish to make is that credit has been expanding sufficiently to keep our bubble economy inflated, but moving forward, accelerating currency growth will attempt making up for faltering credit growth rates. (See Figure 2)

Figure 2

Chart courtesy of The Chart Store

And as you can see above, it hasn"t just been the housing bubble that has kept prices "stable" in the economy over the past few years, if we can borrow this language from Mr. Greenspan, but also a "need for speed" (credit growth) when it comes to investing in the stock market as well. Unfortunately however, it appears this bubble could be popped quite soon though, if the annotated observation denoted above proves accurate. You should know that this eventuality is as close as a dip in put / call ratios on the major US stock indexes, where based on trade of late, it appears the "gods" are still with central planners .

That is to say, and in spite of efforts on the part of authorities short of shutting the exchanges, stock markets around the world would all be plummeting today if were not for increasing numbers of short sellers, as simply printing money is not enough anymore. (i.e. hyperinflation cycles burn out quickly, often spanning only a few years in totality.) Again then, and in emphasizing our original point on credit related stock market vulnerabilities, presently we are poised on the edge of a cliff, where if a contraction in margin debt were to occur, which one must expect sooner or later as increasing nominal interest rates are bound to do the trick eventually, stocks could plunge, helping to "destabilize" prices in our asset based economy. And we know the risks are increasing in this respect because margin debt as a percentage of market capitalization has been on the rise, which usually denotes an approaching top is stocks. (See Figure 3)

Figure 3

Chart courtesy of The Chart Store

And while the larger degree cycle can always be extended, as Greenspan has proven possible if you are willing to sacrifice greater future hardships, there is yet more compelling evidence that some degree of closure to the current Grand Cycle is definitely upon us at present, with the observant currently watching for a brief pause in price increases to mark the start of the "terminal inflation sequence". (i.e. hyperinflation sequence.) This means that if prices destabilize in equity markets anytime soon, because debt is likely to contract, central authorities can be expected to flood the system with fiat digits, along with directly purchasing securities on the open market for their accounts. Again however, it should be understood there is very little doubt we are "far along" in the Grand sequence, and that our wealth, as measured by asset prices, is in the fifth of fifth wave of what will undoubtedly prove to be a "terminal impulse". (See Figure 4)

Figure 4

Chart courtesy of The Chart Store

How can we be so sure of this? While the terminal sequence could last years into the future, we know pressure is building, or should we say "we know the need for increased pressure is growing", pressure now being provided by official "deflationary" countermeasures, because increasingly, it"s taking greater growth rates in credit creation to sponsor nominal gains of asset prices. (See Figure 5)

Figure 5

Chart courtesy of The Chart Store

And if we had to guess, which is of course all anyone can do at this point, but at the same where there appears to be growing evidence to support such a view, evidence that is outlined for you above, prices could remain stable for up to another two-years with no appreciable pullback if history is any guide. This opinion would be shared with those who are labeled "inflationist". These are people, who for one reason or another see no need for what would be considered "cyclical" corrections within secular sequences.

Interestingly, and in case you have not discerned this yet, thus far in the larger degree sequence since 2000, with the exception of precious metals stocks, there has not been what would be considered a "normal" correction in commodities because all asset classes have become both increasing linked and dependent on constant stimulation, which again for reasons outlined above, just keeps coming. Under this scenario, prices, as measured by the Dow shown below, would rise optimally until the summer of 2008, just in time for the Summer Olympics in Beijing. Interestingly, this would also exactly match the time it took to trace out the Supercycle sequence between 1932 and 1966, which lasted a total of 403 consecutive months. (See Figure 6)

Figure 6

Chart courtesy of The Chart Store

As pointed out by Glen Neely in the attached above however, inflation may just be getting started in terms of a new Supercycle sequence that will begin to take effect on asset prices sometime around 2015, where on an inflation adjusted basis, stocks still have a great deal of money supply induced upside to be seen in years to come. The chart below details the projected wave count under this scenario. (See Figure 7)

Figure 7

Chart courtesy of The Chart Store

Which view is right? Or, perhaps a better question is 'should we care as long as we have a good grip on the variables that are making markets move today?' To us, as always, as nobody can ever be 100 percent certain whether their views will match reality, at least within a pertinent timeframe, the best answer in our opinion is to diversify your portfolios (essentially utilizing a straddle strategy) to take advantage of what will undoubtedly prove to be a volatile time as we move forward . This way, even if the global economy enters what proves to be a definitional "hyperinflationary" sequence in coming days, months, and potentially years ahead, your portfolio, net worth, and income will be protected from the ravages of what would undoubtedly prove to be resultant price explosions.

And, to finish with the point we have been building up to posed in the title of this essay, one of whether equities are "to be buoyant and rising, or not" moving forward from here, all we can say is things can change very quickly within the internal drivers of the markets, and that it pays to keep a close eye on these variables. For instance, based on some dramatic changes pertaining to index related put / call activity just last week, it was possible for us to alert our subscribers to the bullish stock market implications associated with these shifts prior to prices taking off, where short sellers are now trapped in bearish positions, while stocks appear poised to set new highs for the larger degree move this winter.

This kind of trend change identification, commonly referred to as "swing trading" within an investment perspective, is what we, at Treasure Chests specialize in within our trading orientations. We do this based on the understanding you can invest your hard earned savings into what could be viewed as an exceptional growth opportunity by a consensus of intelligent observers, only to be proven wrong if macro conditions are not conducive to releasing said growth opportunities, and where disappointment and financial losses may be the result.

We invite to visit our site to discover more about how our approach to market analysis and investing could potentially aid you in realizing your financial goals into the future. And if you have any questions, please feel free to drop us a line, where we will be sure to get back to you with an answer to your query as soon as possible.

Until the next time, 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.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. We are not registered brokers or advisors. Certain statements included herein may constitute "forward-looking statements" with the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Do your own due diligence.

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