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April 07, 2008

You Can Fool Some Of The People Sometimes
by Captain Hook

The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, March 25th, 2008.

But you can't fool all the people all the time. This is a truism that will become increasing trite in coming years as more and more people discover the vulgarities being perpetuated on them by the banking / investment community. As an example of this, without solicitation last week Visa informed me I will soon be receiving my 'First Class Travel Infinite Card', which apparently has 'no credit limit'. Now for some this might be 'good news' if planning to live increasingly off credit. But for me, the message I got was the credit givers want people who pay their bills on time to take on even more of the credit growth burden until they too are overextended, which is the brand of thinking that has gotten us into the precarious position we are in today. In this respect credit givers should know they are barking up the wrong tree with people like me if they expect a run-up in balances that can be taxed at exorbitant rates, as most like minded people pay their balances off each month and don't plan on altering this practice.

For some however, what happens is price increases resulting from inflation simply push the numbers higher, where extra credit provided by these same people (credit givers) is gladly used, but with no thought of repayment. (These are the people you can fool all the time because they are debt slaves for life.) And as long as there are people like this out there the inflation cycle can run unabated, but once they begin to rely on guys like me they run into trouble because an unwillingness to take up more credit will curb consumption, and that's exactly what is happening right now in the commodity complex. Higher prices set against an exhausted consumer (in terms of increasing credit capabilities) have hit the point where demand for commodities is falling, which is perhaps best measured in US crude oil inventories that are currently at multi-year highs. This, combined with other consumption related demand -side considerations is why commodity prices can be expected to fall in coming days if viewed strictly through the consumers eyes.

And the credit givers know this, which is why Visa was passed from private hands to the public last week in the largest IPO in US history. This is very smart money (not getting into who these people are for expediency purposes) that knows the jig is now up when it comes to the credit cycle, not inconspicuously signaled by an apparent reversal in the Yen Carry Trade more recently with the Japanese currency breaking above important resistance. (See Figure 2) Of course just because credit givers are making what appears to be a well-timed exit doesn't mean there are not other interested parties that have a vested interest in seeing the economy remain buoyant, which brings us the politicians, who will continue with further bailouts and accelerated dollar ($) debasement policy until the cows come home, or at least until a panic in currency / commodity markets sparks a derivatives related meltdown the likes of which they cannot handle. You should know this is coming at sometime in the foreseeable future, but that until then they will continue attempting to fool as many people as they possibly can.

That is to say they will continue to debase the currency on an accelerating basis while having their press agents tell you at the same time the opposite is occurring, and making this rue seem real with staged corrections in the dollar ($) and commodities. And of course the Fed would deny vehemently talk of any tinkering on the basis you can fool a lot of people a great deal of the time. The only problem for master planners however, is they can deny it all they want, but measures like that implemented with respect to Freddie Mac (FRE) and Fannie Mae (FNM) this week are de facto currency debasements because more credit will be issued as a result, and in the case of this most recent measure, the amounts we are talking about here are not chump change. In the case of this week's move with respect to these Government Sponsored Enterprise's (GSE's) for example, we talking about FRE and FNM being able to expand their balance sheets by some $200 billion, and then there is the multiplier effect.

Of course this won't make it into the money supply measures, so officials talk like market participants are stupid and suppose to believe them when they claim such actions are not debasing the currency. Here, they point to observation the ($) rallied off of this week's events, when in fact it was the concept US monetary authorities will go to any lengths to bailout the system, and that such actions will at least forestall a crash in the system until more stringent measures will need to be taken later on (soon) when commercial real estate starts to implode. As mentioned previously, and in plain English, the $ was oversold and could easily be prodded higher by price managers worried it's decline was getting a bit out of hand, along with exploding commodity prices.

Add this all up and it means the credit cycle has topped and is in free fall, and it might already be too late to prevent a $ crash, which would in the end guarantee a demise of the Western banking model and dominance of US hegemony. And as alluded above, the next time this becomes an issue, it may be the Plunge Protection Team is unable to stem the tide. This is the message the charts are providing, where in relation to the above, whether the consumer can afford it or not a $ crash would send local commodity prices into orbit, taking down debt and equity markets in the process. At least this is the conclusion one can arrive at using a probability scale once a review of the larger equity complex / intermarket relationships have been performed. An abbreviated version of just such a review is provided for you below for your benefit and convenience.

The first chart is a long-term view of the weekly S&P 500 (SPX) that shows how this most recent move down just bounced off primary channel support, and that if this channel is indeed defining the trade, in leaving the consolidation zone behind yesterday, a move up to the next mid-channel resistance in the1430ish area should be anticipated in coming days / weeks. This would correspond to an approximate 50-percent retrace of the move down that ended last week at 1256, which would terminate the current retracement at exactly 1416. Of course the way prices are moving, and allowing for a time element that could extend into summer, however unlikely this may seem now, a two-thirds retrace may be in order, which would involve a move up into the 1450 area. In this respect a rising channel allows for more gains as time passes. (See Figure 1)

Figure 1

So, the question then arises, which will it be, a 50-percent or two-thirds retracement? In answering this question, one must first attempt to gauge how long it will take for a fresh round of credit concerns to develop in the States sufficient to cause the larger equity complex to trip into trouble again. This would of course influence the $ bounce, and commodity prices, which in turn would again bring down increasing pressure on the larger equity complex (stocks) signaled by gold reasserting itself. As you know from previous work on the subject attached here, if similarities between the current pattern and that of 1978 persist, this would involve a correction that will last into the latter part of next month culminating in an approximate closing basis 10-percent dollar loss. And it just so happens Alf Field is out with an updated gold count that largely supports a similar scenario with the exception he is assuming a 16-percent (intra-day) correction would take prices closer to $850.

Thus, we have a range for the current correction in gold between $900 and $850 (intra-day extreme) based on both historical precedent under similar fiscal conditions, along with what has proven to be a reliable modern day count resulting from a need for speed in present day debasement rates in the US currency. You may remember our thinking on this subject matter in the primary message arrived at in my essays The Need For Speed and the Need For Speed - Part Deux, where Figure 3 in the former shows what is proving to be the actual price path gold is taking on its way to higher trajectories. Here, with the need for accelerating currency debasement rates continuing to intensify, this means relatively shallow corrections in gold (down) and the $ (up) should be anticipated, which also supports the view $850, which would be a test of both Grand Super-Cycle sinusoidal support and the 1980 high, should hold in the current correction.

Applying this knowledge to the larger picture then, and to further borrow from previous work attached here, if gold is preparing to head over the $1,000 on a more permanent basis later this year, then it's a fair assumption the Dow should correspondingly be heading south to towards the 10,000 mark at some point as well, where it's anticipated the next significant support for the Dow / Gold Ratio will come in at approximately 10, the round number. Of course with this week's turn higher in the business cycle, it should be recognized that now propensities lie in favor of inflation, meaning if gold is on its way to $1500 relatively soon, weakness in the stock market may not materialize to the degree it would have if more profound panic lows had been witnessed in the first quarter of this year.

To be clear, this does not mean a more profound panic will not occur later this year, taking out important support on the Dow denoted below (along with SPX channel support shown above), but that prices should not be expected to stay down long. It should be noted this view will remain germane until the next Martin Armstrong Pi Cycle Turn day reverses the trend for financials from up to down in the second quarter of next year. Just how this condition reconciles with a CBOE Volatility Index (VIX) (see Figure 3) that appears set to move higher is unclear at the moment, but if the ascending triangle breaks to the downside and through the 200-day moving average in coming days, the picture will become a great deal brighter. Remember, now that the Martin Armstrong Pi Cycle turn has passed, one must pay greater deference to the possibility of what may at present appear to be unlikely strength in the larger equity complex. (See Figure 2)

Figure 2

Moving into some ratios now in attempting to confirm our views, despite yesterday's out-performance in tech, I would not get too excited about this evolving into a sustainable trend as long as the indicated test denoted below is not exceeded. With respect to the larger equity complex (SPX), only if this test is exceed prior to the SPX testing the two-thirds retrace at 1450 should anybody get excited about possibilities outside of what has already been outlined above. (See Figure 3)

Figure 3

And again, such a possibility must be viewed as unlikely considering the degree of trend change that will occur between stocks and commodities when the current secular trend reasserts itself later this year. That is to say it should be understood that the long-term trend defining stock market dominance over commodities has not even been broken yet, but that with troubles in the economy calling for accelerating currency debasement rates, along with supply side considerations with respect to commodities, such a trend change is inevitable. It's only a matter of time. What's more, and as can be viewed below, the bounce in this relationship should be relatively shallow if the technicals still hold predictive value in this regard, where at best a test of the monthly trend definer should stop the counter-trend correction. This is of course extremely valuable information for spread traders, along with confirming the view corrections in both gold and the $ should be correspondingly shallow. (See Figure 4)

Figure 4

Further to this line of thinking, precious metals bulls will enjoy this next chart, that of the Gold / Dow Ratio, because it does a good job of perceptually putting into context just how far gold has to go against stocks. Here, it should be noted the move is still in its infancy in terms of the big picture, which is of course confirmed in the knowledge the public is not involved in the sector as of yet. This observation relates to what we view as a possible mania in precious metals developing in the not too distant future, which will be discussed further later on. (See Figure 5)

Figure 5

In turning things upside down, and in the 'that explains it' category, technical considerations denoted on the monthly plot of the SPX / Gold Ratio pictured below certainly account for the reversal of the sell stocks / dollar and buy commodities / precious metals trade last week, premature as this may have been. Correspondingly then, because the move did not penetrate into the indicated support zone, this is suggestive a potentially more robust bounce in the SPX / Gold Ratio should be anticipated. This in turn would suggest because strength in the equity complex will largely be a result of monetary largesse, if stocks are to perform relatively strong moving forward, not only should precious metals shares finally begin to outperform the metals; but more, absolute positive returns should also be anticipated. This of course explains the bullish chart related dispositions seen in precious metal share / commodity ratios seen here in Figures 2, 3, and 4. (See Figure 6)

Figure 6

Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. However, if the above is an indication of the type of analysis you are looking for, we invite you to visit our newly improved web site and discover more about how our service can help you in not only this regard, but on higher level aid you 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.

On top of this, and in relation to identifying value based opportunities in the energy, base metals, and precious metals sectors, all of which should benefit handsomely as increasing numbers of investors recognize their present investments are not keeping pace with actual inflation, we are currently covering 68 stocks (and about to grow again) within our portfolios. This is yet another good reason to drop by and check us out.

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 in 2008 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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