Bailout Bubble Blues

By: Captain Hook | Mon, Feb 21, 2011
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The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, February 8th, 2011.


They have to go further and further into forbidden territory all the time now to keep our bubble economies inflated. Increasingly, and like a junkie, because the establishment will not allow for a real correction (slow down) in our fiat currency economy(s), more and more artificial stimulus must be added into the equation every day now because the patient is a walking zombie, devoid of natural and sustainable life. Because if they didn"t do this, the economy would collapse like an exhausted doper whose been too high for too long, never to be the same again, if not dead. That"s the way the geniuses in charge of our financial institutions and their puppet politicians who have been bought and paid for manage the economy and financial markets today, hoping the party can last until the next guy is on the hook.

The only problem is if our gambling government gangsters were ever in a poker game they would be easy to beat. This is because not only would they likely have a bad poker face, one that tells all to seasoned players, even worse they also have a tendency to show all their cards up front, which is a practice sure to doom even the surest of players. Therein, it"s no secret the Fed is printing more money and the government is spending more, because again, our Ponzi economy needs this in order not to collapse. And the plutocrats are probably to allow an upcoming tax holiday for corporations in an effort to attract a great deal of money home that would keep the party going as well, which will have a stimulative but temporary effect in the end.

The question arises however, 'after this, and aside from increasingly debasing the currency, what would be done to keep an exhausted economy going then, where hyperinflation would likely be necessary?" Of course they would blow the bond market up in the process (along with the death of fiat currencies), but as pointed out last week, this process is already likely underway with a buy signal (five-wave advance) now triggered in the TNX, meaning far higher interest rates are a real probability. (i.e. because of credit concerns.) So no matter how it comes down in the end now, the post housing bubble we call the bailout bubble (which is just another serial bubble) is already doomed, not to mention any hope of bringing real estate back to any large degree.

What"s more, and something likely not even contemplated by our price managing bureaucracy, is that pretty soon a consensus of speculators are going to come to the conclusion that QE will go on forever (it"s amazing they haven"t already) and stop buying puts on the market thinking that"s the main variable. (i.e. QE is all that matters in keeping stocks rising.) And all this is happening as the markets are showing signs of increasing exhaustion if you know where to look. Of note, and so far during the present rally sequence, it should be noted tech stocks, as measured by the NASDAQ 100 (NDX) is underperforming the blue chips (Dow), meaning the NDX / Dow Ratio (seen here) is divergently below recent highs despite the fact stocks are vexing new highs. (i.e. this is forecasting the present advance is intermediate degree terminal.)

And now that interest rates are rising, guess what, the big picture is beginning to look more and more like an "87 crash signature by the day, where understandably it won"t take long for rising rates to do their magic. What is of course most scary about the present picture is our genius plutocracy has left itself no way of legitimately dealing with such an occurrence (debt too high, hollowed out economy, etc.) short of hyperinflation, which these idiots probably couldn"t stop at this point even if they wanted. So, be sure and maintain your core positions in precious metals even if volatility picks up, as it surely will under such circumstances, because it"s not surviving in the present economy you should be worried about, but how you will come out of this mess on the other side, where believe it or not, the same geniuses that are about to level the planet economically will also likely be in charge of reconstructing the new one as well - again - believe it or not. (i.e. new currency regimes could see old money traded in at ratios of 5 to 1, or higher, meaning you could possibly lose 50 % plus of your purchasing power overnight.)

No denying it either, the world"s stock markets are becoming increasingly unstable these days, however as usual in the smoke and mirrors environment spawned in fiat currency economies, you would never know it looking at developed country (Western) markets as capital flows out of increasingly suspect emerging markets to safety. Again however, such a trend will only delay the eventual day of reckoning, where like "87, when the trouble in stocks at home comes, it will come surprisingly fast, like the currency devaluation described above. Low volumes, rising margin debt, and rising interest rates are a potent cocktail for stock markets even when they are not as over extended as they are now, but again, they are very overbought, much like condition in both 2007 and 1987. So, when bearish speculators are finally exhausted and stop buying puts the declines should be severe, not the 5 to 10% most are expecting.

In fact, it"s because dip buyers will likely be active once stocks drop into this range that losses would continue as open interest put / call ratios on US indexes and ETF"s fall, leaving the bureaucracy"s price managers insufficient fools to feed on, meaning the short squeeze perpetuated since the lows in March of 2009 would be done on an extended basis. (i.e. the four-year cycle calls for a top in financials soon, matching seasonal timing in 2007 as well.) It should be noted that as can be seen here on a monthly chart of the BKX (bank index), that bank stocks are in fact running a negative divergence to new highs in the broads, which is what you would expect to see if the influence of the four-year cycle is taking hold. What"s more, and again, this is also consistent with the observation interest rates are heading higher, possibly right across the entire curve. (See Figure 1)

Figure 1

This is of course why we have been schooling debt is your enemy, because rates could rise far more than is currently viewed as likely by both a consensus of speculators, and unsuspecting debtors. So, pay your debt off if possible. Or hope for a Christian style jubilee eventually when the time is right (which will be either when it suits the plutocracy or as a result of revolution). Of course hoping for such an outcome could be a big mistake, as the bloodsucking parasites in the financial industry, government, etc. that depend on this usery will fight tooth and nail to keep the party going as long as possible, which could drain most before any relief is doled out. Moreover, if equities start to drop like the post bubble Japanese model (seen here in Figure 1) then those with unmanageable debt will get squeezed on both sides of the ledger, squeezed to the point of bankruptcy in far too many cases. (See Figure 2)

Figure 2

And as you can see above, an important low could be witnessed quite soon once the CBOE Volatility Index (VIX) vexes the 14"s, which looks to be only days away now, as options expiry approaches next week. As long time readers of these pages would know, the question then will be what are post expiry ratios to look like, where like the tops in stocks both in 2007 and 1987 (and all the significant tops in between), significant drops in US index open interest put / call ratios were witnessed once bearish speculators and hedgers had become exhausted, which meant these ratios were not run up again in subsequent months as these types continued to attempt picking a top. No, once this occurs what you have left are the dip buyers, as discussed above, which keep put / call ratios falling and contained, which in turn plays havoc with stocks that have few underpinnings past how much currency the moneychangers down at the bank will be printed today.

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 web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. Along these lines, you should know your subscription to Treasure Chests would include daily commentary from either the myself or Dave Petch. As you may know, I cover macro-conditions, sector timing, and value oriented stock selection, while Dave covers the HUI, XOI, USD, SPX, and TNX technically each week. Mr. Petch is a world class Elliott Wave Theory technician.

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Good investing and best of the season all.



Captain Hook

Author: Captain Hook

Captain Hook

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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