Has Hal Gone Crazy?

By: Captain Hook | Mon, Jul 9, 2012
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The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, June 21, 2012.


Considering how crazy things in the financial world are getting these days, the above title on that very subject seemed both appropriate, and intriguing. Why intriguing? As some may have already discerned, the title is intriguing is because of the revealing parallel that can be drawn between the behavior of Hal (the too smart for it's own good -- or anybody else's -- computer in the movie) in Kubrick's classic 2001: a Space Odyssey; and the Federal Reserve, which unbeknownst to most these days is submerged it's own brand of 'crazy behavior'. What kind of crazy behavior? After all, it's the Fed -- right? What could they be doing wrong? They take care of the money and economy like Hal was (mistakenly) perceived to take care of Discovery One, don't they? This is the consensus view of the Fed on one level or another.

Well, in the first place, the Fed does not 'take care' of anything except its owners (like Hal was only interested in taking care of itself), via Fed policy, which most wrongly assume is for the good of the economy; but in fact, could not be further from the truth. Why is this the case when their stated objectives are to promote full employment, price stability, and to moderate long-term interest rates? In short, it's because in actuality, and in addition to feeding power hungry egos of its higher ranks, the Fed is in the business of doing one thing and one thing only, that being debasing the currency (dollar[$]) in order to both protect and further the interests of its owners, which is of course completely at odds with the best interests of the economy, populace, etc. (i.e. currency debasement is concealed wealth confiscation.)

And while long-term interest rates appear to be low (they are in nominal terms), if one were to factor in the amount of Quantitative Easing (QE) (high level currency debasement) it requires to keep them subdued, the picture would be quite different in those 'real terms', meaning nominal rates would be far higher than if the Fed were not manipulating interest rates. What's more, the manipulation does not end there. No no no. Most notably, in terms of previously reliable important macro-indicators, interventions in precious metals market(s) have also been intensifying in more recent years, where it has been suggested by a growing consensus of long-time market observers that if it were not for the suppression of gold and silver they too (like interest rates) would be much higher. (i.e. increasing currency debasement would normally lead to higher interest rates and precious metals prices.)

Of course the fact these inflation indicators are being suppressed does not mean they will not begin rising in earnest eventually (gold has obviously been rising, but not as much as if the investing public perceived inflation in the proper context), because at some point, as with Hal, something will go screwy with our price managing bureaucracy's best laid plans and all hell will break loose anyway. That's right. Make no mistake about it. Eventually all the currency printing will be properly reflected in interest rates (higher), the $ (lower), and it's counterpart (currency) gold (higher). This is especially true of gold, where it will rise in parabolic fashion at some point, likely as 2021 approaches if our previous time related studies on the subject continue to act as an accurate guide. (i.e. this being a Fibonacci 21-years from the bulls starting-point in 2000.)

Although not making reference to the timing in this regard, Richard Russell makes an excellent point in terms of sentiment and when the general public can be expected to participate in the precious metals bull market, where like all such instances (think tech bubble, etc.), if history is a good guide, it will be at the end. (i.e. 2021 is the Fibonacci number target from my harmonics study attached above.) Below are his latest thoughts on the subject, where at present we are still in the heart of the second phase of the bull, which is characterized by increasing institutional accumulation. (i.e. we will include sovereigns in this group.) Here are those comments, as follows:

"Gold is in a classic bull market. I think gold is in its second psychological phase. The second is the longest phase of a bull market. It's the phase where the public slowly becomes interested in an item.

I believe that the third sentiment phase for gold lies ahead. In the third phase the public finally turns bullish, then more bullish, and finally all-out insanely bullish.

What will be the signs of the third phase of the gold bull market? First, new inflation adjusted highs in the price of gold (gold above $6,200). Next, gold will be the focus of every conversation; it will become THE talk at parties and wherever people gather together. Next, gold coins and bars will disappear. The coin dealers will be out of gold and will start touting silver and platinum (the prices of which will be rocketing higher). Finally, the naysayers will start warning of a "gold bubble." But their warnings will be early. The price of gold will shoot up to unbelievable prices."

What will be the signs of the third phase of the gold bull market? First, new inflation adjusted highs in the price of gold (gold above $6,200). Next, gold will be the focus of every conversation; it will become THE talk at parties and wherever people gather together. Next, gold coins and bars will disappear. The coin dealers will be out of gold and will start touting silver and platinum (the prices of which will be rocketing higher). Finally, the naysayers will start warning of a "gold bubble." But their warnings will be early. The price of gold will shoot up to unbelievable prices."

I believe that the third sentiment phase for gold lies ahead. In the third phase the public finally turns bullish, then more bullish, and finally all-out insanely bullish."

We include sovereigns in this group because it's apparent they realize the importance of gold within the global monetary system, whereas institutions have not jumped on this bandwagon just yet as they are still too heavily influenced by the banking cartel. The sovereigns know themselves better than the public and / or those working the majority of institutions around the world. Like Dave in 2001: A Space Odyssey however, eventually realizes Hal is out to get him and all the other humans on board Discovery One (because Hal realizes he will be turned off), and why Hal (the Fed) must be turned off. Ron Paul is getting this message out there; but again, largely institutions are still not acting on this knowledge. (i.e. denial, etc.). You can rest assured they will at some point however, where the longer they take in this regard, the more dramatic the move later on.

Perhaps such a development would be what is required for both interest rates and gold to rise, but I would not count on this being the case. No, both gold and interest rates are more likely to rise as the inflation channel is stuffed once again, meaning central banks, with Hal leading, accelerate currency debasement protocols once again. Think this is unlikely given all the talk of controlling inflation, cutbacks, and austerity today? Think again. Unlike the 2008 banking crisis, this time around entire countries and economic regions need bailing out, and they are / and will be bailed out at the right time -- make no mistake. (i.e. closer to US Presidential election time a la Bernanke's Pickle.) Because the bond bubble (government finance bubbles) must be funded due to lack of revenue from failing fiat currency based economies whose aging debt burdened populations are deleveraging.

In returning to the message our title attempts to convey then, make no mistake about it, while the Fed might be 'crazy' on one level, as in the parallel with Hal, by no means are Da Boyz about to give up (trigger deflation) without a fight. So, despite the picture of 'cautious and insufficient currency debasement' central banks are trying to paint right now, this will change as the economy and stock market continue to weaken into summer, eventually spurring an appropriate (monetary inflation will begin increasing at an increasing rate once again) response from monetary authorities, just as was the case in 2008. In this regard, one must always remember currency debasement must continually increase at an increasing rate in a fiat currency based economy in order to avoid a deflationary collapse resulting from the post crack-up boom hangover.

Right now, and increasingly as long as currency debasement rates remain insufficient to bring an inflationary tone back into the markets / economy (which are one in the same now in our mature fiat currency based economy), the economy is stalling and blue chip stocks have generated a Dow Theory sell signal, which may need to be dealt with eventually. Of course what usually happens is after the equity markets and economy break down, the Fed (Hal) sees this in its all knowing wisdom (heavy on the sarcasm) and reacts with an accelerated currency debasement response, which is all they really do you should realize -- that being debase the currency at an accelerating rate until all value is exploited. You should also realize Hal is at the root of our societal collapse; and that they (and their owners) are pilfering your wealth at an accelerating rate as part of the larger process of the clandestine confiscation known as monetary inflation.

As mentioned above, one of the Fed's primary objectives is to moderate long-term interest rates, but more recently this has morphed into keeping them highly accommodative (low in both nominal and real terms), because our mature fiat currency based economy is now faltering due to exponentially increasing debt and interest expense. As a result of this, the move in long-term bonds has become labored, stretched, and overdone to the nth degree, as reflected in the indicator negative divergences noted in Figure 1, seen below. The Fed has played it this way in an attempt to stabilize prices (meaning keep commodities / precious metals lower while boosting stocks / bonds), another of their primary objectives, which is particularly important this being an election year. Along these lines, Operation Twist will end this month (not so fast), and this will bring the immediate need for something to replace it (which is why it was extended) or the bond market(s) will crash (given the diminishing returns associated with currency debasement / bond market monetization), especially with the bond market ripe for a correction (or worse). (See Figure 1)

Figure 1

And again (because this is important to understand in determining your expectations for the future), this will likely become a problem sooner rather than later, where unfortunately for Hal (and the rest of us), it should be stressed we have reached the point of diminishing returns in terms of the effect these low interest rates have on the markets / economy (rates are at all time lows while stocks are well off their highs a la pushing on a string), where again the Fed has no choice moving forward except to debase the $ faster. The Fed will have to do something when push comes to shove, even if this means commodity prices will go higher, further undermining both the economy and its efforts. And of course central banks around the world know this, and the implications on their own monetary policy (they must print money faster too in the competitive race to zero), will trigger a global currency debasement contagion the likes of which man has never witnessed. Make no mistake about it; we are living in a QE world, and the rate of currency debasement is accelerating once again. (See Figure 2)

Figure 2

Realizing foreign currency debasement rates are lower than in the US right now (this won't last once Hal cranks up the printing presses again), never the less, as you can see above in the US they are still a healthy 15% measured in True Money Supply (TMS), poised to take off once again (once the percentage change is through sine resistance in red above), with the only question being degree of the move. How can one make the assumption this thinking will become reality? While it true such thinking is presumptuous, one must be realized the Fed (Hal) has no other choice except to 'inflate or die', as Richard Russell would say, meaning it's either continue its inflationary ways or trigger deflation. Moreover, we know the fiat currency economy(s) the Fed has created are sputtering, so like Hal, you can expect it (the Fed) to protect its legacy (as it always does), meaning printing as much new currency as needed in troubled times. (As an aside, if it's not the Fed [Hal] that blinks in terms of pressing the money machine button sooner than later you can count on China in this regard given the stakes.)

Further to this, and in referencing Jim Rickards comments found here (thanks to John Hathaway), where he himself is referencing anthropologist Joseph Tainter's work in analyzing the collapse of 27 separate civilizations (and chaos theory), we find that apparently no matter what Hal does to protect itself and its fiat currency economy(s) an end is still to be expected, and that this should bring back commodity money (with gold and silver at the lead) back into the forefront. Until then however, they will of course completely debase the $ (and all other fiat currencies) in the process, which can only do one thing for precious metals - send pricing and buying power considerably higher. And under-owned precious metals shares would also need to be re-priced given their relative attractiveness to just about everything that moves out there, including gold (and silver). (See Figure 3)

Figure 3

What's more, we may in fact find out very soon that the Fed thinks permanent / perpetual currency debasement is necessary, although they would never admit to this in such terms. Be that as it may, the dye would be cast in this respect never the less; and again, gold (and silver) would also need to be re-priced much higher. Along this line of thinking, John Hathaway handily points out (in the attached above) sentiment conditions regarding QE are such that any such move would come as a surprise to the larger market, causing the need for rapid readjustment, as follows:

"With respect to more QE, we believe the risk/reward posture of the gold market is asymmetric. By now, it seems that market expectations for additional QE have been sufficiently dashed; that any new round of monetary easing will come as a big surprise. The possible absence of QE seems unlikely to inflict incremental damage to the gold price. On the other hand, a new round of QE will most likely be triggered by emergency conditions in the financial markets and be seen as both an act of desperation and a tacit admission by policy makers that they really have no answers. In such a moment, we would not be surprised by a leap in the gold price approaching several hundred and possibly thousands of dollars an ounce in too short a period for significant capital to enter."

Key in any such assessment regarding investor sentiment, but not commonly discussed or understood is the pivotal role speculators play in determining market direction, as we have pointed out previously as a key factor in body of our work. Here, if familiar with this work, you will remember our observations regarding speculator betting practices, as reflected in key EFT open interest put / call ratios, has brought us to the conclusion that because this sentiment indicator is not widely followed it still has predictive capabilities, and that this measure(s) has served us well. In this regard then, you may be interested to know that although the ratios for the metal ETF's GLD and SLV are still extremely low, meaning speculator bullishness has yet to wane, those for the all important precious metals stock indexes, GDX and XAU, have in fact experienced marked increases post options expiry last Friday, which is undoubtedly why (or at least contributed to why) the shares have behaving better of late. (i.e. they are out-performing.)

On this basis then, one should expect the bid in precious metals shares to return quite soon, especially when coupled with the knowledge that Hal is printing again. (See Figure 2 above) Operation Twist was extended yesterday and with this the implication we have QE to infinity, the only question being when debasement rates will accelerate. Considering the Fed's thinking is fundamentally flawed and that the global economic slowdown is accelerating, this should be sooner rather than later or something scary will come our way this fall, just in time for the election. (i.e. that would be as bad as commodity prices taking off as per the explanation in Bernanke's Pickle.)

So, to the question, 'has Hal gone crazy', the answer is obviously no. While their thinking might be fundamentally flawed, and personal egos might play into policy inappropriately, in the end the Fed knows it must print or all over for them. That is to say the illusion of prosperity they create by debasing the currency will end sooner (deflation now) rather than later (think a taste of hyperinflation, then deflationary collapse), along with the need for their fraudulent services. (i.e. they intend to postpone this for as long as possible which is why currency debasement rates are measured as closely as possible.) This makes them liars then (because they are printing but downplay it with the help of the media), not fools, or something along this line of thinking.

Get long gold bugs. Good times are coming soon to a theatre near you.



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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