Banking On A Recovery
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, May 28th, 2013.
The Boys From Brazil who live in New York (or any other place they are fixing prices in the US) down at the bank are banking on a recovery by printing money and creating asset bubbles in their fiat currency economies. But they are going to lose this bet because the Potemkin Rally in the stock market is having little effect on the real economy, setting the stage for yet another epic crash. US Households continue to deleverage at an increasing rate, while public sector debt continues to expand, leaving a net gain in the overall formula, meaning on an aggregate basis debt is still increasing. This is why the economy will never achieve the 'escape velocity' status quo proponents and talking heads continue to picture. And those counting on positive spin-offs associated with the 'wealth effect' will be disappointed because older people (think demographics) want less debt, which is why US households are deleveraging. Do you see the feedback loop? It's amazing the supposedly smart people who 'run things' do not see this, or the looming consequences of their actions.
They don't see that the economy has essentially evolved into a bunch of old guys attempting to keep their bubble economies inflated at the expense of the youth, and that eventually this factor alone will topple their empires. Add to this increasing numbers of the disenfranchised are opting out of 'the economy' both voluntarily and not (think the unemployed), which will include more former bureaucracy members by the day, and the plutocracy will find it harder and harder to find tax and debt donkeys to exploit moving forward, and eventually hit a wall in this respect. Because socialist and economically flawed (corrupt) fiat currency based (debased) economies go like the money, increasingly debased and fundamentally failing at its core, and they decay until implosion takes them over a cliff. Japan is already there, which is why it has adopted its recent radical economic policy in response to impending implosion.
Because the Western Empire is only as strong as its weakest link, and the weakest link in the chain is Japan, with its aged work force, energy challenged infrastructure, and impossible debt levels. (i.e. that will eventually send interest rates much higher.) And again, Japan is not the only one teetering on the edge of catastrophe moving forward, where daisy chain related risk is bearing down on the entire Western Model, and global economy (due to Globalization), which is increasingly reflected in economic data. (See here, here, and here.) What's more, whether we see deflation (like Japan) moving forward, or inflation, it doesn't really matter because both would eventually bring the entire economy to a grinding halt (for what appear to be different reasons) because the larger economic cycles are exhausted no matter policy response, where in the system visibly ends up in the same place - insolvency.
So the banks are banking on a recovery, and looking at the bubbles the easily persuaded could think that's the case; but unfortunately for them, and everyone else, they will not get it. Of course you would never know this looking at the stock market's run over the past six-months; but again, like everything else in the establishment's economy today, this has been the result of deception, with money printing and short covering at center, not fundamentally based long-term investment. But here too the real world must eventually creep in as well despite best efforts on the part of an out of control price fixing bureaucracy, which in the end will be their own undoing. In fact, one could argue European bankers are possibly setting such a cycle in motion right now via a defacto tightening that is systemic in nature, eventually impacting the economy and markets.
Last week's weakness is being attributed solely to Fed jawboning, however such a view will be looked back on as too simplistic, where not only is the European economy 'truly imploding', but also in the sense Bernamke needs to create controversy in order to sucker short sellers back into the market in order to keep the perpetual squeeze alive and well. And this strategy is working; with Ben's latest ruse attracting weak-minded short sellers and put buyers back into the market(s) for yet another round of 'screw the pouch'. Working on the other side of the equation however is the new highs in margin debt necessary to maintain the illusion, which will eventually cause a sharp reversal in prices lower, catching up to fundamentals, once short sellers hedgers are truly exhausted.
And don't be surprised if such an adjustment occurs rapidly when it comes, with HFT and algos gone a rye working in reverse, not to mention the true state of macro affairs. And while it's true the Fed is still pumping $85 billion per month into the economy, better known as the Bernanke put, you should realize the risk of deflationary episodes have not been completely removed, not by long shot. Here, the growing list of serial bubbles will eventually lead to a series of serial flash crashes once all the speculators have been sufficiently worked over, which could come at anytime now. In this respect, the big risk is not deflation, but inflation, which will kick into gear next year when consumers stop paying down shadow banking liabilities and start spending money again. One would think bonds might begin discounting such an eventuality well before however, leaving the stock market's fate equally precarious next year as well.
But again, for now, deflation and serial bubble collapse is the big worry, likely bringing volatility to both stocks and bonds as we progress into next year, being the two largest macro bubbles by asset size(s). Furthermore, and in speculating on which will lead down, your guess is as good as mine, however reason would suggest it the debt market, led by junk and high yield bonds, which are by far the largest bubbles across the landscape. This should not be surprising considering an aging population is chasing yield for everything from income to simple risk aversion, with the majority of participants likely in for an education in capital preservation in the not too distant future. And if it's not a shock in North America or Europe that starts, it will Japan - likely the bond market in Japan.
In terms of both technical (see below) and fundamental evidence such a risk is looming one need not look far as long as you are not depending on government (bureaucracy) sources, as all credibility left this space long ago. Fundamentally, and to add to the above attachments, we have this, this, and this to ponder at your convenience, testament that much of the 'official data' put forth is 'a rye'; and, that the only reason it's not apparent the wheels are coming off is due to the money printing and asset bubbles. But if the big message the Dow / TSX Ratio below is throwing off is valid, which would be technically confirmed with a second monthly close above last year's highs here in May, these growing divergences / distortions / deceptions will eventually need to be corrected, and they will be corrected violently. Such an outcome will cause a deflation scare even in the most die-hard inflationists if allowed to run for very long. (See Figure 1)
Of course there's only one way to prevent that from happening, and that's to print money - printing money an accelerating rate and get it into the hands of the public. (i.e. unlike now with the banks hoarding excess bank reserves.) And although such an outcome would only postpone the inevitable once again - economic collapse - still, one needs to prepare for the eventual hyperinflationary conditions that would be unleashed under these circumstances. Myself, I am converting increasing percentages of my portfolio to precious metals in order to escape the inevitable confiscation risk the powers that be think they are entitled to, however the risk of accelerating inflation is just as good a reason, so strategically averaging into precocious metals in coming days is probably not a bad idea if measured through a long enough time-window, even if the Dow / Gold Ratio is on it's way to 15. (i.e. which is not a forgone conclusion.) Here is the monthly gold plot from the Chart Room that shows if $1300 does not hold, a trip down to ~ $1,000 becomes the next significant Fibonacci resonance related target. (See Figure 2)
And prospects for precious metals shares remains negative despite general strength in stocks, leading the sector lower despite oversold technical conditions. As you can see below, although precious metals are likely relatively close to a bottom in relation to where they are coming from, still, losses could be substantial from here. Again, once the broad stock market(s) roll over on a lasting basis, initial liquidity draw associated with deleveraging will likely place further pressure on precious metals prices temporarily, perhaps for six to seven months if the year 2000 sequence is a good guide. This would be the time one should expect to see a posture change from central authorities, with money printing rates and dispersion (getting this money to the public) making meaningful strides in order to avert anarchy, and a possible new trend towards the public demanding high level bankers and politicians be held responsible for their actions. We may never be this lucky, but then again, if history is a good guide, as unlikely such an outcome might seen now, once the public begins to go hungry stranger things have happened. (See Figure 3)
Look for some real trouble to breakout in Europe over the summer, with central planners possibly using such a backdrop to begin the bail-ins. This would just be a turning of the screws in the 'profiting from fear' rampage elites and plutocrats seem to think is a good idea - until it's not. All I can say to these types is - have you studied the French Revolution?
Not all Bourgeoisie 'did well' in the end either. (i.e. a great many lost their heads.) Think that can't happen in today's lawless society - lawless for the privileged class? Maybe or maybe not. But one thing is for sure - we will know in the full measure of time.
In the meantime however, the question remains, can stocks go higher moving forward (and eventually precious metals as well)? Answer: Of course they can, and here's why. How about the BOJ announcing another doubling of their QE program, followed by the Fed as next year approaches. (i.e. remember next year shadow banking system deleveraging will slow in the US spiking interest rates if QE and bond market monetization is not increased to soak up supply.) This of course means that present talk of tapering is deception on the part of the Fed (enabled by the fact nobody is selling their bonds yet); but this will change.
Bottom line here is at some point not only is a great deal of the money that's already been printed going to be searching for a home (think bond sellers), driving everything from meat prices to stair masters higher, the geniuses in our central planning agencies will need to increase the rate of new printing as well, or bond yields will go through the roof (like in Japan now), adding even more pressure into the equation, and potentially building up to some degree of hyperinflation.
The question at that point will be 'what now?' But of course if you don't have your own farm, or fungible tangible assets that will keep pace with this inflation (think gold and silver) one won't have much time to think about things like that because you will be panicking about your future survival prospects.
And you can take that to the bank.