The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, August 26, 2014.
Looked at in the appropriate light, the world has embraced the essence of the movie Videodrome in many respects since its release in 1983, with a hollowing out of our morality (corresponding to the economy), Orwellian mind control, and living televisions perhaps the most salient parallels. Well, at least it seems like the televisions are alive - and they certainly control how most people think these days. To this end, I would postulate that even the surging stock market has morphed into a pseudo video game, almost completely removed from the real world we live in everyday, controlled by an increasingly debased morality (think increasing fraud), talking head circus barkers (empowered by the debasement), and a runaway fiat currency bubble (the root of the debasement).
We have become Videodrome.
Of course this is not the first time this sort of thing has gripped the human condition, just never on such a vast scale, eclipsing other instances from ancient Rome to the Third Riche by a mile. And this is also not the first time such subject matter has appeared on these pages either, where some may remember my first warning on how the 'rise of the machines' in Welcome My Son - Welcome to the Machines back in July of 2010 appeared to be both unstoppable, and dangerous. Fast-forward to today, and here we are with a volume-less stealth (managed) mania in stocks that is indeed 'bending people's minds' - accelerating debasement trends, dangerous behaviors, and ultimately real world consequences at some point.
And this is of course the question of the day. When will 'it' hit the fan again? When will it become more widely understood by the middle-class (who are not viewed by the oligarchs, bankers, and bureaucrats as people or citizens, but instead taxpayers, consumers, and bag holders) that their disenfranchisement / destruction is accelerating too? Big questions that only you can answer by making enquiries like reading these pages and being honest with yourself. Unfortunately, most will never do this and end up like the already disenfranchised, living day to day in a disillusioned nightmare that never ends. This then, is why you have incidents like Ferguson, and why you can expect the discontent to spread and grow more profound.
All we need is to have the stock market slip and this will become reality for the hoards of 'pensioners' that are presently deluding themselves everything will be just fine. As alluded to above, and as discussed many times throughout the years in attempting to chronicle the reality of an increasing surreal world, the stock market (all markets) has become nothing more than a sentiment / liquidity driven video game, controlled by price managing machines preying on people's fears. And there is much to be fearful of in the real world, from rising tensions in the Ukraine and China, to accelerating debt bubble worries, to worsening Wall Street fraud like the planned US junk bond IPOs coming up, which marked the turn at the last credit crisis if you remember. (i.e. it was foriegn buyers of US junk debt / derivatives that marked the top in 2007, like today.)
Oh, and we must not forget an apparently out-of-control ebola epidemic that could shut down much of the world's economy if unchecked. Of course this is just all fun and games to the bureaucracy's price managers, just more reasons for unsuspecting speculators to buy puts (and short stocks), only to be squeezed out of their positions in perpetually. Because if it isn't one thing, it's another, that is used to spark a rally. This week it's purely structural, because stocks usually go up into month's end due to hedge / mutual / pension fund related window dressing. And next week it could be anticipation associated with the Alibaba IPO, or ISIS being bombed, or whatever. It doesn't matter, because with no sellers in the market (exacerbated with Labor Day holidays approaching), interest rates falling (for the same market rigging reasons stocks are rising), and money supply growth rates still buoyant (see Fed Credit) - it doesn't take much with the Fed's prop desk, corporate buybacks, and foreign capital supporting stocks.
Unfortunately for just about everybody however, these stock buybacks and government subsidized propping activity will eventually have to be paid for, meaning these practices have unwittingly thrown corporate America into a debt induced suicide mission, which will become evident when interest rates begin to rise. People think because the Fed is cutting back on QE that inflationary forces are subdued. However, as indicated above, money supply growth rates are still rising, and they will accelerate if the banks ever decide to start lending reserves again, which is the plan in case you didn't know. Because the Fed can't let the stock market crash now, as it's just too important in maintaining the illusion that everything is under control. How would it look if stocks were crashing right into mid-term elections? Bad is the answer - so expect a concerted effort to keep them buoyant into November on this account no matter how bad the internals diverge.
As mentioned in previous commentary, such an outcome would produce a seasonal inversion (the opposite to established seasonals) that could potentially set-up something nasty going into Christmas this year when nobody expects it. In this highly speculative climate, if not for sheer financial and emotional exhaustion prior, one should actually expect such an outcome. That being said, as discussed previously, sentiment has already shifted considerably in favor of the bears over the past month or so, putting the onus on the bulls, and their handlers, to keep the bubbles inflated. Unfortunately for these types, because the move in stocks has gone parabolic, with increasingly shallow pullbacks (the last only 4% on the SPX); time is running short in this regard, even if the blow-off lasts another two-months. Such an outcome would be surprising, and I am not calling for a seasonal inversion, however in knowing who we are dealing with, one should also not be surprised if it occurs. (See Figure 1)
As it appears the S&P 500 (SPX) may push above 2000 on a temporary basis, one must keep all this in mind that eventually, once bearish speculators in the bond market are burned off, a channel break in long-term rates, as measured by 30-Year Treasuries (same chart for 10-Year Treasuries) (see above) may occur, popping this bubble rapidly, likely before the Fed can respond. Right now speculators continue to be net short futures to the extent this has become a self-supporting mechanism for the market. Again, at some point however, this should change, especially if inflation fears (and rates) begin accelerating higher unexpectedly, something the bureaucrats will not be able to prevent. Of course if this chart turns out be an accurate analog low rates are here to stay, just not the bubble(s) in stocks.
So, it's possible the bond market in the end that finally pops the larger speculative / fiat currency based bubble(s), if long-term channel support indicted in the monthly plot above gives way, but there is no guarantee in this will happen given official proclivities. If the Japanese experience is any indication however, all the debt and derivatives will matter at some point anyway. One should look to the junk bond market(s) for a signal in this regard, as rates should begin to rise here first, which is why price managers have taken advantage of lower summer-time volumes to jam prices back up to the top of the range, as has been the case with stocks. Like stocks, indicators will be putting in noticeable negative divergences this time around however (see attached directly above), making further attempts to paint the tape increasing difficult, especially with the higher volumes that should be expected as the holiday season passes.
The SPX / CBOE Volatility Index (VIX) Ratio (see Figure 1) could close the month at 192, which would be a top defining moment. Therein, this does not mean stocks won't go higher in September as the seasonal inversion blow-off accelerates (not likely but possible), but it does mean intra-month highs should be the top, with October registering losses, much to the surprise of the consensus. Again, if a seasonal inversion is on the menu, with September historically the worst month of the year, stocks should continue to rise most of the month, possibly into the highly awaited Alibaba IPO tentatively scheduled for September 16. Capital flows into the US should begin to abate at some point once excited money managers around the world blow their collective load(s) during this quasi-orgasmic episode. (i.e. a blow-off top has similar psychological features compared to a sex act.)
The Nasdaq 100 (NDX) / Dow Ratio remains contained at present, however all it would take to change this, especially around Alibaba IPO time, is for a few big hedge fund managers to get a feather up their collective, driving the put / call ratios on the NDX and QQQ up, enabling a final blow-off in tech stocks higher. And who knows, maybe Nasdaq 5000 will be breached once again, as impossible / improbable (a bubble top like 2000 has never been tested before) as this might be. Such an outcome could see the SPX vexing 2100, or higher intra-month, as the blow-off accelerates into next month. The script should see gains the remainder of the week as the low volumes (lack of selling) continue to perpetuate a melt-up; again, with any luck, producing a monthly close on the SPX / VIX Ratio of 192.
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