The Twilight Zone - Revisited
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, November 11, 2014.
It's only been a year and a half since we first penned our article entitled The Twilight Zone, but it seems like much longer because of how much further we have fallen into the financial black hole being imposed on us dubbed the 'new normal', the financial repression central planners purport is necessary if we are ever to dig ourselves out this void. Of course if you understand these things, and that the status quo fix for our worsening embroil is completely rooted in Keynesian economics, one would know why this is occurring, encapsulated in the understanding of diminishing returns - the dilution (currency debasement), corruption (crony capitalism), and changing macro-conditions (demographics and population saturation). And as with the focus of last year's piece, again, we would be amiss in not pointing out this can be seen in no other place better than Japan, where a little over week ago monetary authorities went 'all in' on its quantitative easing (QE) program (quadrupling it) in an attempt to thwart natural deflationary forces that have gripped the macro, extending its reach to the purchase of more foreign equities, and 100% of domestic debt issuance, accelerating the insolvency process. (i.e. this can be likened to increasing the amount of morphine given to a terminal patient.)
Continuing down the (natural) deflation hole amongst fully mature and declining Western players we have Europe (with Germany at center), which is not much better off than Japan (most indebted), but is at least attempting to exhibit restraint in debt accumulation by keeping the ECB controlled. At least that's the Western central banker story line being used to manage the currencies right now using a good guy bad guy routine. What one is supposed to believe is because the Fed has ended QE and the ECB is just getting started, you should be buying dollars($), shifting capital to the superior growth found in the US (especially with Republican's in charge now), and selling commodities. And this ruse has been working very well up until now, with the added benefit a rising $ has caused precious metals to plunge, removing any signal of official inflation (to counter natural deflation) just when it's needed most. As economies continue to collapse from natural forces however, an actual heated and partisan currency war could develop, which would see currency debasement rates skyrocket world wide. If this were to occur, we would witness the full effects of what Mises calls a crack-up boom, well underway at some level as we speak, evidenced in Japan's increasingly desperate monetary measures.
As pointed out last year however, this was to be expected, along with the rising prices, booming stocks, and intensifying perception management, evidenced in a rising Dow / Gold Ratio. And while the 'big picture' today may resemble an Owellian nightmare more than Serling's strange stories of the macabre and unexpected twists, still, it's fare to say things are definitely not going well unless you are a 'top taker', milking our rotting system for all its worth in its declining days. Top level bureaucrats are still doing 'OK' while prices remain relatively tame, however once the games associated with keeping the $ propped up have run their course, things will look a little different to these types as well in joining the 'less fortunate' in the unemployed rosters, not that this will matter to status quo apologists and statisticians apparently. Therein, and as is flawlessly demonstrated in Animal Farm (and the former Soviet Union), once the pigs (top level politician's, business leaders, etc.) lose the fear (used to control the people) created by their dogs (think all levels of bureaucrats from high level politicians right down to the cop on the beat), things will be very different not just for the poor, but these bums as well. This, is when things are going to change to the point mass denial that is still possible today, will no longer fly.
But we are still long way from this point, with manufactured denial, delusion, and deception still running the show these days. What's it going to take to change this? In a word - loss. People need to be penalized for their false beliefs and reckless behaviors, and the degree these vices have penetrated into our society would suggest a collapse tantamount to some degree of what happened in Sodom and Gomorrah (symbolically?) (evidence), but if not this, Rome for sure (reality), may be required given the pervasive debasement that has gripped the world. Now, I am not a 'religious man' (although spiritual), however, based on what's going on out there (gay people now openly flaunted on network television, the spread of dangerous diseases, risky nuclear power plants ignored, etc), we are in a great deal of trouble. And you can even see this in precious metals trade, where delusional and stubborn bulls will not give up the ghost in their bullish aspirations, permanently optimistic and rationalizing (clinical) delirium no matter how much prices go down because it would not only mean they may have lost life fortunes (in the shares); but also, simply because they would be wrong. Of course once these types stop eating, or there is at least this prospect, attitudes and behavior will finally change, even though it might be too late financially for many. (See Figure 1)
In following our sentiment studies, one would already be very familiar with these concepts (reality), where we have been aware of this situation for some time now. And what we are doing here today, is attempting to refine this understanding, showing how truly pervasive this dangerous condition is, along with what it could eventually mean to your pocket book. Therein, and bringing the Dow / Gold Ratio (DGR) pictured above into the picture, what this all means is not just precious metal share investors are going to pay the price, but now we have the prospect of the metals also getting pasted, where as pointed out last Friday, past bounces that are presently underway, one must now be open to the prospect of witnessing gold plunging through $1,000, and silver to $10, how knows. As discussed previously, it would not be surprising to see silver plunge into the $12 area in a deflation scare, with a crashing stock market (at some point) taking everything with it (illiquid conditions), but who really knows how low it will go in a scare. And what's worse, which may finally scare some respect for risk into delusional paper market perma-bulls, is this could happen with a falling Dow / Gold Ratio; again, with any luck, hopefully popping the 'optimism bubble' in precious metals gamblers. (See Figure 2)
Technical Note: As can be seen in both Figure's 1 and 2, now that the DGR is through the 233-month EMA, it's now likely to head up to the 38.2% retrace, at a minimum. One should note with the exception of very few moves, bull markets or not, that it would be extremely rare for any market not to correct at least a Fibonacci 38.2% of the previous impulse. And the DGR is no exception apparently. More on this below.
Because again, as long as faulty and fraudulent Western paper market pricing mechanisms (controlled by gambler betting practices, algos, and the machines) still have a heavy influence on pricing, investors / speculators must realize these markets are 'rigged'; and, that with the increasingly financialized economy dependent on tame precious metals prices, falling values will remain the predominant prescription until the gamblers stop fuelling the machines. And apparently it's going to take a deflation scare to accomplish this, where if the charts are not lying again, should be sooner rather than later (see Figure 3 below). Obviously the Dow can keep rising because not only will the bureaucracy's price managers be working overtime going into Christmas in order to spur 'wealth effect' related buying, but also due to speculator betting practices here too, which remain predominantly bearish. (i.e. which is bullish for prices as they are squeezed out.) As pointed out Friday however, previously each time QE was cancelled it took approximately a month for stocks to roll over, making the last week of November post options expiry (when the influence of the December series is least) the time to be wary for a reversal in stocks. (See Figure 3)
The idea is OEX and NDX (large) speculators, the so-called 'pros', along with the MNX boys, who are supposed to be 'sophisticated' retail traders, are pretty much single handedly holding the entire stock market up right now, as they are pressured out of their bearish speculations. And this could continue until we get closer to options expiry on November 21, a full two weeks away at US Thanks Giving Day time (another time price managers want high stocks to spur Christmas related buying), which could be a culmination point. While nobody knows this for sure, as reflected in the trade yesterday, the bureaucracy's price managers are going to do whatever it takes to get stocks higher into this time frame, where anybody stupid enough to be long / buying puts, or shorting, will be squeezed out of the market directly. And while you would think the parabolic moves in stocks would need to correct somewhat between now and then, don't be fooled, because any such weakness will likely be fleeting unless speculators decide to stop buying / abandon their bearish broad market bets en masse. Oh yes, the fact precious metals speculators can be pushed around so easily like yesterday, after many so-called 'gurus' were calling for a reversal (which may still be in tact but it's ugly and shallow), makes their job a great deal easier with the machines programmed to turn precious metals weakness into broad market strength.
This will eventually backfire on price management participants (as the VIX explodes higher), but not before they drive precious metals speculators completely crazy, along with into the poorhouse. Of course even though most would never admit to it, the public is applauding all this, thinking they are getting something for nothing. And US authorities don't have to work at it as hard as one might think, because no matter who wins the two-party elections, the mob is still the mob in the end, where no matter how many become disenfranchised from the American dream, those remaining are an easy sell on the necessary corruption and fraud in order to maintain the status quo - it's the new 'American way' for all now (not just the elites) in case you didn't know. Just keep taking your dole checks and you are in the loop, in the club, a placated mob member. Of course every happy story comes to an end eventually, which is also well underway in America today, and will accelerate as process unfolds (think periphery state decay, rebellion, and varying degrees of war), but not before people get their Christmas shopping in if the algos have anything to say about it.
It's pure materialism, which is not just the Empire's God, but it's maker to meet one day.
But what else should one expect in the Twilight Zone other than the unexpected.
Gold traders are definitely getting a lesson in this respect these days. Gold traders think they have the moral high-ground, and they are correct about this if buying bullion, which is an act of 'saving', not speculation if bought for the longer term. Unfortunately for the savers however, we have the speculators (think hedge funds), where based on their betting practices, most of them are either too stupid and / or greedy to make the distinction between buying bullion and playing the paper, which is 'the rub' as Shakespeare would say. It's one thing to be intellectually correct about the 'big picture' concerning precious metals, but it's another to be outwitted by a bunch of clever moral retards (think New York bankers) that have rigged the game to win in knowing they can prey on these morons (think idiot hedge fund managers and gold bugs) day after day. And none of this will change until it exhausts itself from within; until speculators who think precious metals are a 'no brainer' are either broke or dead apparently. (i.e. develop respect for rigged market risk and cease insane betting practices.)
Putin knows this, which is why he is declaring war on the American status quo. Unfortunately, short of starting World War III, which arguably has already happened, he will have to wait like the rest of us.
How long will that be?
Answer: Based on technical observations above, apparently a 23.6% retracement of last decade's fall in the DGR is insufficient to correct this impulse, implying a move to the 38.2% mark (minimally) at approximately 17.5 should be expected. And again, as pointed out the other day, this implies paper gold prices vexing trajectories slightly below the large round number at $1,000 if stocks remain at present levels. If gold does not breakdown below $1,000, instead vexing trajectories north of the large round number matched with a 50% retracement of the previous decade's gains (consistent with harmonic patterns throughout this period), this means the Dow is possibly headed to 20,000 plus, believe it or not. (i.e. 20,000 / 1000 = 20 = 200 month MA) Of course, if the DGR needs to hit a 50% retracement, then the numbers get really stupid, meaning the Dow could melt up to 25,000 or so, which is in the realm of possibility, because we have entered the Twilight Zone. (i.e. a global crack up boom.)
It should be believable, because intensifying currency wars (think currency debasement) suggests this is now a high probability. And if you think stocks love a rising $, just wait until you see how they react to it plunging. (i.e. when Yellen panics.)
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