Avoid The Pain
The following commentary originally appeared at Treasure Chests for the benefit of subscribers on Monday, December 1, 2014.
It's a basic human instinct - attempting to avoid pain. And it's the reason we are in so much trouble now, because when it comes to managing economies, the longer you put off necessary pain, the worse the result in the end. This is the primary distinction defining the difference between Keynesian and Austrian economics. The former, which is also known as 'interventionist economics', promotes ever-increasing and active central (state) policy responses (think fiscal and monetary) in the management of an economy to thwart the natural course; and, the latter, in its purist form, invites nature, and more specifically, the natural state of man as a rational decision maker (methodological individualism), to bring about 'equilibrium' in markets, setting prices based on actual demand and supply conditions.
So again, the profound difference between the two, from a 'price discovery' perspective, is ever-increasing interventionist policy will distort prices away from the natural path, while leaving markets alone, as promoted in Austrian economics, would in a perfect world, allow markets to arrive at equilibrium, which in theory would in turn allow man to exist with nature in harmony. Here's the 'rub' however, leaving markets alone does not allow for bureaucracy's to thrive, which is why the Keynesian model has become the cornerstone of the 'modern day economy' (the Anglo American 'Western Debt Based / Colonization Model'), our fait based economies gone wild in an interventionist orgy, which on the surface may appear practical to the unaware and naive, but in the end will be lethal as economies (and prices) are thrown back into the natural sphere.
This then, is the premise behind the truism 'short-term pain for long term gain', which is derived from a true understanding of how nature works either with or against man (as a collective), and why this understanding is the basis of Austrian economics. Because again, when we put off pain, we become spoiled (along with corrupt and greedy), and forget Mother Nature's lessons, where the blowback becomes more profound the longer imbalances are allowed to exist. Which brings us to the situation as it is today, where we have the most profound bubble economies in history that are still growing larger with necessary expansion of credit / debt cycles (or face implosion), along with asset bubbles that are set to burst at some point.
Of course if one has been following our work you would know the equity bubbles still have a ways to go because the money printing (monetary policy) is still accelerating on a global basis, which will make the fallout (think economic depression) correspondingly profound. Because again, by avoiding the pain today, we will eventually experience far worse ramifications longer term when prices readjust back to equilibrium, as they always do. This is naturally the argument against allowing Keynesians to become too powerful in any 'market economy', because you in fact cease to have a 'market economy' as these idiots impose an improperly engineered construct on people, eventually bringing down the system (as they are systematically disenfranchised from the graft and can no longer make the interest payments), .
What you are seeing in Ferguson is just the beginning of this process - revolution - that will intensify as process unfolds and the mob strikes back at the establishment. But the money printing is still supporting the rich as the insane asset bubbles continue to grow ever larger, until one day - something happens the 'powers that be' cannot control. Timing is obviously a big question in this regard, but we are looking at two windows for bubble tops right now, with stocks running into some trouble in March, if only temporarily, and then bonds in October of next year according to Martin Armstrong's Economic Confidence Model (ECM). And this next episode in the pain department is really going to be something, because we have become experts at extending cycles way past any sense of good measure, well into the theater of absurd, The Twilight Zone, or any other imagery one cares to throw at this subject matter.
In assigning the proper terminology and mindset to what is coming then, what we are looking at is the much daunted Grand Supercycle event in terms of the US stock market, where a lasting turn now appears likely sometime between October of next year (concurrent with a top in bonds) and 2017-2018, where as Martin Armstrong envisions, starting in October of 2015 (the next ECM turn date), capital will flee government and go anywhere else it's perceived as 'safe' (out of government control), which will not only include stocks, but commodities too, including precious metals. What's more, and again, according to Armstrong, if capital from around the world joins in this orgy, the Dow could reach up to 25,000 (and higher) before it's all over. And sure enough, in viewing Figure 2 below, the technical picture supports such a view. More on this below.
Does the Dow go this high? While nobody knows for sure, and while this may appear unlikely at the moment, one thing is for sure, when the Dow / Gold Ratio (DGR) hits the 50% retracement, gold (and silver) will represent 'good value' if history is a good guide, along with common sense. Therein, based on the premise the DGR is still in a bull market, which we will assume is the case until proven otherwise (or when governments stop printing money), as you may know, our harmonics studies are suggestive that once a 50% correction has traced out, the bull should reassert itself. The fact that this appears to be happening in the proximity of Armstrong's ECM turn date adds a degree of 'confidence' to this view considering gold is still viewed as the ultimate 'put against the idiocy of the political cycle' by the smart money according to Kyle Bass. (See Figure 1)
In terms of stocks, and the Dow more specifically, Armstrong's storyline, that US stocks will be perceived as a 'safe haven' and this is why they can go to the moon is nice, and works on a superficial level, however this smacks as fantasy in my books. No, the reason stocks are going higher is they are being engineered higher via a perpetual short squeezed using algos / computers, where declining volume, which can be seen below, doesn't matter. If Armstrong were right, then volumes should be rising with stocks, not falling, especially when currency-trading volumes have exploded higher, leading one to believe capital is flowing into the US, and therefore, into stocks. The thing to realize however is currency-trading volumes are rising not because of net capital inflows to the US (because this is not the case), but to manipulate sovereign currencies to correspond to central bank storyline, and to create volume (and profits) for banks. (i.e. think commissions, spreads, HFT, etc.) (See Figure 2)
Now I am not saying that Armstrong is wrong about the stock market going higher, or gold lower, because these views are consistent with my own, but for different reasons. His reasoning for gold going up starting sometime next year is excess liquidity coming out of bonds will spill over into the yellow metal (less confidence in government), along with a resurgence in the war cycle, both reasons I can agree with. However, like stocks, if Western paper market speculator betting practices (assuming this condition set still controls global pricing via algos / machines) don't change by then, any moves higher will be muted, because like stocks, this is what ultimately controls prices. This, ladies and gentlemen, is the missing ingredient that is still all-important in market(s) direction as long as the computers are in charge and doing the bidding of the bankers. (See Figure 3)
Financial repression is the name of the game these days, and it will get nothing but more profound and blatant moving forward. CBOE Volatility Index (VIX) 'banging', which we discussed a few weeks back, is a daily occurrence, and when its not, all that's happening is the price mangers are allowing it to rise (while keeping stocks relatively stable), like last week, so they can begin banging it down again in order to ratchet stocks higher. (i.e. this is what they are likely doing as we speak.) That's why the S&P 500 (SPX) / VIX Ratio (see above) is off its highs while the nominal SPX is now threatening the next round number resistance at 2100. And now that periphery economies around the world are collapsing, both manufactured (think cold war [crude oil smash] on Russia and not), even more pressure will be exerted by the Boys From Brazil (down at the bank in New York) to keep stocks and bonds buoyant and commodities suppressed - because as suggested last week, they need tech stocks to rally here because Twilight Zone like valuation can be applied to the most useless of enterprises. (i.e. most people don't need the crap Silicon Valley peddles for survival.)
Because it's important to realize that because of the machines and the psychopath's that run them, the US stock market has become nothing more than the biggest video game on the planet, complete detached from reality, which in itself is deteriorating into a bad science fiction movie about how the entire human race turns into flesh-eating zombies. Along this line of thinking, it's also important to realize the US does not have an economy anymore either. No, what you have now is a gamble, rooted in gambling, and comprised of gamblers - where with the exception of providing for immediate self-gratification, its has been completely hollowed out on all levels (infrastructure, government, markets, ideology, etc.), and is set for collapse. What's more, it's not a question of 'if' collapse is coming, but when, which has become the $64,000 question.
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