Banking On Insanity
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, December 15, 2014.
This piece could have been entitled 'betting on insanity' as easily as 'banking', because the theme centers on how gambling is not just distraction for the idiots anymore, it has gone systemic in our society today. However, considering who is primarily responsible for this mess, it seems appropriate. Because if there's any one group that should be blamed for what is about to happen to the world, the wholesale financial collapse that is on our doorstep, it's the bankers - those creatures from Jekyll Island. At its inception, the Fed was activated on the premise it could smooth out the business cycle, attempting to mitigate the boom and bust cycle that characterized economies previously. Fast forward to today, and unfortunately they have been allowed to perpetuate this to the point of removing the business cycle entirely in order to maintain this illusion, which is an unnatural state that cannot be maintained, one that will result in lethal reverberation when man's natural state (think animal instincts) reasserts itself in our economies.
If you're thinking this theme is similar to that discussed in 'Avoid the Pain' you are correct, because what we are essentially talking about is the argument against interventionist economics, central planning, etc, in favor of proper pricing market economies. Of course, human beings, being what we are, will attempt to avoid pain at almost any cost, searching out avoidance and distraction to the point of mass mania in stressed circumstances. Over time, fascists and other exploiters recognize this tendency and game the system to the point of collapse, which is where we are right now. Because with this gaming and rigging of everything in the system, again, having our banker buddies at center, the debasement of our society and economies via free money becomes insanity in its truest form, due to the degree of violence that will be required to return to any semblance of equilibrium in man's larger economy. You see we need this equilibrium so that we don't blow each other up.
But the parasites remain empowered with the mob now weak and fully corrupted, so no easy solution is likely, bringing us ever closer to the potential for conventional war. You see, the thing is, our banker buddies (and their oligarchy friends), and the useless and redundant bureaucracy's with which they collaborate, that are concerned about nothing other than enriching themselves, can only feed on a dying carcass for so long before the rotting flesh becomes toxic, which is without a doubt the case across all things Western now, or as some would brand it Anglo-Americana. But again, they keep trying by turning the screws in technology (HFT's), which in this case means he who has the most powerful computers (and smartest programmers) wins the game, which has had the effect of turning Western financial markets into nothing more than video games that exploit people's fears, which is of course the exact thing that allows gambling houses to prosper.
Hence the title of this piece, banking on insanity, because things just keep getting crazier by the day in the financial markets. Perhaps the best example of this at present is the crude oil market, where like what happened to overly confident and complacent precious metals speculators over the past few years, many perma-bulls are being culled right now, never to return to the game. Again, like paper market precious metals speculators to this day, which is why they don't recover, bullish crude oil speculators think they have Mother Nature on their side, where you will hear them talking about supply and demand like such concerns actually matter, failing to realize that under the right circumstances any market can be toppled over by the machines today, especially if the market is pushed that way (the algos are programmed to hunt for news and react faster than humans) with well timed news events.
So, it's important to understand the weakness in crude oil has primarily been a result of some idiot hedge fund speculator(s) as opposed to conspiracy theories involving the US, Russia, China, and Saudi Arabia, although it would be naive to think the political economy is not a factor. And sure enough, once it was announced this clown was on his way out, crude started to rally right away, keeping its gains on the day. Now, the only problem for crude is all the other crazed speculators, price management, and global economic drag. Of course what's good for the goose (precious metals) is good for the gander (oil), so don't expect crude to go down due to deflation concerns if speculators get bearish, and start betting that way. COT distributions show that while more speculator related liquidation is to be expected, unlike stubborn precious metals speculators, this condition could be corrected much faster. When that happens (think months best case), crude should be in for quite a bounce because guess what - fundamentals actually do matter in the real world - not that our banker buddies have any such concerns.
Thus, the longer bankers are allowed to fund increasingly bankrupt finance, the worse things will get. Because one must realize, hedge funds putting on these trades (speculations, hedges, etc) are working with other peoples money, so they have a different 'standard of care' than if they were speculating with their own money. Maybe this explains why losing managers don't bother to check what their competition is doing (put / call ratios), and they continue to get away with this stupidity (buying puts and shorting stocks along with the crowd as they are squeezed ever higher). But one needs to wonder how much longer (Dow 23,000?) they will be able to get away with this lunacy - when do investors pull the plug on these idiots? Pension funds are at the forefront here, however this could turn contagious, which would be bad for stocks, high yield bonds, and anything else these people have been buying. Right now, funds involved in high yield credit, especially in the US oil patch, are getting obliterated, which will undoubtedly cause at least a few funds to fold, if not spark a full-blown credit contagion like 2008.
The idea is these guys and gals just want to keep milking what is a very lucrative cow, managing other people's money, which is the primary reason unsuccessful funds have been hedging equity exposures - because of the desire to keep their lucrative jobs. It's better than digging a ditch; even if such jobs do not exist anymore because of the way these clowns lose money, which will eventually topple the colossus. Unfortunately it's almost impossible to protect yourself from what is coming because of official corruption gone wild, where the banks have once again downloaded the tab for the next meltdown on the public -- only ahead of the fact this time around. But don't worry, because nobody else is, the powers that be must know what they are doing right? They wouldn't do anything illegal, or unethical, or just plain stupid like starting World War III (WWIII) in plain view right? Or is it they are confident the public is too preoccupied and dumbed down to care, banking on insanity of the public that the 'powers that be' have successfully engineered. Everything must be 'hunky dory' right? What could possibly be wrong with stocks going to the moon - right? (See Figure 1)
And as you can see above on this monthly S&P 500 (SPX) chart, that's exactly where they will be going once significant Fibonacci resonance related resistance at 2080 is taken out. The target after that is above 2600 if the Dow is heading to 23,000, which is the target once 18,000, is bettered. (See weekly and monthly plots in the Chart Room.) And make no mistake about it, these targets can be achieve because this is the Grand Supercycle Degree top we have discussed these many years. And now we have it unfolding right before our eyes. It's hard to believe its arrived; however, it's also unwise to argue with the price action. As discussed last week, we were expecting a consolidation into the Fed meeting this week, with a rebound into year-end, being similar sequencing to that of the year 2000. And sure enough, we have the set-up for such a turn provided to us with crashes in high-yield bonds and crude oil last week that are sure to get dovish sentiments out of the FOMC this week. And that should be all tech stocks need to rip higher on no volume over the holidays. (See Figure 2)
As you can see above, once the NADSAQ Composite (COMP) exceeds the channel top, like the year 2000, it would make another bubble, likely to top out sometime in mid-2015. Why mid-2015 and not March like in 2000? Again, because this is the Grand Supercycle top in stocks, which means it should be 'grander' than the top witnessed in 2000. This means it can extend beyond any other Supercycle Affair ever witnessed in both dimensions - price and time. What's more, look at the energy that has been released in the weekly COMP chart (pictured below) that must now be spent. That is a large diamond in the MACD that has built up energy for over 10-years, since the 2000 bubble. More recently it broke out and looks to have completed testing now, ready to move considerably higher. This means assuming we get a breakout, which would be signaled by a break above channel resistance shown in Figure 2 (and a breakout in the COMP / Dow Ratio seen in Figure 3), the bubble should grow for at least six-months if history is a good guide, but maybe longer considering this is the granddaddy of all the previous waves. (See Figure 3)
The next chart we are going to look at is the SPX / CBOE Volatility Ratio, which like in October, has already moved down to the retracement. This must be construed as bullish because what it means is speculators are paying far too much for these options considering the SPX is not even 4% off its highs. That is to say, speculators are far too worried and panicked about buying protection, which means that where it counts, which is in their pocket books, they are truly bearish. (i.e. which is bullish for stocks.) It should be noted the SPX should still drop to the 38% retracement of the previous wave up from October at 1980 before bottoming this week, but finish higher by week's end in a seasonally strong period (which lasts until the first week of January). Can stocks just bounce from here, the 50-day moving average (MA)? Obviously the answer is yes, however like the simple minded paper precious metal speculators, it appear more crude oil speculators need to be purged (they are still net long in a big way), which could cause a problem for the broads until the Fed steps in on Wednesday to kick off the highly anticipated Santa Claus rally all their constituents are counting on. (i.e. maybe it doesn't happen because of this?) (See Figure 4)
Low and falling crude oil prices should actually start helping tech stocks soon, like in 2000, because some speculators will drift away from the oil patch quickly once they realize the game has gone. This should not take too long, because if the diehard speculators are anything like their precious metal paper market counterparts, they will remain in their positions, which will continue to feed the cyclical bear market that has now gripped crude. Further to this thinking, it should be pointed out that low oil prices are also good for precious metal miners because it lowers production costs significantly, which will in turn cause sizable bottom line improvements. Now all we need is for gold and silver prices to get back over breakeven thresholds, and hey, the miners might actually return to profitability one day soon. Sarcasm aside, like 2000, this is a good set-up to buy the miners once the larger deflation scare that still lies in front of us later next year (once the broads top out) is passed. Remember, one can get aggressive regarding precious metal shares again once the TSX Venture Exchange (CDNX) hits 400 - don't forget - and be patient.
In the meantime, one can attempt to play the seasonals and oversold bounces; however, such activities can produce counterproductive results if one is not careful, especially if you talking about markets that Western bureaucracy's want to subvert. (i.e. think commodities and precious metals.) Again, junk bonds are already oversold as you can see here, so with Wall Street already bailed out on any losses thanks to sneaking this provision through in the Omnibus Bill; it's not difficult envisioning a bounce in tech stocks just in time for Santa. What's more, Commitment of Traders (COT) distributions for both tech stocks, as measured by the NASDAQ 100 (lowest net long position of the year), and the dollar (USD) (huge net short), are supportive of this view. What precious metals speculators should keep in mind is the large net short in the USD could bring in further strength at unexpected times, which could make playing a January Effect bounce (in January) dangerous. In 2000, similar conditions (USD strength and speculator betting practices) caused precious metal shares to languish in January, not rallying until February approached, which could happen here again with so many speculators looking for a bounce into January, where it should be pointed out prices have already been (counter-trend) rallying since November.
The only way to be sure you have a fighting chance at successfully gaming a bounce in January is if the shares weaken into year-end. Some shares have been cooperating, however, many have not, like Kinross (KGC), which remains stubbornly strong, showing proper respect for risk is still not present in this market. So, be careful. Wait to see the trade between Christmas and New Years before stepping in to any appreciable degree. Again, this is reflected in COT distributions, where net positions for both gold and silver remain bearishly predisposed. Along this line of thinking, one must always remember market dynamics are primarily determined by speculation cycles these days, capitalized on by interventionists. That is to say, if speculators were not betting the way they were, government would not be able to push its agendas the way they do, where once speculators exhaust present trends, both markets and government influence will also turn. The only problem is people are stupid and stubborn today like never before, so these trends tend to last as long as these knuckleheads can remain 'solvent' by maxing out their margin accounts.
For those in the position to be smart about this, meaning bypassing the paper games, like Vlad Putin, whose strategy is to 'starve the beast', to remain conservative, one should be accumulating cheap bullion, exiting a corrupt and fragile financial system, where your wealth is confiscated one way or another, or another. Certainly one cannot have all of their money in precious metal bullion, allocated accounts, etc, not to mention theatrically the shares should exhibit leverage to the commodities at some point as well; however, one does need wonder about such things. As suggested in my piece The Dumb Bell Rally, the shape of the precious metal share bull market should be like that of a barbell, where they outperformed between late 2000 and 2004, and can be expected to do so again between 2016 and 2020, both condensed four-year episodes. So again, be patient.
My thinking has not changed in this regard - for whatever that's worth.
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