The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, May 11, 2015.
Has America turned into a mindless mob incapable of thought independent of the status quo - a zombie nation as it were? In watching how the masses still embrace corporate and political sycophants aimed squarely at exploiting the them, continuing to embrace mindless consumption and never ending false promises, the answer to this question undoubtedly remains in the affirmative, given things are changing as the disenfranchisement process picks up speed. That is to say, for those who think they are still living the American dream, the big house, cars, and endless distraction, there's no reason for these folks to think outside of the box. But for those who have already hit the skids, where every day is a struggle for survival, the world is a very different place, as evidenced in rising tensions witnessed in response to the Freddie Gray incident.
Because despite what corporate America's bought and paid for mainstream media would like you to believe, the unemployment rate in the United States (US) is not 5.5%. And while some would have you believe it's really closer to 13%, if you were to include all those who have stopped looking and fallen from participation rates, which are at multi-decade lows, the real rate is likely closer to Depression levels, at 23% plus. So it should not be surprising to anybody, except the zombies perhaps, working night and day to maintain 'the dream', that growing ranks of these downtrodden souls will likely continue to be unhappy, especially watching spoiled Wall Streeters and oligarchs continuing to eat their lunch. As a good Austrian economist would point out however, there's 'no free lunch', and that eventually all the shenanigans being employed to maintain the dream will fail, along with the status quo.
Because central planners may have altered the business cycle with all the money printing and financial engineering, but they can't eliminate the human emotion cycle from the formula. The financial repression, in the forms of stock buybacks, stock futures propping, negative interest rates, and suppressed gold prices could continue for longer than speculators can remain solvent (which is the case for bears); however, sooner or later the status quo boys will be unable to stay ahead of the curve and this will become an issue, with bullish zombie speculators buying the dips right to the bottom in a mindless and indiscriminate lust for blood. A collapsing macro, the prospect of revolution (against the police state), and the collapse in rule of law - one would think these are all reasons not to be bullish on future prospects in America.
However to a zombie, the undead and unaware, not to mention in many cases being a fully corrupted carcass, meaning brain dead and doing the bidding of his master even though such behavior is at odds with healthy long term prospects - none of this matters - only mindless materialism. This is why Obama can arm the gangs hoping to stir the pot, because these guys have something to prove, which is exactly what the doctor ordered if you were a manipulative puppet master, not to mention the mind-gripping copy (distraction) this provides for the evening news. Because while the zombies are transfixed on this brand of distraction (amongst many others - Ellen, football, wars - anything will do for the brain-dead), Obama and his buddies will be out there confiscating (stealing) what little substance remains of the decaying corpse better known as America.
How can I be so crass in my analysis of prospects for America when the status quo looks more determined than ever? Just look at what money can buy - it bought the zombies and election in Britain again. Obviously those frequenting the food banks are too weak to vote due to malnutrition, a common problem for less fortunate zombies. And no doubt Hillary will be handed the same in America next year as well (no matter how bad the economy is) - where disenfranchised zombies are either too dumbed down or burned out to make rational decisions any more, if they have the energy to get to the polls, or desire. So again, why the contempt for 'America', from the status quo to the disenfranchised? Because as Doug Noland suggests, The End Is Near, where he correctly frames the situation in terms of ultimate outcomes as follows:
"I really don't prefer to come off as some whacko extremist, which perhaps helps explain why I highlight the thoughts of market gurus such as Bill Gross and Stanley Druckenmiller. From my analytical perspective, we're in the "Terminal Phase" of a historic global experiment in electronic "money" and Credit, "activist" monetary management and economic structure. Getting somewhat closer to Bill Gross's parlance, we're in the endgame of a historic experiment in market-based finance. And in a 35-year Super-Bubble, it would only be fitting that the endgame has things turning extraordinarily chaotic: Policy measures turn progressively desperate, throwing gas on increasingly manic and unhinged market behavior."
The fact total securities to GDP have quadrupled since 1980 is certainly hard evidence backing this belief, the likelihood America (the world) is very close to an event horizon of unprecedented scale, but it's not the ultimate reason hard change is coming. The real reason, which is embedded in Doug's poignant prose above, is found in the desperation levels, both by the powers that be in order to maintain the illusion, and by the zombies in their willingness to accept increasingly toxic brands of Soylent Green as sustenance. It's just like what Monsanto is doing to the food supply, which is why there will be a crash in the ecosystem. The toxins are becoming viral and are spiraling out of control. So given such a bleak future, and in the interest of self-preservation, eventually what happens is enough key players will become disenfranchised, and colossus will be turned on its head, never to recover.
The derivatives automaton will implode as a result of its own complexity and size.
This is what China and Russia see, the fall of the Western Model. That is why they wait patiently for zombie Westerners to drown in their own vomit. They wait for our zombie banks (walking dead) to realize decrepitude. The money-center banks are insolvent, remaining alive only by sucking the life blood of the public. NIRP will only delay and make things worse in the end. It's just another tax that will eventually drive more wealth into hiding / alternatives (think gold, silver, etc.), slowing the economy further. This would be the primary effect of a cashless society as well by the way - hastening the demise of our modern day bureaucracy / plutocracy / kleptocracy - the zombie economy. Sure China has a debt problem (Russia does not), but it's nothing like others. It will be able to withstand a slowdown far better than its Western rivals, especially with all that gold under its belt now. As explained some weeks back, the decentralization process is accelerating, and this will eventually lead to a slower global economy, felonious statistics, or the stock market, will not be able to hide. (See Figure 1)
As suspected in our trading notes last week, because US price managers needed a strong Employment Report they would get just that from the boys and girls over at the BLS on Friday (a better acronym would simply be DOBS - the Department of Bull Shit), and that's exactly what happened. And as you can see above, the result in the stock market, as measured by the S&P 500 (SPX), was a rally to new all-time highs, but not on a risk adjusted basis. This is still likely coming soon, perhaps this week, where again, you are reminded we are looking for a blow-off in the SPX / VIX Ratio up to sinusoidal resistance at approximately 200 (see above) a potential Grand supercycle high, with the SPX in the vicinity of 2200, and VIX at 11 (2200 / 11 = 200). And while it's unlikely we will see this targeting hit this week, make no mistake, in a blow-off, it could occur by month's end, or early June. Remember, this target must be maintained on a monthly closing basis in order to complete the pattern. (See Figure 2)
And the same is true for tech stocks, as measured by the NASDAQ. The NASDAQ (COMP) / VXN Ratio must finish the month extending a larger degree five-wave affair in order to make possible a sequence completion, at one of the Fibonacci resonance related targets shown above. What's more, we have a nice setup for a reversal from a divergence perspective, where not only would tech be underperforming the blue chips on a ratio related basis compared to the year 2000 (see below), but nominal negative divergences are possible in key secondary markets including the Transports, biotech's, and financials. That is to say, while the Dow (SPX and NASDAQ) would see new nominal highs directly ahead, some key correlated secondary markets may not, setting the stage for conviction selling amongst the pros once all the games have run their course. This is all happening very fast now, and is why you keep seeing these same charts week after week. These are the only ones that matter outside of those which will help us identify a bottom in precious metals as well. (See Figure 3)
So, if the SPX / VIX Ratio hits 200 with the NASDAQ / VXN Ratio stuck around 400, then we would have a good indication trouble is just around the corner for the broad markets, again, especially if divergences in other key markets persist. What's more, if this were to occur with the Dow / Gold Ratio (DGR) at 17.5 or greater, taking it into the 38.2% retracement zone, then the writing would be on the wall in my opinion, where you better not act like a zombie concerning your portfolio afterwards. One should note the DGR is on a time line turn signal at the moment, which should be viewed as conspicuous all other factors taken into account. And while this does not mean stocks could continue higher (and gold lower) well into summer / fall, at the same time it is becoming apparent the stars are finally becoming aligned for meaningful reversals. (See Figure 4)
The large flag in the SPX / VIX Ratio (and NASDAQ / VXN Ratio) is suggestive the blow-off may take months, not weeks or days, so one had better be prepared for such an outcome. The pace of buybacks continues to accelerate (to make up for the faltering economy) into a parabolic blow-off that looks like it could indeed continue for another few months (seasonal strength ends in July), so amazingly, the move still looks like it could conform to script. In this regard, be aware the propaganda you will hear over the next couple of months is also likely to accelerate and become increasingly complex, matching the deteriorating situation, so one should be aware of this. Considering the technical condition of the stock market, if the SPX can make it up to the 2200 area in coming days, at a minimum, one should consider hedging long exposures, not to mention outright selling, considering what is coming.
Because as suggested last week, once interest rates turn higher on a lasting basis, the buybacks party will be over. Sure the Fed can bring back QE, but this will not happen right away (think next year at earliest), not too mention the effects of QE are still not fully understood, where at some point the Fed's bullshit story, solvency concerns, etc. (the list is long), will wear out and the unraveling will occur anyway, which is always the case in grand scale frauds - just ask Bernie Madoff. It's important to understand what these corporate boards are doing with all the buybacks is criminal, and the ultimate measure of dumb money coming into the market. As can be seen in official government statistics if one chooses to look, inventories are accelerating higher while the final sales continue to slow. When put together, this is a recipe for a crash not witnessed in some time once the liquidity from buybacks dries up.
Until this becomes germane however, and as long as Western markets (global markets) are achieving price discovery as a result of computer-guided sentiment driven trade, nothing, and I mean nothing will change short of World War III (WWIII), which is why this will happen. The US military parades around the world like a bully in the school yard attempting to make sure everybody tows the line in terms of bowing to Western / US policy. This will be increasingly challenged going forward, which is why China and Russia, which are have been systematically (increasingly) building their military, independent economies, and economic ties since the greedy Western bankers almost melted down the global economy in 2008, recognizing the (crony) capitalism being sold by these carpetbaggers is a ruse.
Unfortunately the herd's zombies at home will not recognize this until it's too late.
This is why we buy precious metals on the dips.