The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, December 7, 2015.
So it looks like administered interest rates in the States are going higher - hell or high water. That's the conclusion 'informed commentators' have come to, and they are probably right, but not for the reasons most site. Mainstream media would have you believe it's the strong economy, but we all know that's baloney. Others would have you believe it's the Fed attempting to bring normalcy back into the market, along with attempting to restore credibility. But that's not it either, because the Fed is scared stiff of pricking its precious bubbles. No, assuming the stock market hangs in until next week, if the Fed tightens it won't be because it wants to, it will be because it has to.
Why is this? Because of the crisis in the pension funds and insurance companies. This is a big problem, and they are putting pressure on the Fed it must respond to. They can no longer function on the zero bound. They are getting dangerously close to not being able to meet their structural commitments, where they would fail if this occurred. But I digress, it's probably too late. What good is a quarter point increase going to do to fix this problem? Nothing is the answer. In fact, if the markets read this as a trend change in rate policy as opposed to an experiment, even the low volumes in December might not be enough to save the stock market.
The fact of the matter is no matter how hard low interest rates are hurting pensions, the business cycle, et al., the Fed cannot afford to raise rates even 25 basis points (the repo rate) higher, because it will drain too much liquidity out of the system. So why not just raise the Fed Funds Rate? You know what--that's exactly what the Fed might do to see if they can get away with that much - who knows? Of course this too would involve draining liquidity from the system, with the big question being where the effective rate ends up. So this too could spell disaster - and a deja vu moment - identical to the rate increase in 1936 that brought on the 1937 - 38 recession.
Is the Fed going to 'turn away' from Wall Street? What's more, if the Fed does in fact raise rates next week, it should be understood this will be the only time they have done this at the beginning of a recession since the 1936, which of course caused a halving of the broad stock market. This is what will most likely be the result this time around as well, by tipping the credit cycle over right to it's very core. (See here, here, and here.) And this will also be reflected in worsening economic numbers, where a hollowed out monolith will be quick to respond on such conditions. (See here, here, and here.) Between the impending economic and cultural upheaval, one must wonder if this will be the last Christmas in America.
Further to this, with the recovery of the stock market on Friday, it should now be pointed out that it's ascent is now entering its terminal phase, with the only question being do gains extend into next year, or does the market fail sooner rather than later? That's the big question on everybody's mind right now. You would be amazed at how many people with money in stocks are talking about this. I was out the other day with friends who regularly pick my mind for thoughts in this regard, so this was not surprising, however I could believe some of the conversations I was overhearing centered squarely on the stock market. The gist of the conversations was they were worried about a decline because they knew that economy and stocks were not lining up in reality.
This is of course why we have remained focused on the stocks to precious metals ratios in our own analysis; in knowing the topping process would be tricky, complex, and indistinguishable to most. The two main drivers of stocks in today's modern markets are liquidity and negative sentiment (fuelling the perpetual short squeeze), with both now showing cracks in the bull's foundation. Enter the Fed between a rock and a hard place (because it knows it really shouldn't raise rates if it wants to keep the bubbles inflated), but with its back to the wall because of the insurance companies and pensions that need rates 'normalized'; and, we do indeed have a recipe for disaster on our hands if they think they can tighten here in December and use the reduced holiday volumes to stabilize associated / expected volatility. (See Figure 1)
What's more, and be alluded to above, this is why 'fifth wave failures' in the stocks to gold ratios could in fact be witnessed here, which again, is now a possibility with stocks to precious metals ratios possibly entering terminal impulses this week with any follow-through from Friday's Drahgi induced jam job. (See above.) Therein, it should be noted be noted that both the Dow / Gold Ratio (DGR) above, and Dow / XAU Ratio (see here), are both sporting the same counts; again, calling for one more bout of relative strength in stocks followed by reversals back into their secular trends. (i.e. down.) Again, the only question is how much strength with periphery markets (think emerging market and commodity) already in crash mode, and core markets diverging from the 2000 experience with underperformance in a narrowing market. (See Figure 2)
Technical Note: With everything else said on these pages here today, it should be noted that one should not feel completely comfortable about the bullish posture of the precious metals market until the paper silver speculators have been obliterated. It appears this will not be possible until the Gold / Silver Ratio, pictured above, hits 2008 highs in the 90's, where sentiment conditions may shift to support a positive view. So be careful about precious metals past short-term trading opportunities at present.
But the picture could remain murky for some time yet with gold finishing above $1080 last week, triggering a weekly buy signal. Of course if our suspicion 'fifth wave failures' might be in the cards for the above, meaning a higher low might be seen next week in conjunction with a rate hike on Wednesday, the picture might be cleared up by Christmas in spite of Obama's assurances to the contrary. Who knows, maybe the lows are in for gold. A monthly close in the neighborhood of 400 on the Dow / XAU Ratio would go along way to cementing that deal. The psychopath's in charge will surely be tipped off to a rate hike and be ready for it - meaning expect unprecedented market interventions over the Christmas holidays. (i.e. don't be short stocks.)
Does this mean they throw everything including the kitchen sink at it until year-end to ensure 'proper perceptual management'? Who could be surprised with anything given today's 'new normal'? One thing is for sure, the leaking boats in hedge fund ocean might cause a problem in this regard, so if by some miracle the bureaucracy's price managers are able to keep stocks levitated and gold suppressed into year-end, one would be foolish to ignore such a signal because a great deal of (stocks) selling will be coming out of the gates on January 4th - that's for sure. If on the other hand, the Dow / XAU Ratio were to close below the 50-point interval at 350 at year-end, as warned about last week, then the picture would remain murky because of the failure in the pattern. (i.e. leaving the possibility of a 'false move' and a completely surprising [and expensive] retracement at a later date.)
So we would in fact be tickled pink to see the psychopath's rally stocks / sell precious metals over the holidays because it would not only reveal their weakness further, but also their stupidity - giving thinking traders a rare opportunity these days. What would be better, is to see precious metal derivative gamblers finally change their unbelievably insane behavior over these past years as well (buying calls to the extreme on everything that moves in the precious metals space), even if for the wrong reason. (i.e. because rates are on the rise.) Yes, we might finally have these silly buggers if they think the Fed has changed tack and is set to raise rates more than once. We should know more after the next options expiry on the 18th, only two-days after the Fed decision.
This is important because if they haven't finally exhausted themselves, then ounce the January Effect wears off, along with the goofy hedge funds being squeezed out their COMEX shorts, as warned above, even if the Dow / XAU Ratio closes the month below 350, there is still the risk of a hellacious move coming out of nowhere (at least that's the way it will seem to the uninformed) to send it back up to 400 - killing all the dumb money that piles in without checking true sentiment conditions again. It's true that one of these times the knuckleheads that keep killing themselves in precious metals derivatives (calls) will stop for whatever reason (financial, psychological, etc.), but we don't deal in blind speculation here. We deal in fact and the probabilities these facts create.
So - if they are still repeating the same insane behaviors - we will fade them with prejudice.
Looking at this week, don't be surprised if stocks work their way back down to last week's lows in preparation for the Fed next week, with increasing volatility at that time, possibly even involving the S&P 500 (SPX) moving below the large round number at 2000 temporarily before the boys run it into new high territory for year end. Remember, that's what we would like to see because then the ratios above would complete their Fibonacci signatures; along with telling us bullish precious metal speculators will likely be running out of steam soon. Then, physical market constraints would kick in, and we'd be off to the races again in precious metals.
Forget nasty deja vu - we want the glory days. But you don't want to get killed financially before they arrive - so stay frosty.
Good investing in precious metals will soon be possible.
Tune in to find out when.