Let The Good Times Roll
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, November 14, 2016.
Trump has won the election. For this we should be truly grateful, because the alternative was pure evil and could have ended us all. And you can see the relief in people aware of this possibility everywhere, with true-hearts the happiest they have been in years. What's more, this euphoria is being carried over to the financial markets in a big way as well, with 1000 swings higher in the Dow as billionaires pile back into stocks, economy sensitive commodities soaring, and cost of money breakouts above decade long trend-lines hitting the tape. And why not right? Inflation is back with Trump and his plans - the infrastructure spending, expansionary fiscal policy, jobs that will be created, and so on. Again, for anybody who's been in this game for more than a few years - Dr.Copper is rising, giving us 'the signal', so jump on board - right? Let the good times roll - right?
Thing is, if the economy is truly set to pick-up moving forward, which is likely the case at some point with all of Trumps planned spending, and interest rates are set to normalize - if you listen to the likes of Stanley Druckenmiller on propaganda outlets like CNBC - you would run out and sell all your gold and give that money to a New York based hedge fund manager who's 'optimistically plugged into this new reality'. (i.e. himself.) Of course if you have more than two brain-cells rolling around in your head, one might consider these jobs are not here yet, higher interest rates are about to crush the financialized economy, and that his optimism will be challenged because of this far sooner than he would personally like. (i.e. because maybe he won't be a billionaire anymore.) Naturally you can't blame Wall Street shills for attempting to sell you another load of BS like this because that's their job - where they would like to financialize the economy to infinity if we let them.
Because with all this financialization, the economy has been almost completely hollowed out, with the majority of valued-added jobs exported to cheap labor destinations like China, which in turn has nothing less than devastated America's working class - a condition that is about to bring a sense of reality back to guys like Stan sooner rather than later as well. Just look at the world's most important and economically sensitive commodity for instruction on this - crude oil. Because it's not possible for a few crazed speculators to run oil up like they did copper, where black gold prices have been crashing of late. And of course there's precious metals as well, where prices are allowed to fall unrestricted, however when they start rising copious amounts of naked selling comes out of the woodwork on Comex. Copper is allowed to rise because it jives with the status quo's bullshit story - you know, the one that goes 'who needs that gold and silver crap anyway - right?'
The question then begs just how long Wall Street will be able to maintain the illusion, where Da Boyz would have you believe they have arrived at a "permanent plateau of prosperity". Yup - everybody else can go to hell, but they're very confident they can keep the markets rigged indefinitely because after all - it's only a video game right? And by the way, it's bonus time so don't get too bearish until next year. (See below.) Of course the Democrats thought they had the election in the bag with their rigged machines and they lost. So one must wonder if Wall Street's confidence is misplaced - no? One thing is for sure - it's all or nothing with the 'financialized economy', which is now 'the economy'. There's no wiggle room left because the bozos at the Fed have attempted to erase the business cycle by flooding the system with currency digits; where one mistake now and the entire edifice comes crashing down like the Tower of Babel.
But we're going into the seasonal strength period for stocks now - not to mention bonus time for greedy Wall Street bankers. So according to them, you shouldn't expect bank stocks to go down because they really need the money. In case you didn't know, it takes a great deal of income and assets to keep up appearances. And besides - bank stocks win whether interest rates are rising or falling - didn't you know? If they are going up the bankers win because of steepening spread(s) on yield curve(s) (profits); and, if rates are falling consumers will buy more - right? Hell - it's like shooting fish in a barrel if you're a banker. It's either that or they are taking shareholder capital and jamming their shares up in front of bonus season again. I wonder which it is? You will never get them to admit it obviously, but something tells me it's the latter, if only part of the reason. What do you think?
And in the larger scheme of things it's a bit early anyway, with next year ending in '7', like the 1907, 1987, and 2007 crash years. And you may remember it was the banks that topped first in February of 2007 under very similar circumstances compared to today, so one must wonder what's up with tech, not that they don't have other sundry problems like gross sales to worry about? (More on this below.) Perhaps we just need to give it some time then (looks like nothing will stop the greedy bankers again this year) - because again, years ending in '7' have a tendency to be crash years for psychological reasons. Question? What was the last year Republican's controlled the White House, Congress, Senate, and Judicial Branch? Answer: 1928 - the year before the 1929 meltdown. Given, there was a melt-up going into the '29 bubble, which we will likely see as well for reasons discussed below.
On top of that, if the stock market crashes on Trump's watch it will set up the next election for the Democrats right? Maybe that's the plan? Maybe the bankers aren't a bunch of greedy bastards? Nah - I will stick to my original thinking in this regard and put any misfortune Trump may suffer from an economic/financial crash down to an 'ancillary benefit' for the Dems. And again, as alluded to above, stocks are already at the point they should advance no more from a technical perspective, which can be seen here on a weekly S&P 500 (SPX) plot, where the structure of the advance off the January low is as follows: Wave 1 was 400 points; Wave 2 was 200 points; and so far, what could be Wave 3 is 100 points - all advances except the initial impulse off the January lows 50% of the preceding wave - losing power as the larger degree affair matures.
But there's more to consider, because if the SPX does vault above 2200 and keeps on sailing, obviously all the ranting above is misplaced. Enter the dollar($), The Donald, and his plans to make America great again starting next year; set against the accelerating destruction of the European Union (EU) - where next year's elections could cause a great deal of money to look for a new home. And where will it go? Answer: America - an America being made great again by Donald Trump. All you need do to test this theory is go here and overlay the $ onto the Dow chart starting Tuesday night once the market realized Trump was victor. It's a tic for tic match. And if you flip into the monthly chart you will see a huge multi-year flag that measures up to the 108 area, which means a great deal of money will be coming into the $ from somewhere, with most of it from Europe - if only conceptually. (i.e. most of it will actually come from speculators - which will help the bankers.)
So make no mistake. This is serious business, a trend possibly lasting years as Trump attempts to spend America's troubles away. His strategy won't work in the end of course, because increased 'infrastructure and military spending' are only a shorter term 'band aid solution' - where a healthy economy needs the organic (recurring, spinout, etc.) growth only manufacturing jobs can provide. So this 'band aid solution' could go on for years; or fail next year as fiscal constraints associated with the rising cost of money set against falling tax revenues (he plans to cut taxes) become apparent. Trump is attempting to borrow from JFK and Reagan by cutting taxes to stimulate the economy, however the demographics and balance sheet profiles of Americana (both individuals and corporations) are nowhere near as healthy today as they were 35 years ago (Reaganomics), never mind 55 (Revenue Act of 1964). And it's not just my creative mind fabricating this thinking out of nowhere, the charts back me up. Case in point, the risk adjusted SPX plot from the Chart Room below. (See Figure 1)
As you can see above, although the nominal SPX is vexing all time highs, the monthly SPX / VIX Ratio is still well below sinusoidal resistance, suggestive that although the sinusoidal may indeed be vexed again in coming days, at the same time, the potential for a closing monthly negative divergence exits, which would be quite telling. You will remember from our analysis of the monthly VIX plot a few weeks back that while it could continue to push into the apex of the wedge that has been forming since 2008, this cannot go on much longer past next year. So again, we are looking at 2007 as a probable 'turn window' for stocks of monumental proportions. With Yellen likely out of a job in 2018 when her present term expires, the pieces of the puzzle appear to be falling into place in this respect. She will attempt to protect her legacy until she's gone, which means doing what it takes to keep stocks buoyant - until she can't anymore. (See Figure 2)
And then there's the chart directly above that would lead one to believe stocks could fail right here, or possibly grind sideways as the bankers throw the kitchen sink at their own stocks to keep them supported until after bonus season. Ho Ho Ho. Just how much longer tech can keep crashing without the bank stocks participating is anybody's guess, however one should not be surprised at anything these days. With tech stock to broad market ratios already oversold on a daily basis, one might be wise not to look for weakness over the next couple of days (if not a week), however after that, it's anyone's guess. Because rising interest rates are bad news for over-indebted Americans, where they will have less money to buy gadgets, which is bad for tech. And tech is primary to the overall health of the US stock market, and in turn, the economy at large. Again, this is the reality that will be the primary stumbling block of Trump's plan. (See Figure 3)
Speaking of Trump's plan, and stocks rising into next year, it should be pointed out he plans to de-regulate Wall Street (next year) with the removal of the Dodd-Frank Act, which is undoubtedly a large part of the reason bank stocks are going through the roof right now. There's only one problem with all this optimism. While it's true if all he does is cancel Dodd-Frank without separating the banks and brokerages with a bill that has real teeth, the banks will be able to rape the public more aggressively, he's also planning to print the money for all his infrastructure and military spending by issuing the currency directly from the Treasury, cutting the banks out of the picture - making these projects purely 'public' (good for the people) - which will be bad for the banks. (i.e. because they will (not only) not get all the fees for taking these projects private, they will also not collect interest on the borrowed money to fund these projects.)
Side Note: You will remember the last two Presidents that attempted to go around the bankers and issue currency directly from the Treasury were Lincoln and JFK, the only two successful (Presidential) assassinations in history. Trump knows this, which is why he may be giving them the Dodd-Frank deal as a distraction/appeasement. Plus this initiative is not on all currency issued, just on these deals. It's either that, or he has big cajones - no?
So again, all this optimism might be unfounded in the end, because the banks can no longer depend on government to continue feeding them the 'juicy deals', where just raping the plebs might not be enough to keep the party going for very long. But don't try and tell this to traders today, especially those who were stupidly long precious metals after the Trump victory. As warned a few weeks back, the monthly Dow / XAU Ratio plot from the Chart Room was threatening to turn higher with a vengeance, possibly needing to retrace 100% of the decline, and here we are today with this prospect very real. As you can see above, our next target is 290, the inverse head and shoulders pattern target not distinguishable from the monthly. What's more, the head and shoulders pattern on the Gold Bugs Index (HUI) measuring down to the 115 area, and lower, has now been triggered in spades, where the best those trapped can now hope for is a test of the 195 to 200 area.
What's worse, so far the volatility doesn't have the speculators/hedgers worried, as measured by the key open interest put/call ratios we follow, as can be seen here. Key precious metal ratios remain subdued, which is bearish. What's worse past this, and looking into next year (and alluded to above), is after all the stupid bullish hedge funds get flushed from the trade and prices collapse (because who needs precious metals in an economic boom a la Trump - right?), then precious metal investors will have to suffer through an extended period of deleveraging in the years thereafter, where all a 'Trump boom' over the next year or two (more? - four-years?) will do is extend the pain. The first down leg of the present precious metals bear market lasted four years, from 2011 to 2015. Then we had a little bounce this year. Does this mean precious metals are to be stuck in another four-year down cycle as Trump triggers a boom in America? (i.e. a three-wave A - B - C correction?) Answer: Unfortunately, this may be the case.
I certainly hope not for my own portfolio's sake, but it's possible. Price may be more important than time in this case, however the possibility of equality in the waves opens this possibility.
Last week you were warned of this possibility if gold could not hold above $1250, and here we are staring right in the face today. And even though it may not last four-years, you have the rationale outlined above why it can still last a few more years minimally, another boom/bust (deleveraging) sequence in the years ahead, one that is doomed to fail because its based on 'band aid solutions' (infrastructure and military spending programs) that lack regenerative capabilities (think manufacturing) in the long-term.
So the important thing to realize here is what's happening is Trump is simply engineering another boom/bust cycle when it's all boiled down to its simplest terms, with the big question being 'how long process takes to discount this reality into the financial markets?'
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