The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, April 8th, 2008.
If that's where we are going, which appears to be the case depending on your perspective, we might as well take the high road (meaning via hyperinflation), as at least this way our feet are more likely to stay dry during the trip. Isn't this a much better rationale to justify why we humans are in such a hurry to use up the non-renewable resources that are key to our survival? Moreover, isn't it a better way of accounting for why central planners are allowed to debase our currencies / economies than simple greed and ignorance, because even at a slower pace, the oil will be gone soon enough anyway. Here, the assumption is our population bubble is function of easily accessible liquid crude oil, and that once supplies become increasingly strained (as in Peak Oil), so will our survival. Naturally, most people, who have what they would term an 'optimistic view' of the future, shun such thinking, dismissing it as pessimism entertained by the 'lunatic fringe'.
And why not think this way, because although the future is uncertain, man's ingenuity could surprise us all again, thwarting what a consensus of objectively oriented minds view as scientific certainties at present. Here, and as alluded to above, one's thoughts on the subject is a matter of perspective, and your faith in mankind to arrive at a solution for species survival. Of course even if the 'optimists' are right, and even though a harsh outcome may take much longer to develop than 'pessimists' envision, it makes a great deal of sense to take precautions now in my opinion, because no matter which road one chooses, going to hell is something to be avoided if that is indeed where most of mankind is heading in exhausting the precious resources we need to survive. Just try and imagine what it will be like to live when having a car is a luxury reserved for the rich, and something as simple as getting groceries becomes a far greater task than it is today.
In the meantime however, while a self-serving social elite continues to push for more by expanding the monetary base (and using up our precious resources more rapidly), thoughts of deflating economies should be reserved for the future, as fleeting as our current prosperity may be. So, what we see are continued bailouts of a bankrupt financial system that only delay the unavoidable liquidation of bubble economy excesses down the road. Here, it should be noted MZM (Money At Zero Maturity) is currently growing at a 38-percent annualized clip, which continues to support the larger 'crack-up boom' (hyperinflation) seen as inevitable by classically trained minds (the Austrian School Of Economics) like that of Von Mises, so many years ago now. And this is 'playing hell' with respect to establishing a bottom in the dollar ($) at present, as the rate of debasement in the world's global reserve fiat currency must continue to accelerate in un-natural process to avoid a bust.
Turning to the markets now, technicals associated with an impending $ bottom are presented here by Dan Stinson (who is a buddy of ours, and a good egg), and remain unresolved at the moment. As you can see in the attached, it appears the $ has yet to bottom while precious metals have already made tops in anticipation of this event. Accordingly then, when the $ does eventually bottom, which we expect to occur soon, while gold will undoubtedly have a reaction lower, the fact traders have been anticipating a low in the $ well ahead of time, combined with the fact sentiment, simply measured by plunging open interest, has already suffered a sufficient adjustment to sponsor renewed interest, means any reaction lower should be moderate, and that a surprise could be in store for investors. (i.e. precious metals diverge against a rising $ for a time.)
Of course before precious metals investors enjoy such a situation, they may have to watch the $ make a new low (and oil a new high), while new highs are most likely not witnessed in gold and silver because of all this speculation. What's more, and in confirming interim trend changes (corrections) are likely for the $ and crude (and the commodity complex), watch for the latter to potentially double top against marginal new lows in the former as speculators position for these moves. Such a divergence would indicate multi-month corrections in the $ (up) and crude (down) could commence in short order, with precious metals bottoming well ahead (at least a month) to signal an end to these moves. And if the ECB starts talking dovish this week in an attempt to keep a lid on gold by stoking a $ rally, we may not need wait long at all for these reversals, which would surprise technicians / $ bears. It's all part of the speculation / price management game you see.
In this regard you should remember our thoughts on the timing subject, where we are looking for a bottom in precious metals later this month as per the 1978 seasonal comparison (see Figure 3), or in May, where it should be noted trend changes in November / May tend to be important / lasting from a historical perspective within the context of the present bull market. What's more, notice how a bottom in precious metals here would perfectly presage a top in stocks during June as per our 1948 decennial pattern parallel (see Figure 3) based on speculative constraints discussed above. Of course if the $ is just making a bottom now, an eventual reversal lower could be more protracted, which would account for why Dave is seeing the possibility of precious metals shares continuing to move sideways into August.
Such a outcome could develop because crude has a seasonal tendency to remain strong into May, at a minimum, which would have the effect of pushing down stocks and the $. This is not what we expect to happen however, with technicals on crude and the $ presented above being 'worse case' in extending present intermediate-term trends before more lasting reversals occur. Of course if one were to look at long-term monthly charts of the Dow to gauge rally prospects for what a consensus is now considering a doomed $, you might not be so confident these reversals are in the works. And as you know, my long-term views on both the stock market and $ are definitely bearish, which is a sentiment that is supported by technical considerations. (See Figure 1)
Figure 1
As you can see above, the Dow is already hitting important trend defining resistance as measured by the 20-month moving average (MA) in what appears to be testing process / counter-trend correction, which in theory should prevent it from rising further if the stock market is actually making a lasting turn lower. And certainly this is the perspective educated investors rightfully suspect at present given the credit cycle officially turned down last year, which was marked by an equally important timing related turn in the Dow to reflect this condition. Notice how the all-important On Balance Volume (OBV indicator is at best likely to only test a recent break below MA support represented by the blue line). (See Figure 2)
Figure 2
Do you remember when currencies were thought to lead trends in other markets? This was an investor's way of position in related markets before a move, in taking the lead from currencies. And depending on the timeframe / markets you are talking about, this still exists; however, not to the same extents in all cases. Decay here is a result of speculation / market maturity, where for example before the Canadian Dollar (C$) use to lead crude higher, but now as oil is vexing the highs, it's closer to the bottom of its most recent trading range than the top. Of course one could argue such a divergence is pointing to an important top in crude, and you may be right; however for our purposes we are simply attempting to make the point leading indicators in mature moves will eventually become ineffective, and for this reason investors / speculators must realize this and adjust.
Knowing this, and in getting back to the $, it's my opinion that if comments out of the Euro zone this week fail get a rally initiated, the stock market will, which would be new. And why will the stock market rally, and then lead the $ higher? The stock market will rally because with the volatility since last summer, investor are expecting a great deal of bad news in upcoming earnings reports, as expressed in record high short sales, and now rising US index open interest put / call ratios. What's more, and mentioned on these pages many times over the past few months, although it's effects should be fleeting, an important cycle low for stocks was witnessed in March, which has a great deal to do with speculator propensities to bet on a negative outcome in stocks.
You see most investors have a relatively limited presence of mind when it comes to such things, so as with bullish conditions before hand, if you tell them long enough they should be worried, and prices reflect this, semiconscious speculators will revert from a 'buy the dips' mentality as prices fall to a 'sell the rallies' perspective as prices rise, which accounts for both short sales and open interest put / call ratios rising as stocks rally. Combine this with a money supply growth that is bursting at the seams, and the recipe for a short squeeze is once again present, where all it will take to spark a rally now is better than expected earnings reports in coming days as options expiry approaches. Here is a snapshot of the monthly NASDAQ that shows a closing basis leap over recent highs could sponsor a move to test the diamond break in RSI. (See Figure 3)
Figure 3
In turn then, this will send currency traders a message the economy is stronger than consensus, which should rally the $ and cause commodities to correct, acting as a reinforcement mechanism to move stock prices even higher. Further to this, and as reflected in US index open interest put / call ratios, one should notice that because ratios are rising for the NASDAQ rather than for the Dow, the NASDAQ / Dow Ratio should be rising to reflect an intensified short squeeze in tech, and sure enough this is happening. This is important in relation to the observation the Dow is not anticipated to rally materially past recent highs given it's already bucking up against the 20-month MA, but that this does not mean both the NASDAQ and S&P 500 (SPX), which also has a rising ratio profile, will not continue to outperform as they attempt to vex their 20-month MA's, which are at 2491 and 1433 respectively.
Here is a snapshot of the monthly SPX for reference in this regard, showing that as with the Dow, an attempt to test the MA break in OBV might be forthcoming, which would sponsor a surge up past the large round number at 1400 as the squeeze intensifies. That being the case however, and although it's denoted, don't expect the SPX to get much past 1433 on a lasting basis even though a higher mid-channel progression would support such a move because the open interest configuration puts equilibrium pricing closer to 1350 never mind 1450. Of course this could all change as more puts are piled on at higher prices assuming short sellers are squeezed out of their positions, but I wouldn't count on it because if 1400 were exceeded in meaningful fashion, one would think speculators might start buying the dip once again. Obviously we will be watching how this unfolds assuming a rally materializes. (See Figure 4)
Figure 4
Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. However, if the above is an indication of the type of analysis you are looking for, we invite you to visit our newly improved web site and discover more about how our service can help you in not only this regard, but on higher level aid you in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.
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Good investing in 2008 all.
