The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, September 11th, 2008.
Even some of the most brilliant guys in the business don't get what's happening to the commodity markets right now. They don't get the fact it's not manipulation and government intervention that are causing prices to CONTINUE falling (although a push was provided via intervention), but a genuine lack of liquidity combined with intensifying gambling practices by the general investing population (dip buying is not providing the sentiment washout required to sponsor an enduring rally), that when added together, is producing this 'lethal move' lower in anything that is commodity related, including precious metals. So you see, manipulation and intervention have little to do with 'the price of tea in China' at this point past the policy mistake authorities were destined to make all along in triggering a genuine mid-term correction in commodities and precious metals, which was discussed in our last meeting.
You will remember in our last commentary it was pointed out that it's the distinction between narrowly placed monetizations instead of more broad based money supply growth techniques that is keeping the monetary based growing alright (due to massive bailouts), however little of this money is getting into the hands of the consumer (and therefore not supporting credit growth), as measured by falling growth rates in the M's. And as mentioned above, when you add this condition to the fact the larger investing population remains a mob of speculating fools, still buying every dip in both the broad markets and commodities using derivatives, meaning no sentiment washout has been witnessed as of yet, we continue have this 'lethal move' lower in the larger equity complex that is in fact being signaled by the collapse in precious metals.
In substantiation of this opinion, I offer the following set of facts and figures in proving my point that sentiment is nowhere near the levels required to support a lasting rally in stocks, commodities, or precious metals, and that because of an intensifying liquidity drain continued weak prices in equities will create, an untenable ill-liquidity related event is possible this Fall. Of course it could be argued that perspective wise we are already in the midst of this ill-liquidity event, especially for precious metals investors, however what I am talking about is when the stock market begins to reflect some real fear within investors. And this will not occur until the CBOE Volatility Index (VIX) is trading over 30 (33 to be more exact) on a closing / sustained basis, as denoted in Figure 1 below. (See Figure 1)
Figure 1
Further to this, it should be pointed out that the longer the public wishes to ignore reality and remain complacent, evident in persistently low fear readings, the worse the eventual washout will be, with the best recent example of a Super-Cycle Degree event being the one day stock market crash in 1987, where the VIX went to 150 on October 19th, Black Monday. Here again, it should be noted this event was primarily a result of a combination of complacency (after the substantial rally over the preceding five-years) and tightening credit conditions, just like today. Of course it's important to note there is a difference between present circumstances and those in '87 in that it was market rates that finally broke the stock market bubble back then as opposed to the narrowed liquidity policy (monetizations) designed to temper commodity prices that is starving the public from liquidity today. In this regard, a better comparison policy wise can be drawn to the Fed fumble associated with the 1929 stock market crash, Black Thursday, which was more similar compared to present circumstances in that money supply growth rates were slowed in order to arrest runaway prices, pricking the stock market bubble as a result.
So you see, profound parallels to previous Super-Cycle events in the stock market are present today, which is why one must respect the lack of respect the majority of market participants are ascribing the situation. And there is a great deal more important evidence the assessment present sentiment conditions remain far too complacent found in continued low levels of open interest put / call ratios on US index options markets, where in fact thresholds of the primary market in Dow related contracts (DIA) continue to plumb historic lows. Now, this would be expected if the economy was hitting on all cylinders, but the fact this is occurring in the heart of the mother of all credit crisis dislocations is evidence that the persist interventions on the part of our price managing bureaucracy has completely disassembled people's sensibilities, again, creating the necessary sentiment related backdrop for further substantial declines in stocks, concentrated crash or not.
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Good investing all.
