The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, November 13th, 2008.

To say our self-serving bureaucracies have been printing a great deal of currency to bail themselves out their ill-conceived exploits that characterized the Bush years could easily be said to be an understatement. Perhaps a better way of putting things is the drunken sailors have finally come around, looked at what they have done, and realized it's far better to tie one on again than to actually attempt conscionable governance. They know however. They know the ship is sinking, and it's just a matter of time before the US, and its almighty dollar ($), goes down like the Titanic. We are getting glimpses of this in smaller economies now, where sooner or later the harsh realities of a global boom gone bust will hit US shores for real, when the world owns up to the fact America can no longer pay its bills.

This is when the $ will fall in earnest, as the Fed will need monetize the bond market because even if they wanted to, foreigners will no longer be able to fund the trade deficit with their own economies on the rocks. Of course it's easy to argue this is already happening, however you will know the numbers are meaningful when the Fed begins to add Treasuries to its portfolio, which is not happening yet. And then there's Obama, and the extensive make work promises he made to get elected. Who's going to pay for these - an already tapped taxpayer? Unlikely - so again, the printing presses will need be employed to fund the budget deficits at home, which is bad for the $ as well.

Of course before getting too excited about all this we should consider all the facts. In this regard Jim Sinclair has posted some interesting insights on his website that explains the leveraged speculator community is holding the $ up at present, but that once they finish unwinding all their bad bets, it should decline. And with this assessment I must agree, referring to the situation as a 'synthetic squeeze', a term first coined by Richard Russell in this regard. Another pertinent term that was brought into view earlier this decade in connection with the massive inflation efforts carried out by Japanese banks (in cahoots with the Fed) is 'quantitative easing', which is apparently something we should get ready for as both the Fed and other central banks around the world attempt to save globalization by letting loose hyperinflation. This is of course bad for the $ as well, being the world's reserve currency.

There is one big problem with the above thinking however. The big problem is the speculation game is not isolated to the $. What's more, one must understand that on a related note, which in fact could be the next big card to fall as credit cycle continues to collapse, there are multi-trillion dollar Credit Default Swap (CDS) and Interest Rate Swap (IRS) bubbles which are ticking time bombs that will cause further deleveraging next year, possibly maintaining the synthetic squeeze in the $ far longer than most can contemplate. Of course the good news for precious metals is when this starts to unwind it will essentially take the banking system with it (because these bubbles are gargantuan) via either hyperinflation or deflation, or both, possibly in that order. This would sponsor the need for a grounded monetary system in due course.

Of course before we can talk about next year we need to see some closure in the present stock market washout naturally. Due to the fact the speculator community continues to bank in the ability of the bureaucracy to turn things around however, participants refuse to capitulate in the various sentiment related measures that continue to prove accurate, which is a problem. So basically, until investors decide / believe the bailouts won't help, stocks will continue to decline because bullish speculators will not capitulate until this point. Even now, after what consider 'surprising weakness' in stocks this week, gamers are attempting to push stock futures higher in anticipation of the G-20 Meeting this coming weekend, which is par for the course for these characters, even after the Intel warning yesterday. Various measures of stocks have already reached 2002 lows you see, including semiconductors, which means they should bounce no matter what, right? (See Figure 1)

Figure 1

This is important because tech out-performance is the key sentiment measure to be following right now given the precarious technical position of the Dow / Nasdaq Ratio discussed the other day. And guess what, even with the drubbing stocks have taken over the past few days the 'key stochastic setting' we are following still hasn't broken to the downside (see below), which means two things. First, the bulls still have not given up the ghost. And second, this means stocks are still open to significant downside at present, where those looking for a bounce in Intel shares because its releasing new technology Monday just don't get the fact this will not matter with the credit cycle on the fritz. (See Figure 2)

Figure 2

Thus, what we have here in terms of prospects in the financial markets is the $ breaking to a new high for the move, gold testing the October lows, and stocks breaking to new lows, possibly significantly so, testing 2002 nadirs at a minimum. Given the big break in tech that's still required before sentiment will be poised to sponsor a rally however, and a move that would surprise everyone (which is why it can happen), don't be surprised if 2002 lows are taken out before stocks find any traction in staging a multi-month rally. As you can see below the Nsadaq / VXN Ratio is set to test its 2002 lows, which could cause a brief rally, but as with the recent break in the S&P 500 (SPX) / CBOE Volatility Index (VIX) Ratio, those lows should be taken out soon as well. This will telegraph the likelihood nominal pricing will follow shortly afterwards. (See Figure 3)

Figure 3

What does this all mean in terms of the 'big picture'? It means the present crash in stocks will go down as the worst in the history of modern financial markets. Of course this is a time of historic extremes - extremes in corruption, complacency, and the sociological rot that goes along with these conditions. So to the educated man such an outcome should not be a surprise. It's difficult to grasp in real time given one's sensibilities continually needs to be adjusted however, but in hindsight such an outcome seems quite reasonable all things considered. And this realization process should now include the speed at which the Great Depression II can grip macro-conditions, where once we slip into deflation there will be no coming back for a very long time.

So I must apologize for not having even greater concern for capital preservation than I have had, because even if we get some sort of a bounce in stocks in coming days, given the understandings above, the risk in stocks, and I mean all stocks (including precious metals), remains untenable, and is threatening to enter a condition that could sponsor further surprising and abrupt adjustments despite already oversold conditions. And it's not as if precious metals investors are concerned (non-complacent). They are not evidenced in looking at the low open interest put / call ratios on precious metals shares. (See Figure 4)

Figure 4

Source: Schaeffer Research

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