The following is a commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, March 24th, 2009.
In order of magnitude, it's important for those who pay attention to these things to note what is occurring in the economy and financial markets right now is of the highest degree in terms of importance (and movements), because the world's reserve currency, the US Dollar ($), is in jeopardy of losing this role, which will change everything. Why is this happening right now? Answer: In a nutshell, it's because the global trade loop the US has with China (and the rest of the world to a lesser degree) is increasingly coming unraveled as stressed US consumers purchase less manufactured products from Asia, which in turn reduces currency multiples the Chinese have been using to buy US Treasuries. So, in order to keep market / interest rates down to support the Fed's credit bubble, they officially announced last week to make up for increasing shortfalls of this nature, which we classify as organic demand for not only US Treasuries, but $'s in turn, direct monetization of T-Notes is now a reality, which in effect means the World's key central bank intends to push towards the hyperinflation Rubicon.
Further to all this, and a key central understanding, it's then important to realize that even if the $ is devalued directly ahead, that this will signal a more permanent implosion of the global economy because even though securities prices might be supported for a period of time, the US consumer will finally get a better look at what the future holds, which is steadily deterioration of commerce and lifestyle. So you see effectively then, after the short-term boost to the economy devaluing the currency will provide has run its course, the US will join the ranks of other banana republics, and all this entails. And again, the thing that is of particular importance to understand is the $ has been the world's reserve currency post World War II, which means when the US slows down afterwards, so will everybody else. Of course long time readers of these pages know this from my acknowledgement of the profound insights provided by E.F. Schumaker so many years ago now. We are headed toward a world of increasingly regionalized economies, as globalization is unwound.
As process unfolds in this regard, it's important to note more recent calls to hasten change has not fallen on deaf ears, which means for this reason, amongst others, the sell-off in the $ is likely to be more profound than many are thinking at the moment. At least that's the way the mainstream media will play it for the most part, leaving out sundry details such as things really look so bad an accelerated debasing of the currency is necessary in order to prevent the economy from falling into the abyss. The public just hates reading headlines along these lines don'cha know, especially when they are unemployed and looking for work. Heaven forbid the mainstream tell the public we are heading for a Great Depression after this little party is over. So as it turns out, and in the end, what we are likely to witness over the next several months is a bounce in the stock market of no lesser than Primary Degree, meaning it will surprise the hell out the bears in terms of its strength. This, in my opinion, is the order of magnitude one should expect.
How long will this party last? As you may know from our previous comments on the subject, if it's anything like post 1929 stock market crash bounce into April of 1930, it will last approximately 5-months. Of course from a seasonal perspective, comparisons with this period are not good for several reasons, not the least of which being we are dealing with a seasonal inversion today in coming off the lows just 10-days ago. No, instead I must draw attention to the uncanny resemblance to the 1937 / 1938 crash pattern of the Dow thus far, with a lag mind you, where if history repeats we are about to witness one heck of an inflation induced counter-trend rally. So, hang on to your hats boys (and girls), as yesterday was no fluke. Or in other words, whatever you do, don't fade this bounce until its run much longer and higher, where again, if history is a good guide, the broad measures of stocks could rally another 25-percent plus over the next several months.
In providing empirical evidence in support of this view, take a gander at the similarity of the present bottom in the S&P 500 (SPX) compared to that of the Dow in the 1937 / 1938 sequence. Given, the present sequence is running ahead of itself for lack of a better terminology, which should not be surprising in today's hectic world, but the patterning is an exact match, meaning the psychological set-up is also the same, which of course points to a post crash repeat performance that could run all the way to November. Close inspection of the chart below shows this is eactly what occured off a March bottom in tracing out a seasonal inversion to completion. (See Figure 1)
Figure 1
People are no different today than they were in yesteryears in terms of basic behavior patterns associated with manias, or just about anything else you wish to discuss for that matter; so again, there is no reason to believe we are not in the midst of a similar 'panic' back into stocks in bipolar fashion. Hedge funds will need to show they are 'properly invested' for month's end, suggestive the immediate panic might not take a break until early next week. Of course is history is a good guide, corrections should be shallow until the larger impulse is spent several months down the line, which is a sentiment not only supported by the price patterning pictured above, but also by the timing match seen compared to the Nikki's post bubble crash pictured below. Notice how the divergence the SPX was attempting to trace out over the past few years has now been completely eliminated, and that in doing so it's now in position to put on a sharp rally to match the larger Nikki sequence. (See Figure 2)
Figure 2
On a combined basis then, between the two comparisons above, essentially we have exact matches on our hands in terms of price patterning and timing, where the latter (the Nikki comparison) should arrest any timing related concerns associated with the present rally sequence. And again, you should understand it's basically going to be straight up over the next few months until the panic is spent, so those who are long should not attempt to trade this beast. This was all laid out for you last week, where we expecting a strong showing post options expiry, at the latest. The Boys From Brazil are very hungry, and doing their best to fix a broken system with more poison (credit), but unfortunately for our fiat masters (bankers and politicos), it won't work in the end. More debt (usury) will not fix an already overburdened system. Only Jubilee will do this. In the meantime of course they will do their best to support the paper markets and minimize precious metals; however again, in the end, the primary trends will remain in force, meaning stocks will see further declines ultimately, along with precious metals continuing to appreciate as increasing numbers flee a crumbling fiat currency system.
Can we be sure this assessment is correct on a fundamental basis now that we have timing elements apparently well in hand? In my thinking, and upon further discovery of supportive empirical evidence, the answer to this question is unequivocally, 'yes'. Flawed as it may be in terms of attempting to better the market during the 'good times', conservative assumptions utilizing the Graham and Dodd Valuation Model are presently showing an increasing overvaluation condition as earnings and bond yields crash in tandem. Scary is the word that comes to mind in knowing that if the Geithner plan does not work, which it won't because it's based on the same premise that got us into this mess (extending / proliferating the usury cycle), the larger credit cycle will completely collapse, which will set in motion a long-term economic contraction that will likely go down in history as the most severe Depression ever. (See Figure 3)
Figure 3
Further evidence to support this thesis is found in an examination of the precarious condition in the credit markets, with close attention paid to margin debt considering it's central role in directly influencing equity prices. Here, if one were to simply look at the chart panel below showing that the Rate Of Change (ROC) indicator is at the lowest point in more than half a century, one might be tempted to think a more lasting buying opportunity is the case at present. In fact, it would be easy to come to such a conclusion in simply looking at this picture, and this certainly explains why a sharp rally is a distinct possibility moving forward. (See Figure 4)
Figure 4
Upon further investigation however, we discover that in spite of the already dramatic reduction in margin debt based on the above measure, where the positive trend is still in tact I should add, in terms of washing out the speculators, which is measured in terms of overall percentages to total market capitalization, thus far the correction has only scratched the surface, which again, is scary considering stocks have been halved already. This knowledge of course gas ominous implications concerning long-term prospects for the stock market, where if it's not the speculators that eventually collapse prices completely, it will be the retiring baby boomers. It's a lose - lose scenario long-term you see, not win - win. (See Figure 5)
Figure 5
Try as they might however, the boys will attempt to inflate their way out this funk, which as pointed out above, will support the primary trends in gold and silver as alternative non-depreciable forms of money are sought out by an increasing audience. Indeed, it's not difficult making a case for gold and silver moving forward, where just to match the inflation adjusted extremes witnessed in 1980 using the Consumer Price Index (CPI) (which is a conservative measure of price increases), the metal of kings would need rise to in excess of $2,000, more than double current pricing. And once gold takes out four-figure resistance at $1,000 it should go to these heights, at a minimum just based on historical monetary largesse already under the bridge. (See Figure 6)
Figure 6
And if this is true for gold, it's even more so for silver, where percentage gains once the market lets loose should be multiples that of the yellow metal. Here, it's important to remember that not only are the same fundamentals pushing gold higher at work; but more, silver is controlled more stringently by price mangers, which has kept the Silver / Gold Ratio in the proximity of extreme lows for an extended period of time. This condition will be corrected at some point in the future however when the little guy on the street finally loses confidence in the system for real, and increasingly turns to 'poor man's gold' because the real stuff is too expensive. As you can see below, former real pricing extremes are suggestive nominal prices will vex the $100 mark at some point moving forward. (See Figure 7)
Figure 7
All charts provided courtesy of The Chart Store.
Exactly what the banking cartel does to gold and silver while they attempt to rekindle credit growth is the question at present of course, where historically they have tended to smash it lower as investment demand wanes while stocks are strong. Will this be a repeat performance? Perhaps, however a strong case for further gains can be made from both fundamental (covered today) and technical perspectives, with the latter to be covered in more detail on Friday. Many people now see the writing on the wall concerning deflation and depression down the road, which means it won't be difficult to tip precious metals markets over considering gold bugs have a tendency to be perma-bulls.
That being said, and as per our analysis above concerning the stock market, those expecting the deflation cycle to kick back in after every rally are likely in for a rude awakening over the next few months, which should ultimately bring a more sustained bid back into the inflation camp at some point. So, don't get discouraged if precious metals pull back in the near future, as it's all part of the fun and games provided courtesy of Da Boyz. Unfortunately for them, try as they might, they cannot fool all the people all the time, meaning if the $ is to continue falling, eventually this will need to be reflected in gold and silver. Right now, trading patterns are being altered in an attempt to confuse the loose minded, which is a growing population these days.
I will be back tomorrow with updated pictures of US index open interest put / call ratios to show you why one does not want to fade this rally in stocks until it's run its course.
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Good investing all.
