The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, April 5th, 2011.
We're not there yet, but it's getting closer and closer. To what do we refer? Paying the tab for all the reckless spending by our governments and bureaucracies of course, because the day of reckoning in this regard is indeed getting closer and closer by the second based on exploding debt levels both in America and abroad. Because 'we the people' will never be able to pay back all the debt our politicos and bankers continue to borrow / pile up on our behalf, and eventually the game of pretend and extend will stop when the cost of printing new money rises past a critical mass that deficit spending will no longer be able to hide. But still, such knowledge does not answer the question 'when', does it.
But is the 'when' really that important in the bigger picture in knowing it's coming at some point in the foreseeable future. Perhaps not if one is not concerned, right? Of course for these types, who are also likely heavily indebted and would suffer if the cost of money were to rise dramatically, such worries will not come until it's too late because that's their nature - don't worry be happy is their motto. But for the rest of us who prefer to remain well grounded in our views, and realize that such an outcome (profoundly rising interest rates) would cause an equally profound dislocation in both the fiat currency and real economies, it's important to realize what's coming, where obviously paying down debt should be the first thing one should be doing these days.
Because although the debts of governments and key institutions seen as systemically crucial in maintaining the status quo might receive further bailouts in the future, over-indebted individuals will most likely not, nor would a Jubilee be declared either as long as central bankers are still pulling politician's strings. So again, for the individual, paying down debt should be central in one's financial plans right now because interest rates could begin rising uncontrollably sooner than even the pessimists think, meaning such an outcome could grip the macro later this year as world events spin out of control. And in the case of the US, as unthinkable this might be to most, this would be when the sovereign debt market begins discounting the eventuality of a breakup of the empire - again - believe it or not.
What's more, when it happens, which would be marked by a breakdown in the Treasury market past the containment current monetization practices provide (don't kid yourself, QE3 will quickly follow the end of QE2 in June), the situation could quickly spiral out of control much like it has in periphery economies, such as with the PIGS. Because let's face it, the monetary base is growing out of control to this day in spite of assurances from central authorities everything is 'just fine'. And what most call inflation, where really what they are referring to is the price increases caused by the real inflation (money printing), looks set to soar if something is not done, which is why the ECB will actually raise rates as early as next week despite the fact such a move will cause further stress to periphery members.
In this light then, in case you didn't know, the message here today is pay down your debts if you can, and eliminate them entirely if possible. Because if you don't, not only do you risk suffering through an increasing burden while the larger economy is stuck within a stagflation quagmire, what's worse, if our self-serving governments / bureaucracies are not reined in on their monetization practices, the situation could get right out of control. What does this mean? While outright hyperinflation is not likely on a global scale and with so much debt already in place (the bond markets would not allow for it in theory), certainly shades of this condition are possible, with future price increases making present hikes looking tame in comparison.
Exactly what would be accomplished by raising rates while continuing to flood the system with daily liquidity injections is beyond me past our price managing bureaucracy's desire to fool the people and keep the party going, but surely this will end badly anyway, as strategy this hair-brained is bound have happen. Because one way or another the required true tight money condition will find it's way into the market and greater pain will be felt with of all the delays and extensions of a business cycle gone wrong, where our hollowed out economy's (the product of mal-investment in fiat currency systems) will need profound realignment and cleansing before a regenerated and sustainable system would emerge, with smaller organizational frameworks. (i.e. the central bank led globalization model will be replaced with more localized economies.)
In the meantime however, the good guy / bad guy routine the Fed and ECB will play moving forward (ECB plays the hawkish role to keep the dollar weak) should continue to buoy the equity complex for some time, perhaps even into summer as suggested in our last commentary, increasingly choppy as the price action might be. Myself, I don't see how the present cycle can be maintained that long with factors like deteriorating internals, inter-market relationships, and sentiment conditions increasingly non-supportive of such a move, however again, if our central planners can keep the dollar ($) declining until then, which appears quite possible (if not likely) from a technical respective (the $ needs one more wave down to complete the larger count), hey, who am I to argue. What's more, this would allow the present cycle in Treasury yields (TNX) to reach a previously discussed Fibonacci resonance related target before correcting that would signal the likelihood of further gains later on. (See Figure 1)
And make no mistake about it, once the channel on the long bond is broken to the downside interest rates across the entire curve will need to rise in the US (and world), where this would signal the end of $ hegemony status, and the $'s rein as the world's reserve currency. And you should know this is scheduled to happen later this year, perhaps beginning as early as the summer, which would be the catalyst for cycles to top out in equities as well. So, don't be fooled by recent strength in the bond market. This is simply a reflection of the uniformed moving assets into Treasuries fearing trouble in the equity complex on top of the regular monetization schedule. Again, this will be signaled once the long bond breaks down, which would force Bernanke to abandon his foolish double talk and begin raising rates at the bank level. (See Figure 2)
So, in the end it will be all about the $, as it begins to fall uncontrollably as foreigners abandon US assets in fear of currency risk. And again, although a period of weakness in equities beginning in earnest as early as late spring / summer (the process is beginning already, but near term weakness in the $ would delay profound equity market[s] weakness) might postpone the $ crash until late fall / next year, the important thing to know is it's coming, and like the banana republic the US really is, it will forced to raise short rates to defend the currency, which will usher in not only considerably higher volatility in financial markets, but also, much higher precious metals prices as well.
Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. Along these lines, you should know your subscription to Treasure Chests would include daily commentary from either the myself or Dave Petch. As you may know, I cover macro-conditions, sector timing, and value oriented stock selection, while Dave covers the HUI, XOI, USD, SPX, and TNX technically each week. Mr. Petch is a world class Elliott Wave Theory technician.
In addition to this, you would have access to all archived commentaries, the Chart Room, exhibiting 100 annotated charts of the precious metals and stock markets, along with stock selection and sector outlook pages. 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.
And if you are interested in finding out more about how our advisory service would have kept you on the right side of the equity and precious metals markets these past years, please take some time to review a publicly available and extensive archive located here, where you will find our track record speaks for itself.
Good investing all.