The following is part of Pivotal Events that was published for our subscribers August 18, 2011.

"'No risk" the US will lose its top credit rating, says Treasury's Geithner."

~The Hill, April 19, 2011.

"Stock Market Outlook Bullish argues Jeremy Siegal"

~CNBC, July 9, 2011.

"I believe this is, without question, the Tea Pary downgrade."

~John Kerry, The Washington Times, August 7, 2011.

"Economy will avoid its second recession in three years.."
" The U.S. Merits a quadruple A rating."

~Warren Buffett, Bloomberg, August 8, 2011.

Perhaps Mr. Buffett has been drinking to much Democratic Kool Aid?

Yesterday, Peter Foster's column in the Financial Post on Mr. Buffett was headlined:

"The Stooge of Omaha"

Enough said.

Overview

Two things seem to be coming together. The popular notion that the world will repudiate the dollar has been in the market for a long time. For some the S&P downgrade of US Treasuries is a step in this direction.

Market forces have been downgrading the dollar since the Fed started imposing crackpot interventionist theories. Bondholders suffered the worst bear market in history from 1946 to 1981. That was in nominal price and dollar depreciation made it worse.

This sordid condition does not represent America as a country traditionally dedicated to individual freedom. For reasons too lengthy to list now, an experiment in authoritarian government began in the early 1900s. Initially stealthy, in a hundred years it has become an insatiable beast.

Any experiment in unlimited government requires unlimited funding and as noted a few weeks ago, market forces are beginning to say "no" to reckless theories and practices.

Rating agencies are beginning to say "no" as well.

And on the battle over the debt ceiling the electorate also said "no".

We have long thought that the dollar and Treasuries would not suffer repudiation, but that market and political forces would repudiate experimental policy making.

Timing

In January, our proprietary Momentum Peak Forecaster indicated that the speculative surge would complete around April. The S&P and CRB set important highs on the first trading day of May.

When the big action has included commodities the consequences have been serious. In 1973 the Forecaster registered in November and eventually the recession was determined to have started in that fateful November.

The next signal occurred in November 1979. The mania in gold and silver blew out in January 1980. Six months later the NBER determined that the recession started in that fateful January.

Our conclusion in April was that the recession would likely have started around May with the peak in commodities.

Events since seem to be confirming rather than denying this probability.

Stock Markets

Volatility rules!

Lowry's has been running its research for many decades and the set of 90% upside and downside days in one week has never happened in 78 years of data.

Today extends the violence.

What does it mean?

Ostensibly each rally and slump has been driven by "news". Good one day, bad the next.

The establishment is desperate to drive prices up. Following an outstanding speculative surge the natural direction is down.

Quite likely the volatility is indicative of diminishing liquidity.

This is supported by the increase in volatility in the gold/silver ratio.

The ChartWorks has been expecting an important high for gold this week. A reversal in precious metals could prompt a stock-market rally into early September.

On the decline, the S&P took out the lows back to March. This is a huge set back and one wonders if it pre-empted seasonal weakness in September.

Are conditions bad enough this week to form an intermediate low?

The August 14th ChartWorks was looking for a low around this week followed by a bounce to Labour Day.

Furthermore, the first business expansion out of the post-bubble crash is ending and this longer-term prospect will over ride nearer-term swings in the S&P.

In the meantime, the rally into September could be modest and taking out the recent low of 1100 would formally set the bear market.

Credit Spreads

Corporate spreads were likely to narrow (with the party) into May. Junk came into 619 bps, over treasuries, in April. Then have widened from 721 bps in early July to 1015 bps this week. Similarly the High-Yield widened from 326 bps to 603 bps.

A trend to severe widening in the fall has been possible. The action has set a tested trend and is quite severe already.

It is another example of diminishing liquidity.

Currencies

This month's decline in the DX seems like a test of the July low at 73.5.

Today's rise is suggesting that the test is completed and we have been looking for an intermediate rally.

There is money to be made by shorting the Euro, but there could be more profitable trades based upon the firming dollar. Most of the party animals, including silver stocks, will come under pressure.

However, a token short in the European Currency as the union fails could be considered as position providing great historical satisfaction. Being short an artificial country as it breaks up is a unique opportunity.

Link to August 19 'Bob and Phil Show' on Howestreet.com: http://talkdigitalnetwork.com/2011/08/liquidity-liquidation