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For Whom The Bell Tolls

The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, October 18th, 2011.


If you have taken the time to read Hemmingway's For Whom The Bell Toll's, one could not help but be struck by the genius in his method of making the most from a good title, and this is my aim here today as well. Because like a picture, a good title can capture the essence of a story in one concise statement, providing the writer with a great deal more ease and effectiveness in making his point(s). In this case, Hemmingway was making the point that modern machinery (today it's computerized trading) was destroying the concept of romantic / ancient war, which is a way of saying, mankind, is maturing in an undesirable and tragic fashion. And in this regard I would have to agree, for to me it appears we are 'hell-bent on our own destruction', where everything from the vulgarities associated with technological innovation to excessive population growth are coming together to create the need for a 'profound shift' in the way we will be living moving forward, in our socio-economic systems as it were.

And as with Hemmingway, the primary message I would like to convey here today along these lines is 'the bell tolls' for you too in this regard, as we are all part of the larger macro economies. What's more, and please, make no mistake about it, no matter how much you prepare for these changes, because they will be so profound, one will not be able to completely escape their effects concerning living standards and lifestyles, not that living in the present consumption based 'material world' our fiat masters would like to perpetuate indefinitely is necessarily better than where we are going. In this regard we are going to smaller and more decentralized economies that will be organized such that the wealth an area generates will benefit the locals that generate it, cutting off the reach of marauding central planners the world over. This process will take time of course, and the tempo of change will largely be governed by just how fast we continue to burn off our hydrocarbons. (i.e. the faster we burn off essential and non-replaceable carbon energy supplies, the quicker we will return to more primitive cultures.)

All this said, and to switch our focus to what we can do in order to protect ourselves financially from what is sure to become the most profound currency / credit / wealth destroying crisis in the history of mankind, it's important for you to understand that to an extent, one must exit the present fiat currency based economy with a healthy proportion of your savings if you wish to preserve this wealth for the future. What's more, it should be understood that the longer you wait the more expensive doing so will become, where already, the chief commodity based (well grounded) alternative currencies, gold and silver, have already appreciated considerably over the past decade, each up more than 500% over this timeframe. And the fundamentals remain strong in this regard, with everything from continued public apathy (until it matters) on the subject to outrageously bullish demand / supply profiles topping the reasons it's imperative those truly concerned about their financial future act soon. Again, and as per above, this time around we are talking about lasting changes that will not be able to be repaired or bailed out quickly, so inaction would undoubtedly turn out to be a 'life altering mistake'.

Because there will be nobody to bail you out when the bell finally tolls for our present fiat currency economy as either an international gold standard (if only a partial covered clause) will become a reality once again; or, hyperinflation could come first (this is most probable). Either way, the bailouts and unfretted monetary aggregate growth enjoyed today will cease, leaving only those with 'real savings', savings grounded in 'real money', any wealth left after the re-pricings economic collapse will make necessary. Because again, even if shades of hyperinflation grip macro conditions at some point in coming years, deflation (contracting currency supply), and the necessity of a gold standard in both internal and (especially) external trade, must eventually occur given trust in such matters (payment) would no longer exist. This is because not only would one be getting stiffed on the value of any fiat currency you may be holding; but more, entire countries would be suffering the same fate, where undoubtedly the best example of this is found in the sovereign obligations of highly indebted nations that will never pay back what they owe, with the US the biggest offender in this regard because the dollar ($) is the world's reserve (fiat) currency, which has allowed the Fed to expand the monetary base in unrestricted fashion.

And as you may remember from my last comments on this subject just a few weeks ago, despite perceptual differences based on what appears (and is) a sluggish economy, US money supply growth rates are in fact quite robust at present and rising, which is no surprise given next year is an election year (Presidential), and the Fed almost always endeavors to engineer what appears to be a 'healthy economy' at the time. Sometimes it's to provide a level playing field and sometimes it's to repay past favors, with the latter likely the case this time around. (i.e. Bernanke owes Obama a favor for extending his term as Fed Chair.) Be that as it may, the important thing to realize in this regard is that no matter how much public attention and demonstrations occur, the Fed will still find some way to keep monetary aggregate measures growing sufficiently to maintain the illusion the economy is at least 'relatively healthy' running into next November. This you can be sure of. You can count on it, again, no matter how big the Occupy Wall Street, Occupy Main Street, etc become, as most don't really care about the money printing, they simply wish to improve their own circumstances by whatever means.

Of course I am not one to guess about such things - no, no, no. I need to see hard evidence in forming such important views. So how can we know with a high degree of certainty one is on the right track in this regard? Is any indicator out there important enough to provide such evidence? As a matter of fact there is, and it is measurable via technical analysis. To what do I refer? Interest rates - and more specifically bond yields. It appears they may have bottomed a few weeks back with the much anticipated announcement of Operation Twist, which would then go down in history as another failure (as it was in the 60's) because not only have yields been rising, long rates have been surging against short rates. (i.e. which is the opposite to the aim of operation twist, which is to keep long rates down on both nominal and relative bases.) Here is a look at a 60-minute 30-Year T-Bond Yield chart to showing the recent bottom in yields and wave structure on the recent advance, which again, looks like a bottom. (See Figure 1)

Figure 1
$TYX 30-Year T-Bond Yield
$TYX 30-Year T-Bond Yield

Confirmation Operation Twist is a failure comes in the knowledge foreigners have been dumping Treasuries ever since the program was launched, where one can see on this chart that in fact the selling over the past 6-weeks has been a historical record. This in itself does not confirm a lasting trend change of course, however if Jim Rogers is correct about the staggering stagflation that is on the way, which is the bus we are on, then one would naturally be well advised to take this turn seriously. (i.e. even if the lows are to be tested one more time before a lasting turn develops.) Because if Operation Twist is a failure (which it is), and bond yields continue to surge higher, threatening the economy / housing market(s) into next year, again, an election year, helicopter Ben will have no choice but to roll out QE3 at some point, which will create the self-fulfilling prophecy. From a technical perspective we can better see the grotesque over-bought condition of the US long bond on the long-term plot below, which is sure to test (and likely break) channel support once again at some point if the trend has truly reversed. (See Figure 2)

Figure 2

$USB 30-Year US Treasury Bond Price
$USB 30-Year US Treasury Bond Price

Rolling out QE3. Not likely you say. Not with all the demonstrations against the money printing, Fed, and Wall Street these days. Please don't think this way, because it's wrongheaded and could cause you to make a big mistake with your money here if one believes both monetary and fiscal policy will not be very accommodative (inflationary) next year -a an election year. In fact, the demonstrations in the States, as they get worse, should begin to actually start scaring central planners into appeasing the mob soon, where if solutions in Europe remain insufficient because of continued concerns surrounding inflation fears (they lived through a hyperinflation before and don't want another one), then it will be left up to the Fed to do most of the heavy lifting moving forward, which should play havoc with the $ next year. So make no mistake about it, currency debasement rates in the US should substantially far exceed those in Europe in 2012, which would cause the US$ index to fall commensurately. We are not expecting a good year for the $ next. (i.e. and don't worry, the Euro won't disappear - yet.)

We do expect just about everything else that moves (not bonds - see above) to do well with this knowledge however - stocks, commodities, and especially precious metals (stocks). That is to say, while the best stocks and commodities might be able to do is test this year's highs, new highs should be witnessed in precious metals, with the shares outperforming the metals substantially for the first time in years. We know this is the probable outcome based on our historical cycle cased studies discussed at length last month, where as suggested, while a lengthy bottoming process could take us further into the fall, once completed the Amex Gold Bugs Index (HUI) should double into next year. What's more, although we could easily see the HUI both test and break 500 to the downside again temporarily in coming days, one should not panic if this occurs. You should not panic because this would be a sign the Fed will be panicking soon (and increasing currency debasement rates), where such an occurrence would likely be coupled with a collapse in the broad market, liquidity conditions, etc.

Should we expect another swoon in stocks before the present larger degree correction is over? While impossible to say for sure, one thing that is for sure, the bottom we saw in stocks last month was not a 'good bottom'; and, the rally witnessed over the past two weeks was not a 'good rally'. It has all the earmarks of a low volume short squeeze, which is exactly what has been happening - the shorts have been getting squeezed - sending stocks relentlessly higher. And of course high US index open interest put / call ratios have been supporting this squeeze as well, where it will be particularly instructive after this coming Friday's expiry to see if the high ratios were a function of fear associated with seasonals and Europe; or, if something more imbedded is developing. Myself, I think we may need to shake some trees again going into the seasonally positive period for stocks (between November and April) in order to develop the kind of embedded bearishness necessary to sponsor a lasting / intermediate degree rally in stocks, meaning we may get that 'better bottom' either next week (the last week of October, post option expiry, is prone to weakness), or early next month. (See Figure 3)

Figure 3

Because as you may remember from previous discussions on the subject, more often than not, short-term direction in the stock market depends on how the gamblers are betting, you know, the idiots who play options markets way more aggressively that they were originally designed for. Therein, if US index open interest put / call ratios were to collapse post expiry this Friday, then, despite other sentiment indicators being supportive of stocks at this time, we could still have that nasty spill regardless, which would potentially give us that 'better bottom' in the S&P 500 (SPX) / CBOE Volatility Index (VIX) Ratio, pictured above. Again, while a double bottom in the 1075 area on the SPX is always a possibility (and it looks like this is the bottom now), a 'better bottom' would be formed with move below last month's lows, perhaps characterized by a vexing of the large round number at 1,000 (and 10,000 on the Dow). If this occurs, not only would the Fed undoubtedly get serious about the situation; but also, those calling for austerity measures and less money printing would likely take a good look at what the implications associated with a fatal stock market crash would be and ease off, giving the boys on the beltway the green light to start spending some money like drunken sailors again just in time for the election.

Good investing all.


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