It was a better time, a simpler time, a time when people knew where they stood. The family unit was just that, the modern family set in mid-west America, mom, dad, the kids, dog, two cars in the garage and one job paid for all of it. Mom stayed home to take care of the kids and dad went out to take on the world in his traditional role, with all family members comfortable in their lives, fulfilling instincts that by nature extend back to our very origins. So it was 'happy days', as pictured in the 70's sitcom, with Richie, his family and friends, and The Fonz enjoying everyday life in the 50's, seemingly oblivious to the stresses and strains we live with today, essentially enjoying the American Dream. Because like no other time in history America was enjoying the fruits of its labor, having just won a global war, becoming the world's predominant 'superpower', with reserve currency status at center.
Indeed, it was a time when there was no need to look for a government check in your mailbox as so many do today because life was easy, the people were young, and the best days still lay ahead. Interest rates were low, credit plentiful, and good jobs -- high paying manufacturing jobs -- grew like apples on trees right into the 60's' as America began in earnest the process of Globalizing the world. At the time it was early enough in the process to be able to sell Globalization as 'constructive integration' with benefit to all involved, however as time as passed it's much easier to peel back the layers and reveal what Globalization really is (soft colonization), where the dollar ($) was used to concur the rest of the world not plundered in World War II. Dollar hegemony has been the game all these years wrapped in a fiat currency economy that has given America the highest standard of living in the world.
Fast-forward to today, and things are so sanguine. The vulgarities associated with $ hegemony policy, our fiat currency economy, and economic lifecycle are all profound factors playing on a fully matured situation that is increasingly deteriorating. Much like Rome at a similar juncture the US and the Western Alliance are in contraction and searching for solutions to growing problems (economic, political, etc.), for which there are none short of an inevitable death. None of this is new of course, as the US is not the first empire to suffer such a fate, however we are talking about something far more profound in scale than what occurred to the Europeans. Empires have come and gone throughout the ages, but what we are talking about here is something different - something much bigger in degree.
Here (and now), we are talking about an X-Wave top (minimally) brought about due to technical and physical constraints that will not be overcome for some time, if ever. (i.e. the world will need to find a new technology or grow bigger [increase the population - not possible] in order to replace the old.) So, for example, although the stock market still appears to be working off less profound cycle influences, such as the Presidential Cycle at times, please don't be fooled by this. What you see in front of you is all an illusion. The real economy is in shambles. This is why money supply growth rates must be kept high and accelerating all the time now. (i.e. and they know it.) Because hollowed out Western economies cannot grow anymore and have exported the core of manufacturing sectors to lower cost countries. Oh and let's not forget the fact money supply growth suffers from diminishing returns (think Austrian School) as well, which is the primary reason growth rates must necessarily keep rising. (i.e. because of our fiat currency economy.)
This is why we now have QE-Infinity that is an open ended (both in size and duration) and un-sterilized monetization program aimed at mortgage backed securities to go along with Operation Twist (soon to go open ended and un-sterilized too, which is considerably more potent and direct in terms of endeavoring to simply support commercial banks), which is of course the real primary mandate of the Fed. (i.e. as opposed to their falsely stated dual mandate.) Here, even the mainstream political parties will speak the truth when it suits them, where they were quick to condemn the QE-Infinity announcement saying it allowed the Fed to embark on an unprecedented monetary expansion agenda that would lead to inflation. Of course they (Republicans) stopped short of saying if their circumstances were the same 'no problem' would be the view, where one could (as we have) hypothesize the Fed's latest move was in fact politically motivated. (i.e. Romney was dumb enough to state he would remove Bernanke from office in elected.). Certainly the wavering real economy smacks in the face of such conjecture, however it's always fun to entertain such ideas.
So they will vote for Obama (Democrats) this fall because all will appear well. The stock market is high, interest rates are low, and all is well in our Keynesian nirvana. The checks are going out, with more people on the dole either directly or indirectly (think private business that largely depends on government assistance and multipliers) than not; where again, all appears well. Over 130 million US families and individuals currently receive government checks and this number will continue to grow if unchecked. Presently over 80 million checks a month (if not far more) are mailed out to keep the mob happy, which means paying the bills. And there are programs like cash for clunkers running as well, where the idea here is any and all means will be employed to keep the economy running. This concept will become especially important in the future when you may be thinking Bernanke and friends might be running of means to deal with a sluggish economy. Make no mistake. They will do whatever it takes to maintain their power.
Unconventional policy on the part of the Fed will mean a check in every mailbox. The mob already expects this and the Obama (and Fed) will not let them down. They are buying peoples affections in what parallels the equivalent of bread and circuses in Roman times. What's more, political (election related) concerns will not be on Bernanke's radar screen next year, so if Obama remains in power, guaranteeing his continued tenure as Fed head, then he will undoubtedly feel both comfortable and obliged to keep the mob happy, whatever it takes. (i.e. which is why the Presidential Cycle may extend.) This means the Fed could begin to expand QE monetization targets and other unconventional policy tools quite early in the new Presidential term if need be considering post election years (the first two years in the Presidential Cycle) usually spell trouble for the economy and markets. And next year should be no different considering the markets have been following the Presidential Cycle so closely, allowing already implemented stimulus to blow-off, which is why a confluence of cycles have the equity complex topping sometime prior to mid-2013, along with a profound 'washout' scheduled for 2014.
While month-end window dressing may account for last week's resilience in stocks set against typical seasonal weakness, if history is a good guide, any weakness in the equity complex occurring in the first half of October should prove corrective, giving rise to more gains running into next year. Adherence to the seasonal pattern (in election years) has been tight this time around, so there is no reason to believe this will not continue into next year (at least initially), especially considering if the profound technical indicator I am about to show you triggers a 'buy signal' next month. Therein, with a monthly close in the S&P 500 (SPX) / CBOE Volatility Index (VIX) Ratio above significant Fibonacci resonance related resistance next month we would have a 'buy signal' in place pointing to significant further gains; gains that will set up a top as significant as any we have witnessed since 1929. (See Figure 1)
What's more, if the triple top breakout above Fibonacci resonance related resistance occurs, expect to witness nothing less than a double top in the SPX / VIX Ratio sometime in the first quarter of next year, as was the case in 2000, when speculators have a tendency to set profound tops in stocks. It's either that or the top in stocks comes here in Fall like in 2007, which is a possibility as well. However with so much money printing going on and speculators doubting the rally, evidenced in all the VIX related call buying (VXX put / call ratios continue to decline), one would be foolish to bet this way in my opinion. Moreover, a monthly close above sine related resistance in the NASDAQ (COMP) / NASDAQ Volatility Index (VXN) Ratio would also trigger a 'buy signal', dispelling any such bearish thinking, where it should be noted Fibonacci resonance related resistance is not an issue here. (See Figure 2)
It would be off to a new all time high for the COMP (and NDX) / VXN Ratio which would put the impending top in the 'significant' category, perhaps even of the Grand Super-Cycle variety many Elliot aficionados are looking for these days. Of course the overall picture to most would undoubtedly remain confusing however, because new nominal highs would not materialize for tech stocks. But that's the way it should be at a major top - confusing. Bearish stock market speculators must give up the ghost at some point and for some reason in order to breakdown the 'wall of worry', and visions of new highs for tech stocks, unlimited money printing forever, and whatever else these types can conjure up in their heads to finally exhaust their foolish behavior certainly qualify.
And who knows, maybe the reality of some degree of austerity hitting US shores via the fiscal cliff will be enough to prick more holes in the 'balloon economy'. If history is a good guide however, fiscal cliff related concern should keep speculators bearish, at least for a while, possibly setting up the framework for a capitulation moon-shot in stocks running into the beginning of next year when they are forced to cover. Time cycle analysis points to this possibility with continued strength in stocks later this month. That is just the type of set-up to sponsor such a rally in this smoke and mirrors market environment. The perception vs. reality game is played and speculators not capable of three-dimensional thinking become road-kill.
Because one should expect a great deal of bearishness associated with the fiscal cliff problem, so don't be surprised to see stocks struggle (both before and after the election) until some kind of compromise is negotiated. Once a deal has been cut between the two-party club in Washington however, expect the shorts to cover (sponsoring another rally) no matter how harsh it is, where a bought and paid for mainstream media would paint it as a positive necessary evil, or some other horse pucky. And then of course we still have the yet to be felt positive effects of all the money printing to come as well, where soaring commodity prices running into next year should keep a good bid under precious metals prices - leading the way.
But please do not make the mistake that I am bullish on the stock market, all equities, etc. because I am not. Rising commodity prices, for example, are not a recipe for higher stock prices once speculative forces have exhausted themselves, leaving a seriously bloated and impaired market to collapse of its own weight. And it may not take too much more pushing to get to such a point once the election is over, where it appears the market's price managers are working over-time to keep prices supported right now. (i.e. pushing stock futures higher and precious metals lower every morning.) This of course may leave stocks (and the larger equity complex) vulnerable to increasing volatility sooner than later (we are only expecting strength into January at the latest anyway) post election, making speculation of a fiscal cliff resolution relief rally wrongheaded.
We should know more in this regard as the month matures, along with how speculator betting practices could affect outcomes, which will be the topic of our next commentary.
See you soon.