The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, April 3, 2013.
Who could forget those famous words immortalized by Jackie Gleason in his role as Ralph Kramden on The Honeymooners, when he would quip, "one of these days Alice, POW! Right in the kisser." And although it didn't take much to get Ralph excited, still, this was usually the result of his wife Alice trying to talk some sense into her loud mouth husband, which is what somebody should do to those who think it's a good idea to game the system increasingly today. As you may know, there is quite a list of these characters, with our out of control bankers and politicos at the top of the list, where the West has now gone 'full fascist' with the latest escapades in Cyprus the blue print for much of the same all the way up the line eventually. Look at Canada; they are making bail-ins law in preparation for the inevitable.
Because the global economy is just a giant Ponzi Scheme that is failing, evidenced in everything from industrial slowdown to rampant fraud. This is why it's time to plan for the worst, and hope for the best. With European banks leveraged 26 to 1, it's only a matter of time before an accident occurs, sending stock, bond, commodity, and currency markets into chaos, with the end result likely being total loss for many who think their finances are quite secure today. The stock market just had the best first quarter since 1987, and we all know what happened that year in October. So the warnings from the likes of Ann Barnhardt are likely well heeded - with the big message being - GET THE HELL OUT. As long time readers would know we have been on this page for quite some time, advocating the realignment of portfolios heavily in favor of physical gold and silver as the preferred portfolio structure for those who truly understand (and believe) what is happening.
And again, what is happening is aside from a deteriorating political spectrum in the world, one where no matter which philosophies are supposedly in play, people rights and liberties are systematically being encumbered, market risks have never been higher due to intensifying pressures and divergences that must be corrected at some point one way or another. So the question remains, what will be the trigger? Will it be Europe? You should realize things are unraveling quickly over there now. Will it be war? You should realize things are moving quickly here. Will it be a stock market crash? You should realize stocks are poised at the edge of a precipice, and at some point, one way or another, by confiscation or collapse - one of these days Alice - POW! Right in the kisser.
Of course if you listen to mainstream thinkers who are paid to promote the status quo you will not hear any talk like this. What you will hear is sure, there's always room for concern, but with Bernanke (and all the other money printers) on the job around the world, at a minimum, we will squeak or muddle through, even though it's statistical fact money printing does not work; it does not create employment, only fuelling speculative bubbles and generally rising prices in economies as inefficiencies associated with currency debasement are felt. What's more, it should also be realized all this sponsors totalitarian regimes that now embody Western politics that keep giving it us in one way or another, which again, is a function of the light headed whimsical thinking sponsored by the 'free lunch' thinkers empowered by the money printing. All this can end only one way, and that's bad.
Because to reiterate, one of these days something nasty is going to take things out of the control of the 'powers that be', and things will change very quickly. As an example, one of these days somebody is going to ask for their leased gold back and be told they can't have it - and that will change everything. Because risk is not just a board game - it's very real indeed - and one day the growing risks of the day will need to be properly reflected in the markets one way or another - naturally or not - but still - must be reflected. This means gold will need to rise in price substantially to properly reflect the unbelievable currency debasement(s) that have and are occurring all over the world today. And it also means stocks will need to fall in order to properly reflect the true condition(s) of economies, where historically we look for unity in the Dow / Gold Ratio to tell prices are about where they should be in this regard. (See Figure 1)
Figure 1
The Dow / Gold Ratio has witnessed a substantial cyclical correction higher since the lows in 2011, but is reaching a point where this a - b - c affair (think Elliott Wave Theory) should end soon. And I find it no coincidence a reversal lower could come as a result of the market(s) realizing Bernanke is retiring next January, where again, as mentioned last week, don't be surprised if he announces such a move as early as this summer. That's right - one of these days this summer - likely during his Humphrey Hawkins Testimony or at the Jackson Hole Summit in August - Helicopter Ben will likely spill the beans confirming speculation already swirling in the media, which could be enough to pop the stock market bubble. One need wonder if it will last that long considering future discounting tendencies and the fact stocks are already reaching extremes not witnessed since the highs back in 2007. (See Figure 2)
Figure 2
In fact, and as you will see below, in terms of tech stocks, although the nominal highs witnessed in the year 2000 will likely never be bettered, when measured against risk (think VXN), they are vexing new all-time (sinusoidal) highs at present, meaning the desire to own these stocks (and by inference any stock) has never been higher. Uncertainty associated with Bernanke's departure will surely send stocks into some sort of correction, if not a substantial decline using one of the historical analogs (think a typical emotional / staged sequence) takes control of the trade. Therein, normally the longer a rally sequence lasts the stronger / more intense the correction. With present circumstances being Grand Supercycle Degree, at a minimum (think X-wave, which likely considering rule of law is a distant memory), the likelihood is for a high degree crash of course. All the ingredients are present for a high degree crash, where the popping of the present credit bubble leads to a high degree debt crash, which in turn causes the bubbles, lead by stocks, to crash as well. (See Figure 3)
Figure 3
Such a crash would encompass the entire world this time around as well, where although some locales like Canada were able to escape the carnage last time around, this time the will not be so lucky. You should know a key signal is now being triggered concerning Canada's fate, where we have the Dow / Toronto Stock Exchange (TSE) Ratio now breaking above 2008 highs, implying growth in global resource demand is slowing (this is despite continued population growth in emerging economies), which in turn means global growth is contracting on all fronts except money supply growth. (i.e. and market manipulation.) This hypothesis is of course borne out in key economic data, where we have increasing economic contraction on growing fronts all the way up the food chain. (i.e. the gap between major stock market performance and reality has grown to dangerous proportions.) The only reason stocks are not crashing around the world yet is because markets have been increasingly structured to feed off of misplaced speculative betting practices and increasing money printing, delaying the day of reckoning but not averting it. (See Figure 4)
Figure 4
And although a system crash will obviously not happen in one day, still, day-by-day we are coming ever closer to a tipping point where one will be able to look back and say - everything changed after that. Here, 'that' could be war, cessation (this is why they want their gold back), unexpected inflation, junk bond collapse or something else most people are 'not expecting', like the Icelandic Solution gaining increasing popularity . (i.e. when really they were in denial.) You want to believe that if Texas keeps moving towards cessation some big changes in the political landscape will spread worldwide - with the bankers finally put in their place. (i.e. jail time, etc.) Because once 'the system' breaks down the bankers and politicians will no longer be able to appease the mob by allowing them to collect disability benefits and food stamps for doing nothing anymore. This is because 'the system' will no longer be able to pay those benefits, or the growing list of other entitlements, as deficits continue to increase. All this will usher in the biggest economic disaster in history.
Again however, exactly when this day will arrive is unknown of course, especially with continued push to revive economic growth with further money printing. This means that 2013 will likely see an important top in stocks once all this money printing finally begins to noticeably show up in prices, which could be anytime due to a number of factors. What's more, it appears time and (losing) money is finally working on aggressive paper market speculators in precious metals, where with the exception of small speculators, both the Gold COT and Silver COT are improving structurally, meaning we are likely close to bottoms. You will remember my warnings that gold and silver could plunge to the $1525 and $26 levels (and lower) because these speculators enable undesirable (and unrealistic) price management and now we have prices falling towards these targets in what is hopefully the last such occurrence before meaningful rallies materialize. This should be enough to knock the aggressive speculators on their buts for a while which will give the price managers a great deal of difficulty in keeping prices down. (i.e. and don't forget index and ETF ratios are beginning to improving as well.)
If stocks are repeating a sequence similar to 1987, as alluded to above, then the S&P 500 (SPX) (click to see 1987 chart) should cool off soon (until June), followed by one more push higher into late summer / early fall. Such a sequence could unfold because although sentiment towards stocks is becoming dangerously complacent already, no selling is showing up yet, where hedging is still preferred to outright position sales. (i.e. because the consensus believes the money printing will lead to higher prices and wish to stay in position.) Again however, one of these days, hedgers / speculators will get tired of losing money, which will drive open interest put / call ratios down further across the spectrum of key markets, leaving stocks vulnerable to a flash crash like that witnessed in both 1987, and more recently, 2010 - ONE OF THESE DAYS - considering euphoria has never been higher.
Once turned however, the gold price should grind higher throughout this entire period you should know, so don't be surprised if this occurs when all the talk of deflation becomes fashionable. This is what happened to gold in 1987 as well. Again, bottoms (of unknown degree but my thinking is they will be important) for gold and silver look close. Only the small speculators need capitulate in COMEX markets and we will have a similar structural set-up compared to the bottom in 2008. Open interest in silver could fall considerably, however we have no indication yet whether or not this needs to happen. We should have a better idea after this week.
Precious metals shares will be discussed in detail next week. In the meantime, it appears the Amex Gold Bugs Index (HUI) is about to take out the 61.8% retracement off of the 2011 highs, discussed previously. If this occurs, the next Fibonacci related support is at 283, the 72.8% mark; but if we repeat the 2008 experience, expect to see the 78.6% retrace touched at 255, leaving only the head & shoulders (H&S) target at 190 after that. Frankly, if a flash crash were to occur, precious metal shares should fall with the broads, making the H&S target reachable.
Put that in your pipe and puff for a while.
Good investing all.
