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Despite a recent correction in…

Investor Debt Outpaces S&P 500 Growth

Investor Debt Outpaces S&P 500 Growth

Since the financial crisis of…

No Free Lunch

This is not the first time I have touched on this theme, and it will not be the last. But it's been a while, so a revisit is timely. Of course the wisdom of the truism 'no free lunch' is the basis of my views, so it's always in the work, however it's good practice to formally reexamine your belief systems on a regular basis to ensure they still make sense in this (seemingly) increasingly complex world. Ayn Rand also shares this view, and is the basis of her colossus Atlas Shrugged. Ayn was unbendable in her beliefs, believing them to be self-evident, making her a leading advocate of reason, individualism, and capitalism to this day. And the Austrian School (of economics) is also rooted in non-interventionism, ever aware of the implications of cause and effect, government coercion, and bureaucratic tyranny.

Because as implied above, there's a cost for everything in this world, and just because they can be postponed (seemingly indefinitely), does not mean they will be avoided in the end. In fact, and something true spirits learn through time and experience, is the longer you let problems fester the worse the result in the end, which is a lesson our society is doing its best to forget these days, seemingly lost in a world of hedonism. (The fact a wiener like Weiner is taken seriously in US politics continues the escalation in this regard.) But it's not just the politicians, bureaucrats, and bankers that are at fault in this regard; it's all of us because we allow it to happen. Far too many now believe they are entitled to a free lunch, and they are willing to take increasingly dangerous measures to get it - including allowing themselves to be governed by thieving bureaucrats.

Call it mass insanity, or whatever you want, few prepared for what comes this way in the not too distant future. Most are completely unaware of what is going on in the economy due to ignorance, willful or not. The authorities are still attempting to paint a 'low inflation' and 'improving growth' picture for the US. That's the essence of their bullshit (BS) story right now, the one they use to justify pushing the markets around like they do. And you should get ready for another installment of their BS story this week (along with the Fed meeting) which should ramp stocks and the dollar($), and potentially attack precious metals. Again, a big part of the present BS story is the 'low inflation lie'. So in order to keep this BS looking plausible the authorities will attempt to smash gold and silver whenever possible. And as you know from our discussion last week, silver is still particularly vulnerable, so be careful of the GDP report Wednesday.

What's more, and in an attempt to bring a little perspective to the current situation in the precious metals market(s), while I could obviously be wrong, my experience and research tells me that until the current batch of aggressive and excessively greedy speculators are purged from their bullish derivatives bets, silver paper pricing mechanisms being what they are, will keep the white metal depressed, especially if general liquidity conditions become strained. (i.e. which is coming when the broad measures of stocks roll over sometime between now and early next year.) Martin Armstrong commented on gold not long ago and his views (no lasting bottom in gold until as late as early 2015, but 90% of the price decline is done, with a temporary low now) gel with what is expected over the next 18 (plus) months, so we concur with this thinking. And again, the fact silver remains vulnerable due to stubborn speculator betting practices supports this view, so be prepared for the possibility of a lengthy bottom process for the sector.

You should know the precious metals bull market will not be back until silver begins outperforming again on a lasting basis because this will signal a cessation to the inflationary deflation presently gripping macro-conditions, which as you may remember from previous discussion on this subject matter, is a function of a cyclical deleveraging phase in the shadow banking system. What's more, it's not just the US consumer that's deleveraging at present, but also the Europeans and all-important Chinese as well. So, it's a global affair, meaning this is big, and is why the Fed will not be cutting support of the shadow banking system until this deleveraging cycle is over. Martin believes his Economic Confidence Model, scheduled to peak in early 2015, is measuring when we should expect gold's bull market to resume in earnest due to increased lack of confidence in government. Be that as it may, and something that might or might not operate in conjunction with such an outcome, a turn in the shadow banking deleveraging cycle means consumer credit would begin to expand once again, bring an inflationary tone back into macro-conditions. This is the macro (along with a wall of worry that is not present at the moment) required for silver to begin leading once again, signaling a resumption in the precious metals bull market - in earnest. (See Figure 1)

Figure 1
Silver:Gold Ratio Monthly Chart Part 1
Silver:Gold Ratio Monthly Chart Part 2

Technical Note: Please notice the Silver / Gold Ratio could easily go lower / sideways over the next 12 to 18 months based on technicals displayed in the monthly plot above.

To put some perspective on it, what's happening right now is so many people are defaulting on loans, going bankrupt, and just basically borrowing less, the feds are attempting to make up for the dearth of consumer credit growth by borrowing the public sector into a stupor (as measured by QE, the Fed's balance sheet, and monetary base), which will eventually blow up in all of our collective faces when the consumer decides to start borrowing again. (i.e. think rising inflation.) Again, this is anticipated to begin sometime around early 2015, however precious metals could begin to firm up well before this in anticipation of the turn. Next year could turn out to be like 2008 in terms of the stock market once fiction meets reality, meaning bearish speculators finally exhaust themselves and the perpetual short squeeze fails, which of course fits nicely into our views in terms of timing. Therein, silver is not expected to begin outperforming gold or stocks until the initial liquidity shock associated with margin debt (close to historical highs) deleveraging hits the market. (See Figure 2)

Figure 2
Silver:SPX Ratio Monthly Chart Part 1
Silver:SPX Ratio Monthly Chart Part 2

Once this runs its course however, look out on the upside for gold, silver, and anything that is even remotely related to precious metals by the time the impending mania is through. There's no free lunch here either, with inflation eventually becoming so obvious that even a completely sleepy and / or brainwashed public will notice, bringing a bid into gold that will be very hard for the authorities to fill given the hollowing out of the physical market currently underway. (i.e. in order to keep prices suppressed right now.) So good news for precious metals investors will be bad news for everybody else because the bureaucrats will no longer be able to hide the inflation. And make no mistake about it, the inflation will come because not only will the system need to digest the money that's being printed right now, but more, it will also need to deal with increased monetization practices required to keep everything from stocks to bonds to pension plans from imploding. This of course means the $ will eventually crash as the authorities attempt to 'save the system'. (i.e. their fat a cushy jobs.) (See Figure 3)

Figure 3
Gold:USB Ratio Monthly Chart Part 1
Gold:USB Ratio Monthly Chart Part 2

Along this line of thinking, and although conditions could obviously get more oversold, it should be noted that gold is sufficiently oversold against bonds at present to support a reversal technically, so we are in position for this at anytime over the next 12 to 18 months. The only question is when the inflation appear? That's the question. The answer to that question could have be a surprise to those who think Yellen is the girl for the job considering she is a known dove. I say this because Summers is thought to be a 'loose thinker' and 'unknown', where his appointment as new Fed head could go a long way to pricking the equity bubble (even though some don't think so), creating the need for speed in currency debasement rates sooner rather than later. Of course you would never know there was a problem looking at the Treasury's just released Quarterly Funding Statement, where now in ink they plan to cut back on monetizations (think stocks and bonds) by 30% starting this quarter.

All I can say to this revelation is 'good luck' to these guys, because fiat currency economies by nature require increasing largesse as time goes on, not less.(i.e. due to diminishing returns.) This move is likely being done as a defacto tightening on their part in order to provide the illusion everything is 'just fine'; along with giving them some policy (and psychological) wiggle room later on. And they will need it sooner than later in my opinion, because although liquidity needs are being met right now, this will quickly change as increasingly interest rates suck up increasing percentages of disposable income on an accelerating basis. So the seeds are being sown for a crash right before your eyes with this bold move. It's just a matter of time now.

What's more, renewed volatility could return as early as August (next week), with seasonal weakness in stocks likely given the run-up we've had these past months. This last impulse has been parabolic, which is the sign of a blow-off. Furthermore, stocks are expensive transposed against an economy worse than 2007; and like then, not many are in tune with the growing divergences between the markets and economy. This is the set-up for another meaningful inflection point in both the markets and economy. The only question is when. Does the debt bubble need to get bigger; or, have we arrived?

At some point the lights will begin coming on for increasing numbers of people and that will suddenly realize just how much trouble they face. All we need now is for the gambler betting practices (discussed on these pages regularly) to exhaust themselves and our price-managing bureaucrats will loose control of the markets very quickly.

In the meantime however, look for new highs in stocks this week with machinations associated with the GDP report discussed above, not to mention likely support from the Fed Statement and Employment Report. This should also result in yet another attack on precious metals as well, especially as increasing numbers begin to realize tapering is on its way.

See you soon.


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