The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, February 9, 2015.
To say we live in a bipolar world these days, a world characterized by white or black parallels up and down the spectrum of life, should be obvious to all by now as the extremes continue to become increasingly profound. And this should be no surprise to anybody with a full 70% of American's on mind-altering drugs - stoned, distracted and delusional - allowing the populace to continue accepting an increasingly perverse 'new normal' - the dope makes extend and pretend possible with an increasingly placated population. What's more, everyday life still appears quite normal for those not yet disenfranchised from the materialistic dream, the 'American Way'; however, in the subconscious, people are beginning to show more noticeable panicky behavior because of untenable / unsustainable stress, with participants in the world's bond markets no exception. Here again, it should be no surprise to people this is occurring with an aging and asset heavy baby boomer generation literally panicking about finding yield in order to generate retirement income - accounting for the continued plunge in bond yields up and down the curve - both on this side of the pond and abroad.
Of course you can't blame yield chasers for being panicked about the situation these days, because although they are dealing with this dilemma improperly, the blame is squarely on the shoulders of central planners and oligarchs as they attempt to preserve the status quo via financial engineering. Better known as financial repression, the most commonly known element of which being quantitative easing (QE), or monetization, central control of a growing number of markets both domestically and internationally is driving people nuts because supply ad demand dynamics are being bent - a situation that will not end well. And while the US has officially ended QE (still lots of back and side door QE), Europe has just officially instituted its first program under this guise (designed to shock the market), however it would not be surprising to see the Fed back at it if stocks begin to decline impulsively once again, albeit the next program is likely to widen out in scope for various reasons. (i.e. to include stocks in a bigger and more public fashion [again to shock the market] than is already the case.) Because maintaining the bubbles in both stocks and bonds are important to the Fed if their increasingly desperate behavior is any indication.
Because the name of the game is extend and pretend, rinse - repeat, rinse - repeat, rinse - repeat to infinity if the fascists / oligarchs stuffing the status quo down our throats has their way. And as the desperation to extend and pretend grows, the measures that must be taken in order to keep the bubble economy(s) growing become increasingly desperate as well (emphasis on the unprecedented debt / bond bubble), with the newest incarnation negative interest rates, a condition already being aggressively instituted in imploding European economies, and soon coming to an economy near you. Again, negative interest rate policy is essentially backdoor money printing designed to not show up in money supply measures and / or multipliers so that inflation measures, with precious metals at center, don't take off. This kind of thing can only go on for so long before the 'jig is up' however, where repression measures to suppress the true inflation barometer, precious metals, centered in the West's faulty and fraudulent paper pricing mechanisms, can no longer contain the deception. How the new COMEX precious metals platform in Hong Kong fairs over the next year will be the tell on how it's already challenged state should be gauged - so watch closely. (i.e. if it does not dominate it will die.)
Because again, it's all about extend and pretend and the panic to maintain the illusion of status quo, which at its heart promotes living beyond our means and senseless materialism, but is sold as 'healthy living and a sustainable model' - and to hell with the consequences. Apparently it doesn't matter how much debt is built up (and there is a lot of it now), especially if you are on good drugs. As alluded to above however, this is quite a cavalier attitude towards the situation considering the bond bull market is likely on its last legs, reaching all-time manic proportions as we speak. It's that panic for yield we were discussing above. And this is what keeps capital flowing into dividend yielding stocks as well. Of course this will only work well until something pricks the bubble(s) and capital losses begin to outweigh dividend gains, which is already a problem for growing numbers of widely held companies. Oh and least we forget that as market breadth narrows on the broads as process unfolds, pretty soon fixed income ETF's will be the only issues remaining buoyant, again, until that bubble pops too. So many bubbles to pop - with so little time remaining. (See Figure 1)
CBOE/CBOT 10-year U.S. Treasury Note Volatility IndexSM (VXTYN)
And with any luck, Greece should help us out in this regard, where it appears the apparent Mexican standoff between the newly elected Syriza Party and the European Union (EU) is the real deal. If this turns out to be the case, and Varoufakis and Tspiras are not assassinated, this could send bond market volatility (see above) through the roof by pricking the larger bubble in being the first sovereign to officially declare a debt revolt on the Western fascist regime. So, in this light, it's hard to believe Western price managers were able to rally stocks last week harder than anything we have seen since 2011, with financials / banks leading the way, but hey, they are confident the 'crazies' in Greece will snap out of it before it's too late, giving them a week to think about it. Apparently the thinking is there's no way these guys are not going to kick the can down the road like everybody else; or, you will be able to see the light right through them (think gun shot holes) courtesy of the boys from Brussels. Of course in my opinion the Boys from Brazil in Brussels are too confident all things considered, because these the boys from Athens look serious, even opening talks with Russia in plain view. (See Figure 2)
So either this is the ultimate screw job on speculators laying bets we've finally found some politician's with spine, or Da Boyz are going to be taking big haircuts on their bonuses this year. It shouldn't take too long to find out with Greece almost out of cash - it's either kick the Keynesian can down the road again or default this month - there's no in between here because with a debt to GDP ratio of 175% at last count (could be over 200 by now), either they take the EU money or turn to Vlad and start fresh. If this occurs it's the beginning of the end for a debt bloated West, where you can expect to see not only bond market volatility increase, but in stocks too, with capital flowing towards the safety / alternative of precious metals in earnest. (See above.) Therein, as of Friday both the Dow / Gold Ratio (DGR) and S&P 500 (SPX) / iShares Silver Trust (SLV) Ratio were at the upper boundaries of slanted head and shoulders pattern resistance (and the 233-month EMA for the DGR), meaning either they continue to new highs, or break hard to the downside. These are the measures you want to keep your eye on in coming days because if Greece does indeed default, then despite still repressive paper market dynamics (think the idiots long COMEX futures contracts and options), both gold and silver should make outsized gains on stocks. (See Figure 3)
Of course it could always go the other way, with stocks going to new highs, which is probable given human nature (think Avoid the Pain), however in this instance, knowing the can kicking exercise is on its last legs as well (the marginal utility of kicking the can down the road is diminishing rapidly with debt growth now exponential), depending on how shrewd Varoufakis and Tspiras are, extend and pretend just might get thrown under the bus this time. Just think about it for a minute, while its true the immediate future of Greece would be thrown into turmoil, not that this doesn't occur every time they run out of money now, still, with the debt payments gone, their overall finances would likely be improved in very short order, as was the case with Iceland. And while this may take a few years, nothing worthwhile ever comes easy - just ask silver investors - having their wagons tied to the West's whipping boy. As you can see above, because silver is such an easy market to manipulate, it has made little to no progress against stocks (see above) or bonds (see below) since the 70's - believe it or not. (See Figure 4)
Now however, we have negative interest rates, and while the Fed has done a magnificent job or managing expectations all these years, still, after a while even the village idiots are going to figure out holding precious metals are a far more palpable alternative from a risk reward perspective - because they have no credit risk. So while central authorities continue to wave their arms in the air in an attempt to distract you (think increasingly desperate extend and pretend measures [bigger lies]) - etc.) from the best game in town, don't fall for it, because if its not Greece that opts of the can kicking cornucopia, it will be somebody else like Italy, or France. Again, once this happens a chain reaction will occur, where even Alan Greenspan can't see the euro surviving. (i.e. he can tell the truth now since he's not in office.) And in the 'chickens coming home to roost' department, again, this will mean Western precious metals pricing mechanisms will become redundant as anybody with more than two brain-cells rushes for physical precious metals with the risk a potential derivatives meltdown shooting up to 'Lehman levels' overnight.
So again, watch the 233-month EMA metrics on the above charts for clues in this regard, where for example, if you were to see the Silver / USB Ratio propel itself off the 233-month EMA, followed by the Silver / SPX Ratio crossing and closing the month back above this measure as well, then we would have definitive proof a genuine secular trend change had occurred, and the extend / pretend mindset rendered redundant. That is to say that although Western price managers will likely continue in their ways, attempting to exploit sentiment based market mechanisms, larger earthly based forces will overwhelm these attempts, whether by speculator exhaustion or demand / supply dynamics. As it stands right now, present COT conditions point to further corrective activity in precious metals with near record open interest levels reached in silver just last week, however hopefully this corrects itself quickly in coming weeks such that any favorable outcome in euro turmoil for precious metals is reflected meaningfully in prices, and not squished again by greedy bankers.
We live in a surreal world where our banker buddies have been able to fool and manage the masses increasingly for a long time now - in earnest since Bretton Woods. They do this via smoke and mirrors markets, which in turn allows them to manage expectations. If the ratios discussed above meaningfully break the aforementioned technical barriers however, this will change, and the West's domination of global financial markets will wane, and eventually turn to the East.
See you next week.