The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, March 23, 2015.
If asked about 'the rules' of investing, Wall Street will offer endless variations, but never reveal the big one. Because to do this would point out to the legions hapless rubes (average investors) invested in the securities markets these days, that although stocks and bonds have done fabulously over the past six-years coming out of the 2008 financial crisis, still, for those who actually participated this must be looked at as good fortune more than anything else, especially considering you are 'playing another man's game'. Because stocks and bonds are not going up for the right reasons, they are rising due to a growing list of financial engineering gimmicks that do nothing but hollow out and destabilize these markets, with parasitic high frequency trading (HFT) and illicit corporate buybacks topping the roster, bringing the bulk of benefit to a small group of oligarchs at the very top of the food chain. Sure, the spoils are spread around to the dogs to keep them complicit in the game, and in a larger sense it's still Wall Street against (fleecing) Main Street, but make no mistake about it, the real money is going to the top 1% disproportionately, because they set the rules of the game.
That's right, the rules are shaped by these people because they buy political influence in the positive feedback loop that is the relationship between Wall Street and the Beltway, the largest collective fraud ring in man's history. And that's why the average investor should not be playing this game, because you take all the risk, and will likely suffer losses (again) in the next collapse because it has been engineered to occur very quickly. This is when the sharks come in and make lucrative proprietary deals off the market that guarantee themselves windfall profits down the road at the expense of taxpayers (again), who again, foot the bill. Why don't you hear anything about this kind of thing in the news? Answer: Because like their political dogs, oligarchs the magnitude of Buffett own the mainstream media - who will not report contrary to his interests. (i.e. because they want the advertising revenue.) What makes it easy is the American public is fixated on the latest Ellen show (or some other distraction), so high level fraud like this goes on everyday because the average village idiot is brain-dead. They will wake up one day when they are not eating - it's amazing how hunger will wake up even the dullest idiot - however this kind of thing can be expected to continue until truly dire circumstances befall the American public - and they abandon the distraction game.
This is when the 'powers that be' will play the 'war card', to both step up the distraction game and justify the austerity that will be required to 'aid the effort', but will in fact be a result of the continued rape of dopey public by the oligarchs. This is why Russia is beefing up their presence (nuclear) in the Ukraine, because they know the crazies in Washington are getting ready to escalate (nuclear), which will kick off in earnest when markets / economics allow for it. (i.e. when people will not complain because they are worried about getting more money.) As denoted last week in our commentary on what to expect from the Fed, with the exception of the fraudulent Employment Report, most of the economic data coming out in the States (and globally) is now accelerating downward, and in many instances is in contraction, which is getting increasingly difficult to hide. A carefully couched official Policy Statement from the Fed is designed to obfuscate this fact, however it's important to realize this is happening right now, where it could be argued that from macro-monetary perspective, the Fed is already behind the curve, but nobody wants to admit it because this would be tantamount to admitting a global recession (depression) exists.
And you would never know this looking at the stock market(s) either. The dominant defining relationship in the nexus is still the stocks to precious metals ratios, with the Dow / Gold Ratio (DGR) and SPX / Silver Ratio at center. And although we don't have a firm projection for the DGR because gold will likely outperform due to an improved COT, this is not the case regarding the later, where you will remember from previous commentary it projects to the 160 - 167 range with a breakout above 140. And while nobody knows how much of such a move would be attributable to rising stocks given a good argument can be made they are topping out (it would take a move above head and shoulders pattern defining 2090 on the SPX to change that view), still, a breakout above 140 looks likely with the silver COT in need of further repair, which should be set in motion this week with the reaction to the Fed meeting. Therein, if the Fed drops the word 'patience' from its official policy statement, and even though other linguistic gymnastics will likely replace this ruse, US price managers and fleeing speculators would smash silver again under the guise the US economy is strong, so who needs this sh*t. This may take a little time, but it's coming as soon as enough time goes by for traders to forget this week's weak data points.
That being said, the important thing to realize here is this is likely the last time these characters will be able to pull this off with bad Kabuki Theatre, because the global de-dollarization process is accelerating while the US is exhausting conventional policy based on the bullsh*t story the American economy is strong. What does this mean? It means that aggressive / subversive US foreign policy has pissed off so many people now, people that cannot be pushed around like Iraq or Libya, that they have decided to exit the dollar system in order to dethrone the tyrant, essentially kicking off a grand decentralization process that will become the 'new normal' for the next 100 years. This was made clear this week with the announced launch of the China International Payment System (CIPS) to go along with Russia announcing a new China / Russia futures market, and announcements from European and Australian trading partners joining the China-led Infrastructure Bank (AIIB), which is of course why America's foreign relations with these countries is becoming increasingly stressed. (i.e. because spoiled brat America doesn't like losing dollar hegemony function.)
And this is not the only way the dollar($) is increasingly losing hegemony status, where it should noted China is now the world's third largest arms exporter, implying it's an undisputed global power in this arena, and not a country the US can bully into maintaining the status quo. That's the big thing you must realize here, the next few months are likely the last look one will ever have at the 'status quo' as you know it - so you better enjoy it if you're suckling on its teats. Afterwards and increasingly, as signaled by decentralization that will extend into the very fabric of now vulnerable Western societies, it's important to realize that individuals will not have the state to fall back on because of insolvency, and that living standards in America are likely to crash. On top of this, we have a President and foreign relations machine (along with the rest of the imbeciles up and down the Beltway) that is alienating allies as fast as possible these days in everything they say and do, not to mention US technology sales abroad are likely to crash with spy gate, where knowing these characters, the foreigners are now concerned about privacy at all levels - personal to sovereign (because the 'yanks' will do anything to maintain the Empire).
So if the $ starts rising again, with the Fed now seeing increasing weakness, this would likely prove negative for stocks, because it would be sign of deleveraging. Foreign speculators using borrowed money in $ would be forced to buy, which would bring a large un-natural bid into the currency, especially if process were to accelerate in panic conditions. Certainly to some extent this is already occurring with those playing in the periphery with Greece becoming a potential bubble popper. Given at this point we are not expecting Greek Tragedy just yet, with the net tribulations only serving to reinforce neurotic trader habits (causing them to bet negative on stocks only to be squeezed out once magical bridge financing arrives again), at the same time, it should be pointed out that in a broader and more profound sense, the majority of investors are not structured for Grexit. What's more, it should also be pointed out that as relations with Germany continue to sour, which is not entirely a ruse (it's political theatre because both sides know Grexit involves catastrophic loss in fixed income and derivatives markets), the game of chicken will eventually get to a moment of truth, where Greece could pull a crazy Ivan. (i.e. swerve from the anticipated course and abandon Western status quo by turning east - why not - everybody else is going it.)
And while this kind of risk, let's call it a Murphy's Law view of the market, where sooner or later, something will go wrong popping the present unprecedented bubbles, is bound to occur at some point, it should be remembered it's this exact thinking on the part of active speculators / hedgers that keeps the perpetual short squeeze in motion, which in turn is why hedge funds can't keep up to their benchmarks. The formula that has fueled the perpetual short squeeze in stocks these past years is the growing neurosis across the trading community (causing increased hedging and short selling) set against numerous support mechanisms within the official sphere, where on top of direct government (think treasury, exchange stabilization fund, etc.) and agency (think Fed) support, corporate buybacks could be included since this a critical component of the larger bureaucracy's liquidity mechanism via the banks, who should not be forgotten here - that's for sure. So now we have heavy hitters like Ray Dalio who can't believe what he's seeing anymore either, thinking a crazy Ivan is coming for stocks at some point soon now on this bandwagon, likely to fuel the machines further (think HFT, algos, etc.), which is the last piece of the perpetual squeeze formula of course - because how else does the stock market keep rising on declining volume without gimmicks like spoofing? (See Figure 1)
What's more, as long as tech stocks, as measured by the NADSAQ, keep outperforming all else, ranging from the blue chips (see above) to gold (see below), although breadth and volumes will continue to narrow, stock indices will continue to rise. And as you can see above, this remains a likelihood with tech not only continuing to outperform, but doing so in manic fashion. We are now going into the strongest time of the year from a seasonal perspective, and its particularly strong in pre-election years, supporting the hypothesis stocks can extend gains into summer, and beyond. This supports the hypothesis that while the NASDAQ / Dow Ratio may not reach year 2000 highs, still, it can keep rising longer than bearish speculators will be able to remain solvent. And this also suggests that the DGR and SPX / SLV Ratio will keep rising as well, with the next target at 17.5 (38.2% retracement) on the former, and the in the 160's (new all time highs) for the latter. Events this past week increase the probability these targets will be vexed considerably (ex. SPX to 2100 plus); possibilities that should now be taken very seriously. (See Figure 2)
Along this line of thinking then, that the Western status quo continue to get their way for some time yet, based on technicals presented in the weekly gold chart seen below, it's evident the yellow metal could fall well past four-figure support at $ to $950 at some point this year, surprising the hell out of precious metals promoters again. (Note: the monthly plot calls for a move to the $1030 area to test the Trend Definer giving us an approximate target at the large round number at $1,000 - give or take.) One might think this unlikely with all the gold friendly factors increasingly falling into place as economies seemingly fall apart at accelerating rates, not to mention the war drums (see above), however again, one would do well to remember that along with the demand for $'s rising due to an inevitable deleveraging trend under such circumstances, Western sentiment based price setting mechanisms, what we call 'markets' today, are still determining prices globally, and will continue to do so until the East, BRIC's, etc. are in a position to challenge Western supremacy. (See Figure 3)
Until then, you are playing in Western / Anglo / banker markets that are rigged to exploit traders emotions and neuroses, where the economy and markets are only loosely related and beyond explanation, but somehow always discounting the future according to price manager script. This is why if you must listen closely to what I am about to say because it could literally be a lifesaver for you as process begins to accelerate moving forward. Paul Tudor Jones was out last week talking about the same thing essentially, prognosticating the West is careening towards either revolution, higher taxes, or war, and he's likely right in all accounts. And Mark Cuban was out a few weeks back talking about an impending accident in the stock market(s) because of lack of liquidity. This is a problem that hit the small caps a few years back, then the mid-caps increasingly last, and eventually it will reach the large caps and broad stock measures soon, which will leave only corporate buybacks (as long as money stays cheap) and official buying to support stocks. And like the Bank of Japan, increasingly US central authorities will be forced to start buying stocks directly to support them - but if you don't have your money in the right ones you will lose money.
And that's the warning. It's not that you are playing another man's game if you listen to CNBC® - you should know that already. The warning is if you don't have your money in the few stocks that will 'make it' moving forward you could lose big as liquidity dries up one day, where great swaths of the markets could essentially go no bid at some point. And this is not just true of stocks, but bonds too, which may in fact lead the coming carnage. So although gold looks like it still has another leg down in $ terms, still, one cannot ignore these growing risks forever. What we need to clear the baffles for precious metals is a clear capitulation across the sector, where as pointed out previously, a break below 100 in the Amex Gold Bugs Index (HUI) would likely facilitate such a sentiment change. Obviously the people who trade these things think they have the moral high ground, or some other stupidity, and that fundamentals matter in heavy manipulated markets - and they are wrong. Again, Western pricing mechanisms, those things we call markets, are sentiment based betting parlors designed specifically to exploit this naïve thinking.
Naturally it's the precious metals investors who should be particularly angry about all this (and stop repeated negative behaviors), because although precious metal market mechanisms are structurally rigged to trade off sentiment related betting practices of speculators in the EFT and (other) derivatives markets, which ascribes blame back on the purveyors (Wall Street) and regulators, still, traders should know this is the case, and stop participating in this guaranteed losing game. Instead though, like buffoons, they return week after week, cycle after cycle, playing the bankers game, who have bottomless pockets under the present system to keep paper precious metals contained (with the help of idiot speculators themselves who keep betting like none of this matters.) But apparently that does not matter to the out-of-control paper market precious metals speculators (think hedge funds) who come back for more punishment day after day, week after week, month after month, year after year, and decade after decade, because the precious metals share to precious metals ratios peaked back in 2004, over ten-years ago now - overwhelmingly betting bullish in the derivatives markets for what seems an eternity now - but apparently still undaunted in their determination. (i.e. because they are reckless and idiots.)
Along this line of thinking, perhaps the biggest question on the financial community's mind these days is when will the $ top out, with nobody seemingly having a good answer. I will offer one, a unique explanation that you will not hear anywhere else. The $ will top out when paper market (derivatives) speculators in the precious metals markets lose their insane bullishness in terms of betting practices, meaning open interest put / call ratios and short interest on key ETF's / futures contracts rise substantially, putting a bottom in the sector. Because it's all about speculation these days, where the $ and precious metals speculators look back and forth at each other (reflected in the price action), taking cues from movement. The parabolic nature of the $'s rise at this point is because the move is so mature and extreme now that nerves are getting frayed, especially if you are a US multinational, now being forced into buying $'s. And while its true capital flows from concerned euro holders (at center) is a large part of the reason (the largest on a fundamental basis), still, speculators will play their part in the larger game, where once the move has run its course, it would not be surprising to see the consensus of precious metals speculators get it wrong again, losing their bullish penchant in favor of 'deflation worries', or some other nonsense.
Or does the madness continue until the euro is no more?
Time will tell.