The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, April 6, 2015.
This is a topic we have made a focus over the past five-years (see here) because of growing importance in explaining change in our ever more complicated world moving forward - in terms of how we get along with each other in the world - our morphing political economy. The big picture is human frailty is being exposed now that we have reached impassable physical and technological hurdles that will limit our proliferation and integration with each other, forcing a reversal of the seemingly uni-polar world - the American Empire - that has forcefully dominated our activities since the fall of the Berlin Wall. The fact of the matter is humanity has reached its worldly limits and must now attempt to find means to survive reasserting primitive laws of survival that modern man has attempted to eradicate.
The problem is earthly limitations will always be with us as long as we remain captive to her constraints no matter how much dreaming we do about harnessing the heavens, where all the hype about travel to the moon, mars - wherever - is pure fancy provided by a now wobbling bureaucracy. But don't try to tell this to New World Order (NWO) proponents, or the old for that matter, because they will shut you up, obfuscate, or simply kill you in order to keep the dream alive because life is sweet for the rich (West, oligarchs, etc.), which must be maintained at any cost. And this game has been quite successful because the masses are still eating - at least most of them. When this changes however, so will the status quo, where the decentralization process - the de-dollarization of the world - will accelerate.
What we are talking about here is the death of an Empire - the US Empire - and it couldn't happen to nicer group of guys. Like Rome at the end, America has gone past the colonization phase and is simply in the war business now, accented by any tainted technology the conquered are still willing to buy. This will become evident when the US puppet regime is eventually pushed out of Ukraine, with the situation now heating up in this regard. Like no other, the Ukraine embroil is key to kicking off the acceleration of de-dollarization moving forward (on a symbolic basis), where again, once American war mongers are shown the door, US hegemony will officially be knocked out of place in now rapidly strengthening competing trading blocks that are designed to make the dollar($) redundant.
But it would be wrong to identify the death of an Empire in one event, because it's a process of decay from within, where measures by the conquered to defend themselves from tyranny, are eventually successful. Nowhere do we have a better example of this than in the success of the China led Asian Infrastructure Investment Bank (AIIB), where not only are Chinese allies eager to join this alternative to Western colonial mechanisms (think World Bank, IMF, etc.), close US / Western allies were also hot to get in, including the UK and Germany, with Japan the only 'big boy' holding back in a sign of loyalty. So, things are now happening that would have been considered 'out of the question' just a few years ago - where even Israel has applied to be a founding member of the AIIB, with the US now almost completely isolated because of its own tyrannical mismanagement. With global diplomatic relations now unambiguously blurred (US and Iran are now allies? Does the US need Iran to keep crude oil down?), spurred by an increasingly desperate Empire, one does need wonder what growing political instability will yield on the war front in the end (nuclear war?). One thing is clear however, the 'new normal' in this space is 'it's every man for himself', which again, will continue to accelerate the de-dollarization / decentralization process.
What's more, it should be pointed out this 'new normal' within the political sphere, along with the increased alienation of the US in the business sphere (technology sales will decline due to spying concerns and arms sales will fall due to increased competition), will work to fast track a dethroning of the $ as dominant global hegemony, where although it might remain a key part of a new global basket, it will not be what it is today. What's more, one should also realize this is not the end of the decentralization process, only the beginning. Because as economies continue to disintegrate from continued mismanagement across the globe (because of greed, human nature, etc.), further decentralization will be necessary well into the future until the world returns to a form of pseudo-mercantilism in the end, where although trade up and down the scale will still occur, as opposed to current structure, economies will be far more inwardly oriented. This will be necessary to get people working again - the division of labor that brings localized manufacturing back to the imploding financialized clusterf*ck we call economy today.
Maybe then, people in the West can start saving, and economy build capital stock once again (instead of maxing out stock buybacks or any other financial engineering [think QE] with only narrow and fleeting benefits for the few), however this is the optimistic view given the degrees of ignorance, corruption, and damage that now need to be digested. Indeed it could take generations, if ever, for the American Empire to catch its breath again once the dominos start falling in sufficiently noticeable fashion that its own delusional citizenry finally wakes up. Slowly, but surely, it's happening. The dominos are falling in ever increasing numbers, where again, it would be difficult to put your finger on a single item as the 'big one'; however, without a doubt if Greece were to turn East in coming days, triggering a problem in credit markets, this might qualify. With US / Western technical and macro-conditions in such fragile condition, on top of the foreign relations might mare Obama and the Beltway Boys have summoned, a weakened state leaves the Empire vulnerable to just such an outcome.
Turning to the markets, and from a true sentiment related perspective, we are also possibly aligned for some nasty events to develop sooner rather than later, assuming a resumption of raging buyback announcements post the quite period ending in April does not trump all else yet again. Therein, based on how the key open interest put / call ratios, pictured here, are stacked up at the moment, it should be noted that with the exception of Russell 2000 (RUT) speculators, who cannot be solely classified as retail, it's the pros who nervous at the moment with the SPX and OEX at relatively elevated levels; but that the retail trade has for all intents and purposes capitulated in their desire to bet negative. Even the might XLF is falling like a stone, which means if stocks were to fall here, and retailers have truly capitulated, if the pros were to buy the dip at some point, meaning put / call ratios on the SPX, OEX, and RUT were to fall as well, then ladies and gentlemen, the stock market could finally give up the ghost. It could happen. In fact, at some point this must assuredly happen from a psychological perspective. (See Figure 1)
So, if process is truly accelerating here, it only makes sense to also expect this in the stock market as well, where as you can see in the weekly Dow plot above, although volatility could compress longer, as measured by the descending and contracting triangle in Bollinger Band® width; still, the big take away here is that at some point over the next year stocks will most likely take a header. Once the Dow breaches the large round number at 17,000, prices could fall precipitously, with the larger degree target the bottom rail of the expanding sinusoidal (broadening top). From this analysis then, we can deduce that at some point over the next year the Dow will break support at 17,000 in violent fashion, with the only question remaining from what level. The best fitting Fibonacci resonance projection implies the Dow could approach 22,000 before it reverses lower on a lasting basis. In looking at the Dow / Gold Ratio (DGR) on the same scale it's not difficult envisioning such a move because it has not even hit the 38.2% retracement yet. (See Figure 2)
In looking at a longer term chart of the DGR, attached here, we can see that compared to the mid-term correction in the 70's, the present move does not need to retrace further. So anything could happen here, especially with the building pressure in the markets to properly reflect an imploding global (including the US) economy hidden by smoke and mirrors. With the Dow failing numerous times now at 18,000, one would think failure (a break lower) is the more likely outcome, however one can never tell with all the financial engineering these days. Lest we forget history dictates that corporate buybacks will commence again starting in a week or two, and something tells me the sociopaths in charge of these companies don't give a hoot about the economy, their balance sheets, or anything else except their own pay packets. What's more, if gold does not respond to the softening data and escalating world events in proper fashion, meaning a strong surge, then the machines will undoubtedly be able to chew the speculators up one more time, which will in turn support stocks via the inter-market algos that keep these ratios (see above) on their present trends. (See Figure 3)
Further to this, and as you can see on the weekly plot above, gold needs to begin accelerating higher soon or risk another possible violent breakdown, which is possible from a sentiment related perspective. Therein, not only is true sentiment (open interest put / call ratios and short interest) none supportive of paper gold (GLD) pricing at this time, people are now recognizing deflation in the real economy is accelerating, which could cause some panic selling in the initial stages of asset collapses once the dominos start falling. As you can see above, the indicators show declines are still not out of the question. And while the true value of gold is much higher, the machines are not programmed to react to this - they are programmed to react to momentum, and what the bankers tell them is important. So, it's anybody's guess just when fundamentals will matter.
In terms of true sentiment, as pointed out last week things are definitely getting better for the miners moving forward, where both open interest put / call ratios and short interest (see attached above) have been rising steadily, however we are not quite there yet with both GXX and GDXJ still below unity. If the trend toward pessimism were to accelerate here with a deflation scare as well, such a turn of events would be a positive for the sector in harnessing the power of the machines, however in order to get to this point, logic suggests one more flush will be necessary. What's more, starting next week, seasonality turns lower for the miners, where they usually go to sleep going into summer as liquidity dries up with the holiday season. Of course considering liquidity is already challenged; seasonals may not be a factor if others (fundamentals, sentiment, etc.) turn positive, where tighter supply actually works in their favor; however many have gone broke using this logic, so caution is still advised.
Obviously we could be wrong about this with key data in the US now turning weaker, which is supportive of a weaker $ (stronger commodity prices), however one should never underestimate the creativeness of the bureaucracy's price managers, that and the natural tendency for speculators to continue betting the wrong way in the derivatives markets. According to Martin Armstrong's Economic Confidence Model® the bond market (representing confidence in government) is supposed to turn south in a big way starting in October, which should change the backdrop for precious metals on a profound basis, where simply put, all that money coming out of bonds will need to go somewhere, with only small flows towards gold and silver necessary to cause radical moves.
We are getting closer to a bottom in precious metals, so stay tuned.
Good investing is soon to be possible in precious metals again.
Stay well all.