The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, August 17, 2015.
Central planning is the culprit. It transplants concepts such as for 'the good of the people', and 'good of the state', from those associated with a republic based on political freedom and liberty. Commonly referred to as 'socialism', throughout history centrally planned regimes have been born out of democracies as lifecycle changes take hold, and touted as progress by those in charge of, and benefiting from, the planning. Humans, being what they are, which is easily corruptible, quickly turn such circumstances for their own benefit at the public's expense, who don't mind because they are bribed with handouts as well. My recent work on how the US, and Western world, have arrived at an accelerating state of decrepitude via the fascist state, which is the next phase transition of dynamic political change, can be seen here, which brings us to the place necessary to understand today's topic.
Within the context of the above, it's important one comprehend how the state views you. They want you to be an obedient a consumer, taxpayer, and worker - a commodity - in support of the state, and in turn, the larger bureaucracy. (i.e. including the rentier class, oligarchs, etc.) Better minds from simpler times would view modern day man with a sympathetic eye, but never-the-less, still brand us idiots because of how easily we allow ourselves to be manipulated these days. It's a time of 'bread and circuses'; a time of deceit, distraction, and dumbed down; a time where the public is wrong-headedly willing to sell its freedom for 'economic necessity'; collectively making it an epoch where liberty has been commodisized as well. It's up for sale to the highest bidder. It's the commoditization of the moral code and everything else in turn. And the public doesn't care how spoils are delivered.
It's the commoditization of everything.
The commoditization of the stock market has never been more obvious than through the looking glass of corporate buybacks, which are set to soar once again. Stocks are now rising for one reason and one reason only - corporate greed. Or should I say the greed of corporate executives to pad their own pay packets. That's a more accurate appraisal of what is occurring in watching corporate profits shrink, but because shares are being bought back at a faster rate than this slippage, per share earnings are rising via this ruse. And as long as this lunacy continues, increasing degrees of moral hazard will flourish by de-risking the stock market (commoditizing it), until the bubble gets too big to manage once the interest rate cycle turns. And it will turn; make no mistake about it. At some point the junk in the Fed's portfolio will blow-up and it will be forced to print money on an accelerating basis to replace the air escaping its own bubble (forcing rates higher). This is a certainty if history is a good guide.
But again, for now the public doesn't care how spoils are delivered, as long as they keep coming. Once the bubbles pop however, and the economy turns sour, people will stop eating, and things will change very quickly. This will lead to dictatorship in the next phase transition of the political lifecycle, which is why Donald Trump has a better chance at winning the Presidency next year than the status quo, or anyone else for that matter, may think. (i.e. even though he's a nut bar.) People have been dumbed down and have become lazy, depending increasingly on the State. So they sure as hell don't want to go back to a democracy because this would be hard and involves sacrifice, which would get in the way of uncontrolled consumerism. That's why they opt for a 'sugar daddy' - because they know they are getting taken by the fascists in Washington now - but their loyalties are still up for sale as long as some version of the status quo (payoffs) is left in tact.
This is the most radical solution the public is willing to take at this point - until they see the Donald trump their liberties worse. But this is discussion for down the road, something we should give more serious thought as the election approaches next year. (i.e. because much can change between now and then.) In the meantime we must worry about more pressing items, such as how all this is affecting the financial markets (and economy), where again, as alluded to above, essentially because the bureaucracy's price managers (central authorities, corporate buybacks, etc.), a de facto price setting commoditization has occurred here as well, we now have the tail waging the dog (the markets have become the economy), with the potential for disastrous outcomes when mean reversions are forced back into the equation.
This is essentially what happened this past week with the retaliatory devaluation of the Yuan, where China was sending a message to the West (US); it's better to allow us to integrate as a 'Western partner' than maintain present policy. (i.e. even if we intend to 'take over' eventually.) If not, we will be forced to take drastic action like the devaluation last week that sent financial markets into disarray. This is of course no surprise to us because we know the global decentralization process is accelerating now, not the other way around, and not that this is a well understood condition even amongst (supposed) high level planners in these countries that think they can control far too many things with no consequences. This is the 'big lesson' that will be learned as a result of all the interventionist Tom Foolery in the end, not that 'officialdom' would ever admit it. Keynes should be rolling over in his grave watching us literally destroying our economies for the benefit of so few. It doesn't have to be this way.
And if stocks and bonds do in fact crash in rolling bubble popping parties as process continues to unfold, things will change. The status quo will become increasingly challenged, and ultimately fail in favor of a better system. This is essentially already occurring internally within market mechanisms that are not visible to the naked eye, but never the still exist in 'true sentiment' measures. Here, we prefer to focus on open interest put / call ratios where they tend to reflect true sentiment conditions because traders / hedgers are holding overnight (think structured trades) because of 'conviction'. Of course this does not prevent the machines from carrying out their programming, which is set by the bankers, and is designed to exploit trader / hedger insecurities. (i.e. if put / call ratios are high and rising - prices will rise due to a short squeeze no matter the fundamentals.) This is a large part of the reason why stocks keep rising despite deteriorating fundamentals, this, and the all liquidity measures of course.
Again however, because of either psychological or financial exhaustion, put / call ratios eventually top out and start falling, where once they are below unity, they can no longer cause unjustified price appreciation. And again, the problem is all this bubble blowing Tom Foolery has now brought us into a very dangerous place, where despite the appearance of stability on the surface due to rising stock and bond prices, behind the scenes our commoditized façade is an accident waiting to happen. All that needs to happen is a sentiment change - a true sentiment change - possibly married to a rapid loss of liquidity, could cause stocks to crash - believe it or not. As you can see here, already we have key ratios controlling trade in the Dow, Transports, NDX, MNX, and XLF either at or below unity, meaning all we need is for the institutional traders / hedgers that play the bigger contracts (SPX, OEX) and speculating public not yet bankrupted by all this (SPY and QQQ) to join the party and this support mechanism will be gone. (See Figure 1)
That's when 'solvency' will matter. And that's when you can expect to see the Dow / Gold Ratio (DGR) turn lower once again, because as the money leaves stocks some of it (the smart money) will looking for a safe parking spot in gold with bonds having to contend with their own bubbles. As you can see above, all we need to see a push in the DGR to the 17.5 area (see Figure 1) and the reaction off of 2011 could be complete, even though it might need to extend further (see Figure 2) depending on how much pain it takes to make stubborn traders stop buying puts. Again however, once this process begins, look out below, especially if married to contracting liquidity conditions, which is of course fait accompli already. Traders simply don't want to admit it because this would end many lucrative jobs that will not be possible to replace, banishing increasing numbers to the salt mines of an exploding welfare state. (i.e. which is also a bubble that will in turn pop.) (See Figure 2)
Of course why should they admit it, because they are buying insurance against such an occurrence - right? In fact, buying insurance is the most institutionalized, structuralized, and again, commoditized elements, of the financialization of our financial markets today - its consumerism for status quo techno-junkies - and the life blood of modern day price management practices in Western financial markets. What the West has done is truly miraculous in this regard, financializing the commodity markets and commoditizing the financial markets all in one 'foul swoop' (back in the day with the explosion in futures and derivatives sales because of the '87 crash), so it's perhaps fitting a round trip brings us back to the point where derivatives finally accomplish the signal that was transmitted way back then. Again, and like the DGR, one more push higher in the S&P 500 (SPX) corresponding to another commodity smash led by silver, the status quo's favorite 'whipping boy', because paper market speculators are stupid (always buying calls) and the market (think ETF's and COMEX) is so small (easily controllable), should do the trick. (See Figure 3)
Technical Note: the Franco Nevada (FNV) / Amex Gold Bugs Index (HUI) Ratio shown in Figure 3 supports the view the precious metals sector still as more pain ahead, with the 'best fit' Fibonacci resonance signature still not achieved. Traders seek out the safety of royalty trusts during slow growth periods, which is when growth companies, as represented by HUI, tend to correct previous gains. This is why the ratio continues to rise.
Because that's what it's all about for the status quo ladies and gentlemen, keeping commodity prices suppressed (using financialization), allowing for more forms of financialization to evolve (think HFT, derivatives, etc.) in order to continue the build out and concentration of power in Wall Street, Washington, hedge funds, conglomerates, bureaucrats - and especially the oligarchs - in the neofuedal / neofacsist modern day state. Of course while it's true low commodity prices that allow continued temporary spending increases in the financialized economy; eventually this lunacy will catch up to greedy and foolish status quo seekers, because hollowed out economies, economies lacking regenerative capabilities (found in healthy environments where the capital stock and manufacturing employment are increasing), will eventually show their true colors - with Detroit (or Greece) a classic example of this understanding at work.
Moving onto some market talk to finish things up this week. For the broads, we have a similar set-up to last month, where a weak start spurred a strong finish. As alluded to above, squeezing stocks into options expiry (this coming Friday) is becoming increasingly difficult for price managers, meaning it's more efficient (cheaper) to push prices higher at month's end because this must be done anyway to pad equity pay packets. And this is of course exactly what we need to see in the S&P 500 (SPX) / CBOE Volatility Index (VIX) Ratio to complete the larger degree impulse, a strong monthly close into the 220 area. In order to get stocks to finish stronger, price managers will need to hammer the VIX lower below 12, and then below 11 (next month), in order to accomplish this. The falling open interest put / call ratio on VXX (seen here) will enable such an outcome.
Looking past September / October time window, where apparently too many are still expecting a crash, you've got a divergence in not just the New York Composite (NYA), but in a growing number of key indexes, not the least of which include the Transports, and now the Russell 2000, which is forming a head and shoulders pattern. It's important to recognize that this pattern can trace out with the SPX and NASDAQ going to new highs. And even the mighty Dow itself is having a great deal of trouble generating a bid with speculators afraid to buy puts on it, evidenced in open interest put / call ratios either at or below unity on the DIA and DJX respectfully (seen here). So a post fall crash scenario is more likely because of this setup, with the early part of next year a possible kickoff point. Stocks could continue to grind higher between now and then.
As for the precious metal measures we are monitoring, as delineated at the beginning of this bounce, while $15 has been breached on silver (doesn't matter because its volatile), the levels to watch for are $1130 on gold, and 125 on the Amex Gold Bugs Index (HUI), where weekly closes above these marks would signal something more than just a short-term reaction is occurring. Such outcomes are not anticipated, however stranger things have happened - that's for sure. If this were to occur, what this would mean is the rallies in the Dow / Gold Ratio (DGR) and SPX / SLV Ratio would be put on hold, meaning the blow-offs in these ratios, and stocks, would be postponed, if not negated, as well. Again however, with put / call ratios still somewhat supportive of stocks, and bearish for precious metals (below unity), such an outcome is not possible on a lasting basis as long as the machines still run the show.
It's as simple as that.
All the other factors you read about - the money printing, physical shortages, yada yada yada - they don't matter right now - not until true sentiment becomes properly aligned. Like the status quo boys on Wall Street, such talk does not serve the interests of the gold promoters, essentially making them the status quo of the precious metals sector, aiding the corporate plunder of companies like Barrick - which is now on life support. But hey, they all go on the same junkets - so it's 'party on dude' - right.
This is why you will never see them acknowledge me - because I talk about reality and the truth, which is not part of the status quo narrative. (i.e. always optimistic, buying every dip, and bullish.)
In fact, it's so bad now, these companies will never recover. No matter how much gold and silver go up, heavily indebted large producers may never trade at previous highs. Sure, if gold goes to $5,000, the HUI might go back to 600, and beyond, but it's highly questionable Barrick, or its ilk, will ever see the old highs. This is why security selection will be of the utmost importance in the coming rally, and why we will be providing a list of candidates for accumulation once the time to buy gets closer.
See you Wednesday.