The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, December 28, 2015.
It's getting harder and harder for people to rationalize why our 'modern markets' act the way they do these days because they appear 'counterintuitive' to the naked eye. They go up when they should go down and visa versa. The precious metals markets are undoubtedly the best example of this present overriding condition in that evidence of financial instability and sovereign currency management (debasement) continues to accelerate with no impact on prices. It's like nothing is wrong.
This is of course not the case at all, however one must look under the hood to understand why this is happening, and although entertaining, you won't get the right answers in a movie (or book) like The Big Short. Yes, the 'rigged markets' and 'corruption' are talked about, however the real mechanics of how faulty and fraudulent Western markets continue to misprice underlying fundamentals remains a mystery to most - with the vast majority of professional money managers still in this category.
They know something is wrong, but for most, just can't put their finger on it. All the signs are there, the excesses and bubble dynamics that brought about the reactions in 2000 and 2008, only it's worse this time because it's global. So anybody with an ounce of common sense knows a price must be paid one day - leaving timing as the unknown. The problem in this regard is every time the speculative community attempts to game a top in stocks they in effect delay it because of the way the markets are put together these days, with both official interventions and speculator betting practices working to keep them levitated.
What do I mean? Let's take a look at what normally happens to stocks after an initial Fed rate hike - and why - in order to answer this question.
Historically speaking, stocks have a tendency to go up for about two-months after a Fed rate hike. Based on the way speculators reacted to this last tightening, we have no reason to believe such an outcome will not be duplicated this time around as well, putting us into mid-February for a potential top. Why? Because naïve speculators thought the rate hike was such bad news for stocks they did something stupid again, they bought puts on a net basis, sending open interest put / call ratios on the key broad market ETF's higher (see here), providing the necessary fuel for the machines (think HFT's, algos, etc.) to send stocks higher one more time in the perpetual short squeeze; which again, if the above is any indication, should last until February.
You will remember we had a rather scathing review of this process in our last sentiment study of 2015, which delved into this subject matter in detail, focusing on precious metals, and how they are suppressed via these means. One will remember upon review, this is where we pointed out a little bit of knowledge can get the unsuspecting or naïve in a great deal of trouble, referring to how speculators are killing themselves in ETF's with bullish bets based on what they are seeing in COMEX COT analysis. We speculated trouble (death) is what's coming for hedge funds that have been buying bullish paper market bets in precious metals these past four years because of the 'fundamentals'. And sure enough, money is now flowing out of non-performing hedge funds, of which there is no shortage.
Again, you will remember, the reason for this is US markets are rigged to respond to speculator betting practices - not fundamentals. Here's a fundamental for you. The markets are rigged to ignore fundamentals and exploit stupid gamblers via algorithms driven off of options related speculator betting practices. And in terms of the various paper precious metal vehicles one can gamble with in the stock / derivatives markets, if they missed that fundamental, they are down 95 to 100% since 2011. And here the most remarkable aspect of this mess - they have never been more bullish about precious metals prospects than they are today based on open interest put / call ratios in key ETF's. (i.e. GLD, SLV, etc.)
Are these guys morons or what?
So, do you see what I mean now about how the markets are 'counterintuitive', always moving in the 'wrong directions'? If a consensus of betting market participants (speculators) take positions based on what they consider to be the most likely outcome, the machines will move the market(s) the other way in order to protect the underwriters of the derivatives contracts, which in the vast majority of instances is the banks. Funny how that works - no? Actually it's not funny at all if one is caught up in this schlimazel, because even if one thinks they are acting rationally, slowly accumulating non-time-dependent securities in precious metals (the shares), you can still end up with substantial losses, where if you can believe it, precious metals stocks are still poised for substantial losses from current levels. (See Figure 1)
Regular readers of my dialogue should already know my long standing targets for the Gold Bugs Index (HUI) and TSX Venture Index (CDNX) (see above) are 60-80 and 400 respectively. You would also remember this targeting is based on the belief that as long as speculators are taking put / call ratios lower across the sector the trend(s) in precious metals remains down, as is still the case today. Throw eventual liquidity risk into the formula at some point (this year?) as well, once the broad measures of stocks finally roll over, just like what happened in 2000 and 2008, and you have yet another reason to remain cautious on precious metals (mainly the shares) once the seasonal bounces currently underway are exhausted. In the case of the Gold Miners Index (GDM), which is a wider measure of the group than the HUI, again, we are looking about 20% lower for a final bottom from recent lows. (See Figure 2)
In the what should not be surprising to anybody department then, and corresponding to this anticipated pressure on precious metals, we have the dollar($) likely seeing more gains as well, in connection with the synthetic squeeze once a sustained global deleveraging cycle forces an unwind of the $ carry trade. Once this process runs its course however, look out below for the $ - and lookout above for commodity prices. But why would this occur? Why would commodity prices take off if a depression is to grip the global macro? The answer lies in a theme I have been working with for some time now (since 2012 - but its popular now), that being 'A Check In Every Mailbox' - or as it's better know today - QE (money printing) for the people. Many are seeing the writing on the wall now in this respect, but few understand the implications. (See Figure 3)
What's to know in this regard? The government is going to deposit a certain amount of money in everybody's bank account every month (some are calling this 'basic income') and people are going to spend this money. If like Finland, that amount ends up being $850 per month over here as well, this will be a 'big deal' in the economy you can count on that, likely triggering the unintended consequence of 'price inflation', which would in turn cause interest rates to rise far more than most could contemplate today. So what? Well, one unintended consequence leads to another, like money fleeing dividend bearing stocks because they can get a risk free return in the bank again. But more, what if the speculators finally capitulated in terms of their present insane betting practices right at the wrong time - because if the economy is going to be 'OK' - who needs insurance. (i.e. broad market puts and precious metals calls.)
And while I might be getting a little ahead of myself here, still, I can assure you the above prognostications have a better chance of playing out than one might think because the status quo boys are running out of alternatives, which is why this measure (QE for the people) is being implemented in Finland right now - because they are already in a depression. But if you think things look tenuous right now, just wait until central banks all over the world start raising rates because they must in response to what is likely to become an avalanche of free money hitting the common folk in country after country as the bureaucrats see the writing on the wall. Yes, we have central authorities of various countries attempting other measures, like NIRP and cashless economies, however once they see the initial benefits of QE for the people in Finland, this tactic will be adopted globally.
Remember folks - you heard it here first - again.
Big changes are happening right now so people should be paying attention.
See you soon.