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No Free Lunch Redux

The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, April 25, 2016.


This is not the first time this subject matter has crossed these page, and I can assure you, it won't be the last. The forces behind the colloquialism 'no free lunch' is a primary tenant in nature, and for this reason a correspondingly central tenant of 'sound economics' and the Austrian School. This ideal caught my attention like no other studying economics way back when because it was the only sign on my favorite professors door besides his name. That's how I grew to appreciate its importance - through this brilliant imagery.

So here I am writing on this subject matter yet again, looking back at my last effort penned in 2013, thinking about how much has happened in the economy and markets since then, and seemingly how naïve I appear to myself today. Please take a few minutes to browse through it, as I am about to call on it in order to make a few new points readers might find useful put in proper context. Back then, I thought that the world was still round, and that the laws of gravity were operational.

Boy was I wrong. I thought the bounce in stocks coming out of 2013 would end sooner rather than later, and that precious metals were poised to reassert themselves in the not too distant future - wrong, wrong, wrong as we all know today. Nope - it's been 'free lunch' time since then with central planners attempting to stay ahead of the next crash, and they are working it hard these days. Now we have ZIRP, NIRP, and soon QE for the people (helicopter money) - anything to keep the bubble economies from imploding.

Of course all they are really doing is postponing the inevitable and making things worse, because after hyperinflation comes depressionary collapse. Just ask the folks in Venezuela - they tried socialism and now they can't even afford the electricity bill. And make no mistake about it; America is heading down the same road - over-indebted, over-exploited, and seriously overdue for an overhaul. Watch junk credit. This market will be in serious trouble soon once all the fracker defaults must be recognized - and it's happening in real time.

Because all the money printing in the world will never translate into real economic growth because of its non-regenerative nature, which is the primary insight of this wrongheaded policy Keynesians refuse to recognize. Why? Because many central planner jobs (bankers, bureaucrats, etc.) would be rendered un-necessary in a more 'laissez faire' environment, something referred to as 'free markets' in lay-terms - something we don't have today. No free markets, no free elections - no more free lunch for the public - no more free lunch for anybody soon - including the riggers.

Easily one of the best examples of this over the past week was the announcement by one of the largest pension funds in the States that it needs to cut benefits to it's members substantially; and the kicker, it might be insolvent by 2025. Why is this happening? The short answer is the Fed's repressive interest rate policy. The long answer would involve more of the above, coming around to the conclusion nobody eats for free. The economy must work for those doing the work or it will fail, so this announcement by the Central States Pension Fund, which provides benefits to the Teamsters, is profound.

Because it essentially means the bureaucrats are screwing the working class - right from the bankers to the government(s) - notice no such announcements for these types yet. So the question becomes, 'how long will the plebs allow this kind of thing, the theft of life savings, to go on before they do something about it?' Well, they are trying to fight back in the ballot box this year, which is a definitive sign the tipping point has been reached, however the status quo is a powerful and resourceful lot, so it might take a stolen election to really get them mad.

Excellent quote from visionary Frank Zappa I was reading the other day which fits the bill for this discussion as well. "The illusion of freedom will continue as long as it's profitable to continue the illusion. At the point where the illusion becomes too expensive to maintain, they will just take down the scenery, they will pull back the curtains, they will move the tables and chairs out of the way and you will see the brick wall at the back of the theater." This is exactly what's happening right now in America - and it will only get worse.

But don't tell that to global market managers - these people would have you believe everything is just fine - because of (you guessed it) money printing and buybacks. And it's true, on this basis stocks (all equities including commodities and precious metals) could continue to diverge from reality higher despite deteriorating fundamentals, signals have been triggered in this respect, however it should be remembered once all the games have played themselves out, with everybody in the pool, the payback will 'be a bitch'. Because again, there's no free lunch in this world, and at some point the tab will need to be paid. (See Figure 1)

Figure 1
Gold Bull Markets 1970 versus 2000

As you can see above, a chart I borrowed from here, it appears gold is waking up to this reality again, the reality it's inflate or die, even if it involves the yellow metal going substantially higher for whatever reason. Of course the real reason gold will rise in the end is because of insolvency risk that will become unmanageable as process continues to unfold, with general price levels likely joining the asset inflation party in response to the eventual political necessity of QE for the people - what some are referring to as 'real QE'. So again, in terms of stocks, some version of all this will likely be the result in coming weeks, with higher prices the effect. (See Figure 2)

Figure 2
S&P500 Daily Chart

What's more, now that Trump is applying the pressure with his win in New York, and his stated objective to replace Yellen (and defrock the Fed), you can expect even bolder price management (and inflation) moving into the convention this July in an attempt to dislodge him, which in theory could keep a bid under stocks, commodities, and precious metals until then, if not due to outright money printing acceleration, because of speculation in this regard. In terms of sentiment, this will be more difficult for stocks moving forward with speculators apparently aware of this condition (seen in falling put / call ratios - seen here), or is it they are tired of getting squeezed - or is it both? (See Figure 3)

Figure 3
Rydex Precious Metals Weekly Chart

In my experience, most speculators are not that smart, so I would tend to favor the latter reason over the prior. So who knows how long this can go on for - until July - or June - or May at the earliest - that's for sure? Another thing that's for sure is if one made the mistake of thinking you could trade precious metals in this environment, or simply accumulate carefully, you are in a world of pain right now, because with the Fed is in self-preservation mode, and the hedgers increasingly paranoid about a correction (the put / call ratio on DUST keeps falling and GDX rising - now over unity), precious metal shares could still zoom another 30% higher from here before they settle down - believe it or not.

What's more, it should also be recognized Commercial Comex hedgers are essentially trading at odds with the Fed and Yellen because of all this, which could go very wrong for them this time around - resulting in Commercial Signal Failure'. It should be noted both gold and silver COTS are at multi-year extremes right now. On this basis, with the Fed meeting this week, it wouldn't be surprising to see a takedown prior to Wednesday; however, it would be surprising to see hawkish policy comments in the official policy statement. I am not forecasting this, but with this dynamic in play, you should know what we are dealing with.

And then there's Comex options expiry to consider tomorrow, where distributions would suggest a close below $17 is in order from the Commercial writer's perspective. (i.e. so the banks don't pay.) All this adds up to soft prices likely in the first part of the week, followed by some degree of a rebound in the latter. It's not that Fedsters want precious metals to go up or anything of the sort (commodities) because of the inflation signals thrown off, however at the same time, they can't say anything to upset the apple cart right now either given their predicament. And again, the election thingy sure has them worried - worried enough to break precedent and make big donations to Hillary in spite of the conflict this creates. It's nice to see these Fed parasites squirming finally.

So when is a real correction in precious metals likely? Answer: While nobody knows for sure, if they continue to blow-off into May, it could be the whole Fed / election thingy is discounted - not too mention some hedgers will need to be taken out on a stretcher by then. Looking at it another way however, and to stop the guessing, it will be when nobody expects it. When is that going to be? Answer: When the speculators / hedgers think precious metals should rise, causing open interest put / call ratios and other related hedging to taper off. When will that be? Once the outcome in the election is more certain. When will that be? Answer: In the second half of the year, a possibility that would be more probable if precious metal shares rise all the way into the May - July window.

If precious metal shares can correct into May (or longer) however, as discussed previously, this would signal the possibility of some real fireworks running into November. Is this because either Sanders or Trump end up running as independents, or as part of an already established party (Green Party) if this is not possible? Answer: Yup. So needless to say, we will be watching what happens this week with great interest, looking at how successful status quo price managers are at painting the tape into month end. From a bull's perspective you don't want them to be too successful because a bad monthly close for the sector would normally signal stepped up selling next month. Again however, this should not be a problem with the investing population so paranoid about such prospects, evidenced in the continued crash of the DUST put / call ratio - and soaring GDX.

Does that mean any weakness (this week?) is a 'buying opportunity'? You bet it does. It's called climbing the wall of worry baby.

Some, like this guy, would have you believe different, however one should note the flaws in his method and thinking. In the first place, he and his follower are the suckers buying the all the DUST calls, on which they will never get paid. And second, silver is not just the funds 'play thing'. While it's true it's a favorite play thing for aggressive speculators, at the same time, in coming back down to earth, it's the world's best conductor of electricity, and will be in huge demand over the next five-years in China and India as they roll out expanded photocell use in solar energy initiatives. And then there's the hyperinflation that will be necessary to bail out the parasites. And then there's World War III carelessly being triggered to consider as well.

And then there are the initiatives to remonetize silver and gold, which again is all the talk right now. And then there's a rapidly changing political scene in the most powerful and unstable country in the world - America. At some point these things will matter, given I wouldn't be betting on them like the hedge funds in the futures market - that's for sure. Nope - physical metals and well-selected shares (not ETF's) for longer-term holds are the way to go. While one may suffer the slings and arrows of wrong decisions with all the factors in play, still, when you need to be holding, which is totally unpredictable at this point (as the guy attached above is finding out), you weren't wiped out in some crazy paper crap that will never allow you to anchor your savings into any sort of value play anyway.

So while it's true silver might need to go sideways for a period while all this is sorted out, at the same time it would be further filling in the huge multi-year base its been building, which will pay off handsomely one day for properly positioned (structured) investors. Because something wicked this way blows that will blow conventional (status quo) thinking right out of the water starting this year - that's for sure - so one better be prepared - the revolution has arrived.

In this regard, the good news is I will be reopening the Precious Metal Portfolio this week (Wednesday), where all the picks starting from last year will be included for your convenience.

That's my story, and I'm sticking to it.


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