The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, August 29, 2016.
A day of reckoning approaches – even the oligarchs know this – and it's coming closer faster every day. No, I'm not playing with words here, or your sensibilities. However, because our situation has been in hyper-bloat for so long now, essentially measured by stock market lows in 2009, this statement is simple fact. A day of reckoning approaches – and it's coming closer faster every day. It's that simple, whether you want to face up to this inevitability or not. And it will arrive for all the reasons we discuss on these pages every week, some of which, the important ones, we will discuss here again today.
As regular readers would know, long ago we sounded in on the inevitability of a profound decentralization process, countering still omnipresent 'Globalization' plans on the part of the world's elites, now accelerating in sympathy with increasingly destabilizing economies as central planning continues to destroy the global economy, impoverish increasing numbers, and exacerbate wealth / income inequalities. So make no mistake – process continues to accelerate in this regard – where the economy / markets are disintegrating even though a thin veneer of normalcy is still being maintained in 'price stability', a situation that should look quite different next year.
Next year is another year ending in '7' that should go down in history as a pivot point back towards the volatility that more accurately reflects the vulgarities associated with the human experience – and our flagrant disregard for the 'seven deadly sins'. The markets / economy are being supported by the status quo's desire to maintain stability prior to the US Presidential election this fall, because they are especially worried about being displaced by a popular vote that brings in radical change, if that is truly what Donald Trump represents. Because globalists will put the heat on Trump if he wins – and embedded bureaucrats will back them up logistically.
Thing is, it won't matter who wins in the end, as suggested last week. Competition for scarce resources on a global basis will trump all such concerns in the end. And as process unfolds, which will accelerate de-globalization and the further loss of living standards in America (and world), while central planners and elitists will attempt to counter loss of power by rallying the masses in war, again, this will not matter in the end as localization trends overtake the macro. Schumaker was of course way ahead of his time in envisioning this, a more natural order for the human condition, a genius, as we began documenting some eight years ago now, along with here and here.
The question then arises, 'if the system and markets crash again, won't they just reinflate them like all the other times?' Indeed. Why would this time be any different – postponing a 'true reckoning' once again, and pivot towards decentralization? That's a very good question. The answer of course is answered in the cost of money – which is now essentially worthless and devoid of any value – and is why central authorities must now give it away. (i.e. ZIRP, NIRP, etc.) Unfortunately, this condition will not prevent central bankers from melting down the system in a painful quasi-hyperinflationary event (some degree of hyperinflation), coming to your town soon, evidenced in the now inverted yield curve – concrete evidence the US economy is a painted-over recession.
Power always corrupts, which is why you can't have somebody in Washington or Brussels making it appear they are taking care of your interests. They are taking care of themselves, and are more than willing to throw everybody else under the bus in order to maintain their utopian dystopia. Human beings in positions of power must be managed, as represented by the Constitution, which has been thrown out the window now along with the baby, bathwater, and anything else 'America' once represented that was 'good'. And unfortunately this continues until it's too late, as is the case right now, no matter who wins the election. Because even if Trump is elected, and he is allowed to take office and begin implementing policy, it won't matter because America is broke and will have to print the money to keep all those promises.
So make sure you understand this – it won't matter who is elected in November – the US is broke and will need to implement money printing acceleration or face economic implosion, again, evidenced in the now crashing inverted yield curve, which will play havoc on the dollar($). Add in the growing trend toward decentralization, which is another way of saying 'de-dollarization', and 2017 should see an unstoppable torrent of $ selling that sends commodity and input prices in America through the roof, further enflaming an already enraged mob that will be on the war path for blood. Once people stop eating, which is what will happen as commodity prices explode higher, will turn America into Venezuela so fast is will make your head spin, so I hope Trump enjoys his honeymoon quickly, because it won't last long. As you can see below in the Dow / CRB Ratio, the turn into an accelerating inflationary environment is close now. (See Figure 1)
Here's a chart nobody else is looking at, which is always good for those who are, the NASDSAQ / NASDAQ Volatility Index (VXN) Ratio (monthly). What is the chart pattern in this ratio telling you at present? Answer: That inflation is on the way, and as a result, tech stocks are going higher. It's that simple unless the triangle test currently underway fails. So again, as per our comments above, it doesn't matter who wins the election – the feds will have to print ever-increasing money or face economic implosion – right here – right now – election or no election. So to answer the bigger question – will we ever see a 'day of reckoning' with all the money printing bureaucrats of the world, the answer is still yes, but not in the traditional form. It will come not in a deflation scare – but (some degree of) hyperinflation reality. (See Figure 2)
Funny thing is though, in looking at the plot below, we have a profound negative divergence in tech stock out-performance in this last surge that began at the turn of the year, suggestive any further gains should be fleeting. What does this mean? It means once the NASDAQ tops out, whenever that is (next year ends in '7'), the losses should be spectacular assuming the NASDAQ / Dow Ratio doesn't miraculously explode higher in coming days. So you see, we have a 'Tale of Two Cities' here. Or is it we have a 'tale of sequencing'? Explosion higher in tech stocks another 10% -- then collapse. Who really knows – right? One thing is for sure though; you don't want to be shorting stocks with the message in Figure 1, or that in the Figure below either. We are of course referring to the Dow / XAU (Philadelphia Gold & Silver Index) Ratio, which has turned higher now, as forecast. (See Figure 3)
Because again, although it appears authorities will need to institute something different soon (because conventional games / policy no longer work) no matter who is elected, with America in recession (something you won't hear in mainstream media (MSM)), something different needs to be done, whether that's QE for the people, helicopter money, etc. – something that will get money multipliers turned higher. Because while giving bankers more money to park on deposit at the Fed is working out great for them, just about everybody else is getting killed unless they belong to the (successful) speculator community, rentier class, or higher end of the bureaucrat classes. That's what the above charts are telling you. They are telling you big inflation is coming soon, and that this inflation will eventually have a very negative effect on the economy, corporate profitability, and broad stock prices at some point. (See Figure 4)
That's the big question for so many now, with the stock market so important to the economy at this juncture. So don't be fooled about this hesitation in the inflation trade – the best is yet to come. The Dow / XAU Ratio still needs to correct higher quite a bit more in order to trace out a 38.2% retracement (to 250) in coming weeks (until an equity crash in October?), however don't let this volatility fool you, once this is over the inflation trade will be back on in spades next year as the world accelerates the dishoarding of $'s. (i.e. once they see the money multipliers in the States turn higher.) Again, if inflation (freshly printed currency) is finally disseminated to the public directly through QE for the people or helicopter money (this one would have the biggest kick), the velocity of money will accelerate, general price levels will rise, interest rates will rise, true inflation hedges will rise (commodities, precious metals, tangibles), and paper will lose its appeal.
That's when precious metals will make some serious gains against the stock market, with silver in the lead, as seen in Figure 4. In looking at Figure 4, we see a very 'un-natural' chart pattern that has gone on for far longer than would have occurred if silver were not the West's 'whipping boy' (and stocks the darling), where because of its relationship to gold and the perception of a controlled monetary order by the Fed (and their buddies), silver prices would be far higher today. That being said, in looking at the monthly plot from the Chart Room above, we can see that fresh buy signals are now appearing, with silver coming back in spite of the status quo's price managers – the suppression that has gone on aggressively since the Greenspan Era. So after some further consolidation that could take the correction in silver into October, or perhaps next year at the outside (Commercial sellers will show up again the next time silver attempts to clear $21), it should start a serious 'catch up' move at some point.
So how deep will this correction in precious metals go? While nobody knows for sure obviously, I am sticking with my thoughts from last week on this subject matter in spite of the fact it would be more encouraging to see Comex speculators abandoning their bullish positions faster. The COTS for gold and silver are still on the high side, however they are coming down without damaging the price structures much, so this is encouraging. With respect to the shares, obviously the 250 mark on the Gold Bugs Index (HUI) is now history support wise, where we now have lower trajectories in sight. Therein, if the Dow / XAU Ratio still has another 50-plus points to the upside in order to trace out a 38.2% retracement, then obviously at least a 38.2% retrace should be considered likely here as well, bringing the large round number at 225 into view (slightly below). That said however, we know that in terms of these larger corrections that based on my harmonics study from 2003, the tendency is for a 50% retracement, suggestive a move to the large round number at 200 is definitely not out of the question, especially if general liquidity conditions become an issue in October.
Impossible? If you think that, just go to this link, click the weekly tab at the top of the chart, and notice the MACD just crossed lower last week. Therefore, if history is a good guide in this respect, it should take at least 6 to 8 weeks for a bottom to be put in place – an intermediate degree correction. That puts us into the stock market crash window in the second half of October – for a seasonal inversion. So thinking it's possible (likely?) the HUI vexes 200 is definitely not a stretch by any means – you can take that to the bank. What's more, it should be noted that open interest put / call ratios are falling with prices, meaning we have the proper sentiment background to sponsor further losses as well. Most notably, Friday saw a big decline in the GDX ratio (see here) with falling prices, where it should be noted the GDX ETF and contract generator (speculating & hedging instrument) is the largest in the sector – by far.
So let's hope for this corrective process to get on with it, allowing us to redeploy trading positions at attractive prices. Because after that, with status quo price managers now realizing how bad the economy is, and the need for both accelerating and new forms of money printing, money printing that actually reaches the economy (people on the ground), you are going to need all the inflation hedges you can get. And it just so happens precious metal shares should be at the top of the list in years to come.
Here's hoping for a mania in precious metal shares in 2020 – no?
See you next time.