The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, September 12, 2016.
Interest rates are zero (ZIRP) now, at least for some people – right? If you are rich and don't need money, they are zero. And if you have money in the bank they are also zero, and will likely be negative (NIRP) if trends in Europe are any indication, as central authorities continue attempting to force money into the markets / economy. With these policies, you would think the economy would be doing better, as who in their right mind would pay to keep money on deposit with risky banks, at least if one understand that's what you are doing. Unfortunately however, most people actually don't understand this, and literally don't know what else to do with their money that's not perceived as 'risky', so the insanity intensifies.
Thing is, in spite of all the money printing required to get interest rates down to these levels (financial repression), and the money coming out of the banking system that's going into the asset bubbles, it's no longer enough to keep them inflated, which is especially true in real estate at present. That's right, America, like Japan for all these years now, has reached the point of perpetual decrepitude (because of demographics) despite conventional money printing measures currently being applied (Abenomics), better known to some as 'pushing on a string'. US Housing Price Index Rises 0.2% in June; Slowdown Evidence Accumulates; Existing-Home Sales Lose Steam in July; and Housing Markets in Hamptons, Aspen, and Miami Are All Crashing are just a few of the recent headlines.
And it doesn't end there – evidence in auto delinquencies jumping the most since the 'financial crisis' despite zero-percent financing deals. No, as evidenced above, the entire Western economic model appears to be caught in a 'liquidity trap' that is now becoming evident to all, even the nay Sayers and status quo apologists undoubtedly, not that you will hear about this subject matter in mainstream media (MSM). (i.e. because it does not suit neo-liberal propaganda.) As you can see here however, there's really no denying it – we're caught – and there's no fixing it short of scrapping the whole system. So you can see why the status quo is fighting so hard to hang onto their illusions. Zero interest rates are just one aspect to our increasing totalitarian establishment.
What's worse is it's going to get worse, as Western economies continue to deteriorate, Trump or no Trump in the White House. But let's not count our chickens before they are hatched right, because the status quo is putting not only a fix into the election process, but has a plan to maintain power even if Trump can plow through this obstacle. If Hillary, and the status quo, attempt a coup based on gross election fraud, because Trump is going to win in a landslide, civil war and secession movements will breakout across America, bringing the economy to a grinding halt. So either way, whether it's Trump spending money like a mad man, or the status quo attempting to maintain power, a great deal of money printing is coming, because the economy has never been more addicted.
Of course as far as the economy is concerned ultimately, all this money printing won't matter in the end, even if helicopter money is brought in out of desperation. Again, this has already been established via the Japanese experiment, which lifecycle wise, is simply ahead of the US. Because while helicopter money would undoubtedly bring inflation, it would likely bring too much inflation as people become even more dependent on the free money, meaning authorities will have to continue accelerating the printing as the economy implodes. This is how hyperinflation occurs. And if you want to know how a modern day version of this kind of thing works, you need look no further than Zimbabwe or Venezuela. The terminology 'pushing on a string' doesn't quite cover such circumstances.
While this may be true, it does cover the effect of diminishing returns on the various asset bubbles afloat, where without the unprecedented and increasing monetization of stocks globally by central banks, prices would undoubtedly be much lower. Soon, we will have the ECB join the mix, and then the Fed, with backdoor purchases undoubtedly occurring already to add to their dominance in fixed income and futures markets already established. Thing is, all this QE has hollowed out economies now to the point they are just 'broken shells', completely dependent on increasing largesse in order to avoid implosion. You can see it in the stock market, where no matter how much more central authorities add to buying, losses in the private sector net out such additions, giving us a 'pushing on a string' condition.
So again, unless central planners change things up again, bringing in QE for the people or helicopter money, eventually there will be an accident in the equity markets that may be unfixable, potentially souring the social mood beyond repair, along with their careers. This is of course why central planners are attempting to stay ahead of the curve as much as possible without triggering accelerating inflation, because that would be a career ender as well. This is why they are so slow to bring out measures that would put printed money directly in the hands of the masses (as opposed to the crumbs they allow to 'trickle down' now), because to do this would be to invite potentially uncontrollable inflation – perhaps even some degree of hyperinflation. (See Figure 1)
As you can see above however, up until now they have been doing a marvelous job of managing the stock market bubble higher to 'full potential' as evidenced in the sinusoidal impulse now achieved in the risk adjusted S&P 500 (SPX). (See above) Of course things can happen other than 'bubble mismanagement' to 'pop the party', such as investor fear over political / economic regime changes around the world, which is now an accelerating condition as the lights come on for increasing numbers as well. So as pressure on central planners around the world intensifies, they will eventually be forced to react, which is why helicopter money will eventually be unleashed on an increasingly disgruntled population. (i.e. reacting to their diminishing fortunes.) (See Figure 2)
Technical note: One should note in the above that a 38.2% retracement would put the Dow / XAU Ratio up at approximately 250, where if Friday's performance is any indication (the ratio was up some 7 points but is still below the large round number at 200 – see here), a move to this level would put a tremendous amount of pressure on the bubbles until the retrace is completed. This is why we still see a move to HUI 200 (190ish) as likely. So nothing has changed regarding our view from last week.
And it's starting already. In the fragile periphery, and now possibly (likely?) in 'core markets' if Friday's rout is any indication, stocks, bonds and commodities were all hit simultaneously, signaling a 'liquidity event', meaning if the skids do not remain greased, the bubble economy(s) will crash. What's happening to cause this right in front of the election? Is it Hillary's rapidly declining fortunes? Nope – it's speculation the Fed must tighten at its next meeting on September 20-21, because if they don't do it then, it would not be likely until December because the election makes a move on November 2 politically impossible. Of course there's no way a tightening is possible anyway, however by managing a sell-off here in September, when such things are supposed to happen seasonally, the status quo's price managers think they are defusing the problem.
Only thing is, while this may be true, again, as per our thoughts above on helicopter money, something more than 'conventional money printing' will need to be done in order to jump start the economy this time. What's more, it's risky making such a move, playing with Fed policy expectations right now, because while 'no change' next week might be enough to re-inflate the bubbles temporarily, it might not be enough to accomplish this on a lasting basis, raising the specter of some sort of crash in October when no moves are possible for political reasons. That said, one cannot help but recognize the juxtaposition of present circumstances set against an expected 8-year cycle low for gold in October as a little more than coincidence at this time, meaning gold is hitting a major cycle low right now, and the set-up looks bullish post the election. (See Figure 3)
Because while it might not be possible for the Fed to utter any dovish / interventionist words prior to the election, now only some 60-days away, this is definitely not the case past tense, leaving the door open to such doings at that time. What's more, if Trump gets in, as discussed on these pages previously, not only is he openly friendly to precious metals from a personal investment perspective, his policy initiatives will require a great deal of money printing (think infrastructure, defense, etc.), not to mention he doesn't necessarily view the Fed in a positive fashion, raising the specter of an 'overhaul'. (i.e. whatever that means to Donald Trump.) Again however, no matter what Trump throws at the Fed, apparently it won't matter, because if gold is set to (cyclically) bottom this fall, the world is heading into an inflation cycle over the next four-years – the charts don't lie.
That's right – technical analysis works if you know how to apply it, and once you know how to read the charts you realize they have the ability to map out the future. Take a look at Figure 2 above for example – the monthly plot of the Dow / XAU Ratio. Precious metal shares are allowed to move freely, as opposed to gold and silver prices which remain heavily managed by the bankers, allowing them to tell a story. What story are they telling is right now? Answer: Because of the crash the Dow / XAU Ratio has experienced in the first half of the year, with precious metal shares trebling, a move that should have taken years not months (running the MACD from overbought to oversold in record time), we are being told to expect an 'inflation explosion' next year, which is when the Dow / CRB Ratio (see Figure 1) will follow the signal now being thrown off by the Dow / XAU Ratio. (i.e. gold and its proxies are leading.)
So again, the charts don't lie if you know how to read them – if you know the right ones to be watching – where in fact they tell you what to expect into the future. And again, they are telling us to expect general price increases next year due to a loss of confidence in the dollar($), which is anticipated to be under heavy pressure for reasons discussed above, amongst others. The world is going to change next year, with US exceptionalism, hegemonic practices, and Globalism coming apart at the seams. The global decentralization process will be in full gear no matter who is in the White House, but if it's Trump, he will grease the skids in this regard. Nationalism means doing more at home, which is fine if your economy is 'independent'.
Unfortunately America is anything but prepared for such a reality, having exported its manufacturing base to keep the hogs on Wall Street happy – and now everybody is about to be slaughtered with uncontrollable inflation as the parasites at the Fed will have to accelerate money printing just to keep the lights on. So don't worry about your precious metal shares crashing into October. Embrace any weakness with a passion, because they will soar next year as process continues to unfold, and the Dow / XAU Ratio (and Dow / CRB Ratio following), continues to crash towards zero as people panic into any inflation hedges they can find. Because please realize, the drop in the Dow / XAU Ratio during the first half of this year is 'unprecedented'.
Thing is, it's never moved like that before because again, precious metal shares trebled, as investors, including and increasing array of sovereign wealth funds, begin the tide of a global panic into precious metals into 2021 – a Fibonacci 21-years from the beginnings of the larger degree (secular) move that got underway at millennium's turn. Do you see how the 'big picture' for precious metals is coming together, with the coincidence of a Trump Presidency, the 8-year gold cycle, and the Fibonacci 21-year cycle all pointing to an 'inflation cycle' over the next four-years as America takes back it's national pride.
And we are all for that.