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Copycat Economics

The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, December 5, 2016.


As forecast, the stock market remained buoyant right into month-end, and then preceded to roll over once the month / (fiscal) year-end window dressing dried up. You must realize, that hedge funds make the world go round with respect to the stock market, and this is proof of this fact. And you can expect the same outcome going into year-end for the same reason. Yes, the Fed and it's masters (commercial banks) run the biggest prop desks, and are very important in the equation, however they cannot maintain the illusion on their own. They need the funds not only for support, but to exploit.

Because these are the guys who are doing the majority of the marginal (and aggressive) betting in the derivatives markets, where for this reason, they are the ones who get chewed up by the machines. When they are net long the derivatives of a market (including the precious metal ETF and futures) it goes down, and visa versa. This is why they don't make money for their investors. Of course it's not about making money for investors (never has been), because they (investors) either are either desperate or stupid for the most part - easy to exploit.

No, it's about making money for themselves at any cost, which they learned from the banks. (i.e. look at how bankers support their own stocks going into bonus time using flawed logic.) And they are not too proud to use any narrative that works, as long as they get paid. If Hillary would have been elected, bank / financial stocks would have went up going into Christmas bonus season as well, only for a different reason - not Trumponomics. Next year might not be so cheery with a repeat of the '28/'29 analog now in the works, with Trump the most powerful President since FDR.

That's right - in case you didn't know, Republican's captured not only the Presidency on November 8, but also the House, Senate, and Judiciary, as Trump will be choosing multiple Supreme Court Justices in coming years. And again, this has not happened since 1928, the year before the beginning of the 'great crash' that saw the Dow down some 90% in just two short years. Just how far Trump will get with his plans is unknown, basing his economic plan off Reaganomics, a model that won't work today, however it's not inconceivable like the '28/'29 sequence, stocks run up into next summer as credit markets continue to expand. (i.e. in spite of growing inflation concerns - rising rates.)

So you see, Trump is employing 'copycat economics'; but again, it won't work this time around.

Why won't Reaganomics (or a New Deal) work today? In one word - debt. Unlike both of the previously discussed instances, present circumstances are unparalleled in this regard - inherited from Obama and his banker buddies. The debt bubble Trump is inheriting is both untenable and unsustainable. What's more, unlike the early 80's under Reagan, American's are aging and have become nanny state dependents like never before. Add in the inflation Trump must inject into the system in order to get employment stimulated again (opposite the 80's), and although tax cuts will help, which is why the enthusiasm can last well into next year, nothing will be able to surmount the growing obstacles (debt, demographics, etc.) as time pushes on. (See Figure 1)

Figure 1
VIX Monthly Chart

How do we know Trump will fail? Answer: In two words - the VIX (actually one word and a symbol.) That's right - the key to understanding the timing of the arrival of the next crisis - the next credit crisis (because access to credit is what makes our 'just in time' economic world go round) - is to understand what the CBOE Volatility Index (VIX) is going to do. The VIX is a key element of financial repression, a key element that is used to prop up the stock market. And as you can see above, it's been increasingly suppressed since the last credit crisis, however it's now pushing into the apex of a truly profound wedge, 10-years in the making, meaning when it breaks out, the reaction in stocks will likely be equally profound. (See Figure 2)

Figure 2
Gold Monthly Chart

Technical Note: As you can see below, although the dollar($) could continue to blow off to higher trajectories than what appears probable today, even if this occurs, while gold present c-wave could fall through four-figure support at $1,000, any such breach should be viewed as the buying opportunity of a lifetime in advance of a possible hyperinflation event of some degree in America. (i.e. likely not as bad as Venezuela.) What's more, with Trump hell bent on speeding things up, while the correction lower in gold could last years, with deleveraging similar to the year 2000 and 2008 episodes yet to endure, still, it could also be over relatively quickly as monetary authorities attempt to get out in front of the curve again.

And as you can see above, in terms of the 'when' question', while it's always possible The Donald can keep things glued together until 2018 (see above), next year looks like as good a time as any - especially considering the '28/ '29 analog (discussed above). What's more, next year is a year ending in '7', which is an important decennial (psychological) consideration. In the meantime however, we have The Donald to keep things glued together, and people distracted, so who needs gold - right? That's the attitude on Wall Street anyway, because the suppression of gold (and silver) is another key element of keeping our faltering system glued together. So it should be no surprise to anybody it's now turned lower (in a c-wave) to finish off the larger degree correction that was kicked off on 2011. (See Figure 3)

Figure 3
US Dollar Index Monthly Chart

Because it's all about the $ for now with all eyes on Trump, however once people begin to realize his plan will disappoint, which can come sooner rather than later, it will reverse lower in impulsive fashion (see above), and it will be all over for the 'almighty dollar'. People will realize America's chief export, it's debt / derivatives, are going to be increasingly rejected internationally as Nationalism / the decentralization process accelerate around the world (ironically spurred by Trump), meaning the world's vast supplies of $'s will be heading back to the US (causing hyperinflation). And again, this could come faster than anybody thinks possible right now because Trump is like a 'bull in a china shop' in terms of his protectionist aspirations (think Smoot-Hawley), which will be a large contribution to the next great depression.

So despite his good intensions and hard work, it's important to realize that giving Trump the benefit of the doubt is not a good investment plan. Because one way or another, America's past will return to haunt. Some say give him a chance - let's see what he will do. All I can say to such folly is even if he's able to steer America on to a path of increasing self-sufficiency, so will everybody else, where the loss of empire would devastate the present bubble economy. Sure, everything appears 'rosy' right now with foreign currencies chasing $'s to get a piece of the Trump miracle, however as we can see above in Figures 2 and 3, there's a definite limit to the extent this folly can run. And while present trends in gold and the $ still have a ways to go, months, if not longer (not likely), at the same time they could also be quite fleeting all things considered. (i.e. summer next year at the outside, like '87.)

Because again - copycat economics will not work today.

To get the ball rolling in this regard, last week saw the beginnings of cracks in the financial markets not witnessed in some time, where as more pressure builds in the (economy's) pipe, applied by Trump's policies, at some point it will blow - bringing increasing volatility (see Figure 1), higher interest rates, and rising prices. And while this may paint an obscured picture of the wholesale collapse that waits America once the debt bubble(s) burst, still, in the end Americans will feel the same way - cheated, angry, and looking to blame. (i.e. hyperinflation feels like wholesale collapse anyway because you are priced out of existence.) Is that what Trump's legacy will look like? Unfortunately, this may be the case - even though he is not the one who should be blamed. Personally, I am a big Donald Trump fan. I think he's the real deal. He is giving it his best - and it shows.

However the damage done by Obama and his crony predecessors is profound, and will not be easily undone. And the Washington insiders are still there, waiting to pounce on him at any opportunity so that they can get back to the wholesale rape of the American people. Some think Washington insiders will pull the rug out from Trump once he takes the oath in January, and maybe they are right. In the end the blame game won't matter however, because the reckoning coming over the next four years will change America profoundly - no matter.

On that cheery note - Merry Christmas all.


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