The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, January 30, 2017.
No 'rope-a-dope' for Donald Trump. He's come out of the corner swinging. So far he has signed six controversial bills in only the first few days, and you can be sure more are to come. The only problem with fighters like this is they burn out fast however, where all too often they effectively punch themselves out in the early going. In this regard, it could be argued that's what happened to him with his Atlantic City Casinos. One casino wasn't enough for The Donald. Then they all got in trouble because of his huge ego - and needed a bailout.
The question then arises, 'is the US of today going to turn out like his 'new toy' at the time - his Atlantic City casinos?'
Looks like a repeat here style wise, with the only question how long it lasts - his first 100 days? Trump is very cognizant of the fact the world is watching, looking for him to fall on his face, so you can bet he keep punching as hard as he can these first 100 days. The big question then, is what will things look like after those 100 days - does the economy appear like it's on a sustainable path? And you could go further - does this path look self-generating, 'organic' if you will, which is the idea behind creating (bringing back) manufacturing jobs in America. In doing so, Trump is attempting to give the appearance he is a 'true conservative', and purveyor of Austrian economic principles.
There's only one problem with all this, that being the debt - the rising debt - the debt that is already to high to ignore. This debt would need to be unwound before the US can return to the 50's, which is not in the cards with the Fed still in charge of issuing its debt-based currency, and the Treasury Secretary still taking his orders from these people. What does this mean? It means that while Trump may create a few manufacturing jobs with all he is doing, but in order to do so, a great deal more debt-based money (debt) will need to be brought into the formula, which when added to the existing debt, and higher interest rates all this new spending will create, means his success will eventually backfire on him - and America - and the economy - and the stock market.
So I hope he's enjoying his premature victory lap around the ring right now, because again, all he's doing in the end is coming out of the corner too strong. And while there's no telling how long it will take for him to punch himself out (a 100 days?), if the 1928 / 1929 analog is any indication, summer is quite possible. Gordon long put out an excellent article recently (see here) talking about why we are likely in a crack-up boom that has further to go, along with the deflationary collapse that will follow. As you would know if following my work for some time, this is also the page we are on, with the acceleration seen this year as well. So again, believe it or not, stocks can keep rising, where as per our best estimation (from last week), the S&P 500 (SPX) is likely on its way over 2400.
And please, don't get confused about what is happening here, as it's a 'monetary matter', and nothing more in the end. So good news or bad, whatever that means today, it won't matter until the benefits of the money printing are outstripped by the resultant vulgarities, which includes speculation trends. So when somebody at JP Morgan comes out and warns on Trump's policy initiatives, demographics, war threats (or realities), or whatever - remember none of such warnings will matter until central monetary authorities finish reacting to all this by literally blowing up the economy / markets with excessive money printing, which is picking up steam as we speak. This is why we will be looking a great deal more like Venezuela six months to a year from now than Iceland - of this you can be sure.
We know this because apparently Trump has embraced the Fed, and it's debt based currency system, and all the money printing benefits it offers, not the least of which is a higher stock market. The relationship between a 20,000 Dow and $20 trillion national debt is no coincidence, you can be sure of this as well. That said, is it possible the Fed backstabs Trump by raising rates moving forward under the guise of 'fighting inflation', because it intends to discredit him in reality? With a Fed meeting this week, we may not need to wait long before finding out, but if not then, later on assuming something else doesn't pop the larger credit cycle bubble first. Certainly a tightening at this meeting would be a direct shot across Trump's bow that Yellen has him in her sights despite any backroom deals (or assassination threats) previously discussed, opening the door to reprisal. This would not be good for the stock market - of this you can be sure. (See Figure 1)
So this week is very important from a 'predictive perspective', because as you can see above, last week brought a weekly breakout in the SPX / CBOE Volatility Index (VIX) Ratio (see above), and a strong close going into Wednesday would cement the deal on a monthly basis. Of course if the Fed raises rates on Wednesday, stocks should sense this before it happens, bringing them back down and canceling the all-important 'monthly signal'. It's either that or stocks would get hit very hard post the Fed Statement as expectations are low for a tightening this meeting. So again, this week is 'pivotal' in terms of telegraphing the future intermediate trend for stocks, where if Trump dodges a bullet here, chances are they continue to push higher unabated until any worry over debt ceiling negotiations come into view. And as you can see below, such an outcome could lead to substantially higher tech stock prices. (See Figure 2)
Throwing a little cold water on this view, along with the Barron's cover (a contrarian indicator), we have the monthly SPX / Gold Ratio set below, with the important and downward sloping (in purple) 200-month moving average (MA), suggesting any further gains in stocks / losses in gold should be 'minimal' from here if this resistance is to prove a stopper. This is of course not to say it won't be penetrated briefly, which in this context could be months, however because it's pointing down and picking up momentum in this regard, deference must be paid to the view further losses remain the strongest probability, meaning stocks could be in trouble if not in nominal terms, in purchasing power against commodity money. What's more, this view is supported by the monthly plot of the Gold / CRB Index (CRB) Ratio pictured below in Figure 4, where again, although it might take some months to foment, a bounce (minimally) higher should be coming relatively soon, initiating a discounting of increasing commodity prices in the future. (See Figure 3)
Because it's important to realize that even if the Fed does trigger a 20 percent correction in stocks because of an 'aggressive tightening cycle', it would need to reverse such policy once this mark becomes reality because the stock market is too important to the economy to risk losing control, and their own jobs in the process. (i.e. because the economy is hollowed out employment, savings, etc. wise.) Any such move on the part of the Fed is could be seen internally as a necessary gamble at this point, but with American savings plundered with ZIRP, NIRP, etc., pushing the boundary here would be reckless from a self-preservation perspective if the larger credit bubble implodes on a lasting basis. So again, in relation to comments above regarding Venezuela, the present crack-up boom likely has further to go before the party is over. Any lasting bubble bursting of the Anglo-Western banking system will not come voluntarily, but likely via runaway hyperinflationary blowback. (See Figure 4)
Of course, again, this would not stop Trump from retaliating against the Fed with measures to curb its power (audit, issuing Treasury money, etc. - that's what got Lincoln and JFK killed), however he likely desires to avoid such a confrontation given the potential consequences (not just his life - but would that be putting America first all things considered at this point?) given the larger situation. He did promise to look at the Fed while campaigning, but right now he's attempting the diplomatic route first. So it will be interesting to see what the Fed does over the next few meetings, especially this one, because again, with Fed hikes so scarce over the past 10-years, having two back-to-back would scare the bejesus out of just about anything that moves - stocks, bonds, commodities - you name it - save precious metals. Gold and silver would likely get a bump, which would be good news for our theory the continuing corrective affair for the metals (gold more than silver which still needs to shed the really stubborn speculators) is tracing out a 'flat'.
Again however, because we are expecting a strong close for stocks here in January to throw off a positive January Barometer signal, where if more recent history is an indication, should prove false, a hike on Wednesday would be very surprising indeed, however it could be justified on the basis stocks are strong, which is 'inflationary' - who knows what they would say. Many are expecting the Fed to trash Trump in 2017 for reasons discussed above, so maybe they intend to start the panic sooner, who knows? Such a move would be 'too obvious' from a timing perspective in my opinion for what it's worth, so watch you bets. No hike should result in more rally in the inflation trade, including precious metals (because the dollar[$] would fall), however don't expect any such price action to last with February a traditional consolidation month from a seasonal pattern perspective. The larger pattern this year is setting up similar to both the year 2000 and 1929 analogs, so it should be assumed higher prices will be coming as we move into summer until proven wrong.
In the meantime, with COMEX silver still choking on speculators, don't expect the situation here to be cleared up until they have been expunged from their positions, where it looks like it will take a crashing stock market (liquidity event) to pull this off again. (i.e. like in 2000 and 2008.) That said, although the larger correction currently gripping precious metals is expected to continue (especially with the Fed raising rates), as suggested above, with a little luck the corrective affair will be flatter than previous instances - if we are lucky. Gold and silver are political metals however, especially for globalists these days, where they would like to see precious metals eradicated from the larger picture permanently, so while it looks like these types are in trouble now, they still run the machines, meaning you can be sure volatility is here to stay to some degree. What's more, until speculator-betting practices change fundamentally, which won't happen until these types expect deflation (that won't happen until stocks crash), these machines can be expected to continue driving global price discovery - believe it or not.
With all the US paper market precious metal options expired for the month now, and the open interest put / call ratio for GDX above unity (see here), gold, silver, and the shares could get a bounce at the beginning of the month, as usual, with the influence of the past options cycle on COMEX / over the counter paper passed, and the effect of open interest put / call ratios coming into play. Thing is though, with the ratio for DUST now trending back up, and it being second only to GDX, the 'big daddy' in terms of influence on larger sector-wide trade on the shares, assuming everything remains the same going into expiry on February 17, any strength should be muted, which is likely why the share indexes look like they could roll over - and probably will when the next round of options related price management exercises begin next month around that time. (i.e. because of paper market management systems in place, precious metals tend to rally in the first part of the month and sell-off in the latter half.)
The fact we have the debt-ceiling deadline in mid-March, which should play hard on stocks as traders back out of their positions going into this event, might thwart the influence of COMEX options expiry next month, not too mention open interest for gold is closer to a bottom than a top (not the case for silver though - still lots of selling to come here once stocks roll over). So don't expect much even with the GDX situation. Correspondingly then, in terms of the Gold Bugs Index (HUI), a move to the 200-day MA at 220 should be considered a 'good' result, and 250 'excellent' - and likely tradable (sellable).
See you next time.