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Playing Chicken with a MACK Truck

The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, March 20, 2017.


 

When you are playing chicken with an 18-wheeler - like a MACK Truck - you better be driving something much bigger (a gold mining truck) - or you could be hurt badly. This is the analogy I chose to make the point that the Fed's current tightening bias will eventually work and slow down not just real economy, but the all important (to the Fed and rest of the paper game fraudsters) financialized economy as well, which may not be so easy to resurrect this time around. Because in spite of the Fed's bullshit story, the aggregate economy is quite weak, masked by rising prices (which is just fine if you are an asset rich oligarch) - better known as stagflation.

This was not difficult envisioning for some time now, which we have well documented these past years. And now we are on the cusp of a period of increasing volatility in just about every aspect of your life - driven by a failing economy - and the Fed's attempts to save it. Make no mistake however, the Fed is in control of nothing, as many of the disillusioned are about to rediscover. It's amazing this could happen this way, however if you look at how distracted the average American still is today in spite of the decay which surrounds them - it's not surprising at all.

Getting back to this chicken thing - in my estimation, what's happening right now is because enough speculators / hedgers are betting the wrong way(s) in the larger derivatives colossus, which is underpinned in the long volatility trade (because traders know it's just a matter of time before volatility shows up), this continues to support stock markets to this point. As is pointed out here however, this could be set to change post options expiry this week. And of course we have been on this watch in our own sentiment studies, which will be presented again this Wednesday.

If as suggested in the attached above, speculators / hedgers are about to back off their bullish volatility exposures (VIX calls), then we could in fact have a head on collision with a very heavy machine(s) as we move into spring. Once sentiment has truly shifted, which could come due to speculator / hedger exhaustion as stocks continue to march higher in spite of (because of) increasing bad news, the machines will turn on the bureaucracy's price managers, and there's nothing they can do about it. The combination of increasingly bad news (like this) and the machines could turn on a dime under the right conditions - fostering a crash.

Like 2000 and 2007, because traders have been conditioned to 'buy the dip', what could happen is they do exactly that (buy the dip) as prices fall, meaning broad market open interest put / call ratios fall with prices, giving us the necessary sentiment loop necessary to facilitate a meaningful decline. If on the other hand traders do the opposite, and start shorting / buying puts as prices fall, then the decline would be shallow again. This is why it's so important to monitor true sentiment conditions, which is what we do post options expiry each month.

Some think none of this matters, because if the Fed is tightening, their counterparts in the global nexus will be loosening, which on a net basis will keep the big machine well fueled. And to a point, this assertion is correct. However, it misses two very important concerns not commonly understood. First, 'it's the dollar($) stupid'. The $ controls global input prices, where untenable volatility here would be a real economy showstopper - at exactly the wrong time. (i.e. in crash conditions.) And two, this thinking doesn't take into consideration the impact of the speculators / hedgers in 'price discovery' these days, where various liquidity measures across the globe should not be viewed as a panacea - especially overpriced real estate. (See Figure 1)

Figure 1
COMPQ/VXN Monthly Chart

You only need to look at Japan to know once the base factors (demographics, etc.) roll over hard enough; price manager policy changes can become redundant. (i.e. short of hyperinflation, which is collapse viewed upside-down.) That's the big 'chicken game' the Fed is playing with destiny right now. It's raising rates on a falsehood that only benefits the few (hi-level bankers and bureaucrats) at the expense of the many, where if the above monthly chart of the risk adjusted NADSAQ showing a profound Fibonacci signature has any predictive value, the cost (to all) of such flagrant disregard for reality (true risk) is close at hand. And as you can see below, we get a similar picture in the financials. JPM (the quintessential bank stock) continues to surge higher towards the profound Fibonacci resonance based target, which is close as well.

That's all for today folks. If you want to see the remainder of the charts, observations, and conclusions that go along with them from this commentary, please visit our site at treasurechests.info and subscribe.

You will not regret it.

 

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