Iran drops another bombshell.
Technical analysis of Gold and Stocks by: Garrett Jones
Editors note: The 2007 forecast issues will be beginning January 16th and run through the January 26th editions of Tedbits, don't miss it. It will be thought provoking!!!
I have been an observer of the markets since 1982, and never have I seen what is now unfolding. It is enormous in its scale, and breathtaking in its breadth. It is a symptom of a global malady, that problem is fiat money and credit creation. Never in history have so many Central Banks been on the money printing train, the bust will be equally enormous. But it could be years before we see its teeth, and until then...
There is so much money looking for any place to land that has some returns, any returns!! Its owners don't care about the risks, They have NO FEAR and will engage any asset class just to get some returns. Corporate bonds, Emerging market bonds, Junk Bonds, Stocks, Real Estate, and hard assets worldwide are on a tear, and its up, up and away for every stock index in the world. Stock indexes worldwide look like mirror images of each other.
Dow Jones 30
GET THE PICTURE? Those are the footprints of Central Bank Money and credit creation worldwide!!!
It has now been all time record 901 days since the Dow has had a 2 percent down day. The VIX index published by the CBOE measuring stock investors fear is at 15 year lows. The index fell to 9.39 on December 15th. Its all time record low was 9.31 in December 1993. Only 8 times in history has it closed below 10 and 3 of those times happened in the last two months. Now lets look at the charts from a recent Wall Street Journal article detailing the declining levels of risk across a number of asset classes.
Why is volatility so low? There is more money looking for a home then you can imagine, global debt issuance and money supply growth are on runaway trajectories. Regardless of interest rate hikes around the globe, liquidity is sprinting ahead. And the smart money people who hold these US dollars, euros, Chinese Yuan, Aussie dollars etc., know one thing!!! There are boatloads of currencies coming off the printing presses and the "fractional banking systems" right behind them, and to hold paper is now a sucker's game. Don't hold paper currencies, own assets, money can be borrowed cheap!! Borrow it, lock in the low rates, and find anything that can hold its purchasing power, and hope for a little return on top of it. "We" the citizens of the world are the suckers to the politicians and central bankers who are trying to print their way to prosperity. Now Lets look at the Dow 30 priced in paper dollars and Real Money i.e. GOLD!! Provided by www.Elliotwave.com,
Which is the true picture?
They are stealing your money while it sits in your savings and bank accounts. If you are in stocks you think you are making money, and it appears to be a boom to the public. Is it? You decide. I can show you two charts of the housing market that shows the same thing.
This has been something tried many times in history; it has always worked for a while, in creating a boom, then turned around and bitten the poor goofballs who attempted it. Turning into a mega bust after the boom. Unfortunately for all of us is that these present goofballs are the political leaders and central bankers of the G-8 industrialized countries of the world. They are all on the same page, at the same time, God protect us. Before this was only tried in small corners of the world, think of the German Weimar republic, present day Zimbabwe (interest rates 600%, inflation at 1200%), and Argentina's hyperinflation, those disasters where isolated follies, now we are all doing in GLOBALLY and at the same time.
The reason asset prices are skyrocketing is simple, anyone who holds national currencies in the developed world, and in many emerging markets cannot hold their purchasing power as their governments and central banks are debasing their local currencies at rates ranging from 9 to 50% per year. Add the power of compounding and it is an obscene debasement of the savings and purchasing power of the currencies their citizens hold their wealth in. Governments are supposed to protect their citizens and economies; they are "Benedict Arnolds" destroying the futures of their citizens.
The only way to hold onto your money is to buy something that can't be printed. The smart money knows this and is acting accordingly. This asset inflation is the classic example of the definition of inflation, buy something now, because you know if you wait it will cost more tomorrow. It is why private equity money can pay these enormous sums and not be afraid, as the wind is at their backs. As long as they borrowed at a fixed rate, they can bet that the central bankers and politicians will bail them out!!! By printing more money and issuing more credit. And the investor/speculator will be rewarded for seeing the situation accurately and CAPITALIZING on it. As the globe is past the point of no return, they can't withdraw the liquidity or risk systemic financial system failure.
They can leverage something enormously, and know that 5 years from know they will hold 50% equity in their purchase courtesy of the global money printing presses; their assets will just reprice to reflect the inflated currency it is denominated in. If the currency loses 50% of its purchasing power an asset purchased at 5 billion dollars now will be 10 billion in 5 years, representing 100% return on paper. And of course the managers of these deals will reap a good portion of this appreciation. It is why we hear record purchase prices on everything from real estate, existing companies, and natural resources and raw materials, just to name a few of the asset classes rocketing higher. These things they are buying can't be printed, only repriced in devalued currencies.
When ever you see a liquidity crisis or catastrophe such as what's unfolding in the US housing market, wait and buy. The Federal Reserve is invested in seeing home prices stay even; they will not save individual investors. They wish to save the broad middle class, not the speculators who bought the hype. But lenders are a different story, the fed will let the small ones flounder, but when the problems get close to Fannie Mae, Freddie Mac, or a major bank. Watch them move FAST.
Wait for the crack up from the inflating asset class as it gets ahead of itself, and buy the dip. Gold, oil, grains, stocks, precious and industrial metals are a cinch as an investment, as nobody that has any brains wants to hold paper. As quickly as an asset declines more money comes off the sidelines to come out of the bank and into something that can't be printed.
The biggest money in the world loves bonds, as traditionally they have been the safest investments in the world for generations, not so anymore. They are certificates of confiscation when the central banks of the world are debasing their currencies as they are now. The bond market conundrum Greenspan spoke about will become undone as these "INVESTORS" slowly have it dawn on them what is transpiring, and head for the exits. An example is this is a 10 year bond yielding 5%, at 5% a year compounded annually it takes 14.4 years to double the money. If you look at the price of gold is has doubled since December 2002, an 18% compounded annual loss of purchasing power. That 13% annually really starts to bite after the first year as every year after that as the compounding really kicks in. This money at some point will come off the sidelines EN MASSE as it tries to hold its purchasing power. The only thing they will not want to hold is worthless paper currencies.
There is no turning back, invest with this in mind as it is set to continue till the it all ends in the inevitable Kondratieff winter (credit collapse). When no matter how much liquidity is offered there is not a new taker, no "Greater fool". And that could be many years in the future....
Iran drops another bombshell
Look for war!!! It doesn't matter what the Iranians have done, build Nuclear reactors, and bombs. Foment terrorism, interfere in IRAQ, and deny the holocaust. None of these things has pushed them into war with the United States. But now they have crossed the line, they are demanding payment for oil and Natural Gas in EUROS. This is the primary cause of our toppling Saddam Hussein, he attempted this in 2000 and we can see where this lead and it might be their waterloo as well. We shall see how foolish Bush and the congress are now. Unfortunately, the US is in no position to proceed as they did at that time as George Bush, the Congress and the Central bank are busily destroying the economy of the United States with their own runaway money and credit creation. Look for other countries to follow; as the camel has its nose under the tent. The politicians in Washington will allow anything but this, as its upsets there ability to print a worthless dollar and get something real for it like OIL... This will escalate the conflict with IRAN in an exponential manner. And on the same note...
It was widely reported that the Euro currency has now passed the US dollars in terms of currency in circulation. And it has as central banks and investors around the world edge for the door in their dollar holdings. Unfortunately it is a game of ring around the rosy, when the music stops, "Watch out". As the next currency they buy is doing the same thing the US is; Printing money and credit. It is now a game of who is doing it the least!!!
Technical analysis of Gold and Stocks by: Garrett Jones
"I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle." - Winston Churchill
"We begin with a clean slate"
There is something refreshing about the first day of a New Year - for a brief period of time, it feels like a clean slate where we have the opportunity to begin anew and possibly right the wrongs of the year that just ended. Let's all hold that thought and see if we can "will" some good things for 2007. It would appear that the machine that runs our country can use all the help it can get.
As bad as the news was on occasion last year, the market put in a good showing. The following performance for the major indices is worth viewing:
Dow Jones Industrials
The stock market did well in 2006. It was robust into the spring; had a sharp decline into the summer and then came on strong the rest of the year. The blue chips were the clear winners, for the most part, however, the Russell 2000 won the performance sweepstakes. 2006 was the best year for stocks since 2003, when the market was recovering from a horrendous bear market.
Let's take a look at a chart of the Dow Jones Industrials through the end of the year and see what we can determine. Charts plot price movements and there are three basic things to be aware of with respect to price movements that define a change in trend - if they occur in conjunction with one another. The first is the break of a major trendline. The next variable is if the trend stops making higher highs in an uptrend or lower lows in a downtrend. An example of this would be in an uptrend when prices have a correction, but then fail to makes new highs when they rally again. The opposite is true for a downtrend. Generally, this is referred to as a test of the high or the low. A failure of these 'tests' usually implies that the existing trend is in the process of changing. The final element is when prices go below a previous short term minor sell-off in an uptrend or above a previous short term minor rally high in a downtrend.
It is important to be aware that either of the first two conditions usually are evidence of a probable change in trend. The probability is increased when two out of the three are in play. When three out of three of the conditions are met, a change in trend is virtually always the result.
When looking at the Dow Jones Industrials, we see that the trend line was definitely broken. However, the Industrials haven't stopped making higher highs nor have they made a recent lower low. Therefore, we have to conclude that the Industrials are fine until one or two of the other variables kicks in.
The S&P 500 has broken the trend line and has failed to make a new high, but has not yet made a new low. The S&P 500 is one step closer than the Dow Industrials to completing the 'magic 3', but the jury is still out. If you look at the dashed blue line, one can make the argument that the uptrend line has not even been broken, in which case only the failure to make a new high is in place. In my estimation, the red line is the correct trend line, but I wanted to point out the other line just to be fair.
The third chart is the NASDAQ Composite chart. At first glance, it appears that only two of the requirements may be in place, but that is not really the case. The 'double top' high is actually a bit higher than the first top, so it does not qualify for a lower high. However, the recent top is a lower high and that makes all three requirements legitimately in place. The trend line was broken and a new low was made below a prior low. This is potentially meaningful and means this market must be watched very closely. If a new high is made, then we have to wait. If not, then we have a legitimate reversal in the NASDAQ Composite. If that turns out to be the case, then we have to watch the S&P 500 and the Dow Jones Industrials very closely to see if they confirm.
The final chart to look at is my long term indicator chart which is clearly still in a very strong buy signal. Note the red line is well above the yellow line which signifies the strength the market has had. Also note that price had broken out of the upper resistance channel to the upside. We have to be aware of the large separation between the two lines and the extreme move from the lower channel line to (and through) the upper channel line. This can imply incredible strength or a very extended market that is in need of a correction. Granted, the market has exceeded all Fibonacci retracement levels which implies that it will reach the old highs. At the same time, this is the second longest market in history without having as much as a 10% correction. So, we have the basis for a very strong market in 2007 if the economy continues to improve, but we are set up for a correction that is likely to begin very shortly.
Gold & Silver:
If you are looking for a very impressive market performer for 2006, you need look no further than gold and silver. Gold was up 22.9% which is quite impressive - silver essentially doubled the move in gold.
This is particularly impressive when you consider gold is in its fifth year of bull market since its low in 2001. Silver's move is even more impressive when you consider that silver almost quadrupled its price from its low in 2001. Gold and silver are insurance against a falling dollar and insurance against inflation. The U.S. financial system is weakening relative to the world's financial systems. Massive amounts of dollars are consistently being injected into the economy to keep things from collapsing. Obviously, if the housing market were allowed to collapse, it would bring the economy down with it. We are a nation of consumers and when you remove our sources of funds (mortgages on our real estate [homes]), our spending addiction becomes a very serious problem. Let's face it - addictions are addictions - the US spending addiction may appear to be much different than a drug addict's addiction, but, in reality, it's the same process. In fact, when the final outcome plays out, the spending addiction may prove to be just as ugly as any other addiction.
In the upper gold chart, gold appears to be in a multi month coil pattern. This implies that gold is having an internal power struggle and will likely head in the direction of its ultimate breakout. The second gold chart is a point and figure chart. This chart shows a more bullish alternative for the near term. It shows that gold has already broken out of the pattern; pulled back to test the breakout line; and is now ready to make an explosive move to the upside. One way to determine which of these charts may be more accurate is to see how gold is doing in terms of other major currencies. Gold is poised to break out of its pattern in terms of euros (see chart below). These charts will have to be watched very carefully for confirmation, but the bias appears to be to the upside for gold. Gold is clearly undervalued - particularly in terms of its ratio of gold to US dollars in circulation.
In closing, it appears that the stock market is close to having a reversal. My cycle dates fall after the first week of January. This may correspond with a move up in gold and silver, as well. Arguably, the dollar has fallen and it is clear the Fed doesn't want to see the dollar drop out of sight, so this market has to be monitored very closely. However, a breakout is a breakout - so look for a signal first and then look for confirmation of that signal.
My very best wishes to all of you for a Happy Holiday Season and a Happy, Healthy and Prosperous New Year!
All the best,
NOTE: THIS E-MAIL REPRESENTS THE VIEWS OF THE AUTHOR AND IS INTENDED FOR EDUCATIONAL PURPOSES ONLY. THERE IS RISK OF LOSS IN ALL TYPES OF TRADING. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
Thank you, Garret,
In Conclusion, Look at the enormous sums being spoken about in the financial and mainstream press. They are inconceivably big. I saw a description of a trillion dollars, I will try and bring it to you. When Clinton became president in 1992 he wanted an economic stimulus package of 30 billion dollars and it was voted down as TOO BIG!! Congressional earmarks have "averaged" 30 billion dollars a year for the last 4 years for bridges to nowhere and other nonsense. The unfunded obligations of the United States government have grown from 20 trillion dollars in 2000 to 47 trillion now, and these are conservative numbers. This money and credit creation is set to continue ad infinitum, do you really think they will withdraw the liquidity? It would cause a collapse of the Global financial system. It is a good time to invest in wheelbarrows, as that is what you will carry your money in very soon. Commodities and hard assets are good investments, stocks too as they will just reprice, to adjust for the loss of value in the underlying currency. You can bet on it!!!!