Deleveraging Delusions, Denial, and Disorder
The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, September 9th, 2008.
When first conceptualizing this piece I thought long and hard on an appropriate title. The first one that came to mind was 'Deer In The Headlights - Desensitized To Risk'. And most certainly, this title does capture the essence of what has happened to the vast majority of the investing population. Through years of propagandized conditioning sponsored by corporate America, its self-serving financial institutions, and the governments they have put in place, the media has been used to desensitized investors to the risks associated with the financial markets, debt (excessive borrowing), and a fiat currency system designed to enslave the unwary. (i.e. and serve the elite.) Usery has been used since ancient times as a means to enslave the poor, ambitious, and loose minded, but never before has it ruled the very lifeblood of an entire world like is today. To say the banking elite got their money's worth back in 1913 when they bought the Fed's right to control the debt based currency system in the States is putting it mildly when you consider all new money must be borrowed into existence through them, meaning they not only have a monopoly on currency issuance, but also an unparalleled pension of interest income and influence.
And then I thought that instead of focusing on the 'leveraging up' of the system, which is essentially old news considering what is about to happen (a deleveraging), the title 'Hope Springs Eternal' came to mind in relation to the apparent unrelenting 'optimism' investors have with respect to the stock market these days. At least this is what a logical man must conclude sentiment is concerning the stock market given investors continue to increase / carry healthy margin balances with their brokers today in spite of everything else going on out there suggestive participants should be paying off debt, not increasing it. But this is the delusion many are living with, where the term 'optimism' should perhaps be replaced with word 'desperation' above, as some investors apparently think they can insist stocks higher because they need the money. It's important for you to realize that for this reason alone, the stock market has never been more dangerous, and that until this reckless crew has been purged, the general direction for prices will remain down.
In arriving at the appropriate title for this analysis then, I finally came up with 'Deleveraging Delusions, Denial, and Disorder' in an effort to capture why in my opinion, the delusions (think misplaced optimism discussed above) and denial associated with the massive deleveraging in the financial / credit markets currently underway has increased investing risk considerably moving forward, potentially putting in place the underpinnings for a 'disorderly unwinding' or 'event' in the not too distant future, possibly in the historic season of discontent the Fall has been in the past. (i.e. think stock market crashes [ex. '29 and '87].) Does this title capture the essence of what is happening in the financial markets well? I think so, where we could have added another word starting with 'd' perhaps, that being 'dysfunctional' to describe how all this is affecting prices in financial markets, particularly with respect to aiding in the suppression of precious metals prices within the larger process. Of course many would contend the primary reason precious metals prices are falling is due to price fixing efforts in paper markets perpetuating by the banking cartel in an effort to preserve their present monopoly in money, and perhaps they are correct. One can gain further insight into this complicated issue by listening to the third hour of the Financial Sense Newshour attached here this week.
And one can gain further insight into why the sentiment backdrop in the market is so dangerous right now by reading Alan Abelson's comments found in this week's Barron's column entitled 'A Moratorium on Optimism?', a piece that discusses the 'knee jerk bullishness' with respect to every dip in stocks these days, as follows:
"Maybe it's time for a respite from knee-jerk bullishness... the sudden burst of mass disenchantment was rooted in a kind of exhaustion of bullishness. Investors have been worn out responding to false sightings of bottoms and have gradually and somewhat grudgingly experienced a kind of epiphany as to the true, dismal state of the stuff that drives markets higher. Stuff like corporate profits, which are shrinking rather alarmingly (and, in the process, dangerously inflating P/Es), to consumer confidence and consumer wherewithal, both of which, not unrelatedly, have been badly mauled."
In the months leading up to the Black Thursday of the Crash of 1929, the markets experienced a series of terrific ups and downs that 'left everyone feeling exhausted.' So you see it's when this exhaustion finally takes hold of sentiment, that's when stocks can crash, and we have such a set-up potentially just ahead, right in front of the election which just about everybody views as an impossibility. This is of course a dangerous set-up from a contaraian perspective because of this election related complacency, where once this Government Sponsored Enterprise (GSE) bailout jam job has petered out, as per our analog comparison analysis presented a few weeks back, once any bounce into mid-September has run it's course, a real meltdown in stocks into the Fall (possibly extending into winter) should transpire if history (imbedded human behavioral tendencies) are a good guide.
Be that as it may, my focus associated with this vein of thinking is more practical with respect to capital preservation in your portfolio, that being most investors, including knowledgeable precious metals participants, do not realize just how dangerous the margin debt situation really is, and that until a more profound deleveraging in the stock market takes place, their paper related gold and silver investments remain at risk and subject to intensifying volatility. What's more, and in spite of the likelihood the US will increasingly lose price-setting capacity with respect to precious metals moving forward as the dollar's ($) reserve currency status evaporates due to inflation, along with cover clause requirements being imposed (see related comments attached here), until American paper pricing mechanisms are substantially removed from the formula, this will ALWAYS remain a big risk. Please, do not kid yourself in this respect.
What do you think will happen when (not if) the stock market continues to plunge and over-leveraged hedge funds are forced to cover their margin positions? Do you think they will be prone to selling illiquid holdings first, or those that remain liquid and have held value better than their bad speculations? You can bet the margin clerks will be demanding prompt payment, so my money is on liquid issues being under pressure, which is where GLD comes into the picture. Unfortunately, SLV the silver ETF, does not have the liquidity to qualify for this distinction, so like other less liquid issues it's already suffering from dramatic price swings, such as the 5-percent drop just this past Friday for no apparent reason other than somebody had to blowout a position into thin market conditions. So you see even if these ETF's are not forced to actually sell metal holdings, paper market related machinations will continue to force prices lower during illiquid times, with periods of accelerating deleveraging creating price vacuums despite the tight conditions in the physical markets. How's that for a serious example of irony?
Here is a snapshot of the monthly gold chart, where you can plainly see that volatility has now rolled over, which at this point trumps all other considerations associated with technical conditions concerning any timeframe / measure. Not that indictor supports are holding or anything, as you can see below. Additionally, and what is not shown below due to presentation constraints, is that gold is holding it's long-term trend-line now coming in at approximately $780 spot, which if broken, would usher in a spike to new lows. At this point it may prove wise to remember the mid-term correction in gold witnessed during the 70's saw a 61.8-percent retracement, where if duplicated today could potentially send it all the way down to the $550 mark. And while such an outcome may appear possible at this point based on the way precious metals shares are trading, added to our discussion on paper pricing mechanisms above, I would be surprised at such a result given the tight conditions in the physical market. (See Figure 1)
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