Caught In A Lie
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Friday, December 4th, 2009.
It's no secret governments and our ruling elite (the bureaucracy) lie for their own benefit, and this has been increasingly prevalent for years now. Perhaps the most well known statistics in this respect center on the Employment Report, viewed as the central economic release of the month by most observers in that employment is seen as the core of the economy. In knowing this, and not forgetting governments lie to us in just about everything, it should be of no surprise then that John Williams of Shadow Government Statistics has been able to make a business out of reporting on irregularities and discrepancies in official statistics, where even though such fraudulent data was sufficient to spark a noticeable sell-off in commodities and precious metals last Friday via bogus jobs numbers, one knows this is more fiction than reality.
Further to this, and according to John in a recorded interview that can be listened to here, not only is this bad enough, and additive to the severe economic problems that could surface in 2010, hyperinflation might be the ultimate outcome in this regard, which would economically devastating for most, with dollar ($) becoming virtually worthless overnight. This is of course a large part of the reason why we have been schooling accumulation of physical precious metals, this, and one is not likely to trade them with premiums so high. So if it happens, if hyperinflation does in fact breakout next year, which would surprise a great many people including educated observers, you will be very happy you hung onto your gold and silver, as this would prove to be your economic salvation under such circumstances.
Now this may seem a bit alarmist at this point, and perhaps that is true. However it's likely the US will run into trouble funding its ballooning debt and deficit payments next year, estimated to be in excess of $3.5 trillion, this, with foreigners becoming increasingly disenchanted with the degree of runaway money printing already, which could cause the need for more. That is to say the US is already monetizing increasingly, with stepped up efforts in this regard likely to cause a real problem for the ($). What's worse is the Treasury has been focusing most of its bond auctions over the past year in the short end of the market (2-years), but will need to move out along the curve next year increasingly, which will have the effect of dragging all rates higher, both short and long.
This is because demand for long-dated US debt is already waning as evidenced in the TIC data, and again, this should be worse next year if gold is forecasting probabilities accurately. Moreover, it should also be noted because monetary authorities have far less influence on the long-end of the curve than the short that if long rates rise despite the best efforts to the contrary, falling equities would likely be the result in attempting to 'tame the Shrew'. In this regard it should be remembered the Fed is apparently looking to keep official rates (short-term) low indefinitely at this point, however it should be remembered they do not control the longer end of the curve. This could prove to be a 'big problem' as we move into next year with all the Option ARM's mortgages coming due, amongst other things, potentially triggering round two of the credit crunch. (See Figure 1)
So you see all the talk of a bottom in the credit cycle and economy is a big lie, which the bureaucracy will get caught in once again next year, all at our expense. In the meantime however, and in returning to the here and now, on a related note, in addition to speculative and technical excesses that had developed in the market, this appears to be the 'raison de'tere' for the raid on precious metals because if allowed to continue rallying this week, it would have taken away from the Treasury's ability to generate successful bond auctions with the supply that goes nowhere but up. The idea is once this is out of the way, the Fed can come out dovish next week in its Official Statement and spark a $ sell-off again to ensure equities finish the year strong while supporting the bond auctions this week by not looking like the maniacs they are in reality. And you know what, with volumes in stocks anticipated to dry up even more soon, odds are they will pull it off.
Next year might be a different story however, as per our discussion above, where although the markets are 'rigged for red' for the remainder of this year, with a visit from Santa (think Santa Claus Rally) apparently a sure thing, increasing technical and fundamental evidence points to a probability of this reversing. In addition to the message contained in the charts below, it also appears open interest put / call ratios (the only working sentiment left working in this mature market environment) should also continue to ratchet lower into next year as well if the present trend is maintained, with bearish speculators finally exhausted. You will remember the mechanics of how high and rising put / call ratios work to keep stock prices artificially elevated in our faulty and fraudulent markets from a recent discussion on the subject. (See Figure 2)
What happens when bearish speculators become exhausted is insufficient shorts are present to squeeze prices higher, allowing gravity, which in this case is margin debt, to take over. And as you can see above, margin debt, as a percentage of the New York Stock Exchange (NYSE), is still too high, which will undoubtedly trigger another round of deleveraging at some point. The reason I think this process could begin in earnest as early as January of next year is the VIX is making a diamond at the bottom of a significant range, which is a reversal pattern. By the looks of things the pattern should be finished by year-end, or early January, which is of course consistent with our thinking a great deal of effort will be expended by price managers to keep asset prices inflated between now and New Years. After that volatility should pick up, however if the patterning is anything like that witnessed in the year 2000, the last decennial turn, equities could remain buoyant longer than either the fundamentals suggest (see below), or the bears (short sellers) desire. (See Figure 3)
Despite the best-laid plans of our price fixing bureaucracy's agents however, interest rates will likely rise next year, ratcheting higher until they have a noticeable effect on equities, which should be profound if the valuation models pictured both above and below are any indication. Furthermore, and if this has not already struck you, it should be noticed / understood that in terms of correcting the overvalued condition in the stock market against 10-year yields (long-term mortgage rate), corporate yields (see below), or any other metric one cares to use (earnings, dividends, Graham and Dodd [see below]), the process is just getting started, and has a long way to go. So, those minimizing what could befall equity markets moving forward should be faded, like stocks and bonds, because our meddling bureaucracies have made sure any landing the larger economy will have is guaranteed to be hard, again, even though it might not appear that way at present. (See Figure 4)
Here is a picture measuring US stocks in terms of the Graham and Dodd Model, fittingly showing the greatest valuation gap of the three measures utilized within this study. (See Figure 5)
This is of course because earnings have already crashed (attached above), but don't tell that to the crazies in New York and Washington. Crazy and desperate, that's what far too many of these people are, these people in high places. And this is why the bounce in stocks has been so strong, well ahead of schedule when measured against other post bubble patterns, and greater in magnitude as well. (See Figure 6)
Of course if hyperinflation is in the cards, as suggested by John Williams above, then historical comparisons could get further distorted, not that such a development would bother the inflation adjusted Dow chart much, where instead of counting the last wave higher a 'fifth wave failure', it could be seen as a minor degree b wave in a larger degree corrective sequence. Such an outcome would involve the Dow taking out its 2007 nominal highs, which is not likely given everything we know today, with special attention being paid to the count on the nominal prices chart, along with the probability the credit cycle has likely topped. (See Figure 7)
One should understand this will not stop gold from going far higher however, as increasing inflation and numbers continue to compel an escape from present day fiat currency economies, driving the Dow / Gold Ratio to unity if history is a good guide. In this respect it's important to realize inflation (newly printed currency) will flow into commodities and precious metals as the $ continues to crash, destined for far lower trajectories indeed. (See Figure 2)
In the meantime however, unfortunately gold has just finished a profound five-wave sequence lower and definitely has more downside, suggestive the larger correction might not hold the round number at $1100, not that this will negate the count we are working with. This still requires one more thrust higher to finish off 1 of C, allowing for a bigger correction at that time. (i.e. the one that will take gold back down to test the breakout at $1,000 in $ terms, that being your last opportunity to buy on the cheap in the proximity of three-digit pricing again.) So, what should happen is any strength encountered here, which is happening as we speak, should prove corrective, with another leg down (in an a - b - c sequence), still likely ending in coordination with the Fed meeting next week, but perhaps involving a 1000's handle (eg. $1070) on the price.
It's anticipated the Official Statement from the Fed will remain dovish set against more hawkish talk of foreign monetary officials, setting the tone for more $ weakness into year's end. The Feds need to protect their buddies bonuses on Wall Street don't you know? However before this, if they can (and they apparently can evidenced in the 90 point five-wave decline just traced out), expect price managers to continue to push leveraged players out of their positions into next week, where the selling will hopefully end. All this would of course break parabolic support, which would be suggestive of a larger degree correction, however we will deal with such a development when it arrives. For now, traders should still be planning accumulation, but at lower levels now, between $1050 and $1100. Here, either Prechter is right, and the move to $1200 was part of a running correction (b wave), or gold would likely hug the bottom of the present parabola if it's violated in continuing higher directly in the bullish count.
Unfortunately it's impossible to tell which scenario will prevail just yet, however we should know more by the Fed meeting next week. In the meantime then, again, traders should set their sites on lower trajectories for re-accumulation, where I would not doubt for a minute the Amex Gold Bugs Index (HUI) vexes the large round number at 400 before the larger degree correction is completed.
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