We The People
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, January 5th, 2009.
That's quite the title, no? But without making it even longer, because it covers a vast and complicated subject, it encapsulates what I think will be the most important event that could become apparent to the masses this coming year, which means process would accelerate to a more recognizable end. Let me explain what I mean now that all this confusing stuff is up in the air and in need of some grounding; like our currencies. In the first place one needs to understand the difference between currency and money. This is the primary source of confusion for most people when it comes to money. And it is primarily a function of the fact the terms currency and money are used interchangeably because both are primarily spoken of as a unit of exchange for the purchase of goods and services, or to retire debt. However, it's when we go past this most rudimentary function of money do we see the difference between currency if it is created by fiat (by official declaration) and commodity money, with the former created out of thin air and in unrestricted quantities by the ruling government; and, growth in the latter restricted by the constraints of the physical world.
Many different commodities have been used as money throughout the ages, but as you likely know, gold is the only eternal standard to still exist today. And although silver might be brought back into the realm of being a money unit base again at some point in the not too distant future, the reasons gold has been used historically as both exchangeable money and a basis for specie is because of its physical characteristics. It's hard (slow) and expensive to get out of the ground, and cannot be counterfeited, meaning its existing stock cannot be multiplied by declaration like fiat currency, which can be debased at hyperinflationary rates by unscrupulous governments during challenging economic times. Without the physical constraint of having a commodity based money to restrain the rate at which human's exploit the earth's resource base, we get too far ahead of ourselves, and over do it in every regard including the multiplication of the species, which is a condition that could be in the process of correcting an imbalance with nature itself. So you see, in returning to a 'gold standard' (gold backed currency), what is essentially happening is economic imbalances brought about by human greed are corrected, along with a natural governing (slower rate) of resource exploitation.
This is of course why a US Dollar ($) based fiat currency monetary system was officially adopted replacing Bretton Woods, because it could not keep pace with the greed of politicians and bankers. And unfortunately because the world has been on an unbridled fiat currency monetary system since 1971, when Nixon removed all remaining vestiges of a gold standard, the inflation throughout this period has been significant, meaning a return to grounded money will be painful no matter what counter-measures are adopted to ease the discomfort. Why not just stay on the present fiat currency system then? Well, for one thing, as a race we will continue to exploit the resource base too quickly if we do. But on a more practical level, and for the sake of keeping things simpler here today, let's just say unbridled greed is unsustainable - the lunacy cannot last. As process unfolds, and the lies, dishonesty, and greed grow to systemic proportions, as is the case today, it's the lack of trust within trade that finally checks the system. It's the fear of not getting paid, which is why the Chinese, who depend almost entirely on exports to continue fuelling their economy have stopped buying US paper - because they know they are accepting confetti in return for hard goods.
Another reason is you can't have a Ponzi scheme when the cost of issuing the currency becomes more prohibitive as the ploy matures, which is the case today with new currency growth needing to flow through the banking system, and for this reason debt reaching unsustainable levels. The US is now at this point, and is having to monetize increasing amounts of it's payments / deficits, which at some point (as interest rates keep rising) will break the system. This is all more or less an extension of not only what we were discussing in our last meeting, but more, it's also a view of the future through the eyes of those who see the death of the existing fiat currency monetary system, like Ron Paul, who will be the next President of the United States, or whatever is left of them by 2012. And whether it happens this year or not does not matter, the important thing to understand is the dominos are falling, and those who do not take precaution to secure their wealth in grounded money before the masses lose all faith in fiat currencies will suffer substantial wealth loss at some point in the not too distant future.
With more and more people plugging into this reality every day now, which is why the price of gold (and silver) can be expected to keep rising, price managers are attempting to paint a positive picture for the economy and stocks in January because the saying goes, 'as January goes, so goes the rest of the year', where they are attempting to distract attention to the growing untenable situation discussed above. In fact I'm sure they wouldn't mind seeing this first week end higher too, because some also believe it has predictive powers as well, which again, would infer 'all is well' in the economy. All I can say to these people is 'good luck' because the broad measures of stocks were down some 10% last January, and look how 2009 ended, with big gains. And again, if you have been reading my work for any length of time you will know why. It's because our faulty and fraudulent markets are more a function of betting practices than fundamentals. So, if we have a positive outcome this January, which looks to be a good bet, then a large percentage of the speculators will likely back off buying puts like they are going out of style, which will allow open interest put / call ratios to fall, along with stocks this year.
In terms of timing, again, anytime between options expiry this month and March is our target window, this based on the above observations and cyclical considerations discussed in our last meeting (attached above). It should be noted options expiry for January is fast approaching, a short cycle set for the 15th just next week now. With aggregate US index open interest put / call ratios so high right now, one should remember it's likely stocks will remain buoyant until then, with a top of some degree possible thereafter only if bearish speculators / hedgers become exhausted, and cease buying puts. Then, and only then in our faulty and fraudulent stock markets, will prices fall. And technical evidence does exit this is a possibility, that although stocks might still finish the month on an up-tick (as price managers attempt to paint a rosy picture), some initial cracks in the foundation may appear post options expiry the week after next. The first chart I would like to show you in this respect is that of the CBOE Volatility Index (VIX), which like market participants these days is becoming increasingly 'bent' pattern wise. Of course we can't have a recognizable pattern if we ever hope to get any kind of a reversal in this very mature market with so many would be speculators watching, ready to bet on what they view as a likely outcome. (See Figure 1)
As you can see above, the VIX is possibly tracing out what I have termed a 'bent diamond' to go along with the slanted pattern in its counterpart the S&P 500 (SPX), both possible reversal patterns assuming too many speculators buying puts on stocks (calls on the VIX) don't alter the natural outcome over the next two weeks. Therein, what I mean here is if too many speculators remain bearish and buy increasing amounts of puts, then open interest put / call ratios will stay elevated, and so will stocks into future options cycles. This is of course why we have a topping window extending out into March / April, because stocks will remain buoyant until these guys have their collective heads caved in to the point they are no longer capable of gambling from either a monetary or psychological perspective. In terms of price targeting, as you can see below, even though I expect 'big trouble' for bank stocks and our increasingly stressed fiat currency monetary system, right now they could be in the process of breaking out to the upside, which should complete the corrective Elliott Wave Pattern (a - b - c) indicated below. Here, the assumption is indicator breakouts will prove false, and fail ounce bearish speculators become officially exhausted for an extended period of time. Then the bankers / brokers / politicos will lose their 'whipping boys', and prices will collapse. (See Figure 2)
Before this occurs however, the SPX could touch 1170 in coming days, if not 1200 if the topping process can be extended until the March / April timeframe. The question then arises, given the above, is there an indicator that could aid in targeting the larger degree turn? While nothing can ever be guaranteed obviously, and in making the assumption a downturn in corporate credit availability, as measured by the ishares High Yield Corporate Bond Fund (HYG), would be necessary to mark a lasting turn, at a minimum, and as indicated below, once the HYG vexes 90 only the 'loonies' will be long stocks, them, and an optimistic John Q Public. Again, in terms of timing, such an outcome could transpire as early as next week if history is a good guide, which it usually is allowing for a little 'bobbing and weaving'. (See Figure 3)
Actually, sometimes it can take a lot of bobbing and weaving to finally arrive at a natural result these days with so many ambitious human beings working to thwart a destiny not consistent with their 'utopian views'. And as mentioned above, for the socialists who have now taken control of US government, this involves not only increasingly desperate measures associated with managing our faulty and fraudulent markets; but more, unfortunately civil liberties are also being sacrificed for the sake of these misplaced ideals, all with the objective of maintaining the status quo. Unfortunately for these characters however, again history has proven nobody is too big to fail. And when the public comes to realize this, they are going to run. They will run from risky stocks and they will run from all other worthless paper as well, with the $ the common denominator.
Increasingly, as the lights come on for the masses, they will run from Obama's left wing Marxist government, the two party elitist bureaucracy, and the collapsing economies all this will bring. And as the above commentary suggests, process in this regard could accelerate this year, in 2010, testing both the banking sector and fiat currency monetary system it is built on.
And in the end it will be gold (and silver) that shine through it all, which is an understanding that will become crystal clear to even the mentally challenged if / when bank runs become more widespread and profound, taxing the very foundation of what remains of an over-indebted and bloated proletariat.
'We' the people' will take on a whole new meaning once it's realized how much trouble America has ahead of it - assuming it survives in its present form of course.
Take care all.