When Fiction Meets Reality
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, March 2nd, 2010.
There is no end to speculation concerning the stock market at present, with everything from credible crash calls to major gold stock rallies lying directly ahead. So the question begs, as fortunes are at stake, which view is correct - which view is fiction and which is reality? In my view, and although more upside might indeed exist for stocks prior to a reckoning (due to the lagged effects of money supply growth), the fiction that has become our reality, which is our fiat currency economy, is now hitting the wall in terms of constraints, which will be the stock market's undoing.
That is to say, we have been living in a dream world over the past forty-some-odd years (since Nixon closed the gold window in 1971) while money supply has grown relentlessly, with equally burgeoning government, financial, and tertiary economies replacing slower growing manufacturing activities (much of North America's manufacturing base has been exported to China), which are now facing the realities of fiscal restraints. Here, not only are we now seeing deficits of all varieties (from individuals to governments) flashing warning signs our exorbitant lifestyles are unsustainable, and in need of curtailment; but more, last year's swoon in stocks should also be taken as a shot across our collective bow in this regard, providing an opportunity for those who choose to reside in reality a chance to prepare for changing times.
So it's important to understand that if we are not going to do this voluntarily, where a smug bureaucracy and ruling class have decided to temp fate, the market(s) will do it for us, with not only the stock market and corporate bonds at risk, but also sovereign bonds, due to falling tax revenues, which are in turn a function of a similar internal state in the economy. So far the government has been successful in monetizing the bond market to keep interest rates down, which is turn has been supporting an over-indebted economy; however now, because prices are threatening to explode higher (signaled by gold), monetary authorities have been forced to reverse money supply growth rates, putting macro pricing structures at risk due to these Ponzi Finance measures. And the more foreigners stop buying US Treasuries (because they see the deficits as unsustainable, making US Treasuries a bubble, especially considering they are being heavily monetized), and worse, begin selling, the more this dichotomy will grow, which will in turn further destabilize prices.
What's more, and if all this wasn't bad enough, now, not only do we have the Working Group monetizing stock market futures and bonds on a daily basis, apparently they have also started in on direct monetization of the stock market as well, which as with the above, will add to general price destabilization potential later on. Or perhaps it will be earlier than most think, where as you should know from reading our work on the subject, once the short sellers have been squeezed out of the market, it will have a tendency to fall no matter how much money is being printed. So, in putting two and two together, along with some wildcards like a short selling ban, the picture for both stocks and bonds is looking increasingly suspect, where once US index open index put / call ratios reverse lower again, stocks would in fact be in a position for a significant downturn all things considered.
In the meantime however, according to the latest figures available, the personal savings rate is tapering off again, matched by an increase in credit growth. And as you may know a buoyant fiat currency economy is all about credit growth, where when matched with the observation the monetary base continues to power higher (due to continued monetization), albeit at a slower pace, we arrive at justification for rising equity prices at present. And of course we have seasonals, which were discussed last week, along with lags, also discussed last week, all adding up to a potential year 2000 like blow-off into options expiry here in March, or April at the latest according to Dave. The idea here then is once the lagging effects of accelerating currency stimulus has run its course, by then, bearish stock market speculators should be a puddle in the middle of the floor, removing structural sentiment related support from the market, allowing stocks to fall. (See Figure 1)
Speaking of monetization, and switching our attention to the BlackRock Corporate High Yield fund pictured above because of BlackRock's apparent position in the monetization feeder-trough, which is the likely reason it's vexing new highs while others are not, making it the 'last man standing' proxy, again, here we are also looking for a top within coming weeks, as denoted by the count and Fibonacci resonance related price target. Extrapolating this view into expectations for both the S&P 500 (SPX) and gold, which are positively correlate to corporate bonds at the moment (expect gold to be the ultimate last man standing eventually however), and it's possible new highs will also be witnessed on both accounts as well, with the liquidity related considerations discussed above lifting all boats.
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Good investing all.