Hollow Economy Recipe For Hyperinflation
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, November 9th, 2010.
In case you are trying to put two and two together about what's going on out there to make gold, silver, everything that's not nailed down soar in price these days, let me clear things up for you. It's our hollowed out economy, and the money that needs to be pumped into it so that it doesn't implode. And make no mistake about it, it's bad out there despite what you will hear in the mainstream media, with Friday's Employment Report a glaring example of this, featuring deliberately misleading propaganda set against an increasingly dismal reality. The idea is out comes the printing press to paper over all the problems. The only real problem with our present Keynesian experiment is however this approach doesn't work, evidenced with the poverty that just keeps getting more profound.
So where one might have said the US is slowly becoming a banana republic before, now, we can say it's happening fast. That right, America is now fast becoming a banana republic, so the concept of some degree of hyperinflation (as bond markets would not allow for full blown hyperinflation on a global scale) consuming the macro should no longer sound absurd, even to the square heads in Washington watching gold and silver soar in price. What else could be going on in those pea-sized brains? I honestly don't know anymore myself, because that's what I am thinking. I'm thinking the Fed has committed the world to an all out suicide mission in the form of an out of control Keynesian experiment that can do only one thing, that being end badly.
And it's not just the Fed that's printing money like drunken sailors, because if foreigners don't wish their currencies to appreciate against the dollar ($), they must accelerate debasement efforts as well. Some are starting to voice their concerns about what all this printing will bring however; and some are calling for an outright return to grounded money because they know how the Fed's experiment will end - again - with some degree of global hyperinflation. Even the head of the World Bank itself sees such a possibility becoming a reality, where one need not be a rocket scientist to see that commodity prices and precious metals are surging, which are of course tell-tale signs. Thus it appears we are on an unavoidable course with destiny in this regard because it's unlikely a gold standard is adopted anytime soon, and our oligarch policy makers are hell bent on staying in power, which means accelerated currency debasement is fait accompli.
Some of you may be asking, if this is true, with the $ at center, then why is it rising right now? The quick answer to this question is it's rising due to the rigged Employment Report (and ignorance) last Friday, whereby because the pretense for which it's rising is false (the US economy is not getting stronger), the rally should be fleeting. Just how quickly this rally fizzles is of course the question, as undoubtedly it's oversold, however if I had to guess, this week's G-20 meeting might provide a pivot back down, but again, this is only a guess. It's an educated guess based on the above and the count (which will not be presented today), but never the less just a guess at this point, for whatever it's worth. (Actually my track record on these guesses has been pretty good this year.)
Another reason I could also see the $ pivoting back down is the fact gold and silver have been divergently rallying with the greenback over the past two days, and not by a little, but by a lot. Gold pushed over $1400 yesterday, and is up again overnight like the energizer bunny because people want in now - and they want in bad that, and undoubtedly a little, but not much, short covering in the paper gold markets. It's important to note in this regard open interest (the green line) in paper precious metals markets are still near their highs, so if a commercial short squeeze is expected, it hasn't started yet. Perhaps the lawsuits, and the threat of more lawsuits, and regulatory review of the shorts (JP Morgan & HSBC) will spark commercial signal failure yet however.
Back to the more basic question now.
Why is this happening? Answer: Because gold and silver are becoming remonetized, meaning they are returning to their traditional roles as money, where it should be understood money is more than simply currency. (i.e. a store of value too), . And why is gold remonetizing? Because people are catching on to what the central bankers and politicians are doing to fiat currencies (inflation) and they want out - they want out at any cost no matter what a particular fiat currency might be doing on a given day. So why is it important the $ keep going down in terms of the precious metals bull market? Answer: Because it's still the world's reserve currency, and the vast majority of all financial transactions in the world flow through the $. This is of course the problem the $ is now encountering however, where increasingly foreigners will not accept them in exchange for goods and services unless it's value can be assured, with hyperinflation in the US a growing concern.
But that's enough for precious metals for the moment. Let's switch to the stock market, and the charts, returning to precious metals to wrap things up today.
I'm sure you have heard the saying 'you better not screw with that guy' or just 'you better not screw with that'. Well, this sentiment definitely applies to shorting the stock market (or anything in the larger equity universe) if messages in these next three charts are to be taken seriously, which I advise you to do. Because these charts are 'pictures of hyperinflation', and you are being warned they appear poised to break higher and potentially trace out. The first is the monthly S&P 500 (SPX) / CBOE Volatility Index (VIX) Ratio from the Chart Room that believe it or not, looks like it could go up and make a double top. Last week this key measure of stock market strength closed above the 100-month moving average (MA), which triggers a buy signal, this with all the indicators flashing a green light. Now I don't know a lot of things, but I know enough to not to stand in front of a freight train, and that's exactly what we have here - a freight train that you want to be riding. (See Figure 1)
Impossible. Well, if you think that you might be in for a rude awakening, especially considering this next chart, which is the NASDAQ / NASDAQ Volatility Index (VXN) Ratio. Here, you have a breakout that appears likely because the Fibonacci signature that projects prices considerably higher fits the pattern so well, which is a tell-tail sign the breakout is likely. (You won't read this material anywhere else.) So, while we may consolidate around current levels for a period of time considering we are essentially at resistance, one thing is for sure, you don't want to short a thing, and you should take advantage of any pullbacks to get as deep into the inflation trade as possible, with precious metals obviously at center in this regard. (See Figure 2)
It should be remembered that breakouts can prove false however, and that the inflationists will need the continued help of bearish speculators in order to perpetuate the short squeezes in stocks, commodities, etc. And this may become an issue later on, but for now, it's all systems go in this regard, given setbacks could be encountered between now and the first quarter of next year, like in 1980, which is when important tops in precious metals (and the inflation trade) are scheduled to appear. What's more, it was March for the tech stock top back in 2000, which could be repeated again, especially if the NASDAQ / Dow Ratio (discussed last week) and mid-channel resistance for the NASDAQ pictured on the monthly plot below break higher, indicating mania conditions (which is what one would expect in hyperinflation as increasing numbers attempt to flee fiat currency) grip the macro once again. (See Figure 3)
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