Never Say Never
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, December 14th, 2010..
In reviewing the charts from the Chart Room over the weekend I came to the conclusion that in terms of timing the markets you don't want to think in terms of price right now, but in terms of time, where again, we are not looking for a blow-off top in the present intermediate move until sometime in the first quarter next year, with early February the favored target from both historical and cyclical perspectives. How did I come to this conclusion? Answer: As you will see in the charts below, several breakouts and trend blow-offs are in the process of tracing out, meaning more time is needed for this to occur no matter how overbought technical conditions in the market are at this time. And while it's true that everything from stocks to commodities are intermediate degree overbought, what this means is conditions will become even more overbought, and as a result, it's possible hyperinflationary conditions in the US could at a minimum be tested.
So unfortunately you can never say never when it comes to hyperinflation with a corrupt and self-serving oligarch in charge of the money supply, where monetization practices are not included in conventional money supply measures, leaving the only way we will discover the condition our condition is in is by exploding prices. Of course when this happens people will tune in, which is happening in the bond market now, but will likely not be understood by meaningful percentages of the population until things that directly affect them, like food prices (watch Glenn Beck here), explode higher, which according to John Williams of Shadowstats.com should be anytime time now, ramping up aggressively into next year. So apparently it's time to stock up on rice and cans of tuna believe it or not, although it's our contention that if US Treasuries fall out of bed after a possible relief rally through light trading at Christmas, that while equities could see magnificent price explosions into the first quarter, that running into summer a similar outcome to that witnessed in the year 2000 will be witnessed, marking the popping of what we will dub the Fed's Quantitative Easing Bubble (QEB).
And like all others before it this bubble will indeed be popped at some point, however again, timing is the question. If you were to simply look at stock market sentiment, which is at bearish extremes not seen for some 5-years, one could easily conclude such a popping should come sooner than later, meaning this year as opposed to next. Add on top of this the increasing fiscal uncertainty in Europe (and soon the US with it's popping bond bubble), continued consumer deleveraging, and any other problem of the day you wish to focus on, and a strong case can be made for an immediate popping of the Fed's QEB anytime now. Of course the thing one must remember is this is a suicide mission for these people, which includes the larger bureaucracy because their jobs depend on the oligarchs holding things together, so while the path may be volatile (like in 2000), don't be surprised if Da Boyz continue to jam things higher via an ever-expanding QEB until the bond market literally bursts, and stocks fall in unison with bonds in what would undoubtedly prove to be a sizable rout running into summer a la the 1940 model.
That's what I see happening anyway, where monetization practices or not, eventually the combination of rapidly accelerating deficits (due to rising interest rates) and selling in the bond market officially pop that bubble, making all other considerations save deleveraging moot, at least for a brief moment in time. The question then would be whether we face true hyperinflation or a hyperinflationary depression like Japan's afterwards, or worse, because there is no plan B, possibly decades of feudal darkness once the economy's handlers lose control. And they will lose control at some point - they always do - it's Murphy's Law at work. That's what the divergence in the chart below is telling us, because through the ages people's reactions to bubble economics has not changed. The only thing that changes is the size of the bubbles, with the present bubble in bonds the biggest ever. This is of course why it will be defended at any cost, and why, albeit in more violent fashion, this divergence can get even more profound before something more permanent grips the macro. (See Figure 1)
Source: The Chart Store
When looking at the charts below that's the message we are getting, that the divergence above will grow more profound, believe it or not. How much more profound? Answer: About 200 NASDAQ points if the present bubble to is equal that of the one witnessed in 2007. And again, such a move, and more, is supported in the charts below. Let's take a look.
First up we have the NASDAQ / Dow Ratio plot from the Chart Room, and as you can see below it's right on resistance before it breaks back up into bubble making territory. This of course is not suppose to happen within the same generation, that being another bubble in the NASDAQ the likes of which we witnessed in the year 2000, however at the same time, we still might get a taste between now and March next year if the dollar ($) starts falling again, which in my eyes would not be surprising record bearish sentiment amongst traders or not. (See Figure 2)
Why would the $ fall next year, and as a result facilitate the building of even more profound bubbles than are being witnessed today? Answer: In one word the answer is history. To add the context don't forget just how corrupt and culpable Washington politicians are, and that despite rhetoric run in the media for appearance purposes, they will have the Fed debase the currency by any means, as it's doing with their present monetization practices evidenced in a continued generous POMO schedule. So again, while conventional money supply measures are not reflecting this largesse correctly, as James Turk points out all the numbers don't lie, where hyperinflation of the $ is in danger of breaking out increasingly profound hyperinflationary conditions. And we will undoubtedly get confirmation of such intentions from the Fed today at its last meeting of the year.
What's more, if both the Senate and Congress vote in an extension of the Bush tax cuts this week, a serial bailout program for the States cannot be rule out next year in my opinion, Tea Partiers, Ron Paul, you name it, it won't matter. Just look at the Europeans for the example, where they talk a good game of austerity, but when the chips are down, magically, a bailout always shows up. So, don't go taking talk to the contrary too seriously, no matter who it comes from, and until cutbacks actually become a reality. Because partisan politics is all for show in a one party Washington, where change won't come until it's too late, meaning rising deficits and interest rates cause the US debt colossus to implode onto itself. To think this would come voluntarily is to have ignored history, again, in answering the above question, since Nixon closed the gold window. What's more, one would also need to ignore the following charts, which could turn out to be quite the mistake if one is not in position for at least a taste of hyperinflation - dead ahead. (See Figure 3)
As you can see above, the S&P 500 (SPX) / CBOE Volatility Index (VIX) is possibly set to break higher, where all we would need to see for an indication such a move was on is a breakout of RSI past sign resistance, accompanied by the MACD clearing Fibonacci related resistance. Then, if this measure of sentiment was able to clear indicated Fibonacci resistance at approximately 90, a double top might be in the cards, although nominal highs on the SPX would likely fall short of the 2007 double top high. Of course I could always be wrong about that if the $ is falling hard enough, where perhaps this becomes a reality too when Washington announces it will fund municipal deficits as well in order to avoid the muni-bond disaster many are expecting. If this were to occur, then stocks could possibly go off the scale, as is the case with the Fibonacci resonance related projection for the NASDAQ / VXN Ratio shown below, projecting all the way up to 250. (See Figure 4)
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