The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Friday, December 17th, 2010.
Heaven knows there are a myriad of good reasons for Western stock markets and other equity prices to be falling, and of course for the most part they are in real terms when measured against gold as the ultimate benchmark. We have Europe under increasing fiscal stress and rioting because of this (coming soon to a theatre near you); Chinese stocks looking very toppy; along with what looks to be a trend change from top to bottom in the debt markets that promises to turn into a global contagion likely sooner than later with all the money printing going on today. Of course all the problems listed above can be attributed to the global fiat currency economy that has been running loose since Nixon officially went off the gold standard back in 1971, where now fully matured, we are witnessing it's death spiral, and what will probably amount to an end to the Fed within the full measure of process. (i.e. this is the ultimate reason you want physical gold and silver.)
Because print as they might, the money is not making it down to the masses, being horded by elite banking interests. Enough however is getting through to drive commodity prices and the cost of living up for everyone, which is increasingly impoverishing the middle classes in developed countries, that being the precondition for radical political / economic revolution. That's what happened in France all those years ago, and this was of course the driving force behind the American Revolution as well. So when you see rioting in US cities you will know what is happening. It's process unfolding as the oligarchs are no longer able to hold a bloated bureaucracy together with increasing numbers beginning to feel the pain, whether it be via forced austerity or the dollar ($) being debased to the point it collapses. (See Figure 1 below showing a possible Fibonacci resonance related projection extending all the way down to 33.)
Impossible? Perhaps the $ falling to 33, or even falling period, is a bit of a stretch right at the moment, however again, from our last commentary, if States and local governments start getting bailed out en masse next year, this, with some degree of austerity in Europe perceived, then you better believe the $ will fall, and it could fall hard given the potential size of such a tab. Yes, but won't rates rise as foreigners increasingly shun US bonds? Ah, there's the rub - the fly in the ointment if you will. Certainly this is the message we are currently getting in the market, where the US long bond is on the verge of breaching channel support on a 30-year trend that would mark the end of an era - that being the bond bubble of the increasingly cheap credit that has essential fuelled all other serial bubbles along with it in corporate credit, stocks, commodities, and just about everything else that moves. (See Figure 1)
The question then begs, would a popping of the bond bubble in turn pop the other resultant bubbles in equities? Answer: One thing is for sure in this regard, if like a junkie, equities stop getting their now almost daily injection of POMO residual liquidity from bond market monetizations, it's difficult envisioning an alternate outcome. And of course the thing about rising rates and declining revenues into government coffers is austerity will be forced on America sooner or later, which would necessitate the abandonment of the liquidity feed, just when baby boomers will increasingly need more of their savings to retire. This is why I have no problem envisioning the S&P 500 (SPX) trading at 500 some day, likely when the ratio below (SPX / USB Ratio) is hitting channel bottom. (See Figure 2)
As you can see above, and a view consistent with how we envision things tracing out in the new year, while small absolute gains in equities during the first quarter of next year are possible, once US long bonds fall off their apple cart due to the reckless monetization practices of the Fed, not long afterwards stocks should follow, where rising rates create a self-reinforcing negative feed loop of falling equity prices and deleveraging. Here, the very existence of our global fiat currency economy(s) would come into question, and disarray, likely resulting in more localized reorganizations as collapsing trade relations necessitate change.
Sound radical? Well, that's what revolutions are all about - radical change at the highest levels. And this what we are undoubtedly facing at some point in the future, where if it's not for this reason, then peak oil will surely cause such change as global trade patterns are altered / curtailed. Again, like a junkie, the global fiat currency economy that has been constructed by Western central bankers and their politicians throughout the years depends on an ever-increasing and accelerating expansion of credit, and in the latter stages of the larger credit bubble they have been able to fill that need via expansion into emerging markets and money printing at home, exporting inflation to these areas.
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Good investing and best of the season all.