The Future Is Now
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, December 21st, 2010.
There's no end to the opinions and forecasts of what awaits us in 2011, with everything from your increasingly popular doomsday scenarios that appear to be getting more attention by the day, to the usual propaganda that by now only the kool-aid drinking sociopath types on Wall Street believe themselves still being buffered from reality by their ill begotten bonus booty. To this end I am not attaching any here today, because they're too many, which you will likely see at one point or another on your own if you are reading these pages. No, what I am doing here today is simply continuing on with the themes we have been working with in 2010 as they mature, plotting likely courses for the economy and markets we cover in 2011. If you want to call this forecasting - so be it.
In terms of agenda I would like to start with the economy and finish with the markets we comment on, because in the end you will see our views are on the former are supported with concrete empirical evidence from the later, unlike much of the fiction pawned off as analysis these days. Of course the prognosis for both the economy and equities in 2011 is the same, bad, which will finally vindicate those calling for a deflationary collapse for some time, however these forecasters will still not likely be correct. No - although the future has finally arrived in this regard, and although increasing austerity measures across the full spectrum of government on this side of the pond may be in the cards too, until the Fed in abolished, one must always expect a bounce whether it be in the economy or equities, where because of this we should have our fair share of volatility in next year.
Therein, if we are correct in the above assessment then, it appears 2011 will be that year the can finally stops getting kicked down the road, at least that's what the bureaucrats attempting to hang on to their jobs would want you to think. They will be talking austerity and responsibility in government out of one side of their mouths, while talking bailout from the other, as is the case in Europe as there too exploding deficits are making it impossible to maintain the illusion of functioning economies, accounting for the increase in rioting across member states. So get ready for the same double-tongued routine from central planners at home as well; again, talking austerity out of one side of their mouths, while undoubtedly continuing to doll out giveaways and bailouts, with Obama's present budget a real time example of this. Here the can is just getting kicked down the road, with the US budget deficit guaranteed to be off estimate in a big way again, not that austerity measures would fix the fundamental problem either.
No, austerity measures will not work either, because unemployment would get worse as a result. Of course even if the fundamental problem with the economy was addressed, meaning our present fiat currency Ponzi experiment perpetuated by a corrupt banker to politician feed-loop could be disassembled without collapsing the system, unemployment would go up, but at least if the economy was turned in the right direction one could work towards better times down the road - but that's not going to happen. Nope - unfortunately the ruling oligarch will not allow this to happen voluntarily because this would mean loss of power and wealth, which will be avoided at all costs. So, the can will continue to be kicked down the road by any means, involving increasingly deceptive tactics and strategies in attempting to keep the bubble economy alive. As suggested last week, don't be surprised if 2011 witnesses serial bailouts of states and municipalities in this regard.
And it's this up and down (herky jerky) motion in policy - from austerity to bailouts - that will create a similar condition in the financial markets as liquidity conditions become more volatile as well, leaving the possibility of flash crashes on a broad scale. You should know that's essentially what happened in the summer of 1940 (see Figure 4) as the economy was imploding internally, and is a growing risk today for the same reason essentially. What's more, you will remember from our discussions throughout the latter part of this past year we have been working on the premise that history will repeat, and that the divergence in North American stocks compared to the post bubble pattern of the Nikki would be closed at some point in 2011, as was the case with the divergence that ran all of 2006 and most of 2007, leaving us a window within the current sequence that could run another 200 NASDAQ points and until summer, as can be seen in Figure 1 attached here.
If we are to get another 200 points of gains from the NASDAQ however, the only way this is going to happen is if the dollar ($) falls, which means precious metals will likely rise further as well. In this regard the passing of the Obama tax bill is a positive for precious metals because at a minimum, instead of having the tax revenue to pay the bills, it will need to be printed, which adds to the perceived debasement rate of the currency. So again, after a tax related (taxes would be deferred until 2012) sell-off that is anticipated for the first week of January, it appears the inflation trade (stocks, commodities, precious metals, everything not nailed down) should have one more rally into February minimally, taking gold for example north of $1500, and further above the long-term channel indicated below. (See Figure 1)
Within the bigger picture, such a move would compete wave 1 of Primary (minimally) C, setting the stage for a big correction down towards $1100 into summer, which is consistent with our views concerning the larger equity complex. Again here, we are looking for stocks to plunge into summer as both inter-market (think rising interest rates) and sentiment related factors finally overwhelm the bureaucracy's efforts to inflate and manipulate the perception of an enduring inflation trade. This larger degree sequence is denoted below on the monthly gold plot from the Chart Room, where it's also not difficult to observe that from a technical perspective the move in gold is getting a little long in the tooth with indicators vexing beyond reaches that have previously triggered intermediate degree corrections. (See Figure 2)
Moving onto precious metals shares, with the monthly plot of the Amex Gold Bugs Index (HUI) featured below, as with gold, while further temporary gains are possible, here too, it should be noted indicators and oscillators are now at or near thresholds that have previously witnessed intermediate degree corrections, which again, is what we expect running into next summer off a first quarter high. Thus, any rallies above 600, which as you can see below is important Fibonacci resonance related resistance, should be faded, as they are likely to fail until the larger equity complex is ready to rally on a sustained basis, which will not be until late summer or early fall next year. (See Figure 3)
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Good investing and best of the season all.