Bipolar Monetary Policy Dangerous Parallel

By: Captain Hook | Mon, Mar 7, 2011
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The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, February 22nd, 2011.


It's no surprise the developed Western economies continue to print money, albeit at increasing slower rates as rising prices are now becoming problematic. That is to say, the prices for food, energy, and all those other things are beginning to rise noticeably even for Westerners, with sirens going off in emerging markets (because food and energy comprise such large percentages of an average budget), however because the world's fiat currency economy(s) continue to need perpetual stimulus, the problem remains. Along these lines, it should not be surprising then that while the Chinese ramp up their tightening campaign, and the ECB is preparing to do the same, Bernanke's Fed continues to justify accelerated quantitative easing (QE) and money printing due the sluggish domestic economy that persists, and is still exporting inflation where it is most unwelcome, with China at center.

What's more, it's important to note the historical parallels to the 20's over the past 10-years are actually quite similar in that basically prices kept on rising until the stock market just snapped in '29 as less and less money was available for investing (just like today), not to mention stocks had become expensive themselves. And wouldn't you know it, because history at least rhymes at these times, where because of near zero interest rates in the West we now have confidence in stocks at all time highs along with prices being perky, to say the least. Again however, with China switching off roles with the US as world changers this time around (at secular highs), one does need to wonder just when the disparities of the world will clash sufficiently to cause a return to a more sane reality in the West, one where participants acknowledge money supply growth doesn't cause lasting economic growth, only rising prices, and that all economic cycles end no matter how much printed currency is thrown at them.

For now though, it appears the world is presently going through a period of bipolar monetary policy much like what happen leading up to the crash in financial markets and economies during the 1930's, where roles were reversed, and the Fed was the culprit doing the tightening like China is today. Why did this occur? Answer: Because the US was the central growth economy of the world back then with what had been up to that point a rapidly expanding manufacturing base, again, just like China today. But again, just like the turn into the 30's in America, presently China's manufacturing base growth rate is slowing, and is in danger of reversing, making for potential trouble in assets bubbles both at home (think real estate, commodities, etc.), and abroad; troubles that will one day undoubtedly involve bubble blowing bombshells that unfortunately could bring on a global depression the likes of which never witnessed previously in scope. This is of course why central authorities the world over are attempting to avoid wholesale rational deleveraging at any cost.

As talked about at length on these pages for some time now however, unfortunately for the powers that be, unless they can monetize the entire market(s), once bearish speculators in US stock markets are exhausted, no matter how much money is printed it won't be enough to stop asset bubbles from popping again. The difference this time around however will be not only will equity bubbles burst, but also the larger bond bubble will go as well, with rising interest rates mixing a bitter concoction for the our price managing bureaucracy (with the banking cartel at center) in that the free money (fiat currency) party would be over. This will of course make difficult if not impossible to maintain the larger bailout bubble because people will be paying debt off increasingly to escape higher interest payments. Like I said, this would be lights out for the banking cartel, trouble for their politician cronies, and a wake-up call to the larger (Western) populace in that for all intents and purposes - the party is over.

This notion is being fought tooth and nail however, not just by our price managing bureaucracy, but also by the public at large still. This is because the public is hooked on the good life (higher standard of living) and will not give it up until it's forced on them, which is in fact systematically occurring. At times it's through inflation confiscation (of purchasing power and wealth) and at other times process turns asset bubble(s) deflation to combine for a lower net worth, lower incomes, and lower standard of living for the average citizen. And now the effects of this process is even starting to be felt by the wealthy, where this is especially true if they had a large percentage of their wealth wiped out by one of the Ponzi scheme's along the way (think tech, housing, etc.), with Madoff being small potatoes by any measure. And it's this ongoing desire of the American public to ignore reality that is the reason precious metals prices are not higher in spite of all this (uncertainty) as well, however at some point they will realize the foolishness of their ways, and rush into the market.

But this time is not likely now in my opinion, because equity cycles continue to point lower, and this should have at least a tempering effect on precious metals, if not wholesale liquidity / deleveraging concerns for a period of time. (i.e. like 2008 but hopefully not as bad.) So, this is not a time to be bold in the markets unless you are a short seller, where based on the apparent reversals lower in gold and silver overnight in spite of crude exploding higher, we could get asset deflation signals this week. Such an outcome would reinforce and intensify any selling in the larger equity complex, and at a minimum set the stage for a topping process, if not something more dramatic considering complacency levels right now. (i.e. a fractal crash could occur if volume were to pick-up with selling.) What's more, we will know this risk is prime if silver fails at Fibonacci resonance related resistance at $33, which is pictured below, however it should be pointed out that this should be viewed as a correction (intermediate degree) and not long-term reversal, where once equities stabilize in summer, its advance to $50 (all time highs and the next Fibonacci resonance related resistance) should continue. (See Figure 1)

Figure 1
Silver Weekly

Just how much will silver correct if this is indeed an intermediate degree turn point? If I had to guess, and this is of course all educated guessing, since Fibonacci resonance related targeting appears to be defining the move higher, logic would dictate it might also define the parameters of corrections as well, where the big picture snapshot shown below on the monthly plot would suggest a move all the way back down to $22 potentially. And of course if Harry Dent and Robert Prechter are finally correct, both being hard-core deflationists, then $22 might not stop the decline, however their views paint gold and silver as equities and not currencies, so such an outcome is definitely not necessarily in the cards. What's more, this is especially true considering participation rates in precious metals remain so low, as alluded to above, leaving lots of room for growth later on as increasing numbers seek stable stores of wealth. (i.e. well grounded currencies.) This we know to be true from historical precedent. (See Figure 2)

Figure 2
Silver Monthly

And of course such a move lower would be good news for those looking to take on or increase physical precious metals positions, where as long-time subscribers know, such a strategy should form the base (core positions never traded) of any portfolio for numerous reasons today, not the least of which being the risk of sudden and unannounced currency depreciations on the part of desperate politicians. As you may know, this risk increases the more stressed the economy gets, meaning the more a currency needs to be debased. What happens is you wake up one morning to hear on the news our masters have decided it would be better for the economy to recalibrate fiat currencies to promote price stability and growth (the same BS the Fed [their puppets] spews out), and that your old dollars are to be turned in for new currency units (of a larger dimension) at a predetermined ratio. But if you are a retailer don't fret because re-pricing your stock won't be necessary. People would simply have far less currency to pay for purchases in such an instance. (See Figure 3)

Figure 3
Silver/SPX Monthly

This risk is why precious metals will eventually make a meaningful breakout against the primary form of savings people have today, which is in stocks, where as you can see above, pressure is building at sinusoidal resistance for silver to breakout against the S&P 500 (SPX). And this breakout will happen at some point, likely this year, which will send silver materially higher. (i.e. into three digit territory.) So again, if it pulls back into the $22 area, this would make for an ideal accumulation target, where the likely timing for this pricing should fall in the May / June timeframe.

Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. Of course if the above is the kind of analysis you are looking for this is easily remedied by visiting our web site to discover more about how our service can help you in not only this regard, but also in achieving your financial goals. Along these lines, you should know your subscription to Treasure Chests would include daily commentary from either the myself or Dave Petch. As you may know, I cover macro-conditions, sector timing, and value oriented stock selection, while Dave covers the HUI, XOI, USD, SPX, and TNX technically each week. Mr. Petch is a world class Elliott Wave Theory technician.

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Good investing and best of the season all.



Captain Hook

Author: Captain Hook

Captain Hook

Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.

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