High Altitude Ballooning Aftermath
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday July 18th, 2012.
One need not be a proverbial 'rocket scientist' in order to calculate the sustainability of our bloated economies anymore. The information required is readily available on the Internet. You only need the willingness to see things in their proper light and look in the right places. There's the rub however. With so many now dependent on the bubbles and balloons that are created by fiat currency economics it appears far too many have a vested interested in viewing circumstances through a bureaucrat's prism, which is now becoming so perverse that only the true reprobates are cable still maintaining status quo storyline. But this is what happens after prolonged journey's at high altitudes (the money printing boom since we went off the gold standard in 1971), where increasingly bureaucracies grow to unmanageable proportions, making it worse when fiat currency economy related jet lag hits the masses. And increasing numbers are in fact suffering this jet lagged condition, which appears to be adding to the ranks of the dazed and confused. The thing is, with increasing numbers falling from higher altitudes in the stratosphere (fiat currency economy), which is natural in this un-natural (artificial) economy we all share today thanks to central bank profligate, not only are people being squeezed by higher prices (another major side-effect of a profound currency debasement in a fiat currency monetary system /economy), many are also being squeezed by there own descent from the high altitude ballooning experiment the Fed has pushed on the world. (i.e. especially since the 2008 economic collapse.)
Along these lines then, in one sense you could say what is happening to increasing numbers feeling the effects of inefficiencies associated with ballooning bureaucracies across the spectrum, either pushed out of business or downsized by a bureaucracy themselves (this group is set to grow rapidly soon), is they are victims of high altitude ballooning aftermath, and what feels very much like jet lag in the coming down. This is of course why central authorities / banks print increasing specie in fiat currency economies, to attempt prevention of popping balloons in the stratosphere; however again, because of inefficiencies associated with mal-investment, corruption, and sloppy thinking in bureaucracies (all this money printing creates), such remedies always prove useless in the full measure of time -- always. In an effort to frame the condition our condition is in further, please allow me to introduce a piece of imagery that aides in explaining the 'big picture' in terms of our present economy (global in scope) far removed from traditional frameworks (due to stretched lifecycle considerations across the spectrum), because believe it or not, the economy can be conceptualized in this fashion now with our larger fiat currency economy so mature, meaning in physical terms. Hopefully this provides a better understanding of what is happening out there for you, where the simplicity of thinking about the economy in these terms will undoubtedly scare many. (i.e. especially fiat currency economy dependent bureaucrats.)
As some may have discerned based on the imagery already employed above, we would like to have you think of the economy as a 'big balloon' in your mind's eye right now, a balloon with billions of pinpricks along the circumference of its top (representing global population), and a 'hot-air machine' connected to its bottom (representing all the fiat currency printing). Continuing on, the idea here is the larger economy is nothing more than a big balloon which is continuously losing air from all the holes at its top (representing the burn-off of resources, theft, and mal-investment by billions of participants within the system), which is countered by replacement 'hot-air' (currency printing) pumped in at its bottom, with the objective of being a stable and moderately growing super-structure. Here again, some may have already discerned the chief problem with this situation in that even though growth is only supposed to be moderate, over long periods of time (think since Bretton Woods), the balloon will become so big the machine required to keep it inflated would need to run past its capacity, or be replaced by bigger and more powerful machines (think some degree of hyperinflation), especially as increasing numbers of pinpricks appear at the top. And there you have it. It's that simple, with the only variables being how much air is required to keep the larger balloon inflated (with all the smaller balloons [think stock, bond, and real estate markets primarily] inside), which is a product of the air leaving this balloon due to the reasons discussed above. (i.e. bureaucratic inefficiency, etc.)
Of course the real balloon(s) are far more complex and cannot keep growing simply with stronger hot-air machines pumping increasing currency into the system, but don't tell top level bureaucrats about this, especially the one's over at the Fed. (i.e. because they will keep trying until the system blows up from some degree of hyperinflation. [we will be finding out about this in 2021 explained here]) And in the end, like what is now happening to periphery balloon economies, the same thing will occur to the big balloon, it will pop due to a combination of money printing, run-away price increases, and debt default. But for our purposes, and in the meantime, its useful to use the above imagery in an effort to keep the big picture straight. Furthermore, and along these lines we find its also helpful to be well versed in what money really is, and why gold and silver are more than just simple currency, meaning why they are essential to properly defined portfolio / currency diversification models. Certainly right now precious metals investors might be feeling a little jet lagged, dazed, and confused about why their stock portfolios are suffering to the degree they are given the big balloon is still expanding, and that aside from this previous monetary inflation alone calls for higher bullion prices; but fear not, this condition set cannot last forever. (i.e. and if it's not expanding fast enough right now to keep prices rising it will be when US monetary inflation politicking subsides as we approach the election in November.)
The mainstream media (the propaganda machine of the larger bureaucracy) would have you believe precious metals investor expectations have fallen from grace with inflation expectations well contained due to the lack of apparent currency debasement (QE), evidenced by severe cases of jet lag and confusion having the effect of chasing momentum investors away from the sector at present. (i.e. jet lag, confusion, stupidity, and a good dose of official tinkering within both the markets and sentiments is why precious metals remain under pressure while central bank balance sheets continue to grow geometrically.) In addition to this on the propaganda front, they would also have us believe that the big balloon (discussed above) is not inflating at all (even though the little balloons around the world are busy in this regard) because US politicking will not have the Fed hyping monetary inflation in an election year to appear neutral. (i.e. even though True Money Supply [TMS] growth is picking up which we discussed in recent commentary.) But it's suppose to be this condition that is making the American public feel jet lagged, dazed, and confused about the true condition their condition is in and not buy precious metals; again, even though the big balloon is definitely still inflating aggressively. But let's get real shall we, the European's (and Chinese) are inflating with abandon again and the US will not be far behind, especially with recession indications now popping up.
That being said, and in relation to our balloon analogy, there is one more understanding you should have firmly in place in terms of what to expect with 'bubble dynamics' in coming months given Obama's re-election prospects are dwindling. And that is the Fed has double the reasoning not to accelerate money printing until absolutely necessary now (in addition to simply not wishing to display favoritism) with Obama's chances for a second term fading fast because top officials at the Fed are appointed by the President, and Bernanke undoubtedly wishes to be reappointed again (given his proclivities), meaning he doesn't want to anger Romney. In fact, Romney naturally wants the economy on the ropes going into election time so that his chances for election are improved, which means keeping the big balloon from re-inflating too early. So, don't expect to see any QE announcements from the Fed unless and until things get far worse leading up to the election, meaning either the data deteriorates considerably more or the stock market falls off a cliff. Once the Fed does begin to print overtly however, expect prices across the full spectrum to jump, led by gold and silver, with emphasis on the latter. (See Figure 1)
This is because silver will lead higher in an expansion phase, which will be the result of the big balloon growing again, which in turn will be the result of accelerated QE in the States. (i.e. and reactionary printing by the other central banks in order to alleviate pressure on their own currencies.) Post election years are often characterized in this fashion, and next year should be no different considering the Fed's reluctance to inflate the big balloon at present. Along these lines then, and in watching the chart / ratio above, you will know when the big balloon is inflating at an accelerating rate again when silver begins to outperform gold, which may or may not be coincident with a QE announcement (or something of the sorts) to show markets the Fed is serious about deflation concerns again. And who knows, with so much ground to make up in relation to just about everything else that moves, but in particular, the stock market (because both the bureaucracy works so diligently at keeping stocks elevated against silver as a bell-weather), silver should exceed it's historical nominal highs at $50 tested last year handily, on it's way to the next $50 interval at $100 (and beyond to inflation adjusted targets) if there is a god, which of course there is depending on how one views things. (See Figure 2)
And just look at how much room to run against stocks exists for silver in the chart / ratio above. Indeed, it would be fair to say that silver has not even entered its bull market on this basis yet, that being against stocks and the multi-decade long love affair the public has for risk assets (to this day), bringing the more optimistic targets into play if one understands these things. So, once we are past our usual seasonal summer slump, and silver makes it past major Fibonacci resonance related resistance at $50 (pictured below), the move to $100, (and beyond discussed above), will be in motion, where if preceding cycles are an indication of timing proclivities, the white metal should be vexing in excess of the large round number at 100, and approaching the next $50 interval at $150, within two years time. Again, the focus is on silver at present because it still has bonanza degree potential moving forward, meaning its thought a return in excess of 1000% is still possible. (See Figure 3)
Now you may be thinking such an aspiration is 'crazy talk'; however, try to picture what the mood in the markets will finally mature into when the bank runs begin on this side of the pond. As Ron Paul alludes to in recent commentary, its not a matter of 'if' this will occur, but rather 'when'. Therein, attempt to imagine what reaction would be witnessed in the precious metals markets, and again, more specifically in silver, when it becomes apparent to just the millionaires and billionaires out there that their wealth is nothing more than a fiat currency 'wet dream', and that they must quickly find a real 'safe haven' for their wealth. (i.e. as opposed to more fraudulent paper promises.) Obviously one does not know when such circumstances will appear, but since this looks like it could become a real possibility this summer in Europe, based on growing indications, one would be foolish not to be preparing sooner rather than later for what could easily be termed 'high altitude ballooning aftermath'.
Moving back to this side of the pond, and in addition to such considerations, again, it's pivotal to remember no matter how low prices go they will go back up - way up - because monetary authorities in the States are holding back in new money printing with top level officials at the Fed worried about getting on the wrong side of a new Republican President now that Obama's re-election prospects appear to be suspect. They are doing this in an attempt to keep commodity prices under control with the other system defining macro-assets (stocks, bonds, real estate) apparently stable. The only problem is it's an illusion, as with the economy, where a hollowed out internal structure (too many service / government jobs) is now imploding. This is because the fiat currency economy needs accelerating quantities of new cash now, but the Fed will not accommodate until their hand is forced due to political reasons, meaning the swings in prices of all equity markets in coming months should be quite dramatic as monetary authorities react to collapsing infrastructure(s).
Side Note: As Adam Hamilton points out in a recent commentary on the subject, Presidential elections are almost always decided by the stock market in the last few months running up to November (September and October), so if secretly Bernanke wanted to help Obama get back in, he would wait until later next month to announce an accelerated QE. By doing this Bernanke could accomplish two things. First, he would undoubtedly increase his chances at remaining Chairman of the Fed, where Romney would likely replace him. And two, if Bernanke allows stocks to slide into next month he would have wider moral justification for implementing another accelerated QE program with so many opposed to such an action, where the apparent alternative (deflation) would be obvious to all.
And unfortunately it appears it will require a genuine deflation scare to get the Fed to announce new QE initiatives, meaning it appears this is also what it will take to get precious metals prices moving in the right direction as well. Of course if Michael Kosares over at USAGold is correct this has all happened before, and that we are in fact within the window where once Pandora's (inflation) Box is reopened (think some version of QE3), prices will re-inflate very quickly, making buying this summer an investment opportunity of a lifetime for some. As he discusses in the attached, precious metals still have a long way to go as the public participation phase of the secular bull market is still in its infancy, never mind the mania phase still to come years out as we approach 2021. (i.e. 2021 being the Fibonacci 21-year interval from the bull market origin in the year 2000.)
Along this line of thinking its important to realize that eventually the public will increasing recognize central authorities are monetizing everything in sight -- everything from stocks to bonds to your mortgage -- and the currency is being debased at an accelerating rate. What's more, it's also important to realize a great deal of residual wealth will be created by all this money printing once again, fleeting as it may be, and it's this residual wealth, this liquidity, that will find its way into precious metals because the price managers and bureaucrats cannot completely control people's freedom and thoughts (using the machines that are killing the market), where gold and silver simply make a great deal of common sense in today's increasingly debased (emphasis on fiat currencies) world.
And it's at this point that the risk in precious metals (most notably the shares), which has been to the downside since last spring (and possibly extending into late summer / fall), will reverse, shifting to the upside and non-participation, where all the harebrained hedge funds and institutional managers that are currently not participating in the sector will be forced to buy (back) in, possibly for the first time as participation rates are expected to climb. This means that all the hedge funds et al that have been selling / shorting precious metals for whatever misguided reason, and attempting to piggy back off of official sector price suppression, will be forced to buy at some point (depending on individual intelligence factors), which should bring a steady stream of buying back into the sector on an intermediate-term basis (over the next 10 to 12 months), producing up to 200% returns in the shares.
Clearly our scheming and price managing central planners are attempting to take advantage of present circumstances and break precious metals down to demonstrate to all - see - how could inflation be a problem with gold, silver, and the rest of the commodity complex well contained. The problem is the lack of investment capital flowing into these sectors is so low right now liquidity conditions continue to deteriorate, allowing our price managing bureaucracy to capitalize on this situation and break the commodity prices down with the stocks in the lead. And again, unfortunately this trend appears set to continue, where present conditions can be likened to those experienced in the 1998 to 2002 period, as pointed out by Rick Rule attached here. And the process has been insidious and well hidden by central authorities leading up to this point, where now they are in a position to break gold and silver down out of significant technical structures that are being followed by all traders playing the sector.
Now, all the price managers need to do is tip prices over the edges of these structures and follow through selling by these traders will ensue, bring pressure down on the sector when little liquidity will be present to support prices, causing them to fall further in spite of the fact technical conditions are already oversold across almost all temporal and cross-sector measures. Yes, our price managing bureaucracy has done a great job in this regard, perhaps particularly motivated because it's an election year, however it should be noted that their success is your opportunity because this condition set in unsustainable due to the fact that as alluded to above their fiat currency economy(s) is collapsing internally, and debasement rates will need to be ramped up once again. What's more, the longer they wait the greater the currency debasement that will be required later on, meaning the swings in commodity and asset prices will be even greater than previously. (i.e. meaning corresponding opportunity to make capital gains on well planted money into next year.)
We know this to be true because the ratios tell us this is the case. We know this because the bureaucracy's precious stock market is still only marginally off yearly highs, which has brought precious metal and commodity related ratios against the broad measures of stocks to levels not witnessed since bear market lows in the 1998 to 2202 window. And while the election in November is close, making any such strategy risky, it's difficult imagining price managers not attempting to break prices down further at this point in spite of this risk, where again, as mentioned above, the doldrums in August (or September) might provide this opportunity - again, with the corresponding opportunity for cash to be invested at very good prices.
Good investing all.