The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, November 26th, 2013.
We're getting close. We are getting close to the day of reckoning this fiat currency economy suicide mission the Fed(s) has engineered for us. So you better get ready, because they will not ring a bell at the top of the stock market to warn the party is over - so Achtung Baby. Because the end of the line in QE debt monetization related economic growth is almost here - with diminishing returns in money printing and central bank balance sheet growth re-accelerating. And while it's true central authorities can still increase QE to offset diminishing returns, and in fact have stated they intend to do just that in Europe and Japan early next year, still, as the attached above clearly demonstrates, by 2015, the effects of all this money printing will be negligible. And before it's all over don't be surprised to see QE in the States moving from $1 Trillion per year (where we are now) to $1 Trillion per month, and to infinity essentially.
Because it will never stop until the system blows-up, as unscrupulous high level bankers and their consorts have a grip on the system and will not give it up voluntarily, where their insane practices and comply or die tactics prove this without a doubt. Add to this picture a new and naive Fed chair, with visions of sugar cookies in her head, and one does need wonder how US Treasury yields remain sanguine in coming years. Because once confidence is lost a negative spiral can grip macro-conditions quickly given the hollow nature of the much talked about 'economic recovery' in official circles, making increased QE necessary, which would in turn feed a death spiral in Treasuries. One must wonder however, just how the bond market bubble will be popped with QE to infinity on tap. Will it come from internals or externals, or a combination of both? Perhaps the answer to this question lies in the East.
What's more, it's not just the bubble in Treasuries one should be worried about, which up until this point has been no trouble at all with the QE backstop. There are also stocks and real estate to worry about as well, where you know a problem exists when the speculators are speculating on the degree of speculation. Because there's no free lunch despite what lying bureaucrats would like you to believe, given this lunacy can obviously continue for longer than anybody with a whisper of common sense could conceive. The sad part of this entire mess is the crazier it gets, the more anxiety is created, the more people will hold back, the more the Fed will have to print money, the more stocks will go up - until we reach the point of 'heart attack' for the over-drugged junkie. Then, the bond market is going to blow up, and it's all over.
Because we are all Fed junkies in one-way or another - whether you depend on them directly or not. We are caught in a liquidity trap that demands the Fed monetize some 70% of all net bond supply; meaning rates would be considerably higher if they were not doing so. So, don't fall for any of the BS 'taper talk'. This is just Kabuki Theater for fools because key debt markets are becoming increasingly stressed. Again, with the steaks so high now, crazier than any other time in history, as measured in all-important credit markets, you should realize the Fed(s) have no choice but to keep accelerating the craziness, which will become a problem for the bond market once rigging efforts on the part of the bureaucracy's price managers begin to fail noticeably. You will know this is the case when they can't keep credit markets supported anymore, which will tip diminishing returns into freefall. (i.e. and in turn re-accelerate the need for more money printing as things spiral out of control.)
And of course the same is true for stock market. Things will just keep getting crazier, where what may appear to be crazy talk today will look obvious in hindsight. We already know the Fed intends to accelerate QE next year because they have said so. So again, don't be fooled by taper talk, which has the effect of catching offside short sellers when weak data points come out, causing a short squeeze. (i.e. that's what happened last week post the Fed minutes release.) What market participants don't realize yet is such talk is just expectation management on the part of the Fed so that people are not surprised when it happens, which will be especially important as the pace of change continues to accelerate, and sensibilities are challenged further. This will be particularly important when the stock market finally tops out and the collapse in the larger economy accelerates. One would think this can't be too far out given increasing divergences in fundamentals, however again, it appears one would do well to allow for liberal doses of craziness all things considered. (See Figure 1)
In this regard, and why the chart above is displaying a 'bubble profile', likened to both the year 2000 and 2008, associated with the tech and housing bubbles respectively, we now have the mother of all bubbles, the central bank (planning) bubble in everything except commodities and gold, however these bubbles are coming. In the meantime however, and as one can see above, the present bubble building process in stocks appears to have further to go, likely sending the S&P 500 (SPX) at least another 100 points higher in coming days and weeks, and even higher next year. Again, such an outcome should not be surprising to anybody given the liquidity that is floating around out there, where it appears investors are piling into stocks like never before at present. And we get the same picture in the long-term Dow plot from the Chart Room, now over 16,000 and pushing towards 'broadening top' and Fibonacci (Fib) resonance related resistance, which could take it as high as the next large round number at 17,000 before a Supercycle Degree to is put in place. (See Figure 2)
Then there is gold. Who needs gold when the 'traditional' stock market is going up - right - especially when Da Boyz are making copious amounts of fiat currency underwriting the tech fads of the day. And with stocks still under-owned on some measures, QE set to spread to Europe (and increase in Japan), and the average hedge fund manager struggling to play catch up, which means stocks are likely going much higher, gold could remain in the doghouse for some time yet, well into next year. (i.e. after the pop in January and / or February discussed last week.) Gold will of course be the place to be in the end, when all the Ponzi finance has collapsed, but try and tell that to the average village idiot who has difficulty planning what they will need next month, never mind next year, or heaven forbid, at retirement. And then there's all that social pressure, psychometric drug addicts, and attention deficit disorder to consider - man are we in a great deal of trouble - no? Better buy some gold so you can eat when inflation goes through the roof bailing out this ship of fools. (See Figure 3)
In the meantime however, and as suggested in our last correspondence, the present set-up in the markets "is looking eerily like that of the year 2000", stocks, commodities, and precious metals. For stocks, and in adding to the above, in looking at the MACD in Figure 4, the monthly plot for the SPX, considering present unprecedented expanding liquidity, which was also the case in 2000 due to Y2K fears, what we should see moving forward is year 2000 resistances hit, followed by higher highs in the indexes next year as negative divergences are traced out. So it would not be surprising at all to see the SPX vexing the 2000 area next year, not with all the money printing to fuel the bubble economy(s), the stock market being one of the primary beneficiaries. Bonds are obviously a primary beneficiary of the money printing (QE) as well; however, we will leave a more detailed discussion of that topic for another day. (See Figure 4)
Also leaving commodities for another day, and in maintaining our focus, if the Dow / Gold Ratio is to reach the 233-month exponential moving average (EMA), which is also the 23.6% retracement denoted in Figure 2, this means the ultimate lows for gold should be in the area of 1180, which is not that far away from where we are at present, and would maintain channel support indicated in Figure 3. Again however, and a point that should be stressed, and was in The Dumb Bell Rally, despite possible stabilization in gold (and silver) pricing next year, and although precious metal shares are also plumbing historic valuation metrics, if history is to be a good guide moving forward, with specific attention to similarities of events surrounding the year 2000, no guarantee exists the shares will stabilize with the commodities, where they were cut in half under the same conditions at millennium's turn.
Of course if one bought at that time, you were eventually rewarded handsomely, and one should always hold 'core positions' for the long term (in bullion for sure), however the point here is accumulation / portfolio planning strategies should be approached conservatively. Again, post tax loss selling in January, whether further deleveraging related selling appears later on or not, expect at least a bounce in January / February, especially considering the attractive valuation metrics mentioned above. Some are supposing because of QE such concerns are unwarranted, at least not yet, where precious metals are expected to vault higher on a lasting basis right out of the gate in January, and who knows, perhaps this view is correct considering we have never witnessed a Fed more determined to stay ahead of the curve, possibly extending the present expansion further into the Twilight Zone. (i.e. think 2015 and perhaps beyond.)
However, if precious metals proceed to advance where the fundamentals dictate, rallying on a sustained basis into next year, one would think that at a minimum this would cause a noticeable problem with the bond market, which would undoubtedly have an impact on the larger equity complex considering aggregate debt (think margin debt) levels. Again, this was the condition set that caused additional weakness in precious metals shares in the year 2000 despite they had just suffered through a 20-year bear market in the sector, which the penitent / wise man would need to consider this time around as well.
Buying at the end of December looking for a bounce in January and then monitoring sure makes sense however - so again -- Achtung Baby.