Bonfire Of The Vanities
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, December 17th, 2013.
We must burn our false gods. We must incinerate materialism. We must set ablaze our evil and vane ways. And we must stop being so foolish because it's serious this time.
As a race, human beings have come a long way, of this little doubt exists. This sentiment does not necessarily imply where we have come from, and where we are going is 'good', because it's not. This is because as a race we collectively squander increasingly essential elements that support our existence, along with corrupting social interplay in a complex game of 'survival of the fittest'. This is what makes organizational centralization impossible past the honeymoon, where even the naïve benefit from the corruption and theft. Once Mother Nature reasserts however, we quickly revert back to 'jungle' economics and 'gorilla' warfare, which is where we now.
Post hydrocarbon man is in decline, but we are in mass denial on the subject. All you will read here today is a derivative of this fact essentially. The bubble in human population, which is primarily a function of continue access to readily usable (economic) crude oil, has created the apparent need for 'bubble economics' due to our nature, which is a boom / bust framework. This is what we must change. We do not need growth in order to satisfy the greedy. This is where Mother Nature comes in to sort these types out, where we unfortunately must all pay the price once the honeymoon is over because the weak continue to empower the strong, idiots that they are.
So we must change on a collective basis, both the weak and strong, or Mother Nature will force even more undesirable change on us in the full measure of time. That's the big message here today. We must change our ways in a 'Bonfire Of The Vanities' if you will. In terms of organizational economics, central planning, and more specifically central banking, is now sucking what little life is left of a dying edifice (of excess and vulgarity), a condition that cannot last much longer considering decay is accelerating. Keynesian interventionism is employed by central planners to stimulate natural rhythm in the system and now we are dangerously addicted to the drug, far along in lifecycle.
Despite the best efforts of 'mice and men', inevitable and inescapable decay has gripped the macro however, where central planners will be forced to risk killing the patient with too much of the drug (fiat currency causing hyperinflation), or allow nature to take it's course. (i.e. bringing on the bust.) In knowing our 'leaders' are unlikely to bring on an economic bust under their tenure(s) voluntarily, naturally they will continue to attempt reinvigorating the economy by expanding money supply, blowing the assets bubbles ever bigger until they burst in an accident. The Chinese understand the inevitability of this, especially with respect to their US Treasuries holdings, which is why they have started selling, and may become quick to sell once it becomes clear events are spiraling out of control. (i.e. due to fear of debasement.)
What's more, one should take note that China's foreign currency reserves now total some $3.6 trillion, making the $1.2 in Treasuries they hold increasingly insignificant, a condition that will likely affect policy moving forward. Therein, as China continues to accumulate gold and other hard assets to replace paper holdings, eventually it will be in their leader's best interest to increasingly shape policy to exploit more localized assets considering the US (West) is declining (and this condition is accelerating), making holding Treasuries less attractive. Tension between China and the US is already growing, which in a few years, once China has over taken the US in gold reserves (their unstated goal), will pave the way for USDollar($) displacement as the world's reserve currency, bringing on the inevitable, both escalating economic and military war.
Why would the Chinese do this? The simple answer is greed. Having reserve currency status allows the controlling country to issue credit on an international basis, opening up an entirely new world of commerce to their economy. At first this new power is generally limited to legitimate trade of hard goods (and some services) between countries, however as time passes, and the bureaucracy and plutocrats become increasingly corrupted (power and money corrupt), like the US today, peddling their worthless paper across the globe (under threat of financial and / or military reprisal), trade becomes as debased as the currency. (i.e. the Chinese will debase their currency too once the US is knocked from top spot.)
So, the sharks (both China and Russia, who will play a lesser role in the new more regionalized world order) are circling (accumulating gold at break-neck speed), because they smell blood with US officials willing to 'sellout the country' (attempting to preserve their power via deception), by allowing the gold to shift East at bargain prices. Moreover, China is making big strides on all the fronts necessary in order to make them 'the superpower' eventually, which again, the US will not like at all, eventually bringing war when push gets to shove. Therein, once the US begins to noticeably suffer economically, officials will be empowered to take increasingly desperate measures in order to regain and maintain the status quo. Unfortunately this will prove futile, and American's will be forced to take large wholesale cuts in living standards across the board, swelling the already growing ranks of poor.
This is why 2014 will likely be a year of marked change in terms of the status quo, where the cracks in the system (economy, stocks, bonds) should become more visible. And while momentum from the cyclical upswing in government largesse and the 'good times' that go along with this will likely carry into the New Year, make no mistake, at some point volatility should return, bringing back what are essentially secular shifts in everything from politics (think increasing protests and tensions), to the economy, to the markets. In focusing on the effect(s) of all this on stocks, and again, although price strength may carry through into the beginning of 2014, certainly at this point it would be reckless for even the completely debased to ignore what will likely become obvious hindsight memes at some in the not too distant future. (See Figure 1)
Along this line of thinking, it would be surprising to see stocks run past the beginning of the second quarter, as was the case in the year 2000. Looking at the above weekly S&P 500 (SPX) chart, what we are expecting at this point is a run-up in stocks touching the 1900 area into the first half of January, consistent with both Sornette's and McClellan's analogs, but that may not be all considering the degree of this top (higher), leaving the possibility of higher highs later on. Therein, if the Dow / Gold Ratio (DGR) fails to hit the 233-month exponential moving average (EMA) at the top in January, such an outcome becomes a greater possibility. If however, the Dow traces out an exact match with the DGR hitting the target at approximately 14.5 into this time frame, in conjunction with the NASDAQ / Dow Ratio (see below) pushing up into extreme bubble territory, a major and lasting top might in fact be witnessed in January, so be en garde. (i.e. it's not likely based on the wave count of the DGR, which will be covered at a later date.) (See Figure 2)
With hedge fund performance for 2013 still lagging badly, the Fed and cohorts still actively managing our bubble market(s), and investors still trading on the greater fool theory, it definitely will not be surprising to see stocks continue higher, not too mention escalating desperation levels of an increasingly debased people. And debased people lead to an increasingly debased currency, which is bound to be the case knowing those in charge. So, whether we see an increasingly indebted and financially deteriorating public shop more or not this Christmas, the combination of the above should still be enough to propel retail stocks (see below) higher one more time, because the top 1 % (whom hold the majority of these stocks) can never have enough. This has been a rich man's rally for some time now, since the bottom in 2009. The bottom 90% are collapsing, with retail stocks going up on share buybacks due to cheap money - not fundamentals. (See Figure 3)
So you see, it's the unsavory and vane practices of the bourgeoisie (top 1%) that are at the root of our problems. Does this mean we should witness something like the French Revolution at some point in the not too distant future - a bonfire of our vanities if you will? Given the state of the American psyche (almost completely debased and delusional) these days, such an outcome appears unlikely, however one never knows, we could get lucky at some point. (i.e. especially if the masses start going hungry.) Barring such an outcome however, once our centralized economies start to unravel for real, at a minimum failed interventionism should lead to increasingly neo-feudal like (regionalism) political arrangements in the future, because eventually the periphery (labor, jurisdictions, etc.) will get sick of being screwed by those supposedly charged with caring for them. (i.e. think politicos, bureaucrats, business leaders, etc.)
Until then, we can expect more of the same however, increasingly fascist and predatory politics (Obamacare, etc.) designed to debase, confuse, distract, and divide - with the primary objective of making citizens more dependent on the State, stripping them of their civil liberties, sensibilities, and wealth. Of course people have their limits, with the audacity associated with the Obamacare rollout perhaps the limit of what will be tolerated, even with the apparent limited mentality of the average American. And other cracks in the dyke are beginning to show up as well, suggestive 2014 will likely hold a few surprises for elitists, possibly leaving more than a few of them singed, scorched, and possibly consumed. This is why we expect gold's fortunes to turn around next year as the powers that be attempt to protect their empires. As economic collapse and chaos spread they will be forced to respond with accelerating currency debasement, which will be uncontrollable this time.
Something will prick the larger bubble economy next year, whether it be a resurgence of old problems, or new. So despite all the distraction in mainstream media (taper talk, etc.), don't be fooled. 2014 will be a transition year, where secular trends in the economy and markets are reasserted, with a regained respect for precious metals at the top of the list. With tax-loss selling set to end essentially next week, traders looking for a relief rally in January should begin scaling in soon, especially if the bureaucracy's price managers are able to push gold below $1200. Remember, while such a dip in the gold price might turn out to be the absolute low for the metals (silver too), as per our commentary last week, it should be remember the tremendous amount of margin debt presently employed in the stock market still needs to be unwound, where margin clerks can be expected to employ 'scorched earth policy' when the chips are down.
Thus, precious metals stocks remain a trade for now, not a long-term hold just yet.
See you next week.