The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, August 11, 2014.
Who could forget the feel good tones first piped out by the Beach Boys some 50 years ago now - good good good - good vibrations. Just thinking about this tune is enough to get one off their feet and grooving. That's the feel good part of this piece today, as it all goes down hill from here because we are about to discuss salient features of our present day economy. Back in the 60's we still had the 'great inflation' and the 'good vibrations' this created in the economy ahead with the US (Nixon) going off the Gold Standard. This was like a good Beach Boys tune to the economy. But now we are older, fat, and lazy - completely dependent on the easy money provided by our feel good masters at the Fed - a condition gone world wide in America's attempted colonization of the globe.
In their desire to maintain profits in our mature economies as inflation accelerated, American (Western) capitalists exported the manufacturing base to third world states in order to exploit cheap labor, extending the party up until today. But again, now things are changing in these places as well, as workers demand higher wages to compensate for rising prices, all when this same inflation, and the vulgarities associated with diminishing returns at home, continue to ravage now hollowed out economies, currencies, and markets. And although authorities have been able to capitalize on structural / statistical deceptions over the past few years to make the larger economy appear 'good', like the good times of yesteryears this time is also now coming to an end, with a depleted reality the song of the day.
What's worse, because of the easy money / debt binge we have been on since 1971 (when the US went off the Gold Standard), excesses have now become so extreme that at some point the economy(s) could literally snap, requiring some sort of 'reset'. Again, these are the vibrations running through economies, currencies (think the dollar), and financial markets these days, and they are not good. In terms of the economy it could be argued it's already imploding, led by periphery states, which today increasingly includes rapidly fading European core states. And don't think the previous growth machine China will escape the same fate, where market-moving cracks are showing up as well in spite of stretched government reports. India's central banker sees this - and so will his counterparts eventually.
Moving foreword this should spread to core states increasingly, where once you see 9,000 on the DAX (already in correction mode) in the rear-view mirror it will be included in this group. And it will become increasingly clear that in spite of increasingly desperate measures over the past few years, even the US is also accelerating its decline, where again the gap between economic realty and the financial markets will be closed. Record outflows in both stocks and bonds recently will eventually overcome prop desks and corporate buybacks at some point, even as central planners increase the depth and scope (think buying stocks directly) of monetization efforts. The sheer size of the situation is too big to continue down this road without destroying the dollar($), which is already becoming an issue in the Treasuries market, and will eventually temper such practices.
What could accelerate process here, with vibrations getting bigger and bigger? Well, how about Obama going to war with ISIS, Russia, and China all at the same time. Do you think the markets will finally wake up to what a nut-bar this character is? Be that as it may, this is what appears to be developing. Certainly tensions between Russia and ISIS are accelerating by the day as Obama attempts to preserve the Empire, however he should know better because the blowback will eventually kill the $. But the war machine has the green light to turn the screws again, which is all that's important to the bankers and arms manufactures. So get ready to pay more for everything earthly moving forward, you know, the stuff needed to survive. Because inflation is about to go ballistic, not that this will be properly reflected in the financial markets until its too late. (See Figure 1)
With China the war is still solely on the economic front, but this too could change if delusional American politicians decide to accelerate process here as well. No matter however, because either way the US is set up for a reality check whether it be sooner or later, with the Minsky Moment being when the $ loses hegemony status. Based on the way the American establishment is putting up a fight, although process may indeed be gradual, the reality of such a change will likely come suddenly, whether perceptually, or in an actual 'reset' type of event involving market / institution closures, currency devaluations, etc. It will be the moment everybody, including American's themselves (those not watching TV), realize the empire is dead, along with the $. This is when the debt growth will slow, causing pressure on the $, which will send domestic hard good prices through the roof. (See Figure 2)
This is what the reversal back to the secular trend (lower) for the Dow / Gold Ratio is signaling, and what the same (confirmed) outcome in the S&P500(SPX) / iShares Silver Trust (SLV) (see below) Ratio will confirm when it begins to head lower with a vengeance. Both the Dow / Gold Ratio and SPX / SLV Ratio appear to be counting lower in five-wave affairs at present, but this means little to the 'Boys From Brazil' (the little Hitlers that populate banking corners and Wall Street). Remember, silver is their 'whipping boy' because it's a small / localized market that is easy to control that sends a 'big message', which helps them control gold. If it were not for silver suppression, gold would be thousands of $'s per ounce higher this very day. It's been this way for many years and is why when silver begins to rise uncontrollably, you will know the party is over for the Da Boyz, the $, and American global dominance. (See Figure 3)
Seasonally the coming week is supposed to be up for stocks, however one does need wonder if the bureaucracy's price managers will be able to pull this off with put / call ratios continuing to plunge. So, don't be surprised if this apparent bounce in stocks stalls out at some point, with this likelihood increasing daily as we approach options expiry on Friday as long as the bears don't start loading up on puts again. If this happens then new highs are possible in US stocks with the computers programmed to squeeze such foolishness instantaneously, believe it or not. Aside from this however, based on the prospect for a retracement in the DAX that still has another couple of hundred points to run, while higher prices are also likely in US stocks, here too, gains should be limited to a lower high this being a correction of the losses experienced over the past few weeks.
Certainly the bureaucracy's price managers are attempting to desensitize investors to geopolitical risk considering how worsening conditions are surely coming at some point. So, they are working overtime in this respect to say the least, however again, with speculators already there (desensitized) some really big surprises should be the result sooner rather than later. It's either this or Da Boyz better get ready to print exponentially increasing piles of new currency to monetize the beast because they won't be getting any help from bearish speculators (now exhausted both psychologically and financially), making their computers redundant. So again, once the retracements are complete some time next week, things should get interesting on the downside again, where one should be watching the large round number at 16,000 on the Dow with a great deal of interest.
A violation of the large round number at 16,000 on the Dow would signal the possibility of at least an intermediate degree waterfall event. It could be argued the 200-day moving average in the proximity is all it would take, however the large round numbers often put up a good fight considering the characters we are dealing with.
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