Moonshine or Strychnine?

By: Gary Tanashian | Sun, Dec 4, 2005
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Here we are in December, 1999 with the Asian Contagion and LTCM crisis safely behind us. We still have the dreaded Millennium Bug to deal with, but in Greenspan we trust! Surely the liquidity that has been afforded the markets and economy will get us through any cataclysm that may be in the offing.

Uh, sorry. I can assure you that my personal financial detox remains on track, but the DT's sometimes bring with them some flashbacks. Which brings us to the current year-end feel good fest on Wall Street. First off, let me reiterate that, a reality site as opposed to a bear site, has been warning perma-bears whose charts and fundamental analysis told them that the decline into October was finally THE shorting opportunity of the decade, that a stick save was likely. From our commentary on November 6:

"The price of the stock market has remained buoyant (was there ever any doubt as commentator after commentator began issuing crash alerts in October?) as can be seen on the chart of the S&P 500. Perma-bears that think the 1225 area resistance is in the bag, had better think again. "Price" is everything baby! Again, those doom and gloomers with their "value" propositions need not apply."


The markets not only did not crash, they proceeded to use the shorts as the fuse that has ignited some serious upside. Why, just look at this euphoric run in the S&P since those angst-ridden days of October:

Let's put aside for a moment that this rally is happening on decreasing volume into Wall Street's bonus season amid numerous bearish divergences. A couple decent down days are nearly negated once again and the bears are praying that 1270 holds. Value has been thrown out the window and price is where it's at. A little moonshine helps to tune out the bad and keep the good times rolling. A look at the VIX shows a return to fearless bullish sentiment.

The bears should not give up hope, however. That is a potential inverted head and shoulders bottom in the VIX (top in bullish sentiment) if the right side shoulder does not drop below 10. Something to keep an eye on. But thus far, if bullish euphoria can be seen as moonshine, then the VIX is the still out back behind the outhouse where they make the stuff.


In the big picture bully still has some unfinished business on the downside when measured in gold, the "barbarous relic" that is somehow currently finding respect among mainstream financial talking heads (Larry Kudlow's riffing on $1,000 gold? Cramer likes GG and KGC? Hello? Potential short-term top alarm?). This picture of the ultimate price index (plenty of paper available for whatever price you want to pay) shows a far different cyclical "bull" market from March of 2003 when measured in the ultimate value asset, gold.

Sadly for paper bulls, this long term chart implies a bottom at around 1.00+-, which could mean the S&P and gold will both have a price of 1500, or 500 (these are just random numbers and actual values will depend on inflation, deflation or "muddle through"). But the implications of this chart as well as current macroeconomic fundamentals ( US' massive deficits, gold rising in global currencies, etc.) are that paper assets and gold will continue to head toward parity, in price. So, while many people celebrate gold's rise and obsess on the stock market's price action, I would advocate getting clean and sober, ditching the still and taking a cold hard look at this.

Gold is not a speculative asset at its core. It remains the same, sitting there like a lump on a log. Timeless, it doesn't care what is happening around it. It is liable for no debts and it pays no interest. It is all the other stuff that is in motion. The moonshine is effective at blurring an investor's vision to all of this.

So, to those who have paid down debt and backed away from a speculative ledge made of paper, the question "moonshine or strychnine" need not apply. Others, who have levered up to the ongoing financial asset dynamics, should check that still and make sure of just what it is that's dripping out of the spout.


Gary Tanashian

Author: Gary Tanashian

Gary Tanashian

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