The Dual Paradigms Of Macro Economic Conditions Today
The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Wednesday, February 27th, 2008.
Many are now categorizing current macro economic conditions as being an instance of stagflation. And while current circumstances definitely appear to be so, in my opinion one needs to go past the definition of stagflation to capture the essence of macro conditions at present, because this is not your father's economy. In the last inflation cycle witnessed in the 70's, wages were growing and people had savings, and we still had the disinflation period this sponsored up until millenniums turn to live through. Now, since Westerners have no savings and real wage growth has reversed, an aging population is more likely to begin exporting deflation to the east instead of the other way around, which will play havoc with global trade. F. William Engdahl takes a stab at explaining this through the looking glass of the credit crisis, attached here. But perhaps these inevitabilities are still better explained by the work of Schumaker in terms of regionalizing currencies as a matter of natural process, penned all those years ago.
Putting this all together then, the duality of present circumstances are this. Right now equities are being inflated to support the bubble economy(s) and corporate elitists, which is one world that exists in reality, and what we call the 'Elitist Paradigm'. At the same time however, most people are not benefiting from this inflation - and in fact need relief from the collapsing housing / credit bubble via lower interest rates. So, in what we will call the 'Real World Paradigm', which is a dual world running along side that of the elitists, right now lower rates are needed for US mortgage resets going through, which can only be accomplished by a deflation scare. Thus, with the Fed meeting coming up on March 18th, expect a great deal of hawkish talk out of central bankers after the month end jam job in equities in keeping all the charts looking good and elitists happy. The idea is to get stocks falling temporarily in order for contracting rates in the bond market to justifying another rate cut by the Fed at the mid-March meeting. (Looks like we're getting this for a legitimate reason, but the result should be the same.)
After that - with most of the mortgage resets for the first half of the year complete, master planners will want to drive equities back up to support the bubble economy(s) again, so expect a 'jam job' running into summer as short sellers who take the news too seriously have their heads handed to them. And while it's uncertain just how high stocks will recover given the post bubble like structures in the charts at present (Google, China, etc.), I do know this, you don't want to be short anything much past March 18th. What's more, if our value identification work (reserved for subscribers) with respect to precious metals stocks has merit, you will likely want to be very long precious metals shares for the first time in a long time, where once investors sense an inflationary wind at their backs, risk takers / momentum should come back to the sector. Here we are already witnessing rumblings in this regard, with a possible bottom behind us in Rubicon Minerals Corp., and its related ratios. You can be sure we will be watching which way the wind blows as March progresses.
Along these lines, once past the Martin Armstrong Pi Cycle low projected for in and around March 21st, a very strong bias for equities to rise will exist afterwards; which again, should give short sellers a difficult time right into the beginnings of the first quarter of next year. Of course the initial surge into this summer is anticipated to be the strongest impulse, where after the Beijing Olympics are past, interest rates are seen rising in the States, so make hay when the sun shines as they say. Further to this, and in expanding on the above, such a condition set should also give precious metals shares a tail wind if current trends continue to follow through, where in this regard it appears the higher degree testing process with respect to the Silver / Gold Ratio denoted in Figure 4 on the monthly chart attached here may be complete today with a breakout. (See Figure 1)
Of course this could always be a false signal as well, a sign that with silver blowing off right now, a more substantial correction in equities / commodities is in store moving into summer. And there is evidence this is a possibility in the knowledge silver is breaking higher now because the price fixing bullion banks that are very short and under duress in other areas are finally screaming uncle; which is not the message inflation bulls wish to see. Why? Once all the shorts are squeezed out the party would be over. Of course these characters are very short silver, so based on this knowledge relative strength in silver could be seen for some time, again, emitting the message continued inflation should be expected. Combine this with the anticipated Martin Armstrong Pi Cycle turn in the business cycle from down to up in the third week of March, like I alluded to above, the better part of valor would at a minimum have a wise man rid of his short positions at this time in cash. And of course those who choose to go with it - they should be long precious metals and their related equities right into the sweet shot projected for this summer / fall.
In further support of this thinking, I offer the following two historical gold charts that are both suggestive of further gains moving forward this year. We'll use gold here because we don't want to scare you with a real silver chart, where it's scary thinking about where silver prices could be going. The first chart here is a long-term plot of real gold that dates back to all time highs, which naturally displays then that gold should be over $1,000 higher right now just to match prior (understated) price increases, as measured by the Consumer Price Index (CPI). (See Figure 2)
Source: The Chart Store
And then there's gold's trading pattern from 1978, which is another year ending in '8', with the observation on a decennial basis the pattern this decade is looking remarkably like that of the 70's. This of course means present circumstances are only the beginnings of the blow-off, never mind the end, like precious metal share investors would have you believe with their under-performance. (See Figure 3)
Source: The Chart Store
Unfortunately we cannot carry on past this point, as the remainder of this analysis is reserved for our subscribers. However, if the above is an indication of the type of analysis you are looking for, we invite you to visit our newly improved web site and discover more about how our service can help you in not only this regard, but on higher level aid you in achieving your financial goals. For your information, our newly reconstructed site includes such improvements as automated subscriptions, improvements to trend identifying / professionally annotated charts, to the more detailed quote pages exclusively designed for independent investors who like to stay on top of things. Here, in addition to improving our advisory service, our aim is to also provide a resource center, one where you have access to well presented 'key' information concerning the markets we cover.
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Good investing in 2008 all.