The Need For Speed
Captain Hook
Below is a commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, February 27th, 2007.
The world is awash in dichotomies, misperceptions, and imbalances that make it very
difficult indeed for independent investors to safely navigate shark-infested
waters of the seven seas today. A good example of this is the spin media types
are attempting to pawn off as a rational explanation for the quarter point rate
hike in Japan last week. As per the attached, and consistent with central bank
community party line ‘rhetoric’, or ‘propaganda’ if you will, monetary
authorities in Japan are attempting to make it appear the economy is just right,
as with Goldilock’s porridge, not too hot or cold. Of course anybody with an IQ
greater than a grapefruit knows what’s really
happening behind the scenes would be better reflected by a story involving
the Big Bad Wolf actually gobbling up the naïve little girl, but your not
likely to get any fairy tails like that out of the propaganda machine these
days. Not with the reality of the situation so precarious your not.
Along these lines, governments of the world want to keep commodity prices under
control because just about
everything is now feeling the effects of inflation, and it’s getting harder
to hide, threatening to spoil the party one of these days. Our recent
discussion involving what we see as a relentless ascent in base metal prices
due to supply
pull conditions (tight supplies) is particularly poignant in this respect,
where here, surface dwellers cannot understand why commodities are rising in
the first place, nor do they care. The only thing these guys care about is the
fact rising commodities will eventually eat into corporate profits, but so far
both inflation and profits seem fine, and the stock market is acting well, so
as an acquaintance from California recently espoused in conversation with me on
the same subject, ‘party on dude’.
Whether the party animals on Wall Street care or not
however, the larger eventuality that will matter at some point is that rising input costs will slow profit growth, if only marginally
in some areas, much worse within cyclically challenged economies. As I say
however, not that anybody
cares – yet. Why don’t they care? Because like magic, no matter how bad the
real economy gets, stocks keep rising because we are in the midst of the
strongest inflation cycle in history. From China
to Sweden,
and from the Fed
to the Treasury,
never in the history of man has there been such a coordinated and widespread
use of fiat currency policy within economic intercourse. What’s more, never has
there ever been a more speculative environment, with the current example of
market participants already beginning to discount Fed-easing
par for the course these days.
Are lower official rates necessarily a panacea for rising stock markets?
Answer: At first perhaps, at least until everybody begins to expect more and
stops shorting the stock market. Here, it appears the Fed may be ready to drop
its defense of the dollar ($) before the stock market actually cracks given the
extent of our dependence on asset prices now, with financials at the forefront
in this regard. And the currency does appear sickly
because increasing numbers are expecting the Fed to turn dovish soon, providing
the appearance it’s slightly ahead of the curve. Add in Presidential
Cycle considerations, where if price managers don’t watch out they could
find themselves having to do some very heavy lifting right when politicos will
be expecting stability, and again, one must begin warming up to the idea
official policy might be set for a preemptive turn soon. This is of course the
larger reason third years in a Presidential Cycle are normally strong in the
first place, as incumbents goose the system in an attempt to get
re-elected.
Is this what gold is sniffing out right now? Like a hound dog, is gold sniffing
out a growing ‘need for speed’ in money supply circulation
rates? If I were a guessing man, whom I prefer not to be, even here one
would be compelled to answer ‘yes’ to the aforementioned questions. That is to
say gold’s recent strength is largely due to educated men observing accelerating
underlying weakness in the economy and reacting rationally by accumulating
inflation protection. This is of course why gold is currently out-performing input
prices, and why it is indeed discounting ‘the need for speed’ then.
Interestingly though, you may be shocked at this next statement. Gold has not
even begun to properly discount the degree of currency debasement in the States
because it’s being hidden
in several covert ways, not the least of which is off-the-books wholesale credit creation.
Here, the Fed has already lost control of this boggy, and once the $ loses more
of its appeal as global
hegemony, even the currencies of well endowed (possessing resources) banana
republics will make gains on the $. A look at a plot of the Broad
Dollar Index ($$) tells the story here, where by ‘hook or
by crook’ the greenback has enjoyed unwarranted strength against many
smaller but more fiscally
responsible economies. Again however, this appears set to change. (See
Figure 1)
And when the $ begins to slide against a broader basket of currencies ($$), that’s when
the fun should really begin for gold. In this respect, as you can see above,
the fun has not even begun yet. Old habits die hard though, and for most talk
of (select) emerging market debt being sounder than that of the States would
qualify you for a trip to the nut house. To these people, the fact the States
has no realistic means of ever addressing its mushrooming debts
doesn’t factor into the formula. Do not kid yourself however, it will when
the $ index is trading in the mid – 50’s, which is my minimum secular target
assuming it doesn’t go off the map in present specie. Here, when global
financial trends stop growing outward as the world turns towards regionalism, international
trade will likely require countries to back external debts in gold again,
meaning new currencies will need to be chartered.
Impossible? Consider this – what if bird flu starts to mutate
faster, and within just a few short years from now is passing from human to
human such that international travel all but shuts down completely. What effect
would such an occurrence have the $? Well, for one thing, which will happen
eventually if not for this reason, for others,
the $’s role as global hegemony would become irrelevant. In fact, except for
debt servicing obligations that would be done over a wire in order to avoid
default, if both people and goods are not crossing
borders, which would literally collapse the current global banking model,
the sustainability of all fiat
currencies will come into question. Do you think maybe once people see that
writing on the wall this might be good for gold?
But, we are not even at that point yet. We are still a few years away from this
kind of thing. No, we are still in party mode, where price managers
think they are so smart now they can thwart any slowdown before it happens. Yup
- they are going to paper over any and all problems that come their way. Well,
excuse me, but I cannot help but conclude that this too is a very good reason
to diversify my fiat currency into gold and silver, especially considering the
States is well on its way to qualifying as a banana republic
in its own right. Again however, we are not at this point just yet, which
believe it or not is demonstrated in the fact the Silver / Gold Ratio is poised
to make further gains at present. And as you can see on the attached monthly
plot from the Chart Room, silver has a long ways to go against gold,
meaning if history is a good guide we should expect sufficient inflation in
coming days to continue masking the hidden recession /
depression real world inhabitants face every day. Here, one cannot look at
the world in which Wall
Streeters exist to get an indication of what’s happening in the real world
because they are in fact the primary benefactors of all this inflation. No,
please do not make that mistake, especially if you are one of the beneficiaries
because it won’t last.
Back on topic now, when silver is appreciating against gold this normally
signals the economy and stock market(s) are in an upswing, and a ‘healthy’ (an
officially stated rate of around 2%) inflationary environment exists. What’s
more, this is also when precious metals will make the lion’s share of larger
cycle gains as the fiat currency of the day attempts to escape increasingly
visible inflation. You see it’s not that a period of gold outperforming silver
is necessarily bearish for precious metals, it’s just that precious metals
shares need a predominantly buoyant stock market environment to flourish as
well, where as you may know, precious metal share to precious metal ratios have
historically been the primary definers of a healthy larger sector. To go past
this, where gold will likely hold a shine to just about everything, we are
talking about gold’s monetary role coming to the forefront, meaning financial
assets are usually under considerable pricing pressure (think financial
crisis), which also spills over into absolute pricing patterns of the metals in
full measure. Of course this time could be different if governments begin
revaluing gold for their own purposes, but such a circumstance may not arise
until it’s too late for your stock portfolio, or until after your gold bullion
has been confiscated. This is why some precious metals investors stick to
buying coins (legal tender), as the risk of confiscation is
minimized.
Again however, we are certainly not at such a juncture yet. Nor should we be
for some time if the historical comparisons on these analog
charts prove accurate, which as you may have noticed is exactly what is
happening. Of course some dismiss this whole vein of thinking because it’s
thought both people and circumstances are different today. In this respect I can
assure nothing could be further from the truth, where not only is the same
blood that was coursing through people’s veins at similar junctures
in the past still red today, so are peoples emotional tendencies,
fear and greed both alike. Here, silver outperforms when greed is in charge,
and gold when fear is at the forefront. So, on this basis alone, the fact
silver still has quite a ways to go before it hits previous historical strength
highs against gold tells us the entire Super-Cycle Degree move for the sector
has a great deal more work to do. And of course conceptualization of the
possibilities are endless, but I would like to show you a set of possible
outcomes that should not be too far off the mark if the sector is truly in the
midst of making another Super - Cycle Degree advance at present. Here is the
first picture in this regard showing one possibility of how gold could
theoretically react as it approaches Grand Super-Cycle sine resistance, currently at
approximately US$750. (See Figure 2)
As you can see above, under this scenario gold would head up to sine resistance in coming
days to mark a minor degree b wave before heading back down into the $500’s to
complete a Primary Degree II Wave bottom. And don’t kid yourself; such a
scenario, or worse, could in fact become reality if the equity complex begins
to unravel soon. The price action in China’s stock markets overnight, down some
9-percent in just one
session, could be marking the beginning of such a test assuming this is not a
temporary product of more
warnings. What’s more, on a structural basis, such a pattern would have to
be considered ‘normal’ (a standard A – B – C corrective sequence), especially
considering the importance of Grand Super-Cycle sine resistance, and how it has
contained gold’s pricing for hundreds of years with the exception
of 1980's spike.
Is such an outcome necessarily ‘baked in the cake’? Answer: Definitely not, but
by and large, the above scenario is definitely within the realm of
possibilities. Of course on the opposite end of the scale, if monetary
authorities were to panic, a more polarized alternative could trace out
something along the lines seen in the chart below, so really there is no
telling what will happen other than to recognize long - term the future
appears bright for gold no matter which scenario prevails. Here
however, if a rush of capital flows into the sector gold could push up
through Grand Super-Cycle resistance and continue on to the large round number
at $1,000 directly in not only discounting the need for speed, but also growing
fear and respect associated with the implications of accelerating inflation.
Again though, such a condition will arrive at some point, but if
history is a good guide in terms of human behavior, the lights won’t come on
for the masses until they become disenchanted with the ‘bubble de jour’, of
which there are still apparently many more attractive than precious
metals given the low participation rates across the sector. Correspondingly
then, from a socio-historical-behavioral perspective, an outcome such as the
one depicted below must be considered most unlikely given the totality of
possibilities. (i.e. the others must largely blow up before the public will
make a new bubble in gold.) (See Figure 3)
Speaking of historical precedents, human behavior, and more natural outcomes, you should
know that an outcome more along the lines of what was experienced back in the
70’s should in fact be seen here in fully correcting the previous advance of
the larger degree sequence, which would involve a ‘Golden Ratio’ (61.8 %)
retrace all the way down to $433 in marking the top last May as Primary
Degree I of the current Super-Cycle Degree affair. And in moving past all
this technical jargon, traditional thinkers would categorize such an outcome as
a ‘mid-term’ correction, which in the end essentially proved to be the case
back in the 70’s, lasting approximately 20-months in total. What’s more,
duplicating such an outcome today would mean gold corrects until December and
falls almost $250 from here. Personally, I do not foresee such an outcome until
the Grand Super-Cycle deflation commences sometime after decade’s end, as the
current economy is simply too dependent on asset inflation for price managers
to allow such a signal to be put in view if avoidable.
Here, once prices fall enough in coming months to take some of the shine off commodities,
which is the primary aim of authorities these days given prices were
threatening to escape the bottle once again, they will be quick to re-inflate
the system because unlike the 70’s our asset based economy could not handle the
kind of medicine that was being dished out back then. This is of course where
the need for speed comes in, the need for speed in money supply growth rates by
any means, which because the consumer has all but maxed out his
credit card involves monetization
practices these days. So you see this is why gold will remain relatively
buoyant for the remainder of the current Super-Cycle sequence. It’s because the
need for speed is ever-present, constantly growing, and of such a mass it must
now be fed day and night by essentially every living being on the planet. And
who wouldn’t want to escape this brand of insanity once understood and
presented with a means of surviving the calamity such conditions are sure to
bring. Again, this is why increasing numbers are choosing to hold gold. (See
Figure 4)
And wouldn’t you know it, it appears price managers were
at it again overnight with European stock markets down some 1.5-percent this
morning. And as mentioned above, Chinese stocks fared far worse; signaling to
those exposed to excessive
margin trouble could be brewing for real this time. And if the record high
levels of margin
debt were unwound moving forward from this point, anything is possible in
terms of correction severities, so as mentioned on these pages many times over
the past several months, please ensure your portfolios are ‘comfortably
structured’ for what could prove to be a bumpy ride. In the strictest
terms this means ensure your use of margin debt is kept to a minimum, if
not eliminated completely. Quite frankly there are simply too many investors
out there leveraged to the eyeballs to adopt an alternative approach in my
opinion, because it’s under these circumstances accidents occur no matter how
many warnings
are issued.
So, Greenspan warns of
recession and China continues to warn about stock
market bubbles, but one does have to wonder what the true agenda of central
authorities can be when only one alternative exists for them in maintaining the
status quo, which is inflate or die. Of course history has demonstrated all the
monetary largesse in the world will not work to support prices unless a willing
population of bearish
speculators is on hand to squeeze prices higher, which is a growing concern
considering the overextended nature of the current sequence.
If history
is a good guide again however, knowing price managers need to throw a little
fear into people in order to properly motivate them to buy more
insurance, as suggested by the patterning in the analog chart comparisons
attached above (here
too), we can expect an approximate 10 to 15-perent correction in stocks to
start anytime. In the larger sense however, this would only be a pause as long
as speculators become / remain bearish. Right now, based on collapsing put /
call ratios on the Dow and NASDAQ, it appears some re-convincing might be in
order.
If this is the kind of analysis
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Good investing all.
Captain Hook
March 12, 2007
Treasure Chests is a market timing service specializing in value-based position trading in the precious metals and equity markets with an orientation geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested in discovering more about how the strategies described above can enhance your wealth should visit our web site at Treasure Chests.
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