The Bigger They Are, The Grizzlier They Fall

January 18, 2016

The causes for cataclysmic PE revaluations were discussed in the January 3, 2016 article, linked here. The same article supports the argument why any future money-printing would not pump up equity prices but, rather, merely skyrocket gold to my decade-long target of $3500, while catapulting silver toward the initial long term target of $150 (en route to $500 by 2025).

Therefore, the preceding, in conjunction with the simple fundamental argument made in this article's first section, the case is made for the technical prognoses that are found in this report's 2nd half, as regards just how far the Dow may crumble.

Fundamentally, the biggest story of these years just passed has been what I refer to as a politically motivated international asset-grab, more commonly known as Fed QE (Quantitative Easing).

QE presumably pumped up earnings artificially, and definitely exaggerated PE valuations. However, the most commonly agreed-to effect was that of pouring money into stocks, since all of that paper had nowhere better to be, with rates at zero.

After this month's article, a former colleague reminded me that, just as Fed-QE artificially drove the Dow to 18,000, the next mega-printing "...will drive the Dow toward 30,000, long before it ever sees 10,000."

No, it wouldn't.

Decades ago, I analyzed that the market ultimately gravitates toward there where PEs and their valuations would take the market. This, I specifically noted, was comprised of:

(a) The growth rate of earnings, which were at the heart of PEs, (b) interest rates, insofar as they valuated those PEs, and, (c) how the marketplace's psychology valued all of these (technical analysis), which would include several factors, such as over or under-ownership (i.e. - how far the band had been stretched), etc.

Now, I DO AGREE that all of the Fed QE programmes did pump up financial assets and, with that, stock prices - again, for reasons corroborated in this month's previous article. However,...

Based on the very same arguments therein, future mega-printing can only go into precious metals. Why?

Only one aspect of the printing related to paper that had to be invested somewhere. It wasn't the only effect that printing had; the other effects are now gone. So, I draw the reader's attention to the factors 3 paragraphs above.

I do not even argue that higher rates will drive money into bonds, instead of stocks to some extent. That would be silly.

Even if investors were not worried about issuer risk, the rate levels are still not attractive and would (won't) be for some time. Moreover, the more attractive rates become, the greater the issuer risk in the minds of investors, under today's never-seen-before global financial balance sheet conditions.

Reiterating, this time, based on the same January 3rd article, the financial assets that would benefit from resumed QE would be precious metals. The Fed's knowledge of this fact could actually be the deterrent to resumed printing, since higher PM prices undermine the Dollar, including the latter's drive to survive against the Russo-Sino campaign to unseat the U.S. currency from its role as the world's principal medium of exchange.

Looking down the line, printing might most likely occur after a major price decline, which would allow for natural intermediate term positive PE revaluation, though that would also be best be coupled with a rate decline at that time (tough to imagine, but we'll see what the weather conditions will be at that time).

This becomes the sequel, then, to a technical look at what constitutes, "major decline."  

Technically, to look at what would ordinarily be viewed as the target for a secular low, we must study the expanding triangle that began exactly 15 years ago, almost to the day.

Then, we may appreciate that the next major low should only be a greater pause en route to the uber-secular low at still more outrageously disastrous levels, the latter having constituted the Grand Super-Cycle bottom (multi-century low). To understand, study of the 28-year chart linked below is essential.

An expanding triangle, by definition, signifies ever-increasing volatility, which culminates in a sharp move to conclude the formation.

Following a multi-decade bull market, that triangle translates to a decline of potentially cataclysmic nature. And when that decline is part of a Grand Super-Cycle spiral, such devaluation must correlate to political disaster, as well.

An expanding triangle has 7 points. In a bearish triangle, the odd numbers represent lower lows, while points-2 and 4 make higher highs. Point-6 forms a lower peak, which is followed by a point-7 debacle that concludes the triangle.

The amplitudes of the respective movements depend on the duration of the preceding trend that is being corrected. Here, we are considering massive movements, because we are analyzing a triangle that dates back to 2000, which is correcting a bull move that began in 1982.

However, since we are talking about the Grand Super Cycle, there are bull markets within bull markets within bull markets, which are being corrected. Hence, political chaos and the obliteration of currencies, as a multi-century advance comes to an end.

The here-linked chart is the basis of our study. The triangle began at the true orthodox peak in the markets, in 2000 when the economy peaked.

The bearish triangle's point-1 is in the 4th-quarter of 2002, while point-2 completes at the end of 2007. Points 3 - 4 conclude in early 2009 and the beginning of 2015, respectively.

In the past, I have noted that the initial Dow declines (including those that were en route to their major moves of 50%) ended up being ~2500 points in amplitude. Therefore, we may be about 500 points from a 1st-quarter bottom.

With crucial bear markets in New York having been ~50%, let's examine this superb ZeroHedge article, including its first chart, which provides a fine illustration of how bad this already underway rout will become into 2017.

(However, as per the study of the multi-decade expanding triangle, 50% won't be the end.)

I see Dow support around 9200, which will have caused a massive panic flush-out, since that will have represented a breach of the 2011 lows, which occurred during the European banking crisis, while also breaking the 2010 bottom.

Panic and blood in the streets…with the VIX likely hitting triple digits.

Thereafter, and consistent with the completion of the triangle, a rally toward ~12,500 could ensue, which would be followed by a gruelling bear market meltdown to ~5500 (point-5). A mega bounce to around 9500 (point-6) would likely follow, which would precede the final triangle-concluding point-7 smash to ~4000 into 2025.

No more USD in its present form, the Chicago Plan (if lucky) and war. And there is our triangle.

Parallel to all this, relentless annual records regarding Asian gold demand and withdrawals from the exchanges are precursor to phenomenal, relentless and unstoppable volatility once the cataclysm accelerates.

A year ago, I wrote that the Dow had likely peaked as part of a cataclysm to come later on, kicked-off by a 2,500 point decline. However, I explained, the major investment point was to look internationally to find collapses that would commence sooner than in New York. Indeed that is what has occurred.

Moreover, I advised looking at international equity index and sub-index (European banking index, etc.) long/short investments to mitigate risk and reduce premiums, which would actually enhance leverage, while reducing risk at the same time.

Moreover, I advised inter-asset class trades, since outperformance would be an easier bet, while once again lowering the cost of that for which one would actually be prepared to pay more, namely, PMs.

I warned that once the volatility would begin, there would no longer be a way to be involved in the once-in a lifetime opportunity that the markets have provided.

A year from now, every major opportunity, at the most leveraged prices, will likely have become a thing of the past, even in that last major opportunity called, New York.

As for gold, if the reader doubts that gold will accelerate in parabolic fashion (when, not if), the here-linked report is a must study!  If, like most, the reader has no time to study everything, then one owes it to oneself to integrate the significance of the 12th chart (Comex Gold Cover Ratio) into one's mind.

Politicians, for want of experience and a need to bury their heads in the sand (as their actions reflect the cowardly effort to do that with which they are comfortable, as opposed to that which is essential), do not respond to the obvious truths that are implied and provided in this single study that is found in the preceding paragraph.

But, what about us?

In the final analysis, looking over the shoulder, investors will have learned what a wise man and market historian once taught me:

The more and the longer that the authorities artificially control once-free markets, regardless the market, the greater is the subsequent loss of control.


Courtesy of

The California Gold Rush began on January 24, 1848 when gold was found by James W. Marshall at Sutter's Mill in Coloma.

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