Wednesday, May 26, 2010


Let me start off by pointing out that we did indeed break below the yearly cycle low yesterday.

I've been saying for a couple of weeks now that a break of 1044 would change the pattern of higher lows. That would be the first warning shot across the bow that the cyclical bull might be in the process of expiring.

Does that mean I want to short stocks? Are you crazy? No way I want to fight with a bear market and the Fed’s printing press. For one Ben has already aborted a left translated 4 year cycle.  

Never in a million years would I have believed that was possible, but happen it did. Print enough money and the Fed could just as easily negate a broken yearly cycle low. And if you think he won’t do it I have some ocean front property here in Las Vegas I’d like to sell ya? Sell short? No way no how. Not even with your money.

Let’s face it the mathematics on the short side are just not conducive to getting rich. It took a year and a half for the market to drop 58% in the second worst bear market in history. Sure one can leverage up but if you happen to get hit with a vicious bear market rally or the rules are changed (ban on short selling) you run the risk of losing everything. Need I remind everyone that leverage is what is bringing down the global financial system. Leverage is like walking through a dynamite factory with an open flame. Sure you might survive but you’re still an idiot.

Trading bear markets is tough to do even if the bear is allowed to run its course undisturbed. But I guarantee the powers that be will throw everything they can at the bear. I just don’t need those kind of odds stacked against me, especially when there is easy money to be had.

Now that I’ve made my position clear (just so there won’t be any misunderstanding later. There will be none of this “hey you said the bear is back and we should short stocks. How come the market went up and I lost all my money”).

I’m emphatically telling you that by selling short you are taking your life into your own hands. If you are bound and determined to fight the Fed, Wall Street, Washington and an angry and tricky bear, you are going to do it all on your own. Leave me out of it. I’m going to be over in the corner picking up gold coins, you can join me if you want to.

Whenever the market doesn’t do what it’s supposed to do it’s probably a good idea to pay attention. Yesterday markets all over the world were down and down hard. Some by over 3%. The futures were signaling a big gap down. By all rights the S&P should have followed the rest of the globe lower today. It didn’t. We ended the day positive.

I’ve been warning for over a week now that sentiment has reached severe bearish extremes. Quite a few sentiment indicators are now at levels lower than the `09 bear market bottom. When these kind of extremes are reached the market runs the risk of running out of sellers. Yesterdays reversal may be a signal of selling exhaustion. When that happens, even in bear markets, we can look for a violent 1 to 3 month short covering rally. (In bull markets we can expect a 3 to 5 month new leg up.)

Lately we are hearing the D word (deflation) thrown around quite a bit. Let’s face it we are going to hear this every time assets start to drop. However let me remind everyone that Ben halted the worst deflationary spiral in 80 years in just a little over 7 months. Ben has clearly proven that a determined government, in a purely fiat monetary system, can reverse deflation. The question isn’t whether or not we are going to experience deflation. The question is simply how long will the powers that be allow it to last before they crank up the presses and flood the world with paper again.

The cold hard reality is that the USA has now gone down the path of no return. We are piling on trillions upon trillions of debt in a futile attempt to spend & stimulate our way out of bankruptcy. I don’t know about you but generally speaking isn’t it counterproductive to go deeper in debt if one is already broke?

This debt can’t possibly be serviced … ever. So we have two choices. One we can eventually just default on our massive mountain of debt. At some point we just throw up our hands and cry uncle. Folks if the United States of America chooses to default on its debt then yes we are going to see a deflationary storm cover the world in ruin and despair.

The second choice is to inflate away the debt by printing trillions and trillions of federal reserve notes out of thin air. This course will buy us some time. It may even briefly appear that we’ve cured our problems (it has seemed that way until recently hasn’t it?). If we choose this path, then unless someone like Volker comes along and forces us to take our medicine, the inflationary spiral will continue until a final hyperinflationary storm destroys the country.

Now each of you has to ask themselves which you think is more likely. Will the US all of a sudden come to its senses, default on its obligations to halt the exponential growth of debt, thus unleashing a deflationary holocaust upon the world…or will we just continue to kick the can down the road like we’ve been doing for the past 10 years, thus making the debt burden bigger and bigger and rendering it serviceable only by hyperinflating the money supply?

How you answer that question will dictate how you want to invest for the next 5-10 years.

If you think like I do that we will continue to kick the can down the road then the easy investment is to just get on board the secular gold bull and hold on.


  1. great post but hyper inflation?

    not unless we issue currency not denominated in dollars.

    ben hasn't beat deflation, they created a mirage of inflation. got people excited because the bartender was pouring shots. problem is there weren't enough shots for all the alcoholics in the bar. they can do this but it will have diminishing effects see japan.

    classic liquidity trap.
    end game will be some sort of deflation, not tomorrow but some day. there will be more periods of alcohol hitting the bar but that is it.

  2. Actually Japan never printed money. They had a massive reserves to draw on to support their failing banking system. That is the reason they experienced deflation. Actually they didn't even experience that as the true defintion of deflation is a contraction of the money supply. What Japan experienced was deflating asset prices not true deflation.

    Hyperinflation isn't rising prices, although that is a symptom. Hyperinflation occurs when a countries debt spirals out of control and they attempt to service it by printing more and more paper currency instead of defaulting.

    Unfortunately, as they print the currency quickly devalues so they have to print ever larger amounts. The end result is an explosion in the money supply and skyrocketing inflation.

    Thet can happen in any country if they let debt spiral out of control and then choose the printing press as the means of servicing that debt.

  3. just a break below does not really much on its own= as it can be a running of dumb stops

    other factors need be taken into account like slope of MAs and alignment of MAs, etc

    One way to decide on a good break maybe by certain margin below the the break low based on volatility, if index cuts that, then the break looks more legit

    as you said, it's a warning

  4. I haven't broken you completely yet. But, I will.

  5. To borrow a phrase from Keynes. I can remain rational longer than you can remain solvent.

    If your goal is just to aggravate you are wasting your time on me :)

  6. Toby have you heard the thesis that there will be a run into gold AND the dollar AND stocks? (personally I can only understand going into gold and also stocks since they rise in inflation)

  7. When central banks expand the money supply like they did last year that liquidity has t go somewhere. It usually pops up first in asset markets. That's why gold and stocks have been rising.

    The dollar has been rising because it's measured against a basket of other currencies. At the moment those other currencies are performing poorly so it gives the illusion that the dollar is rising.

    But if you measure the dollar against gold or virtually any other hard asset it has been devalued radically since March 09.

  8. This is somewhat off topic, but I find it interesting that the rate of increase in the amount of mined gold on earth is very roughly equivalent to the rate of world population growth.
    Compare that the the growth in dollars in circulation relative to population growth!

  9. Look up!

    The bull market is back on!!

    Sir Richard Russell was wrong all along.

  10. You're talking about hyperinfation avoiding mentioning that money supply is contracting steeply over the last year or so despite the trillions printed, M3 SGS has gone negative by 5% annual, check the charts. This is deflationary by definition. Your attitude against the fed is exactly what the market wants: to scare the average speculator into not shorting the upcoming long fall down as they still have fresh the memories of their debacle during the thirteen month-long stealth rally. And yes the fall will have its cause in the tightening of fiscal and monetary policy to reduce the debt exactly as it is being done now in Europe (check Volker's latest statements) and that's a third way of dealing with it that you didn't mention either.
    Which means deflation is going to hit back with a vengeance. Ben has called a bluff, don't fall for it.

  11. Son your dreaming. There's no way in this world Bernake is going to stand by and allow deflation.

    He just stopped the worst deflationary spiral since the depression in a mear 7 months.

    The US debt load just keeps getting bigger and bigger. We have two choices as to how we are going to service that. We either default or print. We've been printing for 10 years now, why anyone would think we will all of a sudden decide to do something different is beyond me.

    Hell interest rates are still at 0 and they are going to remain at 0 for a long time. If the Fed was seriously considering deflating the money supply they would be selling treasuries not buying them, and they would be jacking interest rates up not holding them at 0.

    Money supply always dips during a market correction that doesn't mean the Fed is draining liquidity.

    For some reason the deflationists just refuse to understand that in a purely fiat monetary system deflation is a choice.

    As long as the Fed is willing to destroy the currency they could simply print enough money to mail every man women and child a check for a million dollars and wipeout all the outstandfing debt. Granted it would crash the dollar and then we would be faced with a completely differnet problem, namely runaway inflation but in a purely fiat system the only thing preventing that is copmmon sense.

    We've already seen this on a smaller scale with the tax rebates so to say it can't happen is to ignore recent history.


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