Saturday, January 15, 2011


Humans, for whatever reason, tend to project the past into the future. It is an emotional flaw in our genetic makeup. It is also the reason why so many otherwise intelligent people miss the big turning points in the economy and stock market.

A classic example occurred in the summer of `07. The sub-prime market was just starting to implode. With the benefit of hindsight we now know that was the beginning of the end for not only the stock market but the global economy. 

Unfortunately because we couldn't read the writing on the wall we trusted that the Fed would "fix" this minor blip but cutting rates aggressively and spewing out an avalanche of freshly counterfeited dollar bills. It did not fix the credit markets and instead spiked the price of oil to $147 a barrel. That turned out to be the final straw that broke the camels back and sent the global economy spiraling down into the worst recession since the Great Depression. The stock market rolled over into the second worst bear market in history.

Amazingly enough we are ready to repeat this process all over again. The writing is on the wall and virtually no one can see it.  

I'm now going to lay out the the series of events that will ultimately lead to the next leg down in the secular bear market and the reaction by the Federal reserve that will end up pushing the economy over the edge into the next depression.

It is going to start in the municipal and state bond markets. I should say it's already started.

So far the stock market is ignoring the cancer growing in the city and state bond markets... just like it ignored the initial stages of the sub-prime implosion in the autumn of `07.

At some point it is going to dawn on the market that there may be a serious problem developing. I expect that recognition to come as the market starts to drop down into the next intermediate cycle correction (which I expect to begin next week). If so, then what should start out as just a profit taking correction will turn into a much more serious decline, possibly even erasing all of the fall rally.

We've already seen big warning signs that smart money has been exiting this market for a couple of months now, basically since the first signs of stress in the muni markets appeared in November. Big money has used the QE driven rally to unload stock on the clueless public over the last several months.

It will begin as the first cities and states start to default. That will correspond with massive layoffs as cities and states will no longer be able to borrow to meet payrolls. Their only option will be to make drastic cuts any and everywhere they can.

The Fed will panic and start running the printing presses in overdrive just like they did in `08 and just like in `08 that will spike the price of energy and food (it's already starting. Gasoline is back above $3.00 a gallon and a loaf of bread is pushing $4.50-$5.00).

Spiking inflation in a very high unemployment environment will understandably destroy the fragile economy just like it did in `08. (I have no idea why Bernanke thinks rising prices along with 20% unemployment is a good thing.)

This will be the period when gold will enter the final leg up in its ongoing C-wave advance and the dollar will collapse down into the 3 year cycle low unleashing the currency crisis we've been expecting. 

I fully expect by fall the economy will be heading back into recession/depression and the global stock markets will have rolled over into the next leg down in the secular bear market that began in 2000 with the bursting of the tech bubble.


  1. You really believe that 2011 is another version of 2007? Seems far fetched to me b/c of political opposition to more QE. Inflation caused the recession, however leverage and inter dependence caused the crash. I don't believe this will happen again.

  2. 'Inflation caused the recession, however leverage and inter dependence caused the crash. I don't believe this will happen again.'

    How can it not? Sovereign debt is the next bubble. Toby is correctly stating that local governments are now broke alongside the US Government. THAT is the fuel for another leg down because those IDIOTS in public office the world over took on the housing market's debt on every country's books.

    What is going on in Ireland, Greece, etc, is happening on a city, county, and state level HERE IN THE U.S., from Buy America Bonds propping up muni debt to failing pension funds evaporated by the real estate crash. And don't even get me started on lower tax revenue from the recession.

    Meanwhile, the same people who caused this mess are still in power in the government and the banks. And they have continually shown they will bail out said banks, not the constituents they were elected to protect. The system has not been reformed, and is now continuing a downward progression UNCHECKED.

    It is a question of when, not if the economy crashes again. The markets will eventually have a de facto default while the governments print money. It is happening before our eyes like a slow motion train wreck.

  3. Splodey,

    Sure, Sovereign debt is in a huge bubble. However I believe that this is known worldwide, and the way that the Bankers have dealt with this debt bubble is to kick the can down the road and they will continue to do with nary a near term consequence.

    My and I believe the markets current belief is that whatever nation needs to be bailed out next, will in fact be granted a reprieve. The ifs, hows and whys being irrelevant.

    It worked with Greece and Ireland, so I don't see a valid reason for why this will not be effective for Spain or Portugal. Do you?

    As for the states and the disgraceful municipal debt bubble...Toby states that the Feds will eventually intervene during the coming correction. But what makes this intervention dangerous is that it is the tipping point towards an ever accelerating inflation. Even though the entire bailout will cost only 150 to 200 billion.

    Budget stifling inflation will make more fed intervention politically infeasible.

    The Fed intervenes and we get worse inflation, or the market takes a more natural course, allowing sovereign debt to default and the economy to reset and in comes the bear.

    Scary premise. However I fail to see how a muni/state bailout scheme serves as the tipping point for 4.5 dollar gasoline? Therefore I do not believe this scenario likely.

  4. Everybody everywhere gets bailed out. The worldwide banana republic is underway, and countries sacrifice their currencies to eventually cause themselves to be helpless. Then, all of the countries need to policed and disciplined by super sovereign bodies like the IMF, World Bank, and BIS. A new world currency system gets launched and the world gets its first full dose of the new world order. Global government. Got physical?

  5. Gary,

    This morning the dollar went down to 78.64 and as I write is at 78.70. Is this what you were speaking of when you talked about a break below 78.82. Do you see the dollar heading towards the cycle low now? Is this a good enough signal to jump back in to precious metals? Thanks!

  6. I've outlined a perfectly good plan for when to get back into precious metals. One can follow the plan or not as they see fit.

  7. Gary,

    Thanks for the response. So you feel that we should get back in if gold breaks it's previous swing high, breaking the pattern of lower highs. I believe that number was around $1424. Is that correct?

  8. Either that or wait until we have something that looks like a true intermediate cycle bottom. Which ever comes first.

  9. So what happens with GOLD this time does it get pulled down like last time or not ?

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  11. Well since gold and miners are already moving lower I would have to guess that the extreme selling pressure released when the stock market drops into a yearly cycle low will probably pull both down even further.

  12. Here's a hypothesis for you... In the first part of the year, everyone in the club (institutional selling, banks, bullion banks, hedge funds, etc.) collaboratively sold gold to rebalance it versus the major indexes and other commodities. This gave the bears plenty of glee as they got to take their free shot and give us all a good ole fashioned "gold historically isn't a good investment" jack booting. Heck they took the HUI down around the major moving average lines. Could the correction in the metals be over? My hypothesis is that we're now in a gold centric era where gold's direction gives us indications of where everything is going. Because right now basically we're just functioning on this inflation/deflation lever right now, fundamentals are out the window in this Alice in Wonderland Orwell market now. It all depends on the little guy behind the curtain pulling and pushing the inflation/deflation lever. Nothing else matters. I think gold and silver start a major rally soon with stocks doing quite well for some time longer until the oil price starts to exert pressure on stocks to mitigate their gains later this year. But then again, that little guy behind the curtain... We've gotta keep an eye on that guy!

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  14. Dear Gary / Toby
    since October you see a correction. We shall agree on that to be fair. I truly hope you did not short the market.

    Couldn't it be that exiting bond money is actually entering equity?

    Couldn't it be that a bear market can be sideways. Lets say 1500-800 on SP500 ?

    Couldn't it be that this year the SP500 is aiming for 1400-1500 ?

    Why is the monthly chart still showing bullish signs?

    Didn't we hear all this recession talk last year?

    Isn't the US economy based on a global economy.

    Shouldn't it be that it would take several other bourses to trend down as well ?

    How many global bourses are in an uptrend and had new all time highs.

  15. Yes and what did we get in Nov.? If I remember right it was a correction. Now the market is going on the 43rd day of the current daily cycle. Yes we are due for another correction. It is also due for a yearly cycle low. Last year it arrived on Feb. 5 so we are coming up on the one year anniversary.

    Of course any of the things you mention could happen however you are making the mistake of projecting the past into the future. You assume that since the stock market has gone up for several months then it will continue to go up for months.

    That is what causes people to get caught at tops.

    Here are the negatives.

    Stocks are now in the timing band for a move down into a daily, intermediate and yearly cycle low.

    Sentiment has reached levels as bullish if not more so than the `07 cyclical bull market top.

    All indexes are stretched quite far above the 200 DMA. The further this continues the greater the forces of regression to the mean are going to be to pull it back down.

    The law of reaction and reaction. When the market stretches extremely far above the mean when it does correct it tends to correct much more violently than it would normally. We saw a perfect example this summer.

    Breadth is deteriorating badly. The rally is being supported by fewer and fewer stocks.

    And finally there are warning signs that institutional smart money is quietly distributing stock into the rally.

  16. Dear Gary,
    given the circumstance of over stretched indicators, I do agree a correction of some sort is imminent. I disagree with your assumption that a new bear market will start and this is what your article is expressing.

    I have no doubts that a correction of 8,9 or 12% is around the corner and in my opinion it will offer a rather a buying opportunity instead of a new bear market.

    Distribution of your saying does not occur with high advance/decline and high/low volume. It shows rather a accumulation of stocks.

    Real distribution takes several month and has signs in Advance/Decline and Summation Index prior to a steep decline. We have not seen that yet similar to 2007

    I do agree it would be foolish to buy now stocks at this levels.

  17. I still can't believe comments I read on these type pages. Spot shots in time!

    The sub-prime mortgage catastrophe is not over - it was abated. It will be back. But now it will be combined with much higher inflation, lower wages, higher unemployment, unaffordable food prices, more mortgage resets, need I say more????.

    Who ever wrote that it looks like we solved greeces problem is just not paying attention. Greece will be back on the headlines soon. I said the same thing this time last year. Their problems cannot be fixed. There is no monetary restraint anywhere in the developed nations. The US is in a population decline, nearly every State in the union will not be able to balance their books. Our unemployment levels are at nearly 21% and we're "out of the recession". Every number we have to judge growth is gimmicked (eg. unemployment is determined by those collecting benefits - once their two years are up, they are no longer unemployed whether they got a job or not).

    The US debt to GDP makes greece look like the best credit risk on the planet. Anyone read the GAAP release of the US fiscal position. Also - a joke - again present value for known future expenditures (entitlement programs) left off the book.

    If you simply look at the US as a company and the dollar as a stock - you'll see a company issuing more and more stock to pay its bills but generating NO (yep zero) income. Anyone want to buy that stock??? I think you'll see the same about the dollar hear soon. With only 20% of all the dollars in circulation located here in the US, world wide investor dollar dumpiing, the fed will become lender of last resort buying back US treasuries which means all those dollars are coming here - back to our country and inflation will no longer be the headline. The headline will be hyperinflation. Pretty soon the banks fail as their loans are being paid off by those who still have a loaf of bread to sell for 100,000.00 simply because no one can get bread at any price!

    Our country was stolen from us - its leaders committed treason against the US people. I hope when the currency reaches its natural value (zero) - the riots get directed to those who caused this and if their dead - those who perpetuated it!

  18. Great comment Tom. I especially like the 'If the US was a company' analogy.

  19. Heck with the Ivan Drago analogy... This one feels like the final scene from Braveheart! "Freeeeeddddoooooommmmmmm!!!!!!"

  20. Gary,
    Is 200 MA in Gold (curently1280) most important than 1265 breaking point.My question is there a way we can brake 200 MA in Gold?
    Last two times when we had intermediate corection we never cros down this line 200 MA.Apreaciate your answer.


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