MARKETS ARE WAITING FOR THE OIL CYCLE TO BOTTOM

At this point I think even the most diehard perma bear has to admit that my cycles technique has navigated the markets almost perfectly. When everyone was calling for the end of the commodity bull market this summer I correctly predicted what we were seeing was just a move down into a three year cycle low that would soon bottom and generate a tremendous surge higher.

In May and June I warned traders to watch the oil cycle as it would govern the rest of the commodity markets, and the three year cycle would bottom along with the intermediate oil cycle. 

I also warned at the time that the dollar's three year cycle would likely top at about the same time as the CRB bottomed. This also has come to pass and the dollar is now set up to drift generally lower into its next three year cycle low in 2014. As I have outlined previously, this should drive the extreme inflationary scenario as commodities build into a final parabolic spike, as Bernanke's monetary policy slowly destroys the purchasing power of our currency.

When everyone was calling for a bear market in mining stocks, I pointed out the 1-2-3 reversal that was setting the stage for a major bottom and once in a lifetime buying opportunity.

While many others were predicting $1400-$1200 gold I correctly spotted a B-Wave bottom in progress.

Now my cycles system is signaling that all markets are again waiting for the intermediate oil cycle to bottom.
 

Once it does we should see another strong leg up in the CRB, another leg higher in stocks (possibly to test the $1500 level), and probably a final surge in gold to test the all-time highs at $1900 (expect a brief move down into a daily cycle low later this month before the final surge into an intermediate top).

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THE NEXT RECESSION WILL BE TRIGGERED BY OIL

I was confident that the Fed had already begun printing. That seemed quite evident by the overall action in the commodity markets, the dollar, and the fact that stocks were unable to correct in the normal timing band for a daily cycle low. However, I didn’t really expect Ben would come out and publicly admit it. That one took me by surprise Thursday. I guess Bernanke wants to get full value for his attack on the dollar and make sure that markets are rising into the election.

At this point all the pieces are in place for the inflationary spike and currency crisis I’ve been predicting for 2014. We now have open ended QE that is tied to economic output and unemployment. But since debasing currencies has historically never been the cure for the bursting of a credit bubble, all the Fed is going to produce is spiraling inflation. So as this progresses we are going to see the Fed printing faster and faster as the result they are looking for never materializes. This is what will ultimately drive the currency crisis at the dollar’s next three year cycle low in 2014.

At this point, watch the price of oil if you want to know when the next recession is going to begin. As I’ve pointed out many times in the past, recessions (well, at least since World War II) have all been preceded by a sharp spike in the price of energy. Any move of 100% or more in a year or less, has historically been the straw that breaks the camel's back. Modern economies cannot survive that kind of shock. It invariably triggers the collapse of consumer discretionary spending and economic activity comes to a grinding halt.

In 2007 oil surged out of the 3 year cycle low into a parabolic advance as Bernanke trashed the dollar in the vain attempt to halt the sub-prime collapse. That 200% spike in oil is what tipped the economy over into recession, which was then magnified in the fall of `08 as the financial bubble and debt markets imploded.

I think it’s safe to say that Bernanke doesn’t understand his role in causing the recession of 08/09 as he is now making the same mistake again. I think he believes the recession was solely triggered by the financial meltdown. That was the icing on the cake, but not the initial trigger that caused the recession.


Despite the complete inability of QE to heal the economy or job market, and since he really has no other tool, Bernanke just keeps doing the same thing over and over expecting a different result, but never getting it.

Commodities are the check that prevents  Keynesian economic policies from healing the global economy. Keynesian academics either don’t understand this, or refuse to acknowledge it. Until they do, or we install Austrian economic advisers in the government, we are destined to continue making the same mistakes over and over.

So we will watch the price of oil as it rises out of its three year cycle low. If it hits $160 by next summer that will probably be enough to start the economy on the next downward spiral. If politicians get involved (and I’m sure they will) and try to impose price controls, they will multiply the damage and probably guarantee that the next economic downturn escalates into a truly catastrophic depression.

Until we see the spike in oil and the corresponding damage to the economy, no one has any business try to short anything, well maybe bonds, but even that will be risky because the Fed is going to be actively trying to prop the bond market up and keep interest rates artificially low.

All in all there is going to be so much money to be made on the long side, especially in precious metals, that no one needs to fool around with puny little gains on the short side, especially in a market that is going to be hell to trade from the short side. The time to sell short will be in 2014 after the dollar’s next three year cycle low. The dollar’s rally out of that bottom will correspond with the next global economic collapse, ultimately caused by the decisions made by the ECB and the Fed this past week. I dare say if they could see the damage their decisions are going to inflict upon the world and the dire unintended consequences, maybe they would finally stop kicking the can down the road and let the economy heal naturally. Of course that would entail several years of severe pain and politicians, as we all know, are extremely allergic to that.

2014-2015 is when we are going to see the stock market drop 60-75% and the next great leg down in this secular bear market. But until then there’s probably a pretty good chance we are going to see the S&P at new all time-highs in the next 6 months – 12 months.

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HAS QE3 ALREADY BEGUN? GOLD & COMMODITIES MAY BE SAYING YES.

According to recent statements by Bernanke, the Fed stands ready to act with further easing of monetary policy (QE3) if economic conditions warrant it. But let's face it, because the Fed has never been audited we only receive the data they deem fit to publish. We know the government lies to us about inflation, unemployment, GDP, etc. Does anyone really believe the Fed is publishing true accounting numbers? I'm starting to suspect Bernanke has already begun the next round of quantitative easing.

Politically QE is a hot potato and impossible to publicly announce. But there have been enough hints (the last FOMC minutes may have been the loudest) that it is clear that Bernanke intends to print. Hey, we are in a currency war after all, and one can't win the war if you don't shoot your guns!

First case in point; the CRB exploded out of its three year cycle low in June just as I had predicted. Oil is already knocking on the door of $100 a barrel again. Grains in many cases have rallied 50% or more and show no signs of reversing. As a matter of fact, the CRB is showing no inclination to even retest the summer bottom. The complete failure up to this point of commodities to retest the three year cycle low is in itself a warning bell that something has changed. I think we can all agree that the global economy didn't all of a sudden ratchet into high gear, creating a surge in demand. Barring that, the only thing that would generate this kind of explosive move without even a hint of a correction would be another round of massive liquidity injections.

Another odd development is the action in bonds. A month and a half ago the bond market started to discount the inflationary surge as commodities launched out of their three year cycle low. Mysteriously, two weeks ago, interest rates started to tank. 

One has to ask themselves, who in their right mind would be buying bonds with a negative yield in a rapidly accelerating inflationary environment? 

This sudden reversal in interest rates is another warning bell, in my opinion, that QE3 may have already begun, and Bernanke is already buying bonds in the attempt to hold interest rates under 2%.

The next confirmation will come from the stock market. As we have seen in the past, the daily cycle in the stock market has tended to stretch far beyond its normal timing band (35-40 days) during periods of quantitative easing. The current cycle is due to bottom right around the next Fed meeting on September 13. If stocks are still rising with no clear decline into a cycle low by mid-September that would be a pretty clear sign in my opinion that Bernanke is lying to us and QE3 has already begun.

If I am correct then the penetration of the three year cycle trendline by the dollar index on Friday is going to be a harbinger of hard times ahead for the world's reserve currency.

As many of you may recall I've been expecting the three year cycle low in the CRB to correspond fairly closely to a top in the three year cycle on the dollar index. So far the rally out of the May 2011 three year cycle low has been very weak. The dollar still isn't close to moving above the 2008-2011 three year cycle high, and has now formed a monthly swing. 

The dollar's three year cycle is now at risk of having topped in only 14 months in a left translated manner. If so, this greatly increases the odds that we will see the dollar index fall below 72 and probably below 70 by the time the next three year cycle bottoms in mid-2014.

If the dollar's current daily cycle continues to drop all the way into the FOMC meeting on September 13, then it will be unlikely we see any significant corrective action in commodities or stocks for the next two weeks, and at that point I am going to seriously entertain the idea that the Fed is lying to us and has already begun the next round of bond purchases.

The big question though, is how do we invest based on this possibility? 

First off one doesn't want to be short if there is even the slightest risk that the Fed has resumed bond purchases. Second, one has to ask themselves which sector stands to benefit the most from another massive increase in liquidity? 

The obvious answer is commodities. But most commodities have already rallied quite significantly as we've seen with the grains and energy. That doesn't mean there isn't more upside, I'm sure there is. But I think much larger percentage gains are going to be made in the precious metals as price and breadth are still quite depressed in this sector.

The metals are now set to "catch up" as traders take profits on some of their other commodity positions that have already generated large gains, and look to put that capital back to work in undervalued areas with more upside potential (precious metals, especially miners).

It's been my theory for several months now that we saw a B-Wave bottom for gold back in May.

With the recent breakout of the frustrating consolidation zone that always follows a B-Wave bottom, I think gold is now ready to begin the initial phase of the next C-wave advance.

Gold is now entering the high demand fall season. It has been my expectation that gold will generate its first test of the all time highs sometime this fall. If my intermediate cycle count is correct (explained in depth in the nightly premium newsletter) we should see a move above the A-wave top of $1800 and a rally close to $1900 by late October or early November. At that point the intermediate cycle will enter the timing band for the next corrective move, which should prevent gold breaking out to new highs

Following an intermediate degree decline in late November to mid December the breakout to new highs should occur during the next intermediate cycle this spring, followed by a retest of that breakout at the next intermediate bottom.

Yes I know these daily and intermediate cycle counts are some what complicated and beyond the scope of this short article. I do cover them extensively in my premium newsletter. Suffice it to say that cycle analysis lays a general guideline for when to expect major bottoms, and to a lesser extent tops. I like to think of it as a tool that signals when to step on the gas and when to start tapping on the brakes.  

While I don't think gold has much chance of moving above $1920 this year, conditions are definitely in place for a significant rally in the sector over the next couple of months. Miners, and silver in particular, have the potential to generate some pretty respectable gains over the next 2-3 months.

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INTER-MARKET RELATIONSHIPS THAT ARE DRIVING THE STOCK MARKET AND COMMODITIES

This will be a quick post today illustrating what I expect over the next 2 years, and the inter-market relationship between the currency markets, CRB and stocks.

Pay particular attention to the inverse relationship between the dollar index and the CRB; notice how the CRB almost immediately began moving down into its three year cycle low once the dollar formed it's three year cycle bottom in May 2011.

Stocks are driven by not only the dollar but to some extent by commodity prices. When commodities start to surge too high they act as a drag on the economy and consequently the stock market begins to stagnate. When commodities are falling, as they have been for the last year, it tends to act as a mild tailwind for the stock market and this explains why stocks have continued to rise for most of this year despite the dollar moving generally upwards since February.

I think I have mentioned before that virtually every recession since World War II has been preceded by a spike in oil prices of 80% - 100% over a short period of time (usually a year or less).

The surge from $50 a barrel to $100 in 2007 was the straw that broke the camel's back and tipped the economy over into recession, which began in November '07. A further spike to $147 a barrel the next summer guaranteed that the recession would be the worst since the Great Depression, especially considering that the real estate market and debt bubble was imploding at the same time.

Now that the CRB has formed its three year cycle low the dollar index should be at or pretty close to a final top, which should then be followed by a move down into its next three year cycle low sometime in 2014.

If the inter-market relationships continue to hold up, and I don't see why they wouldn't, then we should see commodity prices moving generally north for the next couple of years until the dollar forms its 3 year cycle low in mid-to-late 2014. At some point along the way rising commodity prices are going to begin pressuring the economy, just as they did in 2007 and 2008, and also in 2011 as the CRB surged up into its final three year cycle top.

My current guess is that we will see the stock market start to stagnate in 2013 forming a much extended rounded topping pattern. By late 2013 the stock market should be clearly in a new bear market that will begin to accelerate to the downside as commodities spike into their final top as the dollar bottoms in 2014.

At that point I expect to see a severe deflationary event as the stock market and commodities collapse similar to what happened in the fall of 2008 and early 2009. This collapse and deflationary event should be accompanied by the dollar rallying out of its next three year cycle low in 2014 .

Most bear markets tend to last between 1 1/2 to 2 1/2 years so we can probably expect a final bottom in early to mid 2015.

CONGRESS ARE YOU LISTENING?

Well, it's that time again. Every two years our senses are assaulted as politicians spew an endless stream of nonsense in the attempt to garner votes from a mostly unsophisticated American population. This year the major topic, not surprisingly, is jobs. Each and every politician would like you to believe that he or she has the cure for the persistent unemployment problem.

Of course it's all completely ridiculous. You would think these people could read a history book. Never in history has government been able to legislate productivity. Governments just misallocate capital. They tax one group of people and give the money to another group of people to dig holes. Of course, once the hole is dug or the road built, that job expires. It's not a sustainable productive use of capital.

Real productivity is entrepreneurs creating sustainable companies that satisfy a human need. AAPL is a sustainable business satisfying a human need. GOOG is a sustainable productive business. XOM is a productive business. None of these companies were legislated into being by government.

Almost without exception, real progress involves industry destruction due to mankind’s creativity. For example, when oil was discovered the whaling industry collapsed. When the automobile was invented it destroyed equine powered transportation, and so on. The emergence of each new major technological advance, throughout the history of mankind, has caused employment opportunities in some industries to utterly vanish. The industry that once provided employment becomes obsolete.

This is part of the normal and healthy sequence of human progress. Progress is a result of replacing inefficient technologies with ones that are not only new, but more efficient.

Likewise, nations that refuse to allow this process of creatively inspired ‘destruction’ are found to have economies that stagnate and ultimately fail.

There is one way, and one way only, to cure our employment problem (and debt problem). It is the same cure that ultimately ended the Great Depression and serviced the gigantic debts that were incurred during World War II. That cure was the advent of two brand-new industries: plastics and electronics. These two industries created millions of jobs worldwide and spawned an economic boom from 1945 until 1966.

Now the world is back in the same position it was in 1930, and where Japan found themselves in the early 1990s. The world has created another debt bubble and we've chosen to kick the can down the road just like Roosevelt did in the ‘30s, and Japan has been doing for the last 20 years. And just like in the ‘30s, we are going to get the same result which is persistently high unemployment and generally declining global economic conditions.

What we need to do is allow human ingenuity and creative destruction to actually cure our problems. The biggest problem the US faces today is the triple threat of Social Security, Medicare, and Medicaid. These three entitlement programs have bankrupted the country, and let's be honest, there is no way any politician can possibly reform these programs, or even attempt to do so, and have a prayer of getting elected.

The cure to our problem is staring us right in the face. We don't need to reform Social Security, or government health programs. We need to make them obsolete.

Rather than plowing taxpayer dollars into an insolvent banking system (as the Japanese have been doing for 20 years), we need to allow capitalism to work and insolvent companies to go bankrupt. The taxpayer dollars that are now flowing into an endless black hole which are the financial system and government stimulus programs need to be funneled into the biotech industry. Rather than fund expensive surgeries or endless treatments that only manage symptoms, we need to discover real cures for disease, injuries and aging.

Imagine if a person with an arthritic knee, instead of a $20,000 knee replacement surgery, could simply walk into the doctor's office and receive a stem cell shot that would repair and permanently cure the disease. Or, how about a permanent cure for diabetes, heart disease, and obesity?

Yes, what I'm talking about is a complete overhaul of the global healthcare system. Yes, this is going to be creative destruction on a massive scale. Many many doctors that studied for years and years are going to be put out of business. Health insurance will become mostly a thing of the past as the modern healthcare of the future will become easily affordable by all. No different than buying an iPhone today.

Yes, some industries are going to suffer and go bankrupt, like health insurance, many doctors, and a big part of the pharmaceutical industry.

But millions and millions of jobs will be created and when we reach the stage when we actually cure diseases, especially as related to aging, we will eliminate the gigantic burden the three big government entitlement programs. If people can remain healthy and active for their entire life there will be no need for Social Security benefits and Medicare and Medicaid. These programs will become a thing of the past, as most diseases, and injuries will be quickly and easily reversed or permanently repaired.

So instead of the same old nonsense drivel we get during every election, it would be refreshing if politicians understood the real problems, and the real cures, and put in place policies that would actually have long-term benefits and accelerate the transition through these dark times and into the next Golden age.

Congress, are you listening?

BULLS STILL IN CONTROL, BUT TIME IS RUNNING OUT

In last week's article "Three Weeks Left" I outlined a brief synopsis of what I was expecting based on how the daily cycles were unfolding. So far markets are playing out pretty much as anticipated.

This week I'm going to go a bit more in depth and tie cycle's analysis with the upcoming fundamental calendar, namely the next two FOMC and Jackson Hole meetings.

As you may recall from the last article, the dollar index is in the process of moving down into an intermediate degree bottom, which in turn is triggering a rally in virtually all risk assets, most noticeable in the energy and grain sectors as the CRB exploded out of its three year cycle low.

I think we will probably see the dollar continue to drift generally lower for most of the remainder of this month, possibly even into the Jackson Hole meeting (August 25 – 27) as traders continue to hope for the next round of QE.

When the Fed fails to deliver, which they almost certainly will, we should see the market start to move down into its daily cycle low, which coincidentally is due almost exactly on the September 12 – 13^th FOMC meeting. 

   

The September FOMC meeting will be the opportunity for the Fed to shorten the stock market intermediate cycle and possibly abort most of the move down into the yearly cycle low due in October. However, I think the Fed is probably going to balk at the September meeting also, and when they do it will initiate the real move down into the normal timing band for an intermediate and yearly cycle low in late October, or early November.

I suspect that the Fed will finally cave at the October meeting and begin an open ended QE with the misguided goal of achieving a nominal GDP target and lowering the unemployment rate. The one caveat would be that the Fed meeting in October would call for a slightly short stock market daily cycle, which is not unusual if the market is experiencing a hard decline.

Another possibility, although one with lesser odds in my opinion, would be a final intermediate and yearly cycle low on the November employment report, or the presidential election results, which would stretch out the daily cycle to its normal duration of 35-40 days.

Based on the current cycle count, and taking into account the timing band for the next two FOMC meetings along with the dollar's current intermediate cycle, we should trigger a top in the stock market sometime around the end of August. However, let me warn bears that the move down into the intermediate bottom is not going to be an easy short. I expect we will see most of September chopping back-and-forth with several retests of the highs before finally rolling over. Most of the losses will probably coming in the final 5-10 days before the bottom. As I have said previously, this will not be an easy market for bulls or bears - either one.

Gold is a bit of a different animal than the stock market and its intermediate cycle has a different duration. But gold is still tethered to the dollar index as it continues working through the consolidation phase of this new C wave. Here is a chart I posted back in February depicting the extended consolidation that I was anticipating this year.

Considering that gold is still in this consolidation phase I think we are probably going to see a test, and more likely a break of the D-Wave trendline as the dollar completes its move down into its intermediate cycle low later this month. That should be followed by an intermediate decline that should bottom ahead of the stock market in mid to late September.

At that point I suspect gold will start to sniff out the next round of QE and will begin to resist the remainder of the dollar rally, very similar to what happened between May-July.

Open ended QE, which I expect to begin at the October FOMC meeting (there is a small chance that the Fed will act early in September), is going to be the driver of what should be an inflationary spiral, culminating with a parabolic move in the CRB index and the next leg up in the secular gold bull (probably to $3500-$4000) as the dollar drops down into its next three year cycle low in mid-2014.

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BULLS HAVE 3 WEEKS LEFT

3 weeks, that's how long the bulls have left before stocks roll over and begin the next intermediate degree decline. That being said, the next 2-3 weeks should yield some very healthy gains in virtually all asset classes. Why is that you wonder? Well, it's because the dollar has begun moving down into an intermediate degree correction which will, in the next few weeks, fuel the 'risk-on' trade.

As of Friday the dollar was on the 11th day of its current daily cycle. The normal duration of a the dollar index daily cycle is 18 to 28 days, with the average being about 23 or 24 days. This suggests that the dollar should bottom somewhere around August 21st or 22nd. As you can see in the chart below whenever the dollar moves down into an intermediate degree trough it generates strong gains in asset prices.

What follows, once the dollar bottoms and its next intermediate degree rally begins,  is not going to be pretty. Stocks are going to start to struggle and ultimately move down hard in September and probably October if the Fed doesn't unleash QE3 at the September FOMC meeting.  

By the end of August and certainly by the time we get into September the markets are going to call the central bankers bluff, and it is going to take more than words and the threat of quantitative easing to keep asset prices propped up.

I have covered the rest of the forecast in depth in the weekend report available to premium subscribers.

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