As it becomes more obvious that central banks and politicians, not economic fundamentals including inflation, are currently driving the nominal rate and equity markets, participation has been withdrawn. How is one to position oneself when the determinant inputs are at the whims of seemingly out of touch with reality officials? As interest rate price discovery is disallowed how is one to ascertain the amount of risk in the economy? How are business leaders going to allocate capital resources in such an unknowable environment? The answer explains why the QE’s have not stoked the economy as the politicos have desired. Until the terrain is certain capital will be preserved. Until the government exits the market and allows for true price discovery we will remain in this morass. Until we elect politicians who are free market adherents we will continue the decline of a once great nation.
Monthly Chart of DOW/Gold 1920-Present
“The Most Important Chart in the World.” It still is. The chart I am referring to is the ratio of the Dow Jones Industrial Average: The Gold Price. In a nutshell, charting this ratio demonstrates the “real” return on stocks adjusted for inflation or currency debasement. As we all know, the Zimbabwe stock market essentially went up to infinity during their hyperinflation but did anyone get rich from that? Of course not, the shares were denominated in a currency that was on its way to worthlessness.
What this chart shows you are secular swings in the economy. You see how stocks ran up in real terms into the 1929 crash and then plunged versus gold. You see how they ran up in the next great post- WW2 period into 1968 when they once again plunged versus gold. Then you can see the great secular bull market in stocks from around 1982 to the bubble peak in 2000. In both of the prior two periods (one deflationary and one inflationary) the DOW/GOLD ratio got down to about 1:1. We feel that we will see that same ratio once again. That would imply another roughly 75% drop in stocks to gold and I expect that this next leg is beginning now.
The S&P has ignored all disappointing economic news as it awaits indicated (Draghi and Bernanke) Central Bank intervention and money printing. As September approaches and some of the dire finances of Europe return to center stage we expect a print or die market reaction. We have no current position as market risk is large and we are currently neither technically over bought or over sold as indicated by current price in the middle of the range between Pivot and Pivot Top 1. We would use any celebratory rally to Pivot Top 1 to initiate short position and will use any two day close below Pivot to do the same.
As the European economies slip further into recession and the dire finances of the PIIGS take center stage the DAX reflects the hope that CB’s will react and the utterances of Draghi will win the day over the objections of Merkel. We are a few points from initiating a short position at Pivot Top 1 @7200 Dax.
Another bear trap has been sprung? We are still trapped in the last trap sprung in May. Bonds are beholden to CB buying as they force interest rates below what the finances of the sovereigns would indicate. We feel that until participants realize that the math is undeniable and hope is abandoned frightened money will believe that they have found a safe haven. When that realization is reached the door will not be wide enough for all those who wish to exit.
This is the same story as above with Treasuries as both are deemed the only safe place to be until they are figured to be the bubble that they are!
The Eruro has been able to rally back to Pivot. We will short Dec Euro next touch 1.2610. The Euro will not exist in its current formation 3 years hence. Some reformations are bullish while others bearish. We believe that all fiat currencies are politically doomed. All will lose out to precious metals and to US Dollar.
Political happenings in the middle east and the specter of world wide money printing have pushed Crude higher and will continue to do so. We are flat and are looking for a pull back to Pivot to establish longs.
Unleaded has rallied to all time highs and we will use this to establish shorts next touch of 3.100.
Energy: Heating Oil
No position. As dollar is weakened things will get more expensive.
Energy: Natural Gas
We feel significant long term bottom was established in April and want to buy December Nat Gas when the current contract touches Pivot at 2690.
After 4 month consolidation it appears Gold has broken above Pivot and is on its way to 1,800. We are long Silver and believe that is the better way to play the decimation of the Dollar.
We are long September Silver from the Pivot Bottom at $27.50. First target is Pivot Top 1 at $32.79. We will monitor the way that price is obtained to determine if we exit there or are looking for Pivot Top 2. That will probably be determined by the amount of printing about to happen.
Copper has been lagging other metals. We are long Silver and will use that as our metal play.