What the future will hold is such a dramatic sharp burst to astonishing new price levels of several thousands of dollars. This does not even require hyperinflation. It is not likely that the United States would enter a hyperinflation mode. The system would collapse long before that takes place. The much more likely result will be a complete currency default with a replacement of a new currency. This is one way government defaults by using a shell game so that the average person does not understand he was just taken to the cleaners.
– Martin A. Armstrong on Gold
The FED Cannot Keep Stocks Up
What a difference a month makes. As I prepared to begin my Labor Day weekend in late August the financial media was abuzz with predictions of stock market doom. You could barely read anything without being confronted with several references to the dreaded Hindenberg Omen and how the appearance of several of these had all but guaranteed an imminent stock market collapse. There were plenty of reasons to be bearish. The market performed horribly in August and the economy was clearly still in the dumps despite a continued endless propaganda to the contrary. Nevertheless, the constant predictions of doom was indeed a great contrary indicator and barring some monster reversal today we are about to finished the month of September +10% in what is typically the worst month for stocks. It is set to be the best September in 70 years.
The truth of the matter is while the relentlessness and strength of the rally did surprise me a bit the fact that we bounced hard did not. Ironically, the reason I thought this could happen is because I am SO bearish. At the end of the day, if you are coming from the angle that I am you need to assume the stock market is a political tool for those in charge. I have said this time and time again. The manipulators cannot stop the cycles of markets any more than they can the cycles of nature in the end, but in the interim they can create a lot of problems and seriously damage your P&L if you do not know who you are up against. When it is the system itself that is fighting for survival as it is today, the system will fight back with everything it has. People in positions of power in the United States today are much more Machiavellian than most good natured citizens could ever fathom. If you do not wake up to who your leaders really are you will be led to the slaughter with the rest of the sheeple. I want this to happen to as few people as possible. This is the main reason I write.
Ok, so all of this action in the market is ancient history and the bigger question is what happens next? What I find so interesting about sentiment right now is that it has done an complete 180 from just a month ago. Those that have bought significant out of the money protection on stocks are suffering big losses on their insurance due to the rally and the action in the VIX. From a sentiment and positioning standpoint, this was where the pain trade was into September and therefore it has happened. Bears are terrified to short and this notion that the soon to be extinguished Federal Reserve can prop up stocks forever has entered the psychology of investors and traders everywhere. This is DEAD wrong.
What I find so hilarious about the last week or so is the amount of complete garbage that has come out of people’s mouths, which then gets spun by the media and others to justify higher stock prices and keep this ridiculous rally going. I don’t care if someone is worth $100 trillion dollars and made $5 trillion last year, if what comes out of that person’s mouth is Orwellian 1984 style 2+2=5 drivel I don’t simply accept it like some mindless drone. I don’t check my common sense at the door because of someone’s paycheck and neither should you. I also don’t mindlessly worship a billionaire who acts like some dopey/humble grandfather figure in front of the television cameras all the while lecturing us serfs that it was necessary for the government to bail out the elites at the taxpayer expense. The good news for us is that when I watch many of the elites and power players I see fear behind their veneer of arrogant self-righteousness. Their statements while seemingly brimming with confidence are becoming more desperate. They are losing and they know it. The stock market and money printing is all they have left as a tool to keep people asleep and it’s not working. What I find so hilarious is that no one seems to ask themselves why a big money manager might come on CNBC and tell everyone stocks can’t go down. Perhaps in a market with little to no liquidity someone needs liquidity to dump their garbage on some unsuspecting sucker. Based on the volumes in the market I shudder to think what happens if someone actually tries to sell positions in size.
Are We Near a Major Top in Stocks?
I typically do not talk about the broad market in aggregate unless I feel we are at some sort of major turning point. I think we may be at one currently. When you have a stock market up this much on vapors and the belief that the Fed can keep it up you have nothing short of a disaster waiting to happen. Let’s just think about some of the nonsensical logic out there. So people think the Fed can just launch QE2 and push stocks higher. Really? First of all the market just surged 10% this month and is trading at the highest level since May. Food prices are soaring, gold is above $1,300/oz and silver is above $22/oz (gold is at a nominal record and silver is at the highest price in 30 years). Does anyone realize how ridiculous an announcement of QE2 would look in that context? It would probably freak people out and stocks could collapse. Ok, so if I am right and they can’t do QE2 with asset prices at these levels what do you think is going to happen to stocks once people realize QE2 is not about to be launched. Whereas in late August the pain trade was the rally we just had, the pain trade may be an equally powerful although much quicker plunge down to the 1,000 level in the S&P500.
Oil Closing in on $80/b
This is almost a perfect setup for a big selloff in stocks. As I have pointed out for several years now, the broad stock market has never sustainably rallied as oil breaks the $80/b level. We are trading just under that now in WTI, Brent is nearing $82/b and Asia Tapis is above $85/b. What’s worse is that other commodities are way higher today that than they were the last several times oil approached the $80/b mark.
If you are not up to speed on “Mortgage Gate” I recommend you get there and fast. While the whole issue of put-backs to the banks has been in the news for a long time I don’t think too many people appreciate the implications of all of this. What is so interesting to me is that many people seem to think the fraud that happened earlier this decade is behind us and we can just brush it all under the rug like a bad dream. Wrong. This is only NOW starting to really hit a head and for once in my life I am happy that we have an excess supply of lawyers in this country because we need an army to go through all these documents and put people away. If they had succeeded in reflating housing perhaps a lot of this stuff would have just gone away but they didn’t and it hasn’t. Once people find out how much trouble they will be in they will sing to the authorities and rat out those above them. This is going to get really ugly really fast. The best quick summary I have heard on this issue is by Chris Whalen. The interview is here and is a MUST listen.
GDX/SPX Trade Should Take Off Shortly
One thing that almost nobody thinks can happen is surging gold share prices amidst a falling equity market. In fact, I see no more attractive trade currently although I do acknowledge that in the initial sell-off (look at today) the gold shares could take it on the chin. Nevertheless, I wouldn’t try to be too cute about timing it since I do not think we will see the 2008 trade again. Like I said, I think gold shares will surge as the stock market languishes. This is because big money will buy physical gold on dips while paper longs panic. I expect this spread to be one of the most powerful trades we may ever see later this year and into 2011.
All the best,