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Why Chuck Thinks Stocks Are Ready to Scream

By Rick Ackerman Posted on October 26, 2011, 12:01 am EDT Last Updated October 26, 2011, 3:53 pm EDT

Rick’s Picks occasionally publishes opinions with which we disagree. The inflationist argument below, bullish on stocks but also on gold and silver, comes from our savvy friend Chuck Cohen. On stocks, at least, if not on bullion, Chuck’s scenario goes against our own expectations, since we’re looking for a global economic bust that would send shares into a steep dive before year’s end. While this could also push gold and silver lower, we still expect precious metals to perform well in relation to all other classes of investables. Economic expectations aside, the broad averages have broken above the tedious sideways correction of the last six weeks, and the charts of many key stocks are undeniably bullish. There are also less-than-subtle signs that the Fed is eager to get QE3 under way with the explicit goal of pumping up stock prices.  Keep these things in mind as you read Chuck’s contrarian take on the markets – a follow-up to a piece he did two weeks ago that we disseminated to paid subscribers.  If you’d like to contact Chuck directly about his financial consulting services, or about mining stocks in particular, click here. RA]

Following the recent move up in stocks, I want to update my piece of October 4 (A Bottom Is At Hand) by making some comments regarding stocks, and more importantly to the gold community, about the disappointing lag in the precious metals.

First, the stock market. In just two weeks, while the media and most investors continue to dwell gloomily on the financial landscape, the Dow has recaptured almost 1400 points (13%.) Today we are closer to the April high than we are to the recent low. In fact, both the market behavior and the Dow chart are remarkably similar to those of last year at the bottom in August. (The chart below shows how it unfolded from May 2010 to the end of August. Simply substitute 11,000 for 10,000.) And for those of us who have a short memory, the 2010 low came amidst an almost identical hysteria that a total collapse was at hand. At the very bottom, Death Cross and Hindenburg sightings were seen all over the globe and many were confidently predicting Dow 5,000 or worse. As I pointed out in my October 4 e-mail to clients, it is at such extremes of fear that major bottoms are made.

Reading the Tea Leaves

If I am reading the tea leaves correctly, the stock market is about to continue upward, fueled by the immense injection of liquidity. Inflation, not deflation, will soon be the byword from here. There are some other reasons why this should take place:

** Besides the negative extremes of the sentiment indicators, there has been a gigantic amount of cash taken out of stocks by the public. This tendency is normally seen as markets reach their final correction level.

** In addition, we are seeing an enormous degree of short selling, especially by hedge funds who coincidentally or not coincidentally were very short last August at the bottom. Historically, this kind of bearish action usually provides the fuel for the next up-cycle. I believe that most of the market players and experts are positioned the wrong way here, and a move through 12,000 will cause them to cover and put the withdrawn money right back into the equity markets.

** Another huge technical positive that is rarely mentioned is the strength in many key stocks such as McDonalds, Colgate Palmolive, General Foods, Walmart, IBM, Home Depot, many of the utilities, and, amazingly, now even in the housing-related sectors. (Please do your homework and look at the charts. I have included a few of them below.) These are anything but negative patterns. If we were destined for a meltdown as feared, these significant stocks would be leading the market down, not up. I know it seems impossible but if these charts mean anything, we are entering some kind of world-wide recovery.

** One final point: The Occupy Wall Street gatherings. The looting of America actually occurred over two years ago, but isn’t it peculiar that the public is just now actively reacting to it? And it is at a time when the banking industry is anything but prosperous. Rather than applying a bearish tint to these meetings, I view them contrarily as positive, almost an odd-lot barometer. And considering how small they actually are, the media is giving them a disproportionate coverage as though we are witnessing the beginning of a modern French Revolution. As most of us have learned when the media actually notices something, it is usually irrelevant. I believe we will have blood in the streets one day, but it is still future.

The Bond Market

The most glaring casualty of a rising market and inflation should be the bond market. To me, bonds appear to be turning down, very likely precipitously. In fact, we could well be witnessing an historic inflection point of a bull market that has been in effect for 30 years. This bond chart goes way back, with nary a correction. If you don’t believe in central bank market intervention and manipulation then please try to explain how bond yields could come down persistently all through the past 30 years? Should bonds be finally changing direction, then my conclusion is something new is about to happen, most likely a flight out of fixed rate instruments and into fixed assets, very possibly including real estate.

Why Is Gold Lagging?

I have an explanation or at least a theory on the recent weakness in the precious metals. Since gold bottomed back in 2001 at $250, it has risen for different reasons at different times. In fact, I see two basic reasons for the ebb and flow of the price of gold: fear and liquidity. The one exception came back in 2002-03, as the stock market unwound from the speculative bubble of the 1990s and gold broke loose from its 20-year bear market. But since then, gold has normally followed the course of stocks, not gone against it, such as in 2008 (down) and August 2010 (up.) Both moves were factors of liquidity or a contraction of it as in 2008. We saw an exception last year in May and June when the stock market swooned, and gold went up in reaction to the fear of a collapse. But gold quickly retreated and then rejoined the stock market’s move, this time up in late August. This pattern held through the rise to 12,800 in the Dow.

This connection continued until recently when the stock market rolled over and in late July dropped precipitously. Once again, as the market plummeted, nightmares of an imminent European collapse were everywhere in the financial media. And because of these fears, many investors, especially a lot of newcomers plowed into gold, and even more so into silver in a near-panic. The reasons for buying the precious metals, gold from $1,600 and silver from $35 had changed — from one of growing liquidity to one of near-terror. So when the stock market bottomed, the fear quotient once again began to seep out of the precious-metals buying, with gold, and more dramatically silver, retracing that final thrust from early August. Please examine the GLD and stock market charts below to see what I am getting at. I know this sounds confusing, but by comparing the Dow and the GLD chart, I hope you can follow my logic.

Just Ahead…

Now, if my assumptions are correct, we are entering a new phase, one marked by surprisingly strong recovery but accompanied by enormous inflation. So stocks should move up, and if the recent correlations hold, then the metals will once soon again turn up and then soar, as investors seek to shield themselves from an ever rapid depreciation of fiat money.

The major reason I cited in turning bullish on stocks a couple of weeks ago was the dramatic shift towards extreme pessimism. And now, gold and silver are exhibiting the same signs. In the October article, I included a couple of charts of the precious metals’ public sentiment from Sentiment Trader, and the extremely bullish Commitment of Traders charts. And recently, Bill Murphy’s Midas column reported that the latest gold and silver sentiment had become even more bullish. From such indicators are major bottoms found. MarketVane’s bullish consensus for gold slipped a point to 64% and silver’s dropped 4 points to 51%. These levels were last seen at the late-September low. In a more dramatic development, the HGNSI plunged 13.3 points to -13%. The HGNSI has only been negative three times this year, September 23rd-27th, June 30th/July1st, and January 27th/28th – all significant lows. The HGNSI has not actually been lower than this since March 16th/17th 2009.” And the Sentiment Trader public opinion polls show a sentiment very near the 2008 bottom, when gold hit $730 and silver $8.

On Friday, the commitment of traders report, continuing the positive trend of the past two months, confirmed this abysmal sentiment. So, right now the most predictive methods of the direction of the precious metals are close to the readings they were at the panic lows of 2008.  Below is the COTs chart of silver. You can see that silver’s positions are actually now under the lows of 2008 when it hit $8.

My conclusion

Just as we found out last year in August when almost every columnist and advisor was obsessed with the specters of the Death Cross and the Hindenburg Omen, it is time to throw away your Prozac or Don Julio bottle and get ready for some fireworks. The end of all things is on schedule but it is not yet here. For some suggestions, please get in touch with me. Thank you. Chuck

Also, if you don’t have the October 4th piece, let me know if you wish it sent to you.

***

(If you’d like to have Rick’s Picks commentary delivered free each day to your e-mail box, click here.)

  • SD1 October 27, 2011, 2:24 am

    I am cautiously optimistic on the markets for no other reason than the DOW has met or beat six Hidden Pivot midpoint targets dating back to 1987. The SPX has met or beat seven midpoint targets dating back to 1985. It doesn’t guarantee we’ll go higher from here, but it certainly doesn’t hurt. Time would have to be factored into the equation as we move further back in time, but we should at least acknowledge there is the distinct possibility the markets could quite easily recapture the bear market highs from earlier this year. It may be improbable, but it isn’t impossible.

  • Chris T. October 27, 2011, 1:08 am

    Robert:
    ” … either front run their move, or catch the momentum play immediately after they do it.
    As Steve accurately points out above- this is pure speculation. It is Monte Carlo style gaming that is taking place in a global casino.”

    Well, that depends on who you are.
    For all of us, and most everyone else in the market that is true, but as Antal Fekete has pointed out, the banksters we all love front-run from knowledge of what the Fed is about to do.
    For them it is no gamble at all, but a sure but.

    See all his articles at his archive for the proper argumentation.

    BTW. love the comment about adding current into a system, a great analogy to explain your point.

  • Chris T. October 27, 2011, 12:56 am

    “I almost expect an oil embargo or something similar to set off the events again (even though that is unlikely).”

    Most certainly unlikely.
    All the actions we have taken, and are taking (Iraq, Libya as the last two) were in defense of just that happening.

    In the 70s, we couldn’t act like that, because we weren’t the only hegemon around.
    The Soviet Union, for all its ills (evils if you are a Reaganite), just by being there, kept us from showing our worst side.
    No more.
    Try an embargo?
    You will be hunted down until a hole in the ground is your last refuge to be murderer when pulled out.
    No embargo forthcoming.

  • Chris T. October 27, 2011, 12:36 am

    Chuck:

    a question:

    You mention the enormous short-selling HAVING gone on, and that their covering activities will assist in propelling the market forward.
    Seems a logical conclusion when more buyers, the covering entities, are in the market.

    BUT: where is the price effect of their short-selling acitivities?
    Over the last 24 months, the DJIA is only down about 700 points from its top, how is that possible when such enormous shorting has gone on?
    Just looking for the logical symmetry.

    Certainly one could argue, that the market would now be much higher, had it not been for the shorties, but where would that have come from?

    Also, you write:

    “If you don’t believe in central bank market intervention and manipulation…”

    How could any sane person not believe in that happening?
    What else are Open Market operations, announced just about every 6 weeks, and continually practiced?
    what else are managed interest rates?
    And what else is QI1, QE2, and so on?

    Just now, Krugman is out there trying to provide scientific/academic cover for direct primary market Fed purchases, even while that is illegal. He advocates for a creative legal subterfuge to contravene the FR Act.

    This ties in to the following comment, and my question:

    “In fact, I see two basic reasons for the ebb and flow of the price of gold: fear and liquidity”

    But there IS a third reason, central bank manipulation (intervention to give a less perjorative word) by managed gold sales, etc.

    The evidence has been assembled aplenty by GATA, and finally admitted by Greenspan in his famous:
    “central banks stand ready to sell gold if the price rises to far” comment (not a verbatim quote, but with that exact sense).

    Fear and liquidity may cause a part of the meandering of Au/Ag, but for a long time, the more general direction was due to manipulation/intervention, lately to help keep a lid on things.

    As to bonds turning down, that should have happened a long time ago, but didn’t, for the reason above, Fed intervention.
    Certainly they can’t keep it up forever, but they have a will to, and there is that saying of “never fight the Fed”.

    Because of that body, both markets can still go up (in the bond’s case, at least not collapse), because the same Fed liquidity pump is out there gunning for that effect.

    When the bond market finally craters, despite their best efforts, and rates are back to levels of old, how will all those heavily debt laden entities in the stock market keep up with that burden?

    Our 15+ trillion official nat. debt, at just 5% across the whole structure, would more than double the current interest payments of the US.
    750b is about 1/3 of current tax receipts, an impossibility for the budget….

    That should kill the markets when it happens.

    None of that to stand against the shorter term observations you have mentioned, just questions
    Thanks for the comments

    • Cam Fitzgerald October 27, 2011, 2:27 am

      Going back to the seventies, Chris, inflation led the markets and rising interest rates were the answer to the problem. I can foresee a similar outcome occurring now where inflation grows to the extent that we do finally see wage growth and a housing rebound.

      That may sound ridiculous right now as unemployment rages are housing is flat but consider that as it is not possible to address the 15 Trillion dollar debt with any tool other than devaluation (inflation) anymore, that is now the only possible alternative to an ugly deflation.

      Interest rates would not therefore be as much a concern in that case if they follow rising inflation rates. That will not be our worry. As you have seen, we do in fact have real inflation that is several points higher than that admitted by official sources.

      This is surely no accident and we can rightly be assured that what we are witnessing is actually inflation by stealth. My readings now tell me that this trend will accelerate and I do believe we have seen the interim market low.

      In this scenario, and against the backdrop of a bond market that appears to have reached its zenith we can only conclude that the preferred place to park funds is in equity markets.

      The assumption here is that better companies will easily accommodate themselves to rising inflation over time, thus ensure no loss of buying power while providing a consistent dividend stream and an assumed stock price appreciation equal or the better of the rate of inflation.

      I have little doubt that this is how the future will play out and have made comments in the past to that effect already. We may even stop viewing stocks as risk assets in a highly inflationary environment.

      Regarding the Dow gold ratio mentioned earlier incidentally, I do not believe there is any certainty that we will see a one to one ratio on this cycle due to the unusual amount of monetary and fiscal intervention in economies across the globe. We have skipped a step in other words and it is clear that inflationary forces are going to win this battle.

      That is not to say that the Dow might not rise by 20% while the price of Gold quadruples either. The future should be quite interesting. I no longer think we need to anticipate a falling stock market relative to rising gold prices in order to arrive at the magic one to one ratio. It would be impossible in an inflationary environment anyway. The only other alternative is for both Gold and the Dow to rise together but at different speeds.

      Precious metals should do very well.

    • Chris T. October 27, 2011, 3:37 am

      I wouldn’t venture to predict the stock-markets’ performance in your scenario, but assuming you are right (and I can follow the argumentation, esp. with respect to creating money to pay off debt, where I have posted before, that I can’t see TPTB choosing drastic default vs. stealth default, as the latter is easier), that is not good news for the country.

      I was only a kid in the 70s, and only remember the last third of that decade, and then only in the general perception as children are wont to get.

      By all measures I can think of, the general feeling of malaise was much worse then than now, poss. due to the drastic oil-shortage/price hammer and impossible to not see inflation/interest rates.

      And people actually did adjust their consumptive habits, by far more today IMHO, to meet that feeling.
      TV/Hollywood accomodated this with plenty of catastrophe/collapse/etc fare.
      Remember that terrible movie “Americathon”?

      All the way, in objective comparison to today, we were doing by far better than today:

      The national debt was 1/15, the deficit much less, absolut government share of the economy less, and most important, we had just stopped being a net creditor to the world.
      General public indebtedness was much lower, savings greater.
      And on, and on.

      Today?
      There’s been backpedaling, yes, but as much as back then?
      I also don’t see the same kind of entertainment fare coming out to meet it.

      And the end all of that, Paul Volcker’s crack of the whip?
      Can’t be implemented, because the pump-to-pay debt is the opposite of what he did.

      As one of those responsible early in the 70s under Nixon, Volcker really wasn’t interested in good economics, his real motive, successful then, was to save the dollar from imploding (exploding?), and thus killing the fed. He saved his bank, if it helped us, that was just a fringe benefit.

  • RockHardBear October 26, 2011, 6:28 pm

    Best bullish short-term concise case I have read in a while.

    However—most important chart you present is the 100-year real bonds return chart, which further upholds my RockHardBear stance even harder, and strongly invalidates all your other short-term sentiments, arguments, and charts.

    Because, on that century chart, note that the peak for real bonds return is 1940—11 years after the 1929 crash, and 8 years after the 1932 stockmarket bottom.

    And also note how slowly the real bonds return cycles move up and down, with minimum 2 decades in-between, to cycle up or down back to the median upward line.

    Thus, you have unwittingly added to my RockHardBear stance for me.

    As there is still at least one entire decade left for real bond returns to even come back to the median upward line. And that century chart is more powerful than any other short-term bullish chart you have presented.

    Because centuries tell the holistic human truth, while short-term neurotic fluctuations are just short-term neurotic fodder for daily linear-logic neurotic half-wits.

    Therefore, this is what is obviously coming and fast—
    Decade-long, Deflationary-depression: Dead-ahead.

    _______________________________

    However, since all of you only care about those short-term neurotic fluctuations, here is what I also (concurrently with you) short-term see:

    IF there are 3 daily closes above 12,100 DJI, that would also turn me short-term bullish (and by short-term, I mean a half year max). With a projection then, up to a new all-time screaming DJI high.

    Yet, I currently see that as likely, as pigs flying.
    For I strongly believe that 12,100 DJI will hold.

    • rmsimc October 27, 2011, 4:43 pm

      What?

      (I would not go around throwing the ole “half wit” phrase if I were you.)

  • redwilldanaher October 26, 2011, 6:15 pm

    I enjoy Chuck’s pieces but I have to chime in with respect to a few points that he seems to be making in this piece:
    “** Another huge technical positive that is rarely mentioned is the strength in many key stocks such as McDonalds, Colgate Palmolive, General Foods, Walmart, IBM, Home Depot, many of the utilities, and, amazingly, now even in the housing-related sectors. (Please do your homework and look at the charts. I have included a few of them below.) These are anything but negative patterns. If we were destined for a meltdown as feared, these significant stocks would be leading the market down, not up. I know it seems impossible but if these charts mean anything, we are entering some kind of world-wide recovery.”

    I’d be careful reading patterns in the markets these days versus the olden days. Robots and coordinated hyper-manipulation, among other forces, have definitely change the nature of the sketching of patterns IMO. Of course anything can happen since we all know that the stock indices are not tethered to reality and have become crucial to the central planners and their psyops campaigns. “…now even housing-related sectors.” – It could also be argued that the buying of that junk signals that this latest manipulate up-cycle is aging fast as well.

    “Now, if my assumptions are correct, we are entering a new phase, one marked by surprisingly strong recovery but accompanied by enormous inflation.”

    I need to ask for a clarification on that sentence. Is he referring to a recovery in Index price levels or a recovery of the economic variety or both? The ECRI recently signaled a recession and the numbers in the pipeline suggest that joblessness will likely worsen over the next 3 to 6 mos. I don’t doubt for a second that the manipulation cartel can jam indices higher as I do agree with Chuck that they’ve been analyzing their internals and know that too many of their clients are too short or have stepped aside. That is the perfect scenario to rape your clients and scream things higher in the face of reality. Plus, the timing couldn’t be better for many parties especially those in the business. Many of these psychopaths have performance year-ends of 10/31, 11/30 and 12/30. All they really need to do is to work their magic a little longer and the performance chasing managers of OPM will jump like lemmings because it’s better to go all in than respect their clients’ capital and you know the rest of the story.

    My argument would be that the stage is set for another round of upside manipulation for many reasons, many of which have to do with the internal workings of the criminal syndicates in the markets. Talk of real economic recovery is complete BS because the numbers that are discussed are in fact complete BS and are produced and derived by unprosecuted criminals.

  • Steve October 26, 2011, 5:58 pm

    I still say the majority are BULLS. Just read the posts herein.

    • Carol October 26, 2011, 6:27 pm

      agreed! Hardly a single post here disagrees with Chucks analysis, time to sell!

    • David Tanner October 26, 2011, 7:26 pm

      Carol, I wouldn’t touch stocks with a 10 foot pole because the whole stock market is propped up with these excess printed dollars. All my money is in gold. Has been for 10 years. But, that being the case, still doesn’t mean it can’t go up. Everybody here knows that it SHOULD be a lot lower, but what SHOULD be and what is probably GOING to be, at least in the short term, will probably be two different things. I think all Chuck is doing is giving his view on what is probably going to be happening and why, even though he and the rest of us would probably agree that only idiots and short term traders would be in the stock market at present.

      I think the reason that most people here agree with Chuck’s logic is because most of us here are NOT mainstream thinkers. As a retail investment advisor, most of the public I am encountering is sitting on the sidelines in paralysis right now.

    • Carol October 26, 2011, 7:34 pm

      Thanks David, I don’t own any stocks and haven’t for over 10 years myself; my savings are also only in pms. My trouble is that I have seen no value in stocks for so long it would be hard for me to see a “bona fide” bullish case if one actually existed!

      I know most of us here are not mainstream thinkers that is why I hang out here, which makes it difficult for me to understand how the “non mainstream” thinkers buy into the bullish case. Maybe it is just fact that I can’t help being a perma bear.

    • Cam Fitzgerald October 26, 2011, 7:51 pm

      “…even though he and the rest of us would probably agree that only idiots and short term traders would be in the stock market at present”. ~~ David Tanner
      ———————————-

      Well David, then that makes me an idiot because I jumped back in with both feet a few weeks back and things have been looking up ever since. There is no doubt whatsoever in my mind that a bullish up-leg is in the works. I might even go further to suggest that I believe we have already seen the local bottom so it only makes sense to play this opportunity. It never looked easier actually, a slam dunk buying opportunity came up and all the sheep ran for cover as usual.

      So why would you want to sit on the sidelines?

    • David Tanner October 27, 2011, 4:25 pm

      Cam, you are a trader not an in investor. You are a risk taker basing your jumping in and out on technical analysis. You were right to jump in and will probably continue to be right for a while. I was just making my comments based on a longer term fundamental point of view. You take the risk, you get the reward. Personally, I prefer to avoid the risk. Know I wont get rich overnight, but I also know I wont get broke overnight either. If/when everything locks up and there is a bank/market holiday and folks cant unload their stock positions, and when the market reopens 50% lower then they might have a change of heart from chasing the easy money. Technical analysis works great…. until it doesnt. And none of us know what events might change the world overnight. Speaking of the markets closing, that day may never come, but since I don’t know that for sure, I’ll just plod along with gold. Again, I think the point of this whole conversation is that what the risk takers are doing at this point and what the risk-avoiders are doing at this point are probably two different things….. and both are right based on their individual and unique set of parameters.

  • rickj October 26, 2011, 5:43 pm

    I think you either believe in manipulation of markets or you don’t. How anyone can not believe the gold market is manipulated is beyond me. Can anyone give me a rational explanation for negative interest rates for gold leasing? What about Greenspans’s famous statement, right out of the congressional records in response to a concern about gold rising, when he calmed the waters by stating “Central Banks stand ready to lease gold into the markets should that occur.”
    The history of gold manipulation is well documented, look at the London Gold Pools incident back in the early 70’s which was another doomed currency intervention make=good project. Remember the Snake? Watch the Euro vs US toxic paper shuffle traders dance. Great stuff for the 4x banksters in the know.
    Once you believe in manipulation or even the possibility thereof, things make sense. It is all about pretend and extend. Magically, double tops are painted in gold. who are the hedge funds who sell the gold shares and use the proceeds to finance gold purchases to float the gold price up at double the rate of the last 10 years and then reverse the trade in September, having achieved the painted double top, or perhaps needing gold to go down and cover the gold stock shorts. Wall Street hates gold and gold stocks. When the gold stocks soar, as JS predicts, it will be Wall Street owning most of the shares and selling and promoting them to anyone listening unless they do become the utility stocks of the future.
    Why is it that so many, including Casey, refuse to acknowledge the manipulation?

    • Robert October 26, 2011, 5:57 pm

      I think Doug Casey doesn’t acknowledge the manipulation due to a basic character trait of his- He only applies his thought power to things that interest him.

      He simply doesn’t care to put the time into the analysis. His viewpoint is that IF the PM markets ARE manipulated, then that is simply another reason to be long the market, since all contrived market suppression attempts eventually fail. Since this logic is closed-ended, and since he is already long the PM market, he simply chooses to spend his time doing other things instead of studying the manipulated PM market thesis. He knows there are plenty of other people out there doing the heavy lifting on that topic.

      This is my opinion only, based upon what I can ascertain from reading his viewpoints- I obviously can’t see into Doug Casey’s head.

  • Robert October 26, 2011, 5:29 pm

    Great article Chuck, and compelling analysis. No holes that I could see.

    One thing I think is important for everyone to understand is that the entire world’s financial success at this point in time hinges EXCLUSIVELY on whether or not the Central Bankers will create more currency or not, and to take advantage of that scenario, you have to know, or accurately guess, which Central Banks are going to print which currency, when; so that you can either front run their move, or catch the momentum play immediately after they do it.

    As Steve accurately points out above- this is pure speculation. It is Monte Carlo style gaming that is taking place in a global casino.

    Stocks, Bonds, MBS’s, CDS’s, CDO’s…. all of these are bound (tied, and gagged) to the movements of currencies.

    Just remember at the end of the day that the goal can not merely be short term gains unless you trade exclusively to earn a living. Another goal has to be secure and stable future purchasing power – in other words: savings.

    If you generate savings, and you keep these savings in any of the financial vehicles indicated above, then your future purchasing power is subject to the same whims of the Central Bankers that every speculative trader’s short term gains are. Ignore this fact, and you choose to face the same peril that many of them face, only you may face it on a basis measured in years or decades rather than days/weeks/months.

    I believe Cam is absolutely correct- the end of low interest rates is nigh… if you can convert financial assets into real (preferably economically productive assets) today, then you should be better prepared to face the day in the future when a greater percentage of your income has to be allocated to basic energy requirements of all types: food for bioenergy, and fuel for transportation energy and heating/cooling … because make no mistake- that day is coming; and your nominal income level might not outpace the slope of the real rise of these cost increases (unless you are one damn good short term trader/gamer)- and if your nominal income does not keep pace, then imagine how hard your REAL income will be impacted.

    • rickj October 26, 2011, 7:24 pm

      Robert, what is your take on Fed speak about stimulating through purchase of mortgage back securities? My belief is that this will result in no currency printing, just more transfer of toxic debt at full nominal value to the fed, in exchange for $ infusion to stem withdrawals. Do you believe any of those $ find their way into the system or just a balance sheet shuffle?

    • Robert October 27, 2011, 7:22 am

      Rick-

      I think you answered your own question.

      If the Fed purchases MBS, and the resulting liquidity never makes it from the banks into the system, then how “stimulative” would it be?

      No doubt it would be inflationary, and no doubt the markets would react as such, but inflation does not stimulate spending unless the money makes it into the economy and the people fall into the trap of believing that the new money is due to an increase in real income.

      Part of me thinks the Fed, sensing that their days are numbered, are going to suck every toxic piece of paper they can onto their balance sheet before they meet their demise. (history demonstrates that any government agency that simultaneously draws the ire of the Dems AND the Repubs usually find its head on the chopping block in short order- Hoover’s FBI is the only notable exception I can think of off the top of my head)

  • Treasure Seekers October 26, 2011, 4:56 pm

    Carol,my question would be, who backs the the worlds central banks banks?

    • Carol October 26, 2011, 5:21 pm

      the printing presses!

    • rickj October 26, 2011, 5:47 pm

      I believe the Bank of International Settlements (private clearing house) and IMF fulfill that function to a degree, when the printing presses fail, when currency swaps between central banks fail, etc.

    • Robert October 26, 2011, 6:00 pm

      The BIS and the IMF are themselves merely “lend money that did not formerly exist” institutions…

      My upcoming guest commentary will touch on this topic (assuming Rick runs it 🙂 )

  • David Tanner October 26, 2011, 4:01 pm

    In the short term, “hot money” drives the markets. There’s a lot of money about to flee the bond markets and it’s gotta go somewhere. The gold and silver markets are too small so stocks are probably gonna get a boost, not because they are worthy, but because that money’s gotta go somewhere. This is the same thing Martin Armstrong has been saying for quite some time and it makes sense. You could see the DOW double in the next few years. Not because all is well, but because of capital flows. Fundamentally though, we all know stocks are crap, but that won’t stop the hot money from chasing them as they are the “least-worse” of all the available asset classes.

    • Carol October 26, 2011, 4:08 pm

      Why would bonds all of the sudden, like right now, just decided to sell off in a big lasting way? Bonds have been in a bubble for many years and interest rates have been negative for many years. I understand long terms cycles but I don’t understand what would make such a huge bubble that is presently being backed by all the worlds central banks suddenly implode. Can anyone enlighten me?

    • Robert October 26, 2011, 5:46 pm

      ” I don’t understand what would make such a huge bubble (Bonds) that is presently being backed by all the worlds central banks suddenly implode. Can anyone enlighten me?”

      Panic.

      The Bond bubble could turn over and drift down sloooowly over years/decades, or it could pop, and panic is the only factor that would establish this pace…

      all markets move in sine wave patterns- the only trick to financial and monetary success is not only being able to determine the amplitude (the distance between the peaks and the valleys) , but also the frequency (or period), which indicates how fast the market may move from peak to valley.

      Bond markets traditionally move in a fairly fixed amplitude range, at a very long frequency…

      But, like any electronic signal, the introduction of more energy (currency) can increase either the amplitude, or the frequency, or both.

      Bond yields are in a valley. They can stay in this valley for a long time (long frquency signal), or they can turn fast and move back up rapidly.

      Panic is like the dial that adjusts the frequency. So the trick is to accurately guess where on the frequency dial you think global bond paranoia is currently sitting. I personally think it is right at the halfway mark (5 out of 10 on the dial)

      A big rapid move down in bond prices will trigger enough bond holders to get the hell out of Dodge, and the stampede that would result should have enough energy to run over even the best/fastest money printers at the Federal Reserve.

    • rmsimc October 27, 2011, 4:25 pm

      Carol,
      Very coy question (statement)!

      You are exactly right. The bond market will not yet implode, as it has massive support of the western central banking system. ZIRP has one intention: to allow the member-banks to execute the carry and purchase the long-dated paper free of cost. Otherwise, we would have Armegeddon. Remember, all modern currency is backed by nothing and is therefore limitless in quantity.

  • Avocado October 26, 2011, 3:41 pm

    Anybody remember the Nifty Fifty in January, 1973? All time high for the Dow, fell some 45% in the face of rising earnings. Earnings way up, stock prices way down. Earnings finally caught up with the market reality, as I think they will do this time around.

    I cannot believe anybody really believes we are about to move into a boom from here.

    If you want more info investigate the Kress Cycles. Very interesting stuff!

    Andy

  • Treasure Seekers October 26, 2011, 3:19 pm

    The article seems reasonable and accurate concerning stocks,but where does that leave us with buying power with rising inflation? Will stocks out pace inflation? What about hyper inflation?
    I still prefer physcal gold and silver for the long term . I avoid stocks like herpes at an office , Christmas party.
    ( “DIGs” Dow in Gold Dollars) Today with the ,Dow at 11,706.62 and gold at $1710.70 , it only takes 6.843 ozts to buy the whole Dow.

    • Chris T. October 27, 2011, 1:00 am

      When that hits 2 or less, I’m buying equities.
      Happened twice before:
      early 1930s
      early 1980s

      Still a ways from 6.8 to 2 or less, and no one can say at what nominal levels in either gold or the DJIA that will take place.

      But that DIGs chart since pre 1930 is one to analyze indeed.

  • Cam Fitzgerald October 26, 2011, 12:51 pm

    Absolutely dead on the mark, Chuck. I could not agree more. Your comments regarding inflation caught my attention too because of my own long standing belief in a deflationary outcome. I think you have got it right.

    As you have rightly noted, the trajectory of some of our good old standby Blue chips are telling quite a different story than the fear-laced diet of gloom we are being fed elsewhere on the internet.

    Stocks are rising now based on good fundamentals, not because of faked earnings. Business has been good for those with broad exposure to overseas customers. What did people think would happen? That the market would crash when earnings are healthy? Craziest damn thing I ever heard.

    We all have to get beyond the idea that slow growth means “no growth”. I would also say that I agree we are a turning point and markets may soar as inflation begins to hit our shores in a more serious way. It is impossible to avoid in any event as inflation rates are already so high in much of the developing world. We will be importing it as a natural outcome of the model of our consumption economy and so we should now get prepared.

    Most interesting though is your connection with this turn of events and what appears to be the end of the bond bull. It was inevitable of course and what a great setup for a trade. You only get a crack at being in on the ground floor once or twice in a career. This looks like one of those times to me too and we sure do not want to miss out on that action.

    I will be honest though, this looks so much like the seventies again it is eerie. I almost expect an oil embargo or something similar to set off the events again (even though that is unlikely).

    My last thought today is this. We may be nearing the end of the historical low interest rate period and this is a time that may not return for decades. Best take advantage of the free money while it still lasts. Rates will soon be on the rise here exactly as they are rising all over the world outside the EU and America.

  • Jill October 26, 2011, 7:18 am

    Hi, Gary

    Congrats on your numerous successful market calls so far. Please continue to keep us informed of them.

    I am agreeing with Chuck here though, for the near future. The inflation of the past 2 years did work. The Dow inflated to almost double its March 2009 level. Unfortunately, the inflaters can not seem to inflate anything else but the stock market. But they could easily continue to inflate that. The fact that a rising stock market looks kind of stupid, when the economy is deflating, does not seem to bother people, especially if they are in the stock market themselves. I guess all we can hope– if they continue to inflate the stock market,– is that the people making money in stocks will start spending a bunch of it and will thus will bring the real economy out of deflation too.

    • rmsimc October 27, 2011, 4:12 pm

      What about oil? …or corn? …or copper? …or cotton? …or soy? …or zinc? …or steel? …or coal? …or sugar? …or lead? …or chicken? …or palladium? …or silver?

      Get the point?

      If you need it to live, its going up in price. If it is a luxury…then it deflates.

  • gary leibowitz October 26, 2011, 5:07 am

    My diagnosis for the stock market these past 3 months has been on track. No, let me rephrase. My diagnosis is that the patient has terminal cancer; a fast progressive type. My daily understanding of the progressive nature of this disease has also shown to be correct.

    We are already at the terminal stage right now. It could possibly have one smaller spike up but there is no way the indices hold up in November, let alone next year. I am crossing my fingers that my long standing expectation for a top on the SP500 is 1257. If the 1250 mark can’t hold for 3 trading days in a row than we should see a sharp move down almost immediately.

    There is absolutely unequivocally no way inflation takes hold. It is an impossibility. Have I been coy in my analysis? Wages have been flat for the middle class over these last 30 or so years. In the last year it has started to decline by a whopping 10 percent. As anyone can attest to, Corporate America has gotten the greed bug really bad. There can never be sustainable inflation without wages being hiked along with it.

    Housing, wages, tight credit, jobs, and nations fighting for the right to declare their currency are the weakest is not exactly a prescription for inflation.

    Made my 8th option bet when the SP500 hit 1256. I have an astonishing streak going. I expect at a minimum the SPX fall to 1150 and eventually hit 1030 within weeks of each milestone.

    Now back to reality. Yes the market can go up from here. Yes my bold statements on the path of this market can be very wrong. As for inflation I can rubber stamp a guarantee that it will not happen until the stock market is already in shambles. Here is why in a nutshell. Wages will remain flat or decline from here. Housing prices haven’t even stabilized yet. Banks are in as bad shape as they were 3 years ago. A global debt problem that is just now being addressed. Try to inflate while we have a credit contraction? Man this argument is so old. Let’s go back 3 years. Let’s also assume all the inflation mongers of that time were to get a glimpse of the world government effort to stimulate. They would be pounding the tables that hyper-inflation was on the way. Fast forward and what have we got? Deflation that is going to hit us with a vengeance going forward when third world nations also start to contract. After 3 years of trying to inflate and failing what in the world makes you think it will happen now?

    • PhotoRadarScam October 26, 2011, 3:17 pm

      “After 3 years of trying to inflate and failing what in the world makes you think it will happen now?”

      If you take the fed funds rate shifted forward by 3 years and compare it to the USD index there is a 69% correlation, which is pretty strong. What happened about 3 years ago? The effective funds rate went negative. If the correlation holds up, the USD index is about to take another significant dive.

      A weak dollar is BULLISH for the stock market and is generally inflationary.

      There is NO SHORTAGE of liquidity, and there is about to be another injection on a massive global level I believe.

      Yet still many have a myopic focus on stagnant wages… as if that is the only factor that can create inflation.

    • Chris T. October 27, 2011, 12:50 am

      Inflation is created by central banks.
      Its manifestation, higher prices, is the result, of that.
      Thus higher wages are not the inflation creator, they are a reaction to its manifestation.

  • Beemer October 26, 2011, 4:03 am

    If the Euro tanks, stocks tank.
    If the Euro rocks, stocks rock.

    Until that link is broken, it’s that simple.

  • Steve October 26, 2011, 3:10 am

    Everything I read says the masses are bullish and getting more bullish by the minute on the U.S. system. As soon as everyone is has happy as they were just a while back – well – will reality strike, or will the con continue? My read says that real soon there more people will be happy happy happy just like this article.

    One problem is that nobody stands for anything. Traders are like silk in the wind; shifting, twisting, shuttering, running, going bull, running bear, shoving gold, spearing silver.


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