Bring On the Last Act

Over the last months the markets have been behaving in an erratic, illogical and volatile way. And yet, as the puzzle falls into place it looks like what we saw was the back stage people preparing the setup for what could be a ‘Huge slide’ and maybe the play (crash) of the century that is to be printed in the history books of our grand-children.

The CDO subprime is about to leave the eye of the storm shortly and start its second act as the backstage actors are impatient to join the play: Credit swaps, Credit card debt, Student loans,…

The Dollar runs a current account deficit of more than $ 800 bn per year. Unseen in history! The budget deficit is + $ 400 bn. Even cooked there is not a single American statistic that looks decent.

The Dollar Index is running into the Mother of all Necklines which is part of the mother of all Head and Shoulder formations. Technically, it is extremely overbought and the net short position of Commercials is at a historically high level. The Elliott Wave specialists will probably soon call the end of the ABC correction/wave 4 and the start of a huge parabolic run away 5^th down wave.

Just like in 1921 with the German Mark*, the Dollar is giving the impression that “All is well Mme la Marquise”. Brainless Media are talking the public back into the Dollar. All problems are behind us and the Dollar will once again shine as it has never before.

* In 1921 it only took 6 months before the investors realized the huge mistake they made and (began) to massively start selling Marks. The German currency crashed until 1929 where it was replaced by the Reichsmark.

The American bond market has run up to a point which is extremely close to the upper resistance line of the Top/Distribution pattern. Of course, technically, Bonds are also overbought.

Commodities are flashing the economy could fall into a Deflation cycle. Commodities and Oil have – since this summer – been coming down in a crash mode. Gold and Silver are seeing a sharp correction: Silver lost half of its value and Gold about 25%.

Physical Gold and Silver are in short supply as demand is strongly up as a result of the push on paper Gold and Silver this summer. In Europe, Deutsche bank has stopped trading Kruger Rands because of the present shortage. Technically both have fallen into historically high OVERSOLD positions. Commercial Gold traders are (they know better) sitting with an extremely low position of Short contracts. Elliott wave specialists will probably call the end of the ABC wave 4 correction and the start of a huge run up of Gold in its 5^th parabolic wave.

As expected Talking heads are incorrectly calling for the end of the Gold and Silver bubble, the Investor sentiment has become extremely negative and more and more investors start to short gold now. What the authorities planned is happening.

Western world stock markets all show huge double tops, secular Bear Market Trends and have or are falling out of a rising Flag/Wedge. As they do, they will at a certain point start their second and strongest down wave. Remember, October has a very bad reputation!

At this point, the scenario starts to become clear.

As selling pressure increases on the Dollar and/or the Stock market, both reverse course. Investors start to see the huge mistake they made by buying Dollars and Stocks over the last months and start to liquidate their positions. The pressure increases on the Dollar and Utilities and Bonds also start to fall. As the Fed sits between a rock and a hard place, it has little or no room to increase interests in order to protect the Dollar. So, in order to keep the financial system alive and the economy liquid, it massively starts to monetize the debt (they buy all T-bonds and notes). Because of hyperinflation, interest rates start to rise to levels never seen before.

At the same time, Gold & Silver and some commodities [Oil] sharply reverse course. Banks and financials continue to go bankrupt.

Disclosure: Long gold.

Comments

[whidbey:]

You may be correct in your forecast, but it will not be so obvious as you suggest. Government policy is never smooth and quick, it will involve much shucking and jiving before the end game starts. I think that gold will become the intermediate currency for want of competition. As the Fed works to ward off the failure of the economy it will become obvious that we need a new unit backed by metals. My only concern is whether we can sustain a working economy during all of this. It is not clear that with a failing currency we can survive.

2008 Sep 15 10:45 AM

[bowman711:]

The Government has to borrow the money for all these bailouts. First, they swap the financial institutions worthless and near worthless contracts for dollars. Then the Government 'packages it all up' and sells them as Treasuries to China and other countries, or to you. So, when you are putting your cash into Treasuries, you are essentially buying the junk that the financials just gave up on collecting! The only difference is that the Treasuries have 'the full faith & credit' of the government behind them. But, the Government doesn't create anything (except trouble!), so it is impossible for the Treasuries to become stronger due to the increased production of something (anything) creating wealth.

If it were an honest choice between Treasuries and gold (or silver, to a lesser extent), gold would win hand down. The Government knows, of course, that rational people would choose gold over their 'fiat Treasuries' backed by their increasingly worthless fiat dollars. So, they have been systematically driving the apparent value of gold down with massive naked shorting of gold. In short, they do what they know best - 'print' paper gold and flood the gold market with it to give the impression that the value of gold is also going down! To a great extent, it does fool many if not most of the people.

But, you can't buy gold anywhere right now, or you are very lucky if you do manage to find a coin or two to buy. I'd guess gold dealers, with the limited supply they can lay their hands on, give preference to their regular customers. But, where is the gold that normally would be moving in the gold market? I can think of a couple of possibilities. First, with the price so artificially low, gold producers are either 'mothballing' mines or not selling what they produce in the hopes of getting much more when gold finally breaks free of the Government manipulators. Second, it could be that the Government's 'Insiders' - which likely would include China and other buyers of Treasuries - are siphoning off what gold become available at the artificially reduced prices.

We don't know how long the Government can keep its 'hands' on gold, but we do know that at some point people will discover that their Treasuries are worth about as much (maybe I should say, as little) as the Government's paper money. When that happens, there likely would be revolution against the Government as gold skyrockets back to where it should have been all along. I think the main reason Lehman wasn't also bailed out like Bear Stearns and Freddie/Fannie is that foreign buyers of Treasuries are balking at buying more Treasuries backed, not really by the 'full faith & credit' of the government, but by junk paper.

We are living in very interesting times. I probably wouldn't be a bad idea to stock up enough staple foods to last months if not a year. Who knows what will happen if/when the people realize the Government has duped them all this time.

2008 Sep 16 08:19 AM