Gary Tanashian's  Instablog

The following is excerpted from this week's edition of Notes From the Rabbit Hole, NFTRH 224:

"Just the Facts"

To once again quote the man I respected more than any other market professional I have come in contact with, [a late friend], we will list "just the facts" in order to define a complicated, yet very interesting period in time.

• Stock sentiment was at an extreme over-bearish level by what Sentimtrader.com's data label "dumb money" last summer and as expected, a continuation rally of the bull market out of 2009 sprung from that sentiment backdrop.

• The rally's character is currently of one-way momentum compared to its jagged, up and down nerve-racking beginnings.

• The sentiment profile is now opposite to its over-bearish state (by dumb money) at the rally's beginning.

• The bull remains in full force with a string of 4 sets of major higher highs and higher lows intact out of 2009.

• Major events over the last year included a resolution by the ECB to bailout insolvent union members, the election in the US of a president committed to entitlements and credit expansion, the commitment by the US Fed to use increasingly inflationary policy to manage an economy it deems below capacity, a Kabuki Dance in service to the pretense that the Fiscal Cliff ™ debate was anything more than for show, a kicking of the US debt ceiling can a bit further down the road, Chinese stimulus operations and the election of a leader in Japan who called out the BOJ and has committed to stimulating inflation in his country. Have we missed anything? Yes, there was much more.

• Signs of economic expansion are cropping up in the economy, from the anecdotal evidence of semiconductor equipment orders we noted last week to a 53.1 reading on the ISM report to tepid jobs growth.

And all of it, but all of it is dependent upon credit expansion! The stock market rally, the economy's creeping expansion and the very continuation of the current system are all dependent upon policy makers' willingness and ability to continue to expand credit.

So let's not be fooled into getting too wrapped up in casino mentality. Yes, the writer who criticizes "casino patrons" and speculative mentality is using derivatives to hedge volatility, bull the Yen, etc. But I am also not able to short stocks directly because I requested that margin "privilege" be removed from my accounts to manage counterparty risk in the brokerage world. I keep healthy cash levels and have long-since been an investor in gold and a keeper of the idea that having debt in an expanding credit construct is fine until one day, it is not fine at all.

So with an understanding that everything bullish casino patrons are celebrating today is the product of inflationary policy that came in response to everything they were afraid of last spring and summer, let's move on.

Credit Must Expand

There simply is no other choice. Ever since Alan Greenspan met the end of the last great stock bull market and subsequent economic deceleration early last decade with bold new policy (now child's play compared to what today's Fed is doing), we have been locked into an ever-expanding credit continuum, which was severely interrupted in 2008.

This new bubble in credit launched house prices to new and unsustainable heights but worse than that, drilled down into the mortgage derivatives market by slicing and dicing new Ponzi-products that could be sold into this credit-expansion-lifts-all-boats atmosphere. Whatever it is, sell it! The Fed is compelling you to do so. They sold it all right, and a lot of people bought it.

As the mortgage bubble continues to deflate, credit risk has been offloaded from the institutions that abused and profited from the system to the Federal Reserve itself. But really, this burden falls on the American people in the form of their collective debt via the US Treasury.

So there is a great cyclical stock bull happening. The economy may turn up a bit. Investment managers and the public alike are turning more bullish after having been oh so bearish last year. I am once again writing like a 'bear writer' and this stuff may sound stupid for a while. Last summer I sounded (and sometimes felt) stupid for calling the market a bullish risk vs. reward situation.

How to Play It?

I am not going to try to tell readers whether or how to speculate. That is casino patron stuff. Bears are in agony now as the market feeds on pure momentum as all those investment managers come streaming back into the play. My extended family member who is a financial adviser is now constructive on the US economy and thinks the stock market has legs for 2013 and possibly beyond. You will recall he advised that his best and brightest fund managers were mostly cash in November and expecting a Fiscal Cliff related crash in December. Ha ha ha…

As of now, the market is bullish. They are printing money after all in the age of 'Inflation onDemand', inflate-or-die or whatever you want to call it. But this is now becoming a global phenomenon and as long as the system holds together various currencies are going play Whack-a-Mole and alternately appear strong or weak. As long as FOREX measures these basket cases against each other and as long as the vast majority maintains a casino mentality (i.e. as long as people are able to suspend disbelief that the system is unsustainable) the game goes on.

So it is not just the bears that are having a tough time right now. It is the believers in sound money, which to this point through history has been represented by gold. This is supposed to be THEIR time I tell you! Well no it is not, because it is not. We can read all kinds of reasoning into the situation, from the Fed and its henchmen in the 'Bankster' cabal operating ruthless manipulation schemes to a simple idea that too many people bought gold in too much of a panic during the acute phase of the Euro crisis.

Whatever it is, it is. If you are a strong believer in your principles and if you are able to manage without being overtaken by casino mentality, you are good. Go forth and speculate, but don't swallow anybody else's playbook (including or in some cases especially, the goldbugs') whole. You are a real believer in sound money and sound systems? Then you are not leveraged to the system because you have managed personal debt and outright own things of value, including possibly, the monetary metal.

Biiwii.com, Twitter, eLetter, NFTRH

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: No positions mentioned.

Below is a copy of this week's free eLetter that went out this morning.

Goldilocks Ends & 'Currency Wars' Begin

Amid continuing inflationary policy, the US Dollar is at a critical juncture by both daily and weekly charts. Euro targets 142+ and the Yen approaches our target. Currency war kicks off; gold just sits there biding time.

From last week's eLetter:

"A Goldilocks atmosphere was expertly created in large part due to the fact that Operation Twist (yes, we are still dealing with its effects) by its very definition held long-term interest rates down (buying long-term T bonds) while sopping up any money supply implications and inflationary signals by sanitizing the process with the sales of equal amounts of short-term bonds."

Policy makers have not found a new way to indefinitely manage the economy. Traditional laws of economics have not been repealed. The Federal Reserve used the equivalent of a macro parlor trick to dampen inflation signals and help produce today's Goldilocks atmosphere, which features stocks rising now that the public and its mainstream money managers feel the worst is over with respect to the Fiscal Cliff non-event and the Debt Ceiling noise.

But in economics and macro finance, there is is always a price to be paid for unnatural (read: man-made) distortions. The Fed ran out of short-term bonds to sell and now something has to give, as its ongoing inflationary operation is now unsanitized.

A bearish Head & Shoulders pattern has formed on the currency for which the Fed is supposedly a steward. If the neckline breaks, the measured target is 76.50.

The weekly chart of USD targets 74 off of an even more significant H&S, with the baby H&S of the first chart merely representing the right shoulder of the big daddy H&S.

A breakdown in the US dollar would confirm that the recent tick higher in Adjusted Monetary Base is the beginning of a new trend up in inflationary policy.

Unsurprisingly, USD's chief rival, the Euro is in an inverted and bullish H&S. We have been targeting 142 in NFTRH since the break above the neckline. The Euro appears to be attracting a 'long Euro/short Yen and gold' momentum (read: hedge funds) crowd playing the opposite game to that from mid 2011 when Yen and Gold rose strongly in reaction to the Euro crisis.

Yen has been played to the hilt by the hedgies. We have had 106 as the downside target since the neckline to the massive H&S broke down. Yen could be a heck of a contrarian play for a counter trend rally, as the short-covering should be massive.

Meanwhile, the currency that resides outside the system bides its time. Gold is unofficial money and with all the hype about currency war people who are not patient may have expected a rocket launch in the precious metals.

Here we bring it back to the Euro and realize that too many unhealthy would-be gold bugs came aboard during the acute phase of the Euro crisis in 2011. That is being worked off now in gold's ongoing consolidation.

Bottom Line

US dollar looks bearish. Euro looks to complete its rally to 142+ where it will by the way, encounter a bigger picture DOWN trend line. Yen is bearish but due for a whale of a short-covering bounce soon.

In the near-term some currencies are bullish and some are bearish. But the US Fed, Europe's ECB and the BOJ are not going to engineer their way out of their respective 'inflate-or-die' predicaments. Gold may have a few more months of correction/consolidation but that is a drop in the bucket when viewing its entire history as a monetary anchor to value.

Biiwii.com, Twitter, free eLetter, NFTRH

We have noted repeatedly that Operation Twist served to benefit strategic areas (like housing) with its purchases of long dated Treasury bonds, which kept rates down on the long end. We have also noted that Twist sought to sanitize these asset purchases by selling short-term Treasury bonds to keep the yield curve tame and snuff out any inflation signals that would come from a rising money supply. Enter Goldilocks.

It's all lies. It is a painting rendered by a most brilliant of Fed chiefs playing tricks with the nation's bloated debt load. People are buying the stock market now and they (and their investment fund managers) probably don't give a damn about what created the rally. It's Goldilocks and that's all they are concerned with.

(click to enlarge)

I distinctly remember watching the first yellow highlighted bullish pattern form. Here, don't believe me? I am a perma bear? Here's the post from back then (7.3.12):

Housing Index Targets Higher

I did not buy it because I find it difficult to buy things that I either don't believe in or are entirely dependent upon overly powerful people doing things that should be illegal in order to manage markets to desired outcomes.

But the chart was the chart and it was bullish. HGX has since gone on to much higher levels than I had anticipated as it carries along the absolute dumbest, most greedy money on the planet in tow. These people were hiding in foxholes last summer.

Just remember that if you want to go chasing this market. These people are your co-sponsors.

Risk vs. reward on the broad US stock market stinks. I was not afraid to call it bullish last summer and I am not afraid to call it what it is now.

http://www.biiwii.com