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.