Stock Market Rally: Shenanigans Abounding

This is just an opinion, and it could be wrong, as all opinions may be.

To be long US equities at this point seems risky, bordering on reckless, for anything but a daytrade. And there is plenty of that going on.

The US markets in general have every mark of a maturing Ponzi scheme in the steady run ups on weakness, and the ramps into the close with the selling after hours on weak volumes.

But why?

Thursday is option expiration, a quadruple witch as we recall. September is one of the big ones, often setting up declines in the month of October. Further, we have Rosh Hoshanah beginning at sundown on Friday September 18. As the saying goes, Sell Rosh HaShana and Buy Yom Kippur.

The government is anxious to encourage 'confidence' to the extent of skewing the statistics to create hope in the public, the consumers. The banks are flush with liquidity, but really have no place to put it but for a minimal return at Treasury, or in some hot money trades. They certainly are not interested in making new loans, but the credit card business is reaping some nicely usurious returns between fees and 26% interest at the drop of a hat.

Where is Goldman Sachs business revenue and profit coming from now? How much real investment banking is being done? How much M&A activity and IPOs are there to sustain it at this size, unscathed by the recent market downturns?

Obama and his team have NO credibility for reform on Wall Street after their handling of Goldman Sachs and the AIG payouts. We hear that Goldman had shopped the idea of those derivatives to the London office of AIG which was up for a quick quid, became their biggest customer, and then when the music stopped they managed to obtain the 100 cents on the dollar payouts from the government even as AIG became hopelessly insolvent.

Bonds, stocks, metals, sugar, cocoa, and oil are all moving higher, while the dollar sinks. Is the dollar funding a new carry trade?

The markets are increasingly the flavor of choice, and if the markets do not show a way, they will make one. Volatility is a screaming buy. Put vertical spreads are remarkably cheap.

Be careful. October looks to be the stormiest of months, if we hold out until then. The market is overdue for a correction, which can be up to 20%. Given the distance we have come on thin volume, what may make this correction shocking is the speed with which it will come.

Watch the VIX.

We remain guardedly 'optimistic' on the markets for next year ONLY because of the Fed's and Treasury's willingness to continue to debase the dollar to cover the massive unrealized losses in the banks' portfolios, even as they return to manipulating markets in business as usual.

Inflation is good for financial assets, and we think another bubble is in the cards, at least for now given Obama's unwillingness to reform, unless some exogenous event or actor intervenes. The other troubling thing is the lack of vigor in the real economy. The stagnation in median real wages is strangling the middle class. There can be no resurgent economy without them.

As much of an outlier it might seem, it is possible that Bernanke and the Treasury might lead the US into a stagnation similar to Japan, but with stagflation, because of their policy errors driven by the distorting demands of an outsized and corrupting financial sector.

Wall Street is throwing buckets of money at Washington to fight even a moderate reform such as a financial 'consumer protection agency.' These fellows will never quit, until they are stopped. And it does not appear that Obama and his cronies have the traction or the fortitude to get the job done.

Until the banks are restrained, and the financial system is reformed, and balance is restored to the economy, there will be no sustained recovery.

Long Term Gold Chart Targets 1325

Someone asked for a long term chart in gold.

Projecting this leg in the gold bull market has been of keen interest to us on one dimension, since we do have some trading activity in our own account. However, on the long term for our core positions it is of no more interest now than it was when gold was trading at 550, 450, or even 250. Gold is in a bull market, and you never give up your core positions in a bull market. You can trade around them if you are an aggressive trader.

As an aside, to anyone who can read a chart and as you can plainly see for youself, gold is in an obvious bull market. If you are dealing with someone who says it is not then they can only a) be incapable of reading a chart, b) be blinded by a mistaken belief, or c) be talking their or someone else's book. There seem to be a few analysts, never bullish on gold in a spectacular bull market, working for major gold trading houses, that fit into this last category.

So, gold appears to be targeting somewhere just north of 1300 for this leg of its bull market. As it says on the chart, this is a LONG term projection, and it should therefore be expected to play out over the LONG term.

The lower bound on gold on these formations is higher than 925 so we would not expect gold to trade lower than that while these formations are 'working.'

Every bull market has its 'wall of worry.' Gold certainly has its own. Its price increases are being met with fierce opposition by four or five US Wall Street banks who are increasing their paper shorts against it to record numbers.

The game of Wall Street is misdirection and mischief using paper and the control of information. Yesterday's US retail sales data was a nice example of the partnership in deception between Wall Street and Washington to deceive the people for a variety of motives, some well-intentioned and some merely venal.

For this reason the Bankers and the statists hate gold, because it defies their control, and that of the money manipulators, those who would control nations and the many by controlling their money.

US Dollar Long Term Chart and a Scenario for Dollar Devaluation

Here is a long term chart of the US Dollar Index.

The recent rally in the US dollar completed at an almost perfect 38.2% fibonacci retracement from the 70.70 bottom. In part this rally was part of the short squeeze in eurodollars created by the collapse of US dollar financial CDO deposits held by customers at European banks.

The Dollar Rally and the Deflationary Imbalances in the US Dollar Holdings of Overseas Banks

The target for the active H&S top from 121 is still 65. The Key Pivot remains 81, the high end of band which had been the support level held by the dollar for almost 20 years. While the dollar is below 81 the H&S top is active and working.

We have been trying to calculate a new lower bound for the dollar decline from the charts. Reason tells us that at some point the dollar decline and economic imbalances may lead to a devaluation of the dollar.

People have asked, "How can the dollar be devalued? After all, there is no fixed standard."

Well, the dollar can decline considerably in purchasing power of real goods, as it has been doing for many years. However, the dollar can be devalued against its only true measure as a fiat currency: itself.

A formal devaluation of the dollar would be the discontinuance and reissue of the US dollar as a 'new dollar' with some preset exchange rate.

A likely figure would be 100:1, that is, 100 old dollars for 1 new dollar, possibly to be called 'the amero' as some have suggested or simply the 'dollar' as the US dollars currently in use will be withdrawn from circulation. If this does not provide sufficient relief it might have to be repeated.

This is what happened to the Russian rouble on January 1, 1998 after a debt default. Since it is unlikely that the US default will be preceded by a hyperinflation and protracted period of instability, we think the 1000:1 ratio of reissuance used by Russia might be too severe for the dollar, most especially because of its position as the reserve currency.

However, if the new dollar is to be at least partially backed by gold at the insistence of its international trading partners, then 1000:1 seems to 'work' more effectively given the US gold reserves and projected new money supply. This might be accomplished in phases, or with a dual currency regime.

It should also be noted that devaluation alone does not fix economic problems. It is a form of debt default, more severe than mere inflation. After its reissuance in 1998, for example, the new Russian rouble quickly lost approximately 70% of its value against the dollar because the devaluation had not been accompanied by significant economic reform. It has since recovered through painful adjustment.

You should not believe that this scenario is possible for the US dollar, yet. After all, if it was generally accepted and believed that it would happen, a severe value decline would already be underway.

Fiat currencies traffic in confidence. This things tend to play out over months and years, not days, unless there is a precipitating event usually caused by exterior events. Even though there had been a Russian debt default in the 1990's, the rouble had been troubled by serious inflation for many years before that.

But the warning signs are here if you have the eyes to see them, as unlikely as it might seem. It will appear to be a 'no-brainer' to a future generation. "What were they thinking? How could they have been so blind? What made them think that it could go on like that forever?"

However, we are approaching levels of economic imbalance and unserviceable debt levels that should bring at least a bit of a chill in the dollar bulls, as a warning that all things of the earth pass away, as they have done, and will always do. Some things, however, endure longer than others because they are universal, and not particular to a time or place.

In an upcoming blog, we will attempt to explain why the debt destruction in the US, with a moderating of the growth of some of the money supply measures, is not and will not result in a strengthening dollar. We do not expect any one who 'believes' in deflation as espoused by some of the dollar bulls to accept this. After all, they ignore the dollar devaluation that occurred in the depths of the Great Depression, when a devaluation really meant something radical as it was done against a gold standard.