"Kill The Dow. And Do It Now."
Mar 30, 2010
1. A wipeout may be coming. A stock market wipeout. To get a real wipeout, you need to have a convergence of a number of major fundamental events. The factors are not exactly in place for a wipeout, but they are moving quickly towards that scenario. Since price anticipates fundamentals, the situation may be even more dire.
2. I want to take you back to Dow 6500, to gold 680. The theme at Dow 6500 and gold 680 was a major selling climax. Huge numbers of the investment world engaged in a maniacal “sell it all, short it all” frenzy.
3. I termed the fall into Gold 1085 on Wed March 24 a “bizarre selling climax”. Bizarre because it came after only a modest amount of price weakness, yet featured mass capitulation in the gold community. I advised tweaking buys in the direction of placing additional capital into gold items, and clearly identified real fear in the community.
4. The rally back towards 1115, a $30 up move, may be only a start of the type of up move that follows such a climax, although it is dangerous to call any top or bottom as “sure”. Betting additional money into the weakness of 1085 is not the same as calling a bottom at 1085 and my interest is making money, not identifying exact turn points.
5. While the number of public stock market participants has dwindled enormously, there still are many public investors and they are starting to see the news headlines about the “recovery” and asking, “what stocks should I be buying?” Meantime, Jim Rogers says he won’t buy any stocks anywhere in the world.
6. I believe the Oct 2008-March 2009 lows in the major assets in time will be proven as “generational lows”, in the words of my fund manager friend, Mr. Macro. The economy is in a drastically weaker situation now than it was at those lows, so governments around the world would act with tremendous force to defend the markets from breaking, and likely from even approaching those lows. How?
7. By starting Wave Two of QE, Quantitative Easing, which in the end is just money printing. The stimulus money is drying up, and the fading upside momentum of global stock markets reflects that fact. This is not a situation like the past, because the level of debt is so much greater. A falling Dow in the past could bring values back into the market place. Now a falling Dow, one that takes out Dow 6500, could bring a Mad Max world where even gold is sold to buy food. Marc Faber has noted that wheat is trading at a 200 year low in real terms, and a falling Dow could take those prices even lower. Farmers are carrying more debt, and barely holding on. Global food production could go into the tank if the Dow did a Swan dive, as farmers would just give up planting as crop prices cratered.
8. I’m not sure how much the bears have really thought thru the seriousness of the situation we face. Let me be very clear: Breaking the lows of Dow 6500 is a financial Armageddon type event. If YOU have not taken cash out of the bank, hold physical gold, and taken delivery of some stock certificates (if your broker allows it), you by definition are not taking the growing crisis seriously, and have put your families at great risk.
9. The next phase of the crisis could be the worst. It involves the realization that the world’s major government bond markets have reached a point of saturation, a point where issuing more bonds causes institutional investors to question the ability of those governments to pay them what the bond promises on paper. A guarantee is only as good as the guarantor’s ability to pay.
10. The banksters are pumping the bond market news channels full blast right now with their stories that “rates might rise because of the great recovery!”. That isn’t just propaganda, it’s real. Liquidity flows move markets, and institutions have that mindset now, and they are moving money out of bonds thinking the recovery will put pressure on long term bond prices, raising yields. Unfortunately, there is an undercurrent of heavy money, that believes govt debt issuance has reached a saturation point, that mathematically real point where a nation’s interest payments overwhelm the government’s ability to issue those payments.
11. Institutional bond traders, like my bank trader friend who runs $1 billion in bonds for a city, are on what is best termed a “buyer’s strike”, and have been for months now. My view is we are already in a bear market in bonds, one that is set to accelerate drastically. Bond traders are probably more ruthless than equity traders, generally speaking. They take less risk, which is why they focus on bonds. The bond traders are watching the equity market and won’t end their bond buying strike unless the equity market takes a solid hit. The bond traders are miserable right now. Not only are they on a buyer’s strike, they are losing money on their existing positions. Bottom line: They want the equity market to get hit. Bond auctions are starting to go bad. The US govt, the biggest issuer of bonds in the world, ironically needs the equity market to fall, to bring back bond buyers who would respond to the fall by buying bonds.
12. By hiding the reality of their dire situation, the US govt is creating the conditions for a bond market panic. The saving game is going to involve taking down the equity market, but not so much that it turns into a liquidating frenzy.
13. Those of you who are looking for a parabolic rise in gold could get it in the time frame indicated by the fractal technicals, which called for a move in March, but you need a fundamental reason of great power to cause such buying, not just some generally unknown (to the public) technical guys in the gold community saying “buy big”. You need a black Swan, and Iran/Pakistan blowing into a major war situation, and/or a really major terror attack involving thousands of deaths, or millions, is the only event I can see that could generate that kind of buying to start the upswing.
14. I think we’re some months away from the general realization that the governments have a reached a maximum saturation point of bond issuance, and so while I don’t think 1115 is the end of the run from 1085 low on the upside, I don’t think we’re quite at the point where you have significant institutional money about to pour into gold, causing the parabolic move.
15. Today is a full moon. I’m not an “astro guy”, but the reality is that there is a statistical correlation between major market minor turning points and the lunar cycle. Notice I said minor turning points, for major markets. A minor trend is typically 1-3 weeks in length. Going back about 100 years, the Dow has a tendency to make minor peaks around the time of a full or new moon, with more peaks occurring at the full moon.
16. Whether any kind of minor peak in the Dow that occurs around now becomes an intermediate (larger) sell off is unknown, but any large sell off has to have some kind of starting point.
17. It is clear that any equity sell-off should cause the bond traders to buy bonds, making the govt happy. What is less clear is what happens if the banksters then show up and start a media campaign themed as, “wait a minute, there’s something wrong here, we’re not so sure the govt is actually going to be able to meet all these bond payment obligations…to you.”
18. The question then becomes: What effect does that have on the US dollar and the equity markets? That campaign could cause not only a major sell-off in the US dollar, as bond traders realize that higher rates are only going to make a bond-saturation point-reached govt’s situation much, much, much worse. In normal times, a sell off in the bond mkt causes buying of the currency, as institutions seek to the currency paying the most interest. But when confidence in the ability of the guarantor to meet his obligations is tanking or totally broken, higher rates are not going to have the same effect on bond traders. In the bond traders’ world, just the recent decline is seen as a disaster, so you can imagine how they would respond to the idea that the very ability of the govt to pay is on it’s way down to under a 50% probability, in their minds.
19. There is a very real, and extremely dangerous possibility, that the banksters unleash a campaign like their Greek “dry run”, but this time on the Japan, UK, US govt bond mkts as the equity market is falling. That would open the fundamental door to a sell-off of everything, what Mr. Macro terms the “death spiral”. I believe the US govt would respond the only way it could, with massive money printing and perhaps a change in redemption dates for short term fixed income items, “buying” the govt time.
20. I think generally speaking, the gold community is far too complacent right now, and doesn’t really understand the full ramifications of a break below Dow 6500 to the very existence of your trading accounts. The 64 trillion dollar question is not IF the govt will step in and support the equity and bond markets if they begin a spiral down, but what effect that will have on the currency of the United States. It’s not about diluting the price down a bit, the question is about actually creating a tipping in the minds of institutional investors about the ability of the United States govt to make good on it’s bond market guarantees. Should the institutions believe the govt can’t make good on those guarantees, a currency-selling mayhem could occur, one that one spread like as gasoline fire to all paper currencies, causing a worldwide paper money inferno to occur within a very short time frame, probably just days.
21. The govts would respond by closing all major financial institutions. Hyperinflation would be born in 24 hours unless GOLD was brought into the ultra-immediate picture. There isn’t much gold to buy, so the public would be stuck watching every asset they own go into a tailspin.
22. Will it happen? I don’t know, but I do know this: Many of you sent me what you termed “portfolios” right around Dow 6500. I was horrified as I read the emails. These were huge price plopped shortsales into vast arrays of securities shorted into those lows. While holding no longs and buying nothing! We know what happened while I bought the Dow there. On the scorecard. Yet most in the gold community now have no short side equity bets, no short side bets on the bond market, not even one share. You are responding to price, yes, but in the wrong way. I am aggressively shorting the Dow, here and now. Most of those who shorted it in monster size at Dow 6500 are now wasting time arguing about whether it could go a “bit higher” or not. Who cares, I don’t. When it breaks they’ll chase it like lemmings and the banksters will whip them up and down, like a bullwhip on a poodle. I like to run a 70-30 model in all major asset classes. Meaning I’m willing to carry up place risk capital equal to 30% of my longside bets on the bear side of the equation. That may involve shorting a bit of gold or buying the US dollar. I prefer the latter, because you are buying an asset, rather than placing a bet. Here’s a look at the drastically overbought condition of the Dow on the daily chart, right now:
Dow Daily. Watch this blue uptrend line carefully!
23. I believe the dropping volatility indexes are coming to the end of their drop, and there won’t just be a pickup in volatility, but an explosion, as the public is jolted out of their slumber as the banksters go all out in their attack on the very credibility of the major govt bond markets, the credibility of their ability to make good on their guarantees. As we enter the 3rd stage of the gold bull market, the biggest error the gold community is making, in my mind, is continuing to feed themselves the fantasy food of coming public participation in the gold market. The public will sell even more gold as the bull unfolds. Take the picture you have on your mantle of the coming giant lines of the public, lined up to buy your pet portfolio of gold juniors. Throw it on the floor and stomp on it. It’s a nonsensical picture fuelled by wants, not reality. The public is financially dead. They can’t financially or emotionally buy 10 cents of bullion. The thought of buying or pouring money (that they would have to borrow) into massively risky gold juniors is totally abhorrent to them and no amount of price increase will work to change their mind. Those of you trying to educate family and friends about “quality juniors” are taking some serious risk as these people are in no condition whatever, neither financially nor emotionally, to take the action you want them to take. It’s time to look out your gold window and face reality. The public is selling gold, not buying it, in a frenzied attempt to raise cash to pay bills. They are selling that gold at huge markdowns (the worst I heard was $400 an ounce for actual American Eagles) at glorified pawnshops. These pawnshops are doing enormous business, and some are adding multiple truck terminals to haul away the daily loot.
24. There is no coming “greed” portion of the gold bull. This is the greatest crisis since 1929, and I think it’s much, much worse, because the levels of debt via the otc derivatives are much, much worse. Institutions will buy your juniors, and buy them in size, but not until the banksters show them that govt bonds, the biggest fuel of all for the gold bull, are totally on fire. If YOU believe in the gold bull, you must believe in the bond bear, and you must be prepared for extreme volatility of gold price action as the bear becomes the new gold theme. The bond bear will be countered by govt action, the action of new Quantitative Easing. If the govt fails in that countering, you are probably best to throw your gold in the garbage and move to a tropical island, because it’s mad max time if they fail. The Dow is more likely to close down permanently long before it ever falls to numbers like 1000. The banksters are preparing to attack the bond and equity markets and give birth to the 3rd phase of the gold bull market, ushering in price volatility that will be even more violent than the power of the actual upmove, which itself should be mindboggling. You need to do what it takes to make yourself emotionally stronger. 1085 took many of the gold community out. Few bought. Most sold. The coming urges to liquidate will be many times stronger than you just experienced at 1085, as the bond market comes into play as the dominant gold price factor, because the liquidity flows in the bond market are gargantuan. I guess that brings me back to that pesky little question:
Are You Prepared?
Mar 30, 2010
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