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"Sovereign Debt and Major Markets"

Stewart Thomson
Apr 20, 2010

1. The battle is on. By now most in the gold community are aware of Jim Sinclair’s monster prediction made on the weekend, that Gold goes stratospheric “within days”. The term “within days” is a period less than two weeks, by definition, or it would be “within weeks”. By putting his gold neck on “big call” chopping block, Jim is taking on multiple opponents, including a technically overbought situation on the daily chart, a stock market that is massively overbought on the daily chart, and becoming so on the vastly more important weekly chart, and a timeframe when gold seasonally begins to peak, not start a parabolic bull move!

2. While I only bet money responding to price, I would bet that Jim wins, if I was forced to make a bet. As of this morning, King Price is voting the same way. Gold has surged $17 from the $1125 “Goldman Sacked” lows, to $1142. Some of you are already back to ringing the cash register again!

3. By allocating some funds to short term trading, some to doubles and triples, to use a baseball analogy, and some for an inner core position that allows for an “out of the park”/stratospheric move and protects yourself against a system blowout, you are prepared for all scenarios, mentally, emotionally, and financially.

4. “I think, I know” versus “I respond”: Friday April 16, 2010 will go down in history as Goldman Sacked day, and may have marked an intermediate peak in the stk mkt, but I wouldn’t bet money on the latter. Those that did are now staring at a Dow that has “impossibly” recouped about 150 of the 175 points it lost from that peak, and are most likely underwater on their (oversized?) short positions.

5. Readers know I have advocated a strategic shorting program and urged subscribers to step up the aggressiveness of the program on Friday morning, before Goldman was sacked. Profits have already been booked, at least by me, and no, I am not demoralized because “this is impossible, the Dow can’t make another new high!”. I am simply reshorting into the same price points I did going into Friday’s highs, and if we take out the highs of last week, I want to be even more short, not less.

6. Shorting is a bet, not a purchase of an asset. I strongly urge that you limit shorting to 30% of the capital you have allocated to the long side of the stock market. Better to focus on buying the stock market into weakness that trying to “nail the top”. If you have no long positions on the stock market, would I short it? Only with gambling money. I would focus on waiting for an intermediate correction to leg IN to the market.

7. Some in the gold community are starting to come around to the idea that the Dow made a bear market bottom at Dow 6500. That’s nice to see, although the call is only a year late and comes after the Dow rallied 70%. Don’t confuse a stock market bottom or bull market with a “system is fixed now!” situation. Zimbabwe’s stock market actually outperformed the rate of inflation while the average person almost starved to death, literally.

8. Bull markets can take many forms, one being a refuge from the implosion of the Gman, the implosion of government debt and even paper money itself. The most powerful fund manager in Canada has positioned himself with this scenario in mind, while the average Canadian investor moron waves Canadian government flags and knows that houses bought in Canada on a credit card are totally different than houses bought in America on a credit card. Many money managers are announcing that the sovereign debt crisis is over.

9. Over? It hasn’t even started yet. Hyperinflation is not generally a response to inflation. It a response to deflation. Various Gman starting printing money to reverse asset price destruction, destruction that can become so severe that farm crop prices deteriorate below the cost of production, and farmers cease planting. Food shortages and even starvation become real possibilities.

10. It’s unknown as to whether the Gman has reached what I term the “saturation point” in terms of issuing debt supply that is not met by the required demand. The average investor is paying zero attention to the saturation point theme, while the top institutional money managers are in a state of substantial concern and constantly monitoring and analyzing the situation, which is dire. I have to wonder if the SEC attack on the banksters is real or a scam to give face to President Obama’s “regulate Wall Street to save the universe” banking overhaul. If it is real, and the US govt and the Fed really are at war with the commercial banks, it should be understood that the banks can play warrior too. How long would it be before the primary dealers decide that buying the bulk of the US Gman’s bonds is not a good investment for their clients anymore? Right now, it’s buddy buddy time, as the US Fed is loaning money to the banks for little or zero interest, and the banks are buying US govt bonds with that money, while businesses and homeowners in critical situations are told to wait (for higher rates).

11. Most in the gold community have a mistaken view of Quantitative Easing, as it relates to the various government bond buy programs. There is currently substantial demand for the US gov’t bonds at the auctions. The issues are generally substantially oversubscribed.

12. The various central banks are not buying their govts’ own bonds because there is no demand, they are doing it to flood the system with liquidity and keep interest rates low.

13. That situation, however, could change, and morph into a situation where “everything the gold community thinks is happening in the bond market now but isn’t”….will happen.

14. If we get into a scenario where there really is not enough demand to buy the US govt bonds, that’s the key that opens the money printing spigot, and is the trigger for a potential death spiral, which is: Falling stock market, falling US dollar, and falling bond market. The US government, and probably most Western govt’s, would then be forced to print money to buy their own bonds due to a real lack of demand for them. That action in return would cause literal terror amongst institutional money managers, and they would seek to move cash into the stock and commodity markets to protect themselves. Western paper money could go into a tailspin, sending gold parabolic on the upside.

15. So it’s important to understand that we are not in that situation now, where the govt can’t sell its bonds, quite the opposite; there is solid demand for them, but we may be less than a year away from really being there.

16. Markets move on anticipation of coming events, not on the past, and there is definitely a large component of heavy money that is highly concerned we are only 6-9 months away from seeing the US govt bond market rubber meet the gold road. Perhaps Goodyear tire could replace moody’s as the govt bond agency. Triple A rubber.

17. In the meantime, the Iran situation continues to get worse, and that alone could send gold parabolic, with an Armageddon type situation as a wild card, if Pakistan and India are dragged into it.

18. The corporation recovery is real, and US corporations are sitting on huge amounts of cash. The two key questions are how much of that recovery is a temporary recovery caused by the Stimulus money, and what effect could a sovereign debt crisis have on corporations. “Who cares, all I know is the Dow returned 7 years of gains in 1 year, but I bought nothing at the bottom so I missed it all! Buy me in before I miss any more!” –Joe Blow Investor. Apr 15, 2010.

19. The coming wave of lawsuits over the Goldman Sacked scandal could “paralyze” the banking industry, according to some experts. I want to remind you that financial companies have become the largest component of US GDP and corporate profits.

20. The weekly charts for the major markets cover the intermediate trends. The intermediate trends take investors to extreme levels of greed and fear, in 95% of cases. Few can withstand giant hits or astroblasts and remain professional in there actions, so it is important to have an idea of where we are on these charts. Luckily, of the major weekly charts, the GOLD chart looks the best.

21. The weekly bond market has a massive head and shoulders top on it that may be the last feather in the cap of a 30 year bull market, and the trap door is at 112. Look at the red “line in the sand”, the horizontal support line. While I don’t want to short the bond, I certainly don’t want to be a buyer of a 30 year old bull that has govt buying as it’s fuel. I would submit that the bond market is like an old Volkswagen in the mountains running on a one gallon reserve tank of gas. Bond Weekly Chart Apr 20

22. It’s important to think in terms of risk and reward, not simply where the market might be going as a target. The only thing that really matters is: What are risk factors that surround the possibility of price achieving the target? Joe Blow Public has NO target for his current “I’m missing out, gimme it” stock market play. They just listened to the bankster propaganda that it’s “time” to buy. The RSI, relative strength index, on the Dow Weekly Chart Apr 20 is verging on a strongly overbought condition. That tells me that any buying should be small in size, and that shorting the Dow in modest size is a valid play, and more so if we go higher in the short term.

23. The US Dollar Weekly Apr 20 chart is showing sell signals on some of the oscillators and is certainly not displaying the kind of “bottoming” you might expect to see if the stock market were making a top. You can view this situation in two ways. First, the stock market is only having a minor correction. Second, you may believe it adds weight to the idea that a sovereign debt crisis is near at hand and the liquidity flows concerned the US paper buck are a response to that anticipation.

24. Of the “big four” (Dow, Bonds, USD, Gold) the Gold Weekly Chart Apr 20 is the only one that offers a decent risk to reward set up. The technical indicators are “midships” and verging on buy signals, and price itself sits above the massive head and shoulders continuation pattern, and timewise could be near the end of a consolidation following that breakout. Price could decline further, but the fact is the risk to reward ratio is skewed in favour of higher gold prices! If you had to place money on weakness into a major market today in size, only one market would get any of my money, and hopefully yours, and that is: Gold!


Apr 20, 2010
Stewart Thomson

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