Into The No World Order, Part VII:
The Markets Know It Now

       I was born in a foreign country. I was born on the South Side of Chicago. The South Side was a center for steel mills, packing plants, rail centers, a grain center, farm machinery manufacturing, along with Jackson Park, the Museum of Science and Industry, and a sixteen-year-old Benny Goodman playing clarinet at the Southmoor Hotel. The South Side had a strong identity, character, and vibrancy.
        People from the South Side think in terms of substance, not form. Substance is real. Form tends to obfuscate. Thinking in terms of substance, South Siders tend to be blunt. One must be blunt to make a steel mill run - to make things run.
        I was born at the University of Chicago. My children were born at the University of Chicago. I went to graduate school at the University of Chicago, the citadel of monetary theory. I was proud and thrilled to be there, directly participating and extending my roots and heritage.
        The monetary concept can be explained this way: A hustler in a wagon trots into Klondike gold camp with a dozen eggs. The miners, who have been very prosperous, readily pay a thousand dollars an egg. On the other hand, if they had slim pickings, these miners would only pay, say. . .a dollar an egg. Message: A lot of money with a finite supply results in inflation. Relatively little money available, with a finite supply results in little or no inflation. Simple. Logical. Solid.
        In the practical world, a central bank, the Fed, is used to expand or contract money supply through various financial tools to accommodate perceived money supply needs in the economy. This all sounded great until I saw a long-term chart of inflation that was flat until 1913, when the Fed Act was passed, which was when a secular increase in inflation started up to the present point reducing the buying power of the Dollar to today's five cents. Supposedly, the central bank was to control inflation. Obviously, the opposite was true. Thinking in terms of my blunt South Side heritage, my immediate reaction was "This is a hustle. Somebody's full of bull around this joint." My bubble bursteth.
        There are three problems with applied monetary theory. The first problem is that monetary theory assumes that a mere mortal can control the supply and demand for money more efficiently than the market. That's bull. The second problem arises out of the assumption that those men making the controlling decisions (the Fed) are honorable men. Given the undermining of the currency through inflation, that's bull. This concept conflicts with H.L. Mencken's pithy quote, "Always assume the worst in people. You will almost always be right." Honorable men don't debase a currency 95%. Thieves do.
        The sickest aspect to this whole hustle is that the Fed-babbling fools believe this bull.
        Given the previous two problems, intuitively I knew that there was a third problem, one that is like not seeing the forest because of the trees.
        Let's go back to our hustler in the Klondike with the eggs. He tries to sell his eggs, but the miners, who have had very poor luck and who have little of value, offer our hustler 95% sand, 5% gold. The hustler doesn't want sand so he keeps his eggs, or he wants 20 times what the miners are offering to compensate for the sand content.
        Eureka! The third problem is defined. The money's no good.
        That's what is going on with the upside panic in gold. Gold is good. The money's no good. If the money's no good, the monetary theory is irrelevant. The foundation of our whole Ponzi scheme economy is irrelevant. Defining the problem in terms of Fed-babble is rearranging the deck chairs on the Titanic, simply because the money is no good. Always remember the Curmudgeon's definition of truth: "Truth is the ebb and flow of money." The money's been flowing into gold because the money's no good. Simplistic? Yes. Right? Yes. If you don't think so, refer to the Monthly XAU chart used as a gold proxy.
        I've illustrated my favored wave tea leaf count. I admit to having an alternate count, but both counts suggest that the II corrective primary ended as illustrated. This suggests that the III primary started in May 2005 Most likely, the first intermediate upleg of the primary III has evolved as momentum exploded upwards portending an upside objective which I don't even want to think about this stage of the game. The upleg off of the II corrective wave has classic III wave Elliott action.
        Near term, the slightly favored count suggests that a #2 intermediate correction of the primary III is evolving, relieving the obviously overbought condition of the gold complex.
        All of this analysis only provides perspective, which suggests that the cyclic bull market in gold is super-powerful and confirms that the new epoch is evolving as the debt Ponzi scheme is imploding.
        Keeping the previously described perspective in mind, the savvy player has to convert all of the analysis to profit from the move. This suggests that the main upcycle must be respected. Again, as I've said before, don't get cute and try to trade the move. The chance of losing a good position is simply too great.
        Keeping the gold situation in mind, let's review bonds and stocks.
        The bond market has completed a cyclic bull market and has most probably started a cyclic bear market that is showing signs of confirmation as the bonds have just busted 110 to the downside. Higher interest rates are evolving and the housing bubble is bursting. Given auto inventories, the auto bubble will burst too. This is simply debt implosion. In addition, given the bond bust, my hunch is that the boys overseas, who are up to their butts in bonds, aren't too happy about the bond breakdown.
        The stock market has been waving out a final upleg since the 2002 low, which is part of the upcycle that started in August 1982. The previous blah, blah implosion was part of that two-decade upcycle. Referring to the Value Line, I've counted out the favored wave tea leaf count. From a long-term view, the twenty-year bull cycle will be followed by a bear cycle having a life expectancy of about a decade.
        Near term, the recent upleg off of the 2005 low is loaded with putrid internals such as major supply/demand measurements, quantified advances, new high/lows, etc. However, as rotten as the internals are, the uptrend must be respected for no other reason than that it exists.
        The first sensitive hint that the market is beginning to break down would be closes below Dow 11,140 confirmed by the Transports below 4480. Less sensitive lower levels will be defined as the dynamics develop.
        Given that the bond market is cracking downward and that the derivative situation is a disaster waiting to happen, my hunch is that, when the downmove begins, it will be carnage.
        In sum, the gold breakout is confirming that the money is no good. The bond market's downside crack is cranking up interest rates, which is busting the housing and auto bubbles.
        The stock market, while still in an uptrend, is waved out, loaded with putrid internals needing a minor downside crack to suggest the start of a cyclic bear market, which will harmonize with the gold breakout and bond breakdown.
        All of this suggests that the fiat currency game is done, which suggests that the Fed's machinations are irrelevant. It is critical to think in terms of the new epoch, not the old Fed epoch as 90 years of monetary debasement burns into the ash heap of history. No doubt, there will be a transitional period of overt capital confiscation evolving from the covert capital confiscation that resulted from inflation.
        However, all evolving events aside, no nation can survive without a currency and monetary system. That's what the gold's bull market is all about. . .the money's no good. The savvy players have known this for years. However, this was not important until now. Why? Because, as the gold has broken upward and the bonds have broken downward, and the markets have figured out that the money's no good. That's what's important.
        Editor's Note: Thomas Henning's column, The Stock Market Curmudgeon, appears regularly in The Bull & Bear Financial Report.