By Thomas Henning
Fed-babblers - those who are honest - are a frustrated lot of good people who are not pragmatically applying the concept that one cannot stop a sewer from stinking. Let it go, guys. The central bank concept, along with collectivization, is intrinsically corrupt and pernicious in that it concentrates power, which readily makes that power controllable. This power concentration facilitates what the human condition does second best, which is to steal. Of course, the collectivist thievery is always dressed up in moralistic clap trap, the latest version being "shared prosperity." Always remember one of the Curmudgeon's rules: "When you hear the words fair, share, and common sense, grab your wallet and run like hell."
To the savvy player I say: Cheer up, guys; it's all going to have a happy ending. There won't be any prosperity to "share" or the mechanism to enforce the "sharing," for the prosperity is based on 5% margin, which is now caving in, in the form of hedge fund implosions. These boys own mortgage-backed securities which are on 5% margin, with the banks holding the paper. Oh, but not to worry because there are derivatives which are on 5% margin hedging the risk - no problem.
Oh really? Somehow I think that there is a problem because 5% margin means 95% debt, and the world is in the process of trying to cash in some of that debt as the rasbucknic has begun to tank. The Yen and Swiss Franc have flashed lovely buy signals from extreme oversold divergent levels as anticipated in last month's screed.
It seems that the world doesn't like 5% margin. However, I have news for them: they're no better off, because they're also on 5% margin.
You see, they have central banks too, along with parasitic collectivist governments. It's not that their currencies don't stink; they just stink less than the rasbucknic.
The Weekly Dollar chart will show that the downleg from the 122 high has been digested upward with my slightly-favored wave count as illustrated. Since the C-wave, the buck has legged down, consolidated, and is testing the 80 low.
Overall, the broad sideways action does look like a potential bull wedge bottom, but the Swiss Franc and the Yen in particular have turned bullish, flashing oversold divergent buy signals. This suggests that the 80 level will get violated, leaving air under the Dollar. The Dollar could hold at these levels, but given the action of the Yen and Franc, along with the gold and bond action, this is doubtful.
The bond market has likely started a bear cycle after completing a bull cycle at 120 in June 2005. The favored count is illustrated.
Near term, a recent downleg is testing a 106 low, and a bust of that low will no doubt signal an acceleration to the downside as higher rates put the screws to the whole hedge fund, derivatives, real estate, banking complex. The Asians who are stuck holding U.S. debt can't be a happy lot, given the bond action aggravated by the Dollar bleeding. It's obvious that the Asians are wise to the hedge fund problem and they want out. I doubt that they will be able to get out when the stampede accelerates.
Gold acts well. For the last year, the gold complex has been digesting a I-wave off of the 2000 bottom having evolved a II corrective wave as marked on the Weekly XAU chart. The wave tea leaf counters, myself included, have been brawling over the form of the correction.
In last month's article, I suggested that my favored count looked valid, but I was going "mechanical," walking away from the brawl and letting the complex develop with a fair conviction that we're in a cyclic bull market.
In that vein, the moving averages have turned bullish, the stock/gold ratios have turned very bullish, and the Daily and Weekly Soft and Hard Momentums have confirmed buy signals. So far, so good.
What we need now is a clean breakout by the XAU above 150, confirmed by the gold above 705. Those breakouts would signal the start of the much-anticipated, juicy III-wave. Don't rule out a panic. The latest hotsy-poopsy in the underground is that the hot money asset guys are starting to get the hots for the gold stocks. Oh really? Sorry guys, in terms of relative trading volume and capitalization, there ain't no gold stocks, and given that the hard core gold bugs are foaming-at-the-mouth true believers, don't look for a lot of gold stock to be for sale.
The stock market is in the final waves of a bull cycle that started in 1982.
Nearer term, the upleg off of the 2002 low looks waved out with a fairly clean count. The recent uptrend has been characterized by rising negative volume, as the floor members have become heavy sellers, which is obviously a background atmospheric. However, the recent uptrend is loaded with divergences as the Dow scored a new high which was marginally confirmed by the Transports. It remains to be seen if the Transport confirmation "holds" and, as of this writing, that is questionable. I hate this, but the jury is out.
At any rate, as of this writing, the uptrend is intact and that must be respected. However, closes below Dow 13,250, Transports below 4990, would bust the uptrend to Hades and would signal a breakdown, as this would cause the Daily and Weekly Hard Momentum to turn bearish. In short, it's highly probable that a breakdown would be fully confirmed, suggesting that a bear cycle of about a decade is starting to complement the bull cycle that started in August, 1982.
In sum, the Dollar looks like it will crack the 80 level given the bullish action of the Yen and Swiss Franc. Gold acts well, needing an upside breakout to convert the bullish hot air to reality as the bonds look sick. The stock market is under distribution as the bull cycle waves out in its final evolution.
When the stock market breaks down, the 5% margin will be gone, and only the 95% debt will remain.
Editor's Note: Thomas Henning's articles appear regularly in The Bull & Bear Financial Report and Bull & Bear's Monetary Digest print editions.
