By Thomas Henning
The world of economics is inundated with the analysis of the minutia of the world-wide implosion of the bilderboyz bankers' Ponzi scheme.
The insolvency of Greece, Portugal, and California ad nauseam is analyzed endlessly. While most of the analysis is valid, honest, and suggested by well-meaning, intelligent analysts whom I respect, it is an exercise of watching the trees and not the forest.
The forest is this: the whole shebang is caving in. The savvy player must adapt to the form of the cave-in because the new deflationary epoch is evolving and the rules of the old inflationary epoch are not valid.
As the debt implodes, the central bank gang is becoming impotent to do anything about it. Money printing is having a diminishing effect as money velocity has declined, along with M-3.
Meanwhile, as the old gag goes, the central bank gang is frantically rearranging the Portugal, Spain, etc. deck chairs on the sinking One-World-Order Titanic. The passengers, who stampeded onto the ship with their votes, are all taking to the decks because their parasitic free lunch is drying up.
What are the new rules other than survival of the fittest? The markets will define them, starting with bonds.
In the last article, I suggested that an upside bear market rally in bonds was due, which would carry up to the mid120 area and last about six months if the usual Fibonacci time and price models were followed.
Refer to Bond/Interest Rate chart. The wave model appears valid with the A wave just about complete. The model suggests that a B downwave is evolving, which should be followed by a C wave up for completion. So far, so good. Do understand that this is only a rough roadmap that gives perspective.
In that last article, I suggested that the Fed was forced to load up on bonds because nobody else wanted them and somebody needed to get stiffed to get the Fed off the hook. The question remained as to who would be the stiffee--besides the obvious helots.
Following the Curmudgeon's rule that truth is the ebb and flow of money to the exclusion of all other factors, the scenario seems to be shaping up along these broad general lines.
Short term rates were engineered down to zero by the Fed. The bozos in the Washington totalitarian Politburo voted to bail out the "too big to fail" banks. The large banks leveraged up the gelt at a zillion to one playing the carry trade game, which allowed them to buy the bonds with about a 4% yield. Of course, the Fed is most likely unloading the bond inventory, probably at a profit, and the banks now own the bonds with a hefty yield leveraged up to their butts. Goody, goody.
As the old vaudevillian Ted Lewis used to say to his audience, "Is everybody happy?" Answer, yes, the audience was happy until they had to go out into the cold night air when the show was over.
In this case, the cold night air hits when the bond market rally ends, and the bonds tank down to under par, and the leveraged banks become more insolvent. Incidentally, I don't think that the Asians and the Mid-East gang, who are also up to their butts in bonds, are going to be happy campers when this happens. Tra la. Anyone for meltdown?
Question: What is the Fed going to do with the mortgage garbage? No doubt they'll figure a way to foist off this junk onto the helots. After all, the bankerboyz have bought off the politicians and they'll deliver. You'll know this when you see the words fair, share, and common sense used in conjunction with mortgages. I do have a hunch as to how this will go down, but I'll leave that for a future article.
To move onto the next act in this drama, the Rasbucknic rally, as suggested in my last couple of articles, has evolved. (Refer to chart.)
To sum up, a 5-wave leg down bottomed in 2008, having a clean count, and an upside digestive phase has developed, having the usual A,B,C counterwave internal structure.
Near term, the C wave is getting old, has become overbought, and has loaded in bearish divergences. While I suspect that the current C wave may have more near-term life, modeling suggests that the best part of the C wave should be over, if the count is right.
Do respect the near-term uptrend because it exists. However, a close below 84 would bust the Daily Hard Momentum to the downside and would suggest that the C wave of the rally is finished and that the next downleg, having a rough target of about 50, is starting. Do wait for the hard evidence to the downside.
Throughout the gold cycle, I've been preaching about not getting cute and staying with the main bull cycle. One of the boys in the underground summed it up nicely by suggesting that the only way to mess up the bull cycle in gold is to trade it.
That preamble aside, I have three major wave counts, and to be blunt, I'm not sure which one is right. Understand that there is nothing wrong with not being sure. What is wrong is not admitting it.
However, I've labeled my very slightly favored count on the Monthly Gold chart.
The gold stocks, basis the XAU, have assumed the shape of a more normal B wave not scoring a new high. Silver has done likewise. To be totally honest, there are problems with this count, but that's the nature of the beast.
However, if this count is right, a C wave down is due, as suggested by the saturated internals on the bottom of the chart.
Overall, if this is indeed a B wave, the extreme irregularity on the upside, that is the extreme strength upward, suggests a lot of inherent cyclic upside momentum, which leads us back to the preamble: Stay long the main bull cycle and don't get cute. The only way you can mess up the bull cycle is to trade it.
Correlating the Rasbucknic and the other currencies with gold is difficult because a disconnect between various garbage fiat currencies and gold is evolving as the debt-backed economies are tanking. Again, the century-old central bank bustle is caving in and the established relationships between the various currencies and gold that have been operative for a hundred years are very questionable. The old rules are being tossed out as the inflationary epoch transitions into the new deflationary epoch.
This does not invalidate the technicals or wave theory. Only the usual parameters are in doubt.
So again, we're back to don't get cute and trade the cyclic bull market in gold, because that's the only way you can mess it up.
The stock market bottomed in August, 1982, legged up into a bull cycle that has become terminal. The market bottomed last November and has moved up in a 5th wave/tag-on rally. A bear cycle of about a decade is due.
In my most recent article, I suggested that a severe #4 corrective wave down was in the cards and it has evolved. Prior to that downwave, a minor Dow's Theory bearish divergence developed between the Industrials and Transports. This divergence was followed by a breakdown which signaled the start of the correction.
The question remains as to whether the bear market has started or whether there will be another upleg to round out the count as suggested on the Amex Index.
In view of the anticipated cyclic bear market having a life expectancy of about a decade, the question is one of irrelevant trivial form, not substance.
The substance is that a cyclic bear market will evolve, which will wipe out the stock market. In view of that outlook, a near-term rally or final 5th wave is but a bump in the road.
Near term, indicators have shaped up suggesting that the upleg has started. The form of the upmove is debatable, a new Dow high being not ruled out, along with the counter possibility of a blah "feeble 5th." Take your choice.
However, in spite of this anticipation, closes below Dow 9700, Transports below 3980, would confirm the near-term weakness as well as the start of the cyclic bear market.
In sum, the bond market rally looks like it has more to run before a bust down to below par, busting every balance sheet in the world. The Bucknic rally looks just about complete with some probable near-term upside life remaining. Honor a hard breakdown. The gold waves have turned to chop suey with the best 51% call suggesting that a C wave down will evolve. The stock market is terminal. If the recent lows are busted, dive for the foxhole.
The central bank concept was flawed from the start, because to control it, it was first necessary to wreck the world's economic structure via debt and fiat currencies. In this, the central bank gang has succeeded. However, to take the next step in their little scheme, a cohesive banking force was needed, along with a denial of the territorial imperative.
Obviously, with the implosion of Greece, Spain, ad nauseam, this is an unworkable situation. The boyz have been meeting, and modern communication technology has made it obvious that they are in a panic. The needed cohesiveness of this effort has disintegrated.
It has been suggested that this is all planned. I doubt this for one simple reason: they've been busting their butts betting the farm on holding this hustle together and it's not working.
Remember, with the central bank hustle, no country exists as a nationalistic entity. It only exists to be plundered through taxation, inflation, and debt slavery. Now that the debt has become unsupportable, and there are no more assets to plunder, implosion is evolving. Patriotic nationalistic concepts are a total irrelevancy. This is the forest.
Editor's Note: Thomas Henning's column, "Musings of a Stock Market Curmudgeon," appears regularly in The Bull & Bear Financial Report, in both print and online editions.
