Henning: Musings of a Stock Market Curmudgeon
By Thomas Henning
The problem with the inflation argument, of which I am acutely aware, is that it is based on the central banks’ ability to facilitate debt and then have it serviced in perpetuity. It ignores the concept that there is a debt saturation point whereby, as more debt stimulus is added to the economic model, that stimulus diminishes in its ability to generate productivity to service the debt. At some point, the additional debt overloads the economic model to the point of breakage. That point has been reached.
 Blackbeard Benny has been beating a dead horse, bailing out his banking cohorts by flooding the system with printed Rasbucknics and clinging to the implied Keynesian concept that there is no end to the ability of the economy to respond. The economy has not responded. The law of diminishing returns has become operative. The debt continues either to default or move closer to default.
Not being totally stupid, bond buyers have all but disappeared, so Blackbeard Benny has been buying this junk by injecting Rasbucknics into the non-responding economy in hopes of keeping the Ponzi scheme bubble from bursting.
Benny is now stuck with a Fed balance sheet comprised of roughly 70% worthless mortgage garbage that he bought from his banking pals to bail them out of liar loans and U.S. Government bonds, which have most probably started a cyclic downtrend. Better you than me, pal.
 Obviously, given the Keynesian concepts, price inflation has recently squirted upward, igniting the inflation/deflation debate: inflation being the blow-up of money and credit factored by velocity, verses potential deflation resulting from a debt default avalanche.
The question that remains is that, if the debt default avalanche starts, will it usher in the transition from the thieving inflationary epoch that started with the Fed founding in 1913, into a new deflationary epoch? I rather believe that it will, given the economic non-responsive effects, other than money bloat, resulting from the recent massive money infusions. There is money, but declining credit and velocity.
As the new deflationary epoch evolves, Keynesian noise will become increasingly irrelevant drivel, which the true believers will cling to as sacred dogma. These believers have too much invested in the massive banking/economic system. A downside deflationary crack is totally beyond their comprehension. Their Keynesian drivel will not be valid because the necessary inflationary structure that supports it will be evolving into debt default, into the deflationary epoch, thus their Keynesian drivel will evolve into irrelevancy.
The markets alone will suggest the start of the new deflationary epoch. The savvy player must stay humble to the form of the bust and must not cling to the old inflationary relationships--which may or may not still be valid-- such as: Rasbucknic goes down, gold goes up, etc. Stay loose and take it as it comes.
In last month’s article, I suggested that the markets were probably at tipping points. They’ve started to tip.
 The CRB Index has cracked downward; crude oil has also broken down; the bond rally has become mature; the Rasbucknic shows hints that it may rally; gold has finally responded to the technicals and has moved into a correction; and the stock market uptrend is leaking a lot of oil and may have seen its highs.
The CRB Index has been in a terminal Vth wave of a larger cycle that started in 2001. The recent primary upleg began 2009, has waved up having an internal 5-wave structure as indicated on the Weekly CRB chart, has become overbought, has built in the usual bear divergences, and has broken down on schedule, hinting at the start of a cyclic decline.
While price levels are but a symptom of inflation, the downside bust of the CRB is a serious tip-over in favor of the deflationists.
In short, the immediate market action has confirmed the model and, barring any disruption, which will be identified if it occurs, it must be assumed that the model suggesting a downward price cycle is correct.
Like the CRB Index, the crude oil market has waved up in a cyclic bull market since 1998, as marked on the Monthly Crude chart. The crude has developed the usual internal bearish divergences as indicated and has broken down about on schedule as anticipated in last month’s article. So far, the wave model looks dead right. This implies that the up cycle is done, and the major bear cycle is in the cards.
 Curve ball: The near-term count holds out the possibility of another upleg which could punch the oil into new high ground. If it happens, it should last about a month. It is not the favored count, but if it happens, every bearish divergence in the book will evolve, which will generally rule out upside sustainability. Overall, this is another symptom of a coming deflation.
The Rasbucknic Index has been in a cyclic bear market with the favored count illustrated.
Nearer term, the V wave has started at the 88 level and the book suggests a downside target in the 50ish area.
In the last couple of articles, I’ve indicated that one should keep the bear suit on with fingers on the zipper, suggesting that some sort of bottom could be in the making.
Since the last article, the favored wave count suggests that a #4 counter rally is due, which would probably last about three months, if the usual time frames are followed.
At this stage, for the market to confirm this count, a close at about 76.50 is needed. Early internal buy signals have flashed.
If the rally evolves, it will probably be fueled by the European Central Bank hustlers trying to keep the Euro afloat as their sovereign debts smash.
The bond market has fallen out of bed as illustrated in the Government Bond chart, has waved down in a 5-wave sequence and has rallied upward about as anticipated, digesting the previous decline.
 Near term, the daily studies are beginning to look waved out with the usual internal bearish divergences evolving. This action suggests that the overall rally is getting mature. A close below 123 would provide the first hint that the rally is complete.
Going to the longer-term picture, a close below the 116 low would confirm the next leg down to about the par level.
Obviously, if the bonds move to par, every balance sheet in the world, including the central bank balance sheets, will move to insolvency. I suspect that, at that stage, it will be “every man for himself,” as the central bank, 0ne-World-Order Titanic plunges to the bottom.
The gold complex is in a cyclic bull market with the I, II, and III counted out as illustrated.
Near term, the gold is waved out, hyper-overbought, with internals giving off vibes to back away. Meanwhile, the gold stocks, basis the XAU, are oversold, loaded with bullish divergences, and appear to be at or near the end of an A,B,C, down, up, down correction. In short, the gold is stretched out to the upside, while the gold stocks look corrective and due for the next upleg, with the gold stocks having very bullish On-Balance Volume.
From a wave standpoint, I can reconcile this conflict—the gold being in a large, irregular “runner” as the XAU has assumed a more standard corrective form. If, and that’s a big “if,” this count is right, it is extremely bullish. At this stage, this configuration is tentative and solid buy signals are needed.
However, the Rasbucknic does look like it is due for a major rally; given the usual relationships, this does not bode well for gold.
 If the reader is confused, it’s because the situation is indeed confusing, but this chop suey must be recognized to allow the jury to come in. We are probably in the transitional phase from inflation to deflation and the relationships will likely be in flux.
Meanwhile, gold is in a cyclic bull market, so again, don’t get cute and trade it. It’s the only way that you can mess it up.
The stock market is at the terminal stage of a cyclic bull market that started in August, 1982. The implication is that a bear cycle having a life expectancy of about a decade is in the cards.
The question remains as to how the cyclic decline will be launched.
The market has waved up in a terminal fifth wave as illustrated by the Amex Index, which is being used as a probably futile attempt on my part to dodge the brokerage front runners and plunge protection gang.
Moving down into the technical gang-fight gutter, an intermediate Dow’s Theory bearish nonconfirm evolved as the Transports scored a new high on May 10th without confirmation by the Industrials. Since then, near-term lows were busted with clean downside confirmations by the Breadth Indices as the Daily Hard Momentum has confirmed to the downside. Other internals have failed.
From a wave tea leaf perspective, I can do a contortion act and conjure up another upleg, which will, no doubt, assume the shape of a Gann failure rally or “tag-on rally,” but if it evolves, the internals stand virtually no chance of confirming the strength, thus undermining upside sustainability. If a rally occurs, it will be part of a larger topping process.
(Tag-on rallies start suddenly and usually look very impressive on the upside. Momentum indicators usually give buy signals well after the rally starts. New highs are often scored, with massive internal non-confirmations. These rallies end suddenly and are followed by major downside smashes.)
To the downside, closes below Dow 11,550, Transports 4930, would bust the mid-May lows and would suggest the start of the bear cycle. If a downside bust of those lows occurs, I’d say that one can rule out a tag-on rally.
In sum, the CRB and crude oil have broken down; the bond rally is very mature with a 123 close needed to suggest the next downleg as gold has assumed a potentially bullish shape with the jury still out.. The Rasbucknic shape is suggesting that a rally could evolve, and the stock market has broken down with the possibility of a tag-on rally.
As this has been going on, the central bank gang are trying to keep the inflationary hustle afloat as the debt implodes. They are enjoying the fruits of a hundred years of economic plundering. Their efforts are futile, as their inflationary epoch implodes into a deflationary epoch.
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
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