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Massive Rally or Crash?

Tuesday, October 25, 2011, 11:43 AM

Contributing editor Charles Hugh Smith notes that markets are at an important inflection point. The direction things take from here may likely be apparent within the next few days.

As I noted in my previous exploration of the U.S. dollar and the technical evidence for a long-term uptrend in the dollar index DXY, global markets for stocks, commodities and currencies are on a simple see-saw: On one end is the U.S. dollar, and on the other are all other major currencies, global stock markets, commodities, etc.

The U.S. stock market has been recently surging on hopes of a comprehensive settlement to the European debt/banking/euro crisis. Technically, this surge exceeds the recent trading range, and thus is seen by many traders as a valid breakout; i.e., the signal a new Bull market is underway.

This aligns with the views of many experienced technical analysts, who expect a strong rally to start from here and last into early March.  The reasons many expect such a rally, despite the headwinds of global recession, are seasonal and cyclical: Stocks almost always rally strongly in Nov.-Dec., and the third year of the presidential cycle (2011) is generally positive for stocks. In addition, various timing tools and indicators can be interpreted as supportive of a major rally from this point.

A much smaller number of analysts (including Chris) see increasing probabilities of a global stock market crash. » Read more


The Flashing Market Indicators To Watch For

Monday, October 24, 2011, 10:14 AM

The Flashing Market Indicators To Watch For

Monday, October 24, 2011

Executive Summary

  • Foreign official demand for US Treasurys is at its weakest in five years
  • Fed insiders are increasingly voicing the need for more stimulus
  • Why the US stock market will crash before the bond market does
  • The key metrics to watch closely as this story unfolds
  • Why higher prices AND higher unemployment are on the way

Part I - The Real Contagion Risk

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II - The Flashing Market Indicators To Watch For

Custody Account Holdings Fall

In Step #1 (in Part I), the first thing I am watching for is a decrease in central bank holdings of Treasury debt. The easiest way to track this trend is through the custody account at the Fed, which is where most of the official holdings of US government securities held by foreign central banks are stored. In this custody account are both Treasury and Agency debt; luckily, they are reported independently. 

It’s still early in the day on this story, but notably we've just witnessed the largest two-month drop in the custody account in the past five years. Maybe it means nothing and will soon reverse, but it is possibly also the first warning sign that something has dramatically shifted in this story.
Here’s the data. Let’s start with the total amount of custody holdings over the past 20 years.


Off the Cuff: Proceed With Caution

Thursday, October 20, 2011, 9:50 AM

In this week's Off the Cuff with Mish & Chris podcast, Chris and Mish opine on:

  • Market stresses galore
    • The markets are acting dangerously out of touch with both fundamental and technical indicators. What does that mean? And will the next break to be the upside or the downside?

  • Europe
    • The situation continues to be a nerve-wracking tightrope walk. What are the likeliest outcomes and when are we likely to see some resolution? (Or devolution?)

To our commentators here, it smells like 2008 all over again, but the markets are shrugging off what should be a concerning amount of data. » Read more


What to Expect for Gold in 2012

Monday, October 17, 2011, 10:06 AM

What to Expect for Gold in 2012

by Gregor Macdonald
Monday, October 17, 2011

Executive Summary

  • Why economic concerns incent miners to produce less gold
  • Why gold is set to dramatically appreciate further vs. the stock market
  • How the West has sown its discontent by using increasing debt to mask the decline of real wages
  • Predicting the gold price vs. the S&P next year

Part I - Gold and Economic Decline

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II - What to Expect for Gold in 2012

As I covered in Part I of this report, Dr. Krugman uses Hotelling rather creatively to explain the strength of gold from an investor's point of view. I actually think Krugman is also applying a kind of traditional, discounting method of valuation. In essence, he is arguing that because interest rates are so low, the penalty normally associated with holding a non-income-producing asset, like gold or even cash, has evaporated. Indeed, this is the deflationist view, that cash is king because its purchasing power is increasing while the price of goods and services is falling. However, for those of us who prefer gold to cash, we are asking that gold provide additional services by offering protection against instability in the system and maintaining purchasing power more completely over all prices produced by economists and governments, not just price indexes.

But what about gold from the producer's point of view? Remember, Hotelling says there's a declining incentive for producers to extract and market their natural resources if the price appreciation taking place in situ (in the ground) is greater than the capital they could earn after having turned those resources into cash. Let's take a look at more than a century of global gold production, updated with the latest data from the USGS.


Off The Cuff: Time to Get Defensive

Wednesday, October 12, 2011, 12:52 PM

In this week's Off the Cuff with Mish & Chris podcast, Chris and Mish discuss:

  • The Occupy Wall Street Demonstrations
    • What's the OWS movement about? Will it drive any real change?
  • The Increasing Fragility of the Banking System
    • What's the contagion risk to the global system if (or really when) Greece defaults?
  • Market Correlation
    • Where do you get diversification when all assets are positively correlated?

» Read more


What to Do Before the Next Crash

Wednesday, October 12, 2011, 8:51 AM

What to Do Before the Next Crash

Wednesday, October 12, 2011

Executive Summary

  • Are you prepared for a 'bank holiday'? (Hint: It's not nearly as fun as it sounds)
  • Smart wealth safety strategies
  • Securing the "big four" essentials: shelter, food, fuel, and water
  • The immense advantage of cultivating a healthy mindset
  • Why the steps before a crisis are so much more valuable than those taken afterwards

Part I - Big Trouble Brewing

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II - What to Do Before the Next Crash

What a Bank Holiday (Collapse) Means

If the next shock to the system is a sovereign debt default in Europe that spreads throughout the world banking system or perhaps a surprise that comes from China, we might expect a bank holiday. During such an event, the idea is that the banking system has to be shut down for some period of time in order to sort out whatever mess has interrupted its normal operations.

By this I mean that the banks are literally closed to normal commercial and retail traffic, and things like credit and debit cards, ATMs, and even checks are no longer useful for moving money or conducting transactions.

The key risk here is that by and large, the world runs on credit. Without that credit, things don't ship, and shortages will rapidly develop.

For example, major cities might keep a week's worth of chlorine on hand to treat municipal water supplies. The next week's shipment of chlorine requires that the credit system be up and running so that debits and credits can be recorded appropriately. Without chlorine treatment, water is no longer safe for drinking without boiling.

The same need for a functioning system of credit is true for food shipments, medical supply deliveries, and virtually every other item of daily importance. Unless the banking system is there as the middleman in an enormous proportion of these exchanges, many transactions will slow down considerably, if not cease entirely, until things get sorted out.

That's the risk. However, nobody really knows how big this danger really is, or how long things will take to get resolved, or even what sorts of disruptions may result, and this is why you find politicians bending over backwards in order to avoid finding out the hard way.

Remember Hank Paulson marching into Congress in October of 2008, closing the door, and ranting about martial law and social collapse? On one hand, we might be tempted to think of his act as a heavy-handed scare tactic to assure that his colleagues on Wall Street got a big, fat bailout. On the other hand, we should reserve some space for the idea that he might simply have peered into a banking abyss and gotten scared by what he saw. Perhaps it was a bit of both, but it is the latter idea that should give you pause, because if the Treasury Secretary has no idea how dangerous things are, it means the same uncertainty lurks in the hearts and minds of everybody else on some level, too. When your entire system of money runs on confidence, such doubts are more serious than you might at first appreciate.

A bank holiday, then, simply means that banks close for some period of time, ranging from a day to perhaps several months, limiting or precluding some range of transactions, and affecting only retail customers or impacting everybody. A bank holiday can fall anywhere between a minor inconvenience and a world-changing event.


Twilight for the UK: Connecting Dots

Monday, October 10, 2011, 6:51 PM

It's time to connect a few dots. On the surface, the recent social upheavals seem to be about a lack of fairness and a loss of jobs and opportunities, while the actions of the central banks and various governments seem to be about trying to find the right combination of policy tweaks and adjustments to get things back on track.

None of these things can really make sense if we stay on the surface.

By traveling down to the layer where we can see the connection between energy and the economy, all of these actions suddenly make a lot more sense. If an economy is the sum of all goods and services, and every single one of those is dependent on energy, then having more surplus energy rather than less will produce a larger economy with more surplus that can be divvied up among a given population.

Conversely, less energy, whether we opt to measure that in terms of net energy or the cost of energy (itself just a marker for net energy, when we bother to scratch at the idea a bit), means less economic abundance that can be shared.

» Read more


Casey Research Summary (And I'm Off to Join a Protest)

Friday, October 7, 2011, 6:49 AM

Note:  I am going to travel to NYC today to attend the Occupy Wall Street protest. I want to see firsthand who is there and what their concerns are. It's not that I don't trust the media to accurately portray the concerns of the attendees... Okay, yes it is, that's exactly my concern. I will be traveling with an accomplished media crew to record the event, interviews, and my observations. If you are planning to be there, we will be starting at Zuccotti Park, arriving there about 1:30 pm. Look for us, and let's connect and have some fun!

I had an opportunity to attend and present at the Casey Research Summit in Chandler, AZ on October 1-3, 2011. My perception of the audience, shaped during conversations held during breaks and over dinner, was that of interesting and curious people, most of them incredibly successful in life, seeking to better grasp what the issues and opportunities of our day really are. At times I felt like I was at a wedding, where there’s really no chance of connecting with all the people you wish to speak to.

The conference itself was incredibly well run – like a tight ship – and I learned a lot from the other presenters and exhibitors. My own talk was quite well received, and a quick show of hands at the beginning revealed that roughly 90% of the 450 in attendance had not yet heard of the Crash Course nor been otherwise exposed to my work.

I always relish the opportunity to reach new audiences and this was a great one. (Thank you, Carl!)

My key take-aways from the conference were:

» Read more


The Technical Argument for a Stronger Dollar

Tuesday, October 4, 2011, 12:43 PM

The Technical Argument for a Stronger Dollar

Tuesday, October 4, 2011

Executive Summary

  • The dangers of depending on correlations
  • The dollar as 'anti-euro' argument 
  • Key support levels to watch
  • Cycles analysis of dollar prices
  • Keeping the limits of technical analysis in mind

Part I - Heresy and the U.S. Dollar

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II - The Technical Argument for a Stronger Dollar

In Part I, I raised the potentially heretical possibility (at least to some) that the U.S. dollar, as reflected by the DXY dollar index, might be in a multi-year uptrend, and then endeavored to sort through the psychological underpinnings of resistance to this possibility.

Here in Part II, I will lay out the technical case for the DXY’s possible multiyear advance.

I would like to start by addressing correlations. Given our minds’ predilection for pattern-matching, it’s natural to see correlations between two slices of the market. For example, when the DXY rises, the stock market declines. This correlation invites speculation on reasons that would explain the correlation.

As the saying goes, correlation is not causation, and so while this line of speculation might illuminate some hidden causal dynamic in play, it also offers ample opportunity for distraction and misguided conclusions.


Six Inches Thick

Monday, October 3, 2011, 11:08 AM

The big macro story here, perhaps the most underappreciated of them all, is the decline in net energy from our energy extraction efforts.

Energy drives all economic activity. Without energy nothing is possible. It all centered on food energy once upon a time. Food was the limiting factor for the populations of every country, just as it is for every other organism. With more food comes greater populations. 

Once we discovered other concentrated forms of energy that could be converted into food, and the food energy problem was effectively solved, then humans could turn their attention to other pursuits - even dedicating entire lives to things besides food production, such as painting and science.

That is, we turned ancient stored sunlight into food and reaped the benefits. Hallelujah!

However, as with all too-good-to-be true-forever stories, this one comes with an ending. And signs that the final act has begun are all around us if we care to see them. Most do not, but you are reading this, which means you are willing to face 'what is' rather than ignore reality.

» Read more