Monday, April 30, 2012

Bernanke's Pickle

Dr. Bernanke is in a pickle. And when Bernanke is in trouble, we’re all in trouble.
Why is Bennie in trouble? He is in trouble because he has a debt, or should I say an obligation to Obama for reappointing him Chairman of the Federal Reserve, the Fed. Here’s where the problem lies. In order to fulfil this bond of duty, Bennie and his buddies down at the Fed will need to pull off slight of hand tricks that would put the best of magicians to shame. They will need to keep people’s attention focused on the left hand while the right continues to do their ‘dirty work’. (i.e. print new currency and create inflation at ever-increasing rates.) They will need to print ever-increasing currency because the hollowed out US economy demands it, Presidential election year or not. But of course because this is an election year, and Bennie has this debt to Obama to make the economy appear as good as possible (so he can get re-elected), you can expect the Fed and all their friends in the larger bureaucracy (government, media, etc.) to work overtime creating obfuscation about what they are doing on one hand, while keeping other fingers on the button – the currency printing button. (i.e. think True Money Supply [TMS] growth, unstated Quantitative Easing [QE], and all the other sources of currency printing not accounted for in “conventional money supply measures”.)

None of this is new of course, it’s just more extreme this time around because we are feeling the effects of long-wave cycles that could be far more profound than most realize, or care to admit. We will have more to say on this subject below once we get into the charts because they will conclusively demonstrate that as a society we are still well embedded in denial about our future prospects, where it’s characteristic for the masses to ignore unpleasant realities and the cold harshness of the inevitable.  Be that as it may, and maintaining our focus on what we will term more ‘near-term influences’, in terms of the above, we are referring to the Presidential Cycle naturally, the four-year cycle that revolves around the election occurring later this year in November. Here, it is now widely understood by almost everybody who is involved in the investing game, from institutions to the small speculator, the effects on the economy of Fed largesse in the third and fourth years of this period, with emphasis on the fourth year here today given present circumstances.

What then, is unique about present circumstances, and why is this a pickle for Bernanke? In short, and in borrowing from subject matter already introduced above, Bernanke’s problem is embedded in the fact the US (and larger Western) economy is dangerously hollowed out due to the ever-increasing needs of our very mature fiat currency monetary system, implying debasement rates must continue to rise even if this means a parabolic trajectory. This in itself is of course a big enough pickle for Bernanke to deal with all on its own, attempting to hide the increasing currency debasement (inflation) via obfuscation and hand shuffling of sorted varieties. What’s more, it’s this condition that will likely make it impossible for him to deliver on Obama’s debt because in order to not have our hollowed out economy collapse prior to the election he will need to keep increasing currency debasement rates to the point inflation becomes noticeable despite all of the ‘official rhetoric’ (propaganda) to the opposite, with gasoline prices the number one measure in this regard ever present on voter’s minds.

And as you may well know, as it has been the source of considered discussion already of late, no US President has ever been re-elected with gasoline prices rising and making new highs regularly, which places both Mr.’s Bernanke and Obama in one pickle jar, and the rest of us in others. For Obama, unless the Bernanke can get gasoline prices back in the bottle this would likely mean no second term if history is a good guide. And for the rest of us, broadly speaking, such an outcome would mean even higher energy costs in all likelihood because by implication this would infer currency debasement rates continue to accelerate, where we know this must occur in faltering and very mature fiat currency based monetary systems / economies. Again however, even if this occurs don’t expect the media or government agencies to paint such a picture, as is the case at present. Expect to see more doctored data and attempts to hide reality and persuade to the opposite, where over the past few months the powers that be (with help from our loved financial institutions) have been tightening the screws on the precious metal stocks pickle jar.

This is because they know speculators believe precious metal shares both lead and outperform in strong moves to the upside in the sector; and if they can be trashed, for whatever reason, even if false, at a minimum this would create the impression (and give the Fed, government, and the mainstream media ammo to aid their collective cause) inflation is well contained. Now I realize this may sound ‘out there’ to those who choose to ignore the Fed’s own propaganda. And to an extent I can sympathize with such a view in knowing wrong headed speculators continue to furnish market conditions that will not allow for rising precious metals prices barring hyperinflation, where some of you may remember my previous discussions on this topic – gambler betting practices in paper precious metals derivatives. At the forefront of understandings in this regard, it must be remembered / recognised that until currency debasement rates trip the light fantastic the ‘authorities’ will be able to continue exploiting these wrong headed speculators using High Frequency Trading (HFT), algorithms, etc., toppling them over at key times (think expiries, key data releases, etc.) repeatedly, maintaining the illusion inflation must be under control with precious metals shares collapsing.

That’s the pickle jar precious metals investors are in at present, all bottled up by the powers that be, but with a great deal of pressure building due to all the inflation, ignored presently as it may be. This will change however, and such change can be very rapid depending on how exhausted hair-brained speculators within the paper based precious metals space become. (Please note the naked shorting of precious metals shares and physical bullion supply issues are factors here too, however at the margin, it will require a change in ETF speculator betting practices to spark a new cyclical bull market phase in the sector.) Given precious metals shares are both oversold and undervalued at present, any such exhaustion should be profound once it arrives. And I can tell WHY this will in fact be the case. This will be the case for the exact opposite reason speculators are buying calls on key paper precious metals representations at present, generally causing put / call ratios in the ETF space to remain well below unity and approaching .5 on the important ones. (i.e. GLD, SLV, and GDX) In this regard it’s essential to realize there is generally two calls for every put in this market presently, making the prospect of a short squeeze impossible. And again, this dynamic is the chief mechanism by which the authorities can conduct raids in the sector, like the one just last week at Fed meeting time, proving to all that Da Boyz are still in charge – or so they think.

Let’s hope they are enjoying themselves at present because one of these days, likely at an options expiry sometime between now and the election in November, bullish speculators will become exhausted, sending put / call ratios back up through unity across the sector, and they will not come back into this space for considerable time. Why? Because once November is passed they will assume Bernanke’s debt to Obama will be discharged whether he is successful or not, and that he will back off currency debasement rates post election as is the custom associated with traditional Presidential Cycle related thinking. This, you see, is the forensic ‘why’ you can expect a significant rally in the precious metals sector post the election. Is it possible the rally begins earlier? Yes, it’s definitely possible for a bottom to occur prior to the election, however the best part of the rally will likely not occur until the bullish speculators are broken, which cannot be expected until closer to election time. To know the odds in this respect, simply keep your eye on the open interest put / call ratios for GLD, SLV, and GDX (GDX has the large open interest) attached above. Once they are back above unity this will signal bullish speculator exhaustion, and precious metals should be able to rally subsequently whether liquidity conditions remain favourable. (i.e. people will panic into increasingly scare precious metals in order to preserve their wealth.)

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