Gold News

Silver 2011 Flame-Out for Stocks?

Two courses for US stocks near term...
 
HAPPY Independence Day America! writes Gary Tanashian in his Notes from the Rabbit Hole.
 
Your markets are bullish...and over bought, over loved and running on increasing momentum.
 
 
The graph tells a story of the end of the Greenspan era's commercial credit inflation, which was resolved in 2008, and the beginning of the Bernanke era and official credit inflation, which is ongoing.
  • The bubble in mortgage and high risk commercial products (notice how officialmonetary base was in essence flat) began to fade in 2006 as corporate profits began to roll over, soon followed by the S&P 500.
  • The 2008 liquidation of the Greenspan era excesses brought with it all manner of official bailout operations, including QE's 1, 2 & 3. Notice how each QE was instituted after a flattening of money supply.
  • But ultimately it is corporate profits that conventional market analysts are paid to respect (paying no attention to that man behind the policy curtain) and they have generally been strong.
As we noted last week, profits are rolling just a bit. Meanwhile money supply and the stock market continue upward. But there is a thing called 'QE tapering' in play and that could eventually flatten out the money supply as happened in 2010 and 2011/12. They are tapering in an effort to gently manage an exit from the latest round of market and economic manipulation AKA official inflationary operations.
 
It will end badly because it was created through manipulation, not productivity. The current operation makes Greenspan look like child's play. He had plausible deniability because it was the evil entities on Wall Street that took his policy ball and ran with it, slicing and dicing up all sorts of investment vehicles to sell to an unsuspecting public.
 
This time, there is no middle man. The Fed is more honest about its inflation as it expands its own balance sheet for all to see. And yes, the balance sheet is still expanding albeit at a tapered pace. Add in Zero Interest Rate Policy (ZIRP-Infinity?) and the Bernanke Fed has been celebrated as heroic because the majority perceive that they successfully did what they had to do to save the financial system.
 
But what the sycophants always seem to forget is that they had to do it because a different flavor of the same inflationary Fed policy fomented bubbles and brought on the big bust to begin with.
 
We remain in the age of Inflation onDemand and of boom/bust, which is much different from the pap that the happy idiots pumping today's bullish environment would like to believe. Right now we are on a boom and that should not be denied. But understanding the framework within which the boom exists is important in managing risk.
 
What look like stellar technicals right now could continue to an upward blow off because that is how booms usually end. But if we are correct on the boom/bust nature of policy driven markets, the bust is gonna be a doozy. So please keep that on radar as well. These are not conventional markets.
 
The US stock market is quite vulnerable to a correction, which could be healthy in nature; a pause to refresh that might put the ultimate top out to later in the year. If the market does not pause and grind out some of the over bullishness, a top that comes off of unsustainable momentum and over bullishness would probably be terminal.
 
Option 1: We stand with the view that a near term correction is probable because sentiment is unhealthy, indicators like the VIX and the Gold-Silver ratio are stretched to limits, the market is separating from the fundamentals that even conventional analysts follow and simply because July is a month that usually brings about some disturbances. This is the favored view.
 
Option 2: The less favored view is that dumb and increasingly greedy money now sponsoring the market continues to pour in taking US stocks to an eventual 'silver spring 2011' style flame out.
 
Option 1 is potentially much more bullish from a sustainability standpoint. Option 2 would get all sorts of dumb money excited before likely terminating the bull.

Gary Tanashian successfully owned and operated a progressive medical component manufacturing company for 21 years, through various economic cycles. This experience gave Gary an understanding of and appreciation for global macroeconomics as it relates to individual markets and sectors. Along the way, Gary developed an almost geek-like interest in technical analysis (TA), to add to a long-time interest in human psychology. Various unique macro market ratio indicators were also added to the mix, with the result being a financial market newsletter, Notes From the Rabbit Hole (NFTRH) that combines these attributes.

See the full archive of Gary Tanashian.

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