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This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy. But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them. It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last. Thanks again, Ludvig. Unfortunately, for us all this is now NOT an isolated currency policy as detailed in the last paragraph, because globally virtually “ALL” governments are pursuing this policy at this point in time. So first we will see the biggest offenders suffer from their hubris, AKA the “UNITED STATES”, and then it will rotate to all countries which follow such monetary policies. Public Servants always and every time have become Public Serpents, robbing their constituents to further their personal ambitions and collection of power and wealth. Smoke Signals aka The "Big" Picture In the opening Crack up boom series we outlined the chorus of opinions expressed by the charts of global stock markets. And what a chorus it was, you just can’t ignore what those charts are saying. And to think that with the exception of China the broad public is skeptical and on the sidelines is to realize how far these markets have to run. Today’s “CRACK UP BOOM” is a lesson in TEA LEAF reading! They too are forming a chorus of INVESTMENT insights. Last week we outlined how the “POLICY OF INFLATION” through fiat money and credit creation is now “Globally” wide spread. Having learned their craft from the maestro Alan Greenscam er Greenspan, and now Ben Bernanke these Central banks and financial authorities are taking it to heights even they never imagined. In 1987 when the US stock market crashed the Greenspan “PUT” was born. This policy of meeting every financial or economic shock with the printing presses at the treasury commenced at that time, evolving into the greatest “BULL” market in history, stocks, bonds, real estate, etc. NOTHING WAS LEFT BEHIND. The stock market crash of 1987, the real estate crunch in the late 1980’s and early nineties, the emerging market bond market collapse of 1997-98, Y2K, NASDAQ and stock market weakness in 2001-2003, was met ALWAYS with the same prescription from the DOCTOR aka Greenspan. Print and lend away, today’s real-estate problems, I promise you will be met with more of the same. The Federal Reserve and US treasury are on the prowl, checkbook in hand ready to drop money into the holes as the blasts from this latest “PROBLEM” emerge. Not to do so spell CURTAINS for the “asset backed” financial system as it is currently comprised. Bernanke is an EXPERT on the depression; a liquidity crisis will not be tolerated by this man, on that you can INVEST. Of course public servants in the United States were staunch supporters of the Maestro, as his monetary policies made for soft recessions and heightened prospects for extending their incumbencies past the next election. Now Public Servants and financial authority’s world wide have embraced his lessons. So the “CRACK UP BOOM” is now a GLOBAL AFFAIR. The rope is short in the United States, but not close to the end as most people think as most of the liabilities are held “OFF THE BOOKS”, and the mainstream financial media focus only on those that are “ON THE BOOKS” so the uniformed investor and public at large are sleeping just fine thinking things are “MANAGEABLE”. The only problems they are having are when they go to the grocery store, gas station, public utility, tuition window, etc. They haven’t figured it out yet what the game now is. But many others such as readers of this commentary and the “SMART MONEY” have. And the party has just begun, as I am about to outline to you. The first leg of this boom was from 1987 stock market lows to the 2000 highs (powered by Greenspan), we now have gone through a corrective period in time and price and the next leg is just beginning. The wind was at their backs as disinflation allowed them to get away with murdering the dollar through printing press with impunity. Dollars in circulation rose by some estimates 600% over the period of Alan Greenspans tenure at the Federal Reserve. This next leg up is powered not only by the United States money and credit creation machine but now by the Worlds Central Banks and Public Servants, as they build their own economies using Greenspans Blueprints. So get ready to party like its 1999!!! Let’s keep in mind the 10’s of trillions of dollars, yen, Euros, Rupees, rubles, Swiss Francs, Aussie dollars, Dirhams, Real’s, Yuan, that are just sitting in bank accounts and bonds around the world. It is what many store their wealth in and it is under “ASSAULT” as the governments that issue them try to steal the purchasing power in them while they sit in the bank and bonds from the people who hold them through “FIAT CURRENCY and CREDIT CREATION”. This money is being eaten daily by the governments as it sits in the banks and the bonds. Remember as well that what you will be looking at is priced in this BALONEY aka the currencies you use to conduct your affairs. This money must find a new home before this “CRACK UP BOOM” has run its course. I will be outlining many if its new homes and highlighting some of its past ones. Buckle up your seat belt!
Years’ ending in 7 and what comes after! It doesn’t matter which global stock market you view, they are all in unison signaling the inflationary global boom as outlined by VON MISE’S in the crack up boom. But they are now a “FINGER OF INSTABILITY” As they have gotten ahead of themselves as excellent fundamentals have combined with too much liquidity to go TOO FAR, TOO FAST. Last week Federal Reserve chairman Bernanke made to statements which are INTERESTING. The first being that inflation expectations are “IMPERFECTLY ANCHORED” and that a “fiscal” crisis now threatens the near future and of course he speaks of the CDO, CMO (collateralized debt/mortgage obligations) crisis that is disrupting the credit markets. What a perfect one two punch to people who may now be a little overconfident. It is being reported that between 200 and 600 BILLION dollars worth of these toxic BOMBS sit on the balance sheets of institutions and pension funds. Sounds like a lot, but it is barely 3 or 4 months of money printing at the current pace, and as I have previously mentioned, they have the checkbooks at the ready. They will print the money BEFORE it destroys the liquidity of the US financial system, on that you can rely. Only the LITTLE guy will be left out of the rescue, and he or she will be Hung/left out to DRY. It has been over 1500 days since the US markets have corrected over 10%, the longest stretch in HISTORY. So we are due. I want you now to look at two charts of EXCELLENT WORK by Peter Eliades of www.Stockmarketcycles.com (I highly recommend his excellent analysis). The first chart is the years ending in 7 with each day averaged over a hundred year timeframe spanning 1897 to 1997, and of course we are in 2007. Take a look at this; it is breathtaking in its correlation:
He published this chart a week ago and look what happened the vertical spike we saw this past week in the global markets MIRRORED the pattern going forward as outlined. We now have a “ROADMAP” on what to watch for and when. If Bernanke has to pull out his checkbook to address the emerging CDO/CMO “FINGER OF INSTABILITY” and the stock market corrects which it badly needs to do it will set the table for the next round of fiat currency and credit creation. Bernanke’s big job will be to take the bombs off the balance sheets of the institutions and pension funds as they are actually “WEAK HANDS” as their investment covenants force them to sell if the investments they hold fall below a certain investment grade rating. Which they are doing on a daily basis. These institutions and pension funds (incompetent fools) seldom if ever look past the S&P, MOODY”S or Fitch rating label, and the Oak-lined offices of the money center banks and prime brokerages. As once those are applied to ANY investment product the only consideration is the track record, and up until now they have been EXCELLENT, as marking to model has been different than marking to market as up until now there hasn’t been a market for these securities except over the counter. So you can expect the years ending in 7 to do what they have done for over a hundred years, and that is “CRATER”. In Peter’s daily update of July 16 he notices something very rare: “Something happened today that has never happened before in the history of the Dow, at least in the 81 year history we were able to check in our computer database. The Dow Jones Industrial Average closed at a new all-time high while breadth on the New York Stock Exchange was greater than 2-1 on the negative side. This is not phony, distorted breadth either, because the breadth on the S&P 500 was also almost at a 2-1 negative ratio with 166 up issues and 328 declining issues. That has never happened before going back to 1926. Of course, if something has never happened before, it is difficult to attribute significance to it if it happens for the first time.” Wow, very interesting, as anyone who has tried to short this market has been severely punished by the marketplace. A LOT of last week’s 280 point rally was a short covering BONFIRE of the record short interest in stocks. Big funds and the Plunge protection team took the shorts to the BANK! Punishing them for the heresy of selling things short in an asset backed “Financial system”. Puts are at record levels so it will be very hard for the market to retreat on such negative sentiment.
Another catalyst for this pullback is Murphy’s law, what can go wrong will go wrong. The big banks are out on a limb, they have committed to 10’s of billions of private equity financing with cov lite terms and the Junk bond markets have seized up in fear of the sub prime mess and because of the sell off in the bond markets in general, leaving them holding the bag on commitments they had planned on unloading on investors. They are long those loan obligations and very nervous! And of course it is a big opportunity for those of us that use sophisticated techniques such as “SHORTING” the market. Should we worry and pull the covers tight over our heads? Probably not, for as we look at the next chart covering the same time-frame. It is extended to the other side of the outlined pattern going out over the same time period but going into years ending in 8: The “CRACK UP BOOM” saves the day as dollar holders EVERYWHERE step forward to take advantage of the “Indirect Exchange” opportunity courtesy of the “FIRE” sale on stocks. LOL. Nothing is a sure thing, if this pattern does not unfold as outlined it is solid evidence of the crack up boom in full swing. So buckle up your seat belts and get ready for a roller coaster ride into the fall. A fall like the one outlined above would only be healthy and take the worlds stock markets back to their 20 month bull market moving averages, in the case of the Dow Jones industrials it is 12,220, on the quarterly chart it is 11,190. In the case of the S&P 500 the monthly moving average is 1387, and the quarterly moving average is 1272. I WILL SAY IT WITH MORE EMPHASIS - THIS WOULD BE A HEALTHY EVENT! Of course it would “RE” anchor the publics inflation expectations as Bernanke desires, and would entail the short term fiscal crisis he warns about. But until it happens he can’t see where the fires are so he can send his helicopters with water er cash to put them out! So it’s off to the races for the next month or so, then a breathtaking ride on the rollercoaster named stocks. It will be interesting to see if history repeats itself AGAIN! In conclusion, an inflationary BOOM is on the near horizon courtesy of the emerging “CRACK UP BOOM”, and it has many years to run. As Ludvig says about the crack up boom “This first stage of the inflationary process may last for many years”, and it will. “FINGERS OF INSTABILITY” (see Tedbits archives) will present themselves over and over again in reoccurring patterns. Learn to benefit from them, don’t let them knock you out of your longer term opportunities. The gas of Trillions of dollars and other currencies are sitting in the tank (er BANK), so to speak ready to fuel the “CRACK UP BOOM”. Those that look for deflation you are WAY early, but your faith in it shall be renewed if the stock market holds to history. Don’t miss the next and final edition of the “CRACK UP BOOM” series!
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INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
