It’s All Out the Window Now

It’s All out the Window Now

By Gary Tanashian,

Excerpted from NFTRH 204:

In the run up to Thursday’s FOMC announcement of open ended ‘asset’ (mortgage debt) purchases, ZIRP extension and Twist continuation, NFTRH had been using the average US presidential election cycle, sentiment backdrop and of course technical analysis to stay bullish (with associated rising risk profile).  We had incorrectly minimized the potential for QE right here and now in the interest of not running with an increasingly over bullish herd and with respect to risk management.

Well, that is all out the window now because the US has apparently conspired with Europe to jointly enter the currency depreciation sweepstakes with the US springing out of the gate to a healthy lead.  Sentiment is becoming dangerous, speculation is breaking out and liquidity warning indicators like the Gold-Silver ratio, US dollar, US Treasury Bonds, TED Spread and LIBOR have all been dispatched on a southward journey in the interest of greed, speculation… and desperation.  This is the moment of maximum hubris by Ben Bernanke and powerful policy makers the developed world over.

This is the moment that this newsletter’s name comes to the forefront because we as market participants, as participants in society are down the rabbit hole now.  We have actually been there since 2001 (some would argue since 1971) but now all pretense of normalcy is gone.  The somewhat clichéd title of the main website ‘but it is what it is’ (biiwii) comes into play because this is the system they have created for us.  Our dear leaders actively manage the environment in which we operate and thus far, survive.

“There is nothing wrong with your television set. Do not attempt to adjust the picture. We are controlling transmission. If we wish to make it louder, we will bring up the volume. If we wish to make it softer, we will tune it to a whisper. We will control the horizontal. We will control the vertical. We can roll the image, make it flutter. We can change the focus to a soft blur or sharpen it to crystal clarity. For the next hour, sit quietly and we will control all that you see and hear. We repeat: there is nothing wrong with your television set. You are about to participate in a great adventure. You are about to experience the awe and mystery which reaches from the inner mind to — The Outer Limits.”

outer limits

You just knew this was coming… :-)

Why the little smiley face?  Because since day one (for that was June of 2004) I have felt that the system (of Inflation onDemand) is phony baloney and began preparing in line with this view in 2002.  Precious metals, debt elimination, alternative heating, personal protection and other initiatives have been combined to augment a relatively happy lifestyle, while always remaining aware of the artifice and embedded moral hazards of the system in which we operate.

Excerpted from first thing I ever wrote, which may have also been the last thing I actually needed to write, FrankenMarket Lives, in 2004:

“Whereas a less mature, formative America worked and produced itself to the stature of superpower, we now find a bustling, mature society that sadly feels entitled to its riches and stature.  In short, hubris has set in to the American consciousness, and it is hubris that I believe will be its downfall.  We are simply not seeing things through the same eyes that our great grandparents, grandparents and even parents saw them through.”  And…

“The market will look to the economy, and being a forward looking monster, I expect it to see one of two things; The Fed taking away the punch bowl for real, deciding too late that the party is over, or more realistically, it will see a Fed doing all it can to sustain the monster it created.  This market was stitched together with debt, and it will require more of the same to keep it going.  We are knocking on the door of hyperinflation, and I believe the Fed will choose to open that door, given that it is too late for our economy to de-leverage in any orderly fashion.”

Since this was written I have come to respect the idea of deflation as an eventual terminator of the system.  This would be the alternate ending to von Mises’ Crack Up Boom hyper inflationary blow up.  I am not learned enough to be able to predict which will win out, so NFTRH will just proceed with the simple picture it has used since its launch in 2008.

30 year yield
Monthly 30 Year Yield, AKA the ‘Continuum’

The Continuum AKA the multi-decade decline in long-term T bond yields acts as a backbone to the Federal Reserve’s main body of work; i.e. inflation.  When the lower boundary of the Continuum is threatened the Fed acts in an inflationary manner, ostensibly to save the system from a deflationary unwinding.  When the upper boundary (the 100 month exponential moving average) is threatened, a red arrow gets inserted into the picture and just kills anyone foolish enough to go in hard on the inflation play; like ‘Bond King’ Bill Gross did concurrent with the most recent red arrow’s appearance.

So, according to the Continuum at least, we see why Ben Bernanke went steroidal last week.  He had the implied permission of this chart.  It has been after all, a neatly mocked up deflationary backdrop ever since Europe started to unwind and the Fed and those who follow its breadcrumbs began sopping up T bonds to epic and over bought status.

But that play is out the window now as the frightened millions who bought the deflationary bear argument at the exact time they should have been looking bullish sit squarely in the line of fire of inflationary bazookas being manned by the Federal Reserve and ECB.  Folks, we are going off the charts now and risk will continue to rise with market prices.  It’s a high stakes game after all.  All or nothing.  With gold and silver prices above 1700 and 30 respectively, crude oil at $100 a barrel and the S&P 500 above 1460 backed by a lame economy, one wonders how much upside certain asset markets have in them.  It is a long way after all, to the next red arrow.  We’ll leave aside (for now) the question “what happens if the Continuum does not paint a new red arrow at the EMA 100 but rather, just smashes through it one day?”  Well, here’s a hint… we would hear a lot of the name ‘von Mises’ and a lot about his ‘Crack Up Boom’.

But that is what bubbles are.  They are all until eventually they are nothing.  We may be forced to speculate and make our funny munny that would be created out of debt monetization.  I personally enjoy this process in warped sort of way.  I understand the terminal nature of what is in play.  I understand what happens when money gets so frightened that it just flies up its own ass in a panicked display of unbridled greed and fear.  But this is what I have been preparing for since 2002.

I was created first by Robert Prechter and then nurtured by Marc Faber, Bob Hoye and a notable and unnamed person I met down in the Rabbit Hole.  He also played a role in activating others, including some who are widely known now.  That was a weird and scary time in my life.  Today is just destiny I guess.

So it is all out the window now, with “it” mostly defined as conventional analysis by conventional market analysts.  The lunatics are taking over the asylum and you are about to participate in a great adventure.  You are about to experience the awe and mystery, which reaches from the inner mind to – The Outer Limits.

Be ready for anything; like risk, riches, martial law, the system’s end or a brighter future.  We are going off the balance sheet and off the charts.  Okay, now NFTRH 204 reels in the loony talk and returns you to your normal programming.

And with that NFTRH 204 transitioned to more traditional analysis because there are fortunes to be made, there is capital to be preserved, perceptions to be cemented and and a willfully created speculative environment to be managed.  Check out the free eLetter and keep an eye on as we manage as best we can, what may prove unmanageable for many due to the Fed’s actions last week.

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