Thursday, November 17, 2011

Try-Tri-Trianglulations, Rounded Tops and Waterfalls

It is highly unusual for us to get very high negative tick into the close…it usually leads to a nearly immediate reversal, however, there needs to be support and better yet confirmation for that to occur. The reality is that debt, currency markets and many indexes have no indication of any pending bounces and offer no confirmations other than for more weakness. Additionally, as I have said in previous posts…everyone and their brother is watching the bullish pennant continuation pattern - yes that Triangle. It certainly appears rather deformed on the Pit Sessions - to say the least…yes MUCH MORE LIKE A ROUNDED TOP, but WSJ left that option out because its not bullish I guess. Highly publicized patterns and consensus within the society (investors being a subset of society) or a community are VERY suspect. More over the Wall Street Journal has now gotten into the action of identifying the pattern…

So far, there seems little to support their thesis and quite a lot to support that the HEAVY down ticks hitting the close are a sign of the panic and desperation among the investment world to generate cash…I suspect that particular activity will become far to customary going forward. There is a very real potential that the heightened sense of desperation on these market participants will cause a market failure. It will not likely look pretty, to say the least, and I would think its possible to see double digit declines in a very short period of time.

The irony is that while Kyle Bass will be insured with his "put option against the idiocy of the political cycle"…he may find himself being unable to maintain/sustain his position over time and will end up being rewarded with significantly constrained purchasing power for his efforts - likely quite a bit more than his highly misinformed trade analysis may indicate. But, this is the pattern, Bass, Paulson and many others like them will reach the desperation phase and sell anything not glued down, even their most prized jewels, to generate cash. Central and Sovereign Banks and Commercial Banks will have to desperately sell anything not glued down because there is no escape from default for them. This means all that Gold in the Spanish, Greek, Belgium, Portugese, Irish and Italian vaults will have to be released on the open market much sooner and more desperately than anyone could imagine…and that gold will not likely protect you when this occurs…So, ultimately even the insurance it gives you may be of great value when you can hold it for the next 20 political cycles, however, like normal mortals there are practical elements to managing positions and assets - it will find a need to be liquefied most likely well before the insurance value has paid the cost of its carry.

Lest anyone think that the Fed and ECB can invent a miraculous plan by tomorrow morning to shock the markets…they need an event first in order to change rules or sell their unpopular transgressions of society’s rights under some cover. They need an EVENT in order to setup and then will proceed to market their reaction and subsequent plan. By the time that event has happened any plans they think they have now will likely need to change dramatically in addition to amounting to typical peashooter exercises. So, there is little likelihood that the Fed can really do anything miraculous in the very near term.

What you see going on around you is a contraction of credit money…the Fed/ECB can try to offset that with printing and monetization but they will simply be replacing a small piece of the credit destroyed by asset devaluation and credit defaults…their actions will fix nothing and very likely continue to make things worse - as their harebrained schemes have done over the last two years. Lastly, the dramatic constraints on available cash will tighten like a noose around the neck of its prisoner.

Anything that the supposed authorities do will most likely result in less available credit…and there is but one result from that in this extreme stress environment…strong demand for existing and available cash and very weak demand for ALL assets. So, whatever the Super Committee, BURNanke and TRICK-IT come up with will likely further intensify the stress we currently have by further constraining the flow of available CASH where they it is really needed and trapping it where it is not. This means DOLLAR/CASH up and ASSETS down in value. Since the EURO is not really proper cash don’t expect it to fare will against the dollar when there are very few choices left.

What people fail to understand is that in our system, the drug addiction is the credit based money amplification schema and the cure is not real assets or gold…but is something more akin to the relationship of heroin and methadone. In this case, the cure for credit based money is non-credit money. Translated that means - simple, pure fiat paper!
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