Tuesday, December 22, 2009

'Tis the Season of Hope

On December 4th, Investophoria wrote '... we have returned to the "olden days" of the bubble era'.  This was demonstrated by quantifiable measurements of investor complacency.  We also noted that this market is literally on less footing than in '07.

That footing has gotten even more slippery, the bullish gas powering this motor reduced to near fumes.  Since December 4th, when we last posted an update on our market thoughts, the market has done this:

Despite the fact the Hope mentality grows stronger and stronger, as indicated by the further increase in bullish extreme in the next charts, the market is virtually sideways.

We are, however, anticipating a further incline throughout holiday trading on very light volume that should take the Dow up about 250 - 300 points from its current levels before the long-term reversal and downtrend resumes.

This bear market has at least one major downward leg in it as deflationary pressures continue to mount and all inflationary attempts by government are either utter failures or completely counterproductive.

Here are the Investor Intelligence Surveys for the most recent period.


We are at even higher extremes in optimism and bullishness in stocks will almost nothing to show for it.  Again, this is indicative of an imminent top in the major indices, which should follow the risk currencies and commodities downward.  Gold and silver have already resumed their bear-market trends and the primary direction for these metals is down.  The majority of commodities should follow suit as virtually all markets except the USD decline in near tandem.

As more debt defaults are called in, the demand for USD's - which make up a huge majority of all debt in the world - will continuously grow, fueling even further increases in its value due to the actual scarcity of cash reserves relative to debt, which is currently treated as cash in most markets.

If you haven't already, our recommendation stands firm - treat yourself to another gift this Christmas Season and be thankful for an excellent exit opportunity for your stocks, muni and corporate bond holdings, and commodity holdings.  As we have stated many times before, in this Deflationary Depression, "Cash is King, and will soon be Emperor".

Enjoy the holiday season all, and be thankful for those around you!



  1. Oops. Sorry I screwed-up when writing this nonsensical blog. I just found out that unlimited printing of fiat dollars is actually INFLATIONARY and we are going to experience a HYPERINFLATIONARY DEPRESSION. My Bad! Let me apologize for being so stupid. What I meant to say is CASH is TRASH and anyone holding ALL CASH is an idiot. My friend Warren Buffet bought a railroad so he didn't have to hold TRASH and recommends that people not hold TRASH. Do a search for other people a lot smarter than me like Peter Schiff, Marc Faber and Jim Rogers. Read what they have to say and ignore me. You'll be glad you did!

    Sincerely, "Derek the Boob"

  2. Please refer to my post to correct the highly common misconception in the inflationist' belief that the government is "printing money".

    What in fact they are doing is increasing cash reserves, and thus only increasing existing dollars in credit form were lenders willing to lend and borrowers willing to borrow.

    If you look at the majority of lending activity through the past 12 months, you can clearly see that almost all of it has been either guaranteed in part or whole by the Fed and state agencies, or the loss portion of the portfolios bought and lent has been partially guaranteed. This is in fact deflationary as it shows that the market cannot and furthermore WILL not lend or borrow at this point in the credit cycle.

    Once losses are realized on not only the state agency balance sheets but the supposedly untouchable Federal Reserve, they will be forced to cut these programs due to sheer public outrage and thus the credit cycle will not only continue its contraction but that contraction will in fact accelerate.

    Thanks for the comment, "Derek Boobyhead" :), and have a Merry Christmas!

  3. Let me get this straight. We have tens of trillions of unfunded liabilities, plus a deficit that we can't service but all this adds up to "there is such a huge demand for dollars that Gold will decrease in value. The fact that China has announced that it will be increasing its Gold reserves tenfold in the next decade will have no effect. What school of economics did you attend. Get your facts straight.

  4. Dude, you are dangerous. Because you think you're so right.

    Look, we can have a debt collapse(deflation)and still have assets like gold rise(inflation).

    One flation is not going to cover the gamut of ALL asset classes.

  5. The government has 3 choices to come up with the funds for the the deficit. 1.) Severely raise taxes. Political suicide.2.) Renege on the Government debt. highly unlikely 3.) Monitize the debt (print more money. Which do you think they will pick. I totally get that right now the bulk of the money being "created by the gov. is being held by the banks to shore up their balance sheets(nobody wants bank failures) and I also acknowledge that we could have a deflationary inflation(people have less available dollars yet the dollars purchasing power decreases) even in this scenario Precious metals would still be an excellent store of value.

  6. jr. M.O.T.Y. for providing (false) witness to the reality of the economics of gold

  7. I am a gold bull, but I don't feel the need to react hysterically whenever someone posits a different viewpoint. I'm grateful for it, actually.

    To that end, the Investors Intelligence survey clearly portends a substantial correction in stocks. I doubt that it will be of the magnitude of 2008, however. 20%-ish would be sufficient to put the fear of God into people.

  8. I agree David. I don't understand this guy's hysterical reaction. 20% correction will put the fear of god in people.

  9. Derek B is absoutely correct. I've been stating this since Sept 09 and wonder if Derek stole my posts......lol

    Because I had called and know in 2010 all will crash except the USD which will go to 90-95 before it falls to 41 in 2012.

    "Nothing is new under the sun. What has been will be again."

    "Jesus was a rebel" Remember this and your trading will soar. YOU do not have to be religious to get it.

    Merry Christmas

  10. Derek, I have a question on something you wrote on October 29, 2009. This is the quote: "..there will be far less US dollars the government can get (from taxes and such) to repay their bonds with.."

    This is part of your argument for deflation. I do not disagree with you, but would like to ask the obvious. Why won't the government print money to pay their bond obligations with? Fear of inflation? Wouldn't they want to create some inflation if sharp deflation threatens?

  11. E.D.

    The government will always attempt to inflate to negate the deflationary effects on their debt obligations.

    However, attempt is the key word in that sentence - the government can only create inflation via the Federal Reserve adding to the monetary base. Under normal credit and economic conditions this would then turn into much more money via the fractional reserve banking system.

    The catch here is that banks are not using these reserves to lend to private borrowers. Not only are they not willing to lend because of their decimated balance sheets, but borrowers are not willing to take on more debt. Both sides of the transaction are unwilling parties at this time, and we should see this trend perpetuated further and deeper over the next several years.

    The banks are basically doing the monetizing for the government as the current situation stands. This will likely continue for at least a few years.

    In terms of treasuries, this actually makes the government a net beneficiary, as banks are taking these reserves and buying short term treasury debt with them - thus the government can continually perpetuate its treasury ponzi scheme using the vast amount of incoming funds to pay out to those wishing to redeem.

    The majority of treasury transactions done over the next several years will most likely be paper-only transactions with no money exchanged - the US Treasury will simply roll out a new treasury bond, at the request of the holder, tacking on the accrued interest as new principal for the newly issued bond.

    In the mid-term this is highly deflationary. This is money that is being taking from the private credit system and thus will not increase total money via credit expansion - even the fact that most short term treasuries are at or around 0% yield is deflationary. Add in the net credit contraction which is continuing to accelerate and you have a several-year period of deflation in total money.

    The vast majority of existing dollars are in the form of credit which the market has been treating as if it were as good as actual cash. This is obviously not true. The lower quality the debt the less liquid it is. The larger the balance sheet losses the more actual cash must be accrued to repair the damage. This is net deflationary as credit (total money) contracts while cash reserves are in higher demand to offset losses. Basically, there are less dollars to go around and more people who need them.

    In the end, the current situation actually greatly benefits the US Treasury as it makes their bonds that much more liquid via demand. In 5 years time, once the deflationary forces have abated, the inflation side of monetizing debt via the banking system will kick in. Especially since private economic output will have contracted very heavily relative to "public" share.

    This is when the entire integrity of US Treasuries will be brought into question and there is a great potential for downgrade of US Debt and thus very high interest rates and inflation to monetize the gap between existing issue and waning purchases.

    This will also be when you want to own anything but dollars, and should be moving them back into alternative assets (precious metals certainly included).

  12. Derek,

    You write "..the government can only create inflation via the Federal Reserve adding to the monetary base... The catch here is that banks are not using these reserves to lend to private borrowers."

    What's to stop the government from taking extraordinary measures? What if they decided to send $10,000 a month to every person in the US, bypassing the banks? That would get dollars into circulation and drive up inflation, wouldn't it?
    Why couldn't something like that happen? Does this weaken the deflationist argument

  13. Firstly, the process by which the Federal Reserve can do any monetizing is slowly and getting more muddled up. Bernanke and Pals have to watch their step more and more as the possibility of being audited, and constant information requests from congress and the media are forcing them to cover their tracks.

    Secondly, government is always slow to react and late to act. Generally, something that drastic, would mark an imminent BOTTOM to a contrarian investor - for such a drastic action to be taken social mood would have to be at such a negative state.

    Is this possible? Certainly, however government will exhaust all other possibilities before just dumping a bag of money in everyone's lap - they need credit markets to unfreeze so asset values can correct upward to cover massive equity gaps in their programs (i.e. government pensions $2 Trillion shortfall this year because of collapsed asset values).

    Their primary goal is the reflation of asset values for their own political gain and stability, and secondly, everything else.

    So I'm not saying it isn't impossible, I am saying that it will take several years of violent deflation to get the government to the point of just handing out cash. As I have written many times before, there is a very high possibility of high-to-hyper inflation coming out of this deflationary period. But as for the deflation, government does not know how massive it will be and will therefore over-react at the very end just when they should be letting the markets begin their recovery naturally.