Deflation is still running the show.

I can't count the ways that I see deflation settling in on the global economy; the signs are myriad and legion.  I'm of the view that the world is trying to remain calm but that there are just too many signs and signals for the herd to ignore.  You can't turn on the TV anymore without hearing about "the fiscal cliff".  The military is quietly receiving major budget cuts (called sequestration).  Banks are being forced to increase their tier 1 capital reserves to 7% and gold is being called up again to serve as the premier monetary asset that will back the fractional reserve Ponzi scheme.  China is rolling over, Australia's housing bust is in full swing, the Middle East is in crisis, the Eurozone is in a historically significant depression and Japan is a bug in search of a windshield. 

 

Finally, and most importantly, Bernanke is reaching the very end of what is possible for him to do in regards to Ponzi pumping.  His recent pledge to keep interest rates low until mid 2015 is broadly viewed as a "throw hands in the air and panic" move by the fed.  All of their learned pumping cannot re-ignite the Keynesian animal spirits.  The herd is retrenching, pulling back its horns.  It is not taking out more loans and in fact the new "cool" is to be seen as low impact on the planet with a tiny house, a tiny car and a tiny lifestyle.  These are cultural swings that Bernanke cannot fight over the long run and it will lead to not a lost decade but rather a lost generation.  These are the wages of the fractional reserve pump and dump Ponzi.

 

A few days ago I posted that I thought the S+P 500 was looking ripe for a major roll over.  The recent revelation of tech revenue collapse by the likes of AMD support this view.  And I'm looking at comments about the latest IPhone right now and they tell me that Apple is running out of steam.  I would not touch AAPL stock with a 10 foot pole right now.  With Steve Jobs gone, AAPL has most likely peaked.  When AAPL stock begins to decline it will further dampen the animal spirits of investors and I think the result has to be a massive rush for the exits.

 

In truth, the S+P 500 has been on a decline for many years if viewed in inflation adjusted terms:

In fact, it's even worse than it looks because while investors have been losing real buying power, their dollar denominated "profits" have gone up and that means the tax man gets a big windfall from fake, inflation generated profits.  Regardless of whether you look at the S+P performance in real or inflation adjusted terms, these charts are ugly to the point of being scary.  In both cases there is a significant setup for a head and shoulders collapse.  Worse yet, this is happening on the right hand side of a clear mania chart. 

 

The exponential left hand side is clear evidence that the growth of stock market profits was driven by massive amounts of leverage of the type that is only possible with a corrupt money supply based on fiat currency and fractional reserve banking.  I'm telling you once more and without even a hint of doubt that this mania chart will eventually collapse just like the Nikkei 225 chart did over the past 20 years.  It must collapse because the banks no longer want to lend money (or their books are too impaired to allow it) the way they did during the boom at the same time when the people don't want to borrow anymore and instead want to pay down debt and live more simply.  This is credit deflation 101 and it must mathematically reduce the quantity of currency rolling around in the economy.

 

What I'm looking at on the S+P right now is shown in the chart below.  In short, the right hand shoulder of a massive head and shoulders formation looks to have peaked in the form of an

ending diagonal.  This is not confirmed yet by the chart.

Confirmation, if it occurs, will take place in the form of the S+P falling below the lower line that forms the ending diagonal. Further confirmation could be seen by a failed back test of that lower support-turned-resistance line from below.  If this occurs then it will constitute a trinity of technical terror IMO: 1) the collapse of the ending diagonal  2) breakdown from a declining double top (with the last peak in 2007) and 3) likely on the downward slope of the right shoulder of a massive, multiyear head and shoulders formation.  All of this is happening at a time when boomers are retiring and they are no longer contributing to their 401ks and instead drawing down money from them. 

 

I hope that everyone has the eyes to see and ears to hear this fundamental truth: there is not enough value in the stock market to cover all the claims and expectations of those who are invested.  PERIOD.  The high valuations are to a great degree the result not of honest investing but rather of massive leverage by elite moneymen/bankers/hedge funds who are very effectively gaming the corrupt money supply.  Do you REALLY think Mitt Romney earned the $200 million he is supposedly worth?  Of course not.  He gamed the system because he knows how the scam of fiat currency and fractional reserve banking work and he got on the right side of the trend at Bain capital and leveraged up to the hilt.  Every dime he extracted from the markets and from the economy like that was effectively stolen from working people.  PERIOD. 

 

Keep in mind, I'm not really blaming him.  He didn't create the Federal Reserve or its corrupt rules.  He just gamed the system like a pro.  But he knows what he did which means he is a man of low moral character IMO.  Of course Obama is the same crap, gaming the system for his own political purposes.  Ron Paul was the only honest guy out there, a fact which people will someday come to realize, but probably only after he is dead and gone.  For now, the people still think they are going to get rich in the something for nothing Ponzi even though most cannot win by pure mathematics.  People will only get it after the Ponzi-pumped stock market collapses and everyone finally sees it for what it really is: gambling with sharks.

 

While all of this is happening the dollar price of gold and I believe of silver as well can and will be volatile.  However, even if the dollar price of these metals goes down I am 100% confident that the buying power of them will be retained.  The global monetary system is so screwed up and corrupted today that the ONLY way to get it back under control is to back it with gold in a very significant way.  That means that big money houses will have to be buyers of gold and they will be competing with individuals for this ownership.  The Internet is taking away the first mover advantage from those in the know.  They no longer have unlimited amounts of time to play their games without everyone else catching on.  Too many people are already aware of the new Basel rules that are moving gold to tier 1 capital status while mandating an increase. 

 

We are not talking about short term ups and downs here, folks, but rather a measured move to reduce leverage over the next decade BY LAW:

"To meet the capital requirements effective in 2015 (4.5% for the common equity ratio, 6% for the Tier 1 capital ratio), banks are estimated to increase their lending spreads on average by about 15 basis points. The capital requirements effective as of 2019 (7% for the common equity ratio, 8.5% for the Tier 1 capital ratio) could increase bank lending spreads by about 50 basis points."

 

Yes, that's right, they are already planning to reduce leverage in the multitrillion dollar banking system by significant amounts over at least the next 7 years.  Now, imagine you are a banker and you see these rules.  You know you will have to maintain higher reserves lest the government come in and take your bank over.  Are you going to be increasing your reserves by buying government bonds which have been tier 1 capital for a long time knowing that everything is cyclical, or will you do it by buying gold which has not been a tier 1 asset but which is going to turn into one in 2013?  If you have any sense at all you will get behind the new trend, not continue with the old, tired trend.  If the US keeps going into more debt (and it WILL, for sure or there will be massive riots or worse) then someday someone is going to downgrade it to the point where it can no longer be used as tier 1 capital reserve.  Why would you want to risk that as you comply with the new reserve laws?  In short, the bankers might be greedy a$$holes but stupid they are most certainly NOT.  They will buy significant amounts of gold in order to meet their new reserve requirements and it will put a floor on how low the dollar price of gold can go.

 

As usual, I suggest that timing the gold market is for the most part a fool's game.  Save your retirement funds on a regular basis outside of the 401k system, outside of the dollar, outside of the paper money scam altogether buy trading your dollars in for real money on a measured and steady basis.  Do so as a savings vehicle, not for the purpose of "investing" or trying to make something from nothing.  Be happy with the ability to save your excess labor in a form that is beyond the greedy hands of governments and bankers.  The monetary status of gold is a gift to all honest working people all over the world.