SP500 and Dow Jones Megaphone charts 2009-09-07

S&P500 and Dow Jones Megaphone charts

Monday 7th September 2009 at 18:04


Here are two charts of the S&P500 and Dow Jones with megaphone (top?) formations, as described in my previous post:
Inflation Deflation debate on financialsense.com 2009-09-06

I think that they may indicate increasing episodes of alternating deflation and inflation that may continue to alternate leading to some kind of collapse at the end, because megaphone patterns tend to be bearish and resolve with a breakdown below the lower trendline.

I am going to look for more evidence to see if it is likely that we get alternating inflationary and deflationary episodes during the current crisis and to see if there is any precedent for this.

Dow Jones megaphone:




S&P 500 megaphone? :




Inflation 1980s-2000:
Long term bull market in stocks, bonds and property with few interruptions. Topped 1999-2000.

Deflation 2000-2003:
Small debt defaltion and falling asset prices, stock market crash.

Inflation 2003-2008:
Massive inflation in debt instruments and derivatives, very low interest rates at 1% , huge property bubble, commodities rising, price inflation, rising stock markets, some to new highs.

Deflation 2008-2009:
Larger debt deflation, banks bankrupt, financial panic, stock market crash.

Inflation 2009-now:
Massive injections of liquidity into bankrupt financial systems, ultra-low interest rates of zero-0.25% in USA (similar to Japan in late 1990s to present day). So what happens next?

Deflation? 2010?:
Massive bank failures, debt repudiation, market crashes, negative CPI.
or does the present 2009 trend morph into Hyperinflation?


Here are three of my previous blog posts before last year's panic:


Inflation/Deflation debate is BUNK! 2008-05-29.

Megaphone top in Dow:Gold ratio? 2008-06-03

Chart hints at Financial Disintegration: 2007-12-23)

Inflation Deflation debate on financialsense.com 2009-09-06

Monday 6th September 2009 5:03 pm:
Inflation Deflation debate on financialsense.com

Bon Prechter the archetypal deflationist was interviewed by Jim Puplava on http://www.financialsense.com/ this Saturday. Very interesting. He admitted that he hadn't expected that there would be one last 'final' reinflation after the recession of 2001 (he had expected the deflaiton to start in 2000-2001), but he was convinced that the events of 2007-2009 were exactly what he had predicted in his book 'Conquer the Crash' many years earlier. The book has been updated for a new edition and is going to print, by the way.

Jim Puplava is going to interview two inflationists followed by one more deflationist in the following couple of weeks. If they are as good as Prechter's interview then they will be very informative and intellectually stimulating.

Myself, I wonder if we are going to see something different from the big hyperinflaation or big deflation that the inflationists and deflationists are touting.

I think it is possible that we might see alternating periods of inflation and debt deflation, because we have actually seen this already:

1980s-2000: Long term bull market in stocks, bonds and property with few interruptions.
2000-2003: Small debt defaltion and falling asset prices, stock market crash.
2003-2008: Massive inflation in debt instruments and derivatives, very low interest rates at 1% , huge property bubble, commodities rising, price inflation, rising stock markets, some to new highs.
2008-2009: Larger debt deflation, banks bankrupt, financial panic, stock market crash.
2009-now: Massive injections of liquidity into bankrupt financial systems, ultra-low interest rates of zero-0.25% in USA (similar to Japan in late 1990s to present day). So what happens next?

These periods coincide almost exactly with stock market rises and crashes.

1) Liquidity injections not sufficient to offset debt collapse and asset deflation: result, another banking crisis and deflation, possibly hyper-deflation and comlete deleveraging of economy.
2) Liquidity injections sufficient to prevent debt collapse, possible spillover into many asset markets and consumer prices: resulting high inflation or even hyperinflation.

No-one seems able to give a really convincing argument to back either of the above cases, possibly because nobody knows the answer!

I have a feeling that we might be in a new stock bull market that could take us to yet a new nominal high in the Dow Jones, as per 2003-2007, or to a high in the 14000 area. However, Prechter's argument is that there has been a socio-economic change in 2008 that makes this impossible and people are not going to take on more debt.

The large increase in the savings rate agrees with Prechter, as did the rally in the US dollar in 2008 that corresponded to the unwinding of the 'synthetic dollar short position' that the deflationists were postulating before this event. The deflationists were correct: dollars were raised in a hurry to pay off debts and to refill destroyed bank reserves, resulting in a very sharp US dollar rally in late 2008. In that case, we see either a low trending market or another crash coming soon because deflationary forces could be dominant. Many inflationists (even very clever ones such as Jim Sinclair) scoffed at the synthetic dollar short position argument, but it did happen!

My feeling is that, since there is no convincing argument to determine whether the Federal Reserve, the ECB and the Bank of England can re-ignte inflation to balance the deflation which is the natural process that would happen in their absence, then we might be in for alternating periods of inflation and deflation, which might increase in amplitude as the debt collapse continues.

I note that the stock market, well the Dow Jones (and the S&P500) anyway, made a high in 1999-2000, a low in 2003, a higher high in 2007 and two slightly lower lows in 2008-09, we have another possible megaphone formation in progress, much like the megaphone in the Dow to gold ratio that has been forming since the 1920s. In other words, the market values of assets are increasing in uncertainty as this crisis unfolds, possibly leading to a catastrophic collapse at the end of this period.

Bob Prechter is expecting a major deflation in the 2010 timeframe, larger than the one in late 2008, once the present 2009 inflationary episode is over. In his view, the Fed's purchases of non-performing assets in 2008-09 will not generate inflation because they were more or less targeted as loans to specific institutions to replace the non-performing assets with existing Treasury bonds, rather than freshly 'printed' money, as I understand it. And when more assets fail, such as in the commercial real estate, prime mortgages and leveraged buyouts, many more defaults will come and deflation will continue, sending markets to new lows.

Here are two of my previous blog posts before last year's panic:
Inflation/Deflation debate is BUNK! 2008-05-29.
Thursday 29th May 2008: Inflation/Deflation debate is bunk.
and
Megaphone top in Dow:Gold ratio? 2008-06-03
Tuesday 3rd June 2008: Megaphone Top in Dow:Gold ratio?


Charts for new post:


Dow Jones megaphone:







S&P 500 megaphone? :

7 months later, still under $1000 - 2009-08-13

2009-08-13 at 23:55: 7 months later, still under $1000

Wow, I am back online. In the last few months, I was looking after my elderly Dad, who has now sadly passed away, God bless him.

During this time, nothing much has happened. No significant new bank meltdown, gold still consolidating under $1000, so I didn't miss much in the gold world.

Obama with more power than Bush 2008-01-30

Obama with more power than Bush 2008-01-30 1:26 p.m.

<<>>

Who said that? I like it. It's a good quip.

I was a bit amazed by how Obama was saying in his speech about all these things that the Americans need to build, you know, railroads, roads, bridges and all the like. Maybe oil refineries would be a good idea too!

Anyway, one might wonder where is the money for all this stuff and of course it will all be printed money. Why weren't all these things built during the boom when there was actually some money? It's not the time to build them now - America is broke (and so is the UK of course!)

However, I suppose you can never underestimate how the ruthless ruling class can pull some "magic" rabbit out of the hat.

I pondered to my Dad last night and wondered if the bear market in everything might have been finished (the deleveraging, the "deflation") and we might be infor the inflation soon. I said to him that last year everyone was expecting the crisis to be postponed until after the election so that the Republicans might win. The opposite happened. The whole thing went completely tits up just before the election and the republicans got shafted.

Now the newly elected Obama seems to have a huge store of goodwill and euphoria over his victory. Bush gone, everyone is happy. Race equality, the era of slavery finally put to rest, eveyone is happy, so they think. (Wicked thought: Maybe Equality = slavery for everybody!)

Maybe the elite stuck Bush with the worst of the crisis.

Anyway, now Bush "Shrub" is gone, Obama has so much goodwill right now that he could take far more emergency actions and powers than Bush ever could, before the angry public took to the streets, couldn't he? That is superb for the elite, don't you think? Obama is a gift for them. During the first Great Depression, Roosevelt (FDR) nicked all the gold, nobody cared, devalued the dollar, nobody cared, took USA into WW2, nobody minded; they loved him, gave him 4 terms!

Did we have Hyperinflation already?

Hyperdeflation scenario:
Could we get hyper-deflation of the $500 Trillion derivatives pyramid - a total and instantaneous deleveraging? This could all happen in a single day or even a single hour and no-one will be able to get out of the way. It could come like a thief in the night.

Hyperinflation scenario:
However, if the Fed succeeds in stopping this process or event, it will mean that they will have committed hyperinflation to cover all these potential failures, having possibly had to underwrite or monetise all several hundred trillion of derivatives transactions. Taking $500 Trillion as an estimate of derivatives' notional value, that would mean a 40x increase in money supply (M3 being about $13T - and US GDP being about the same). That's 4000% inflation guaranteed then, if the Fed succeeds."

Now, considering the above, have we already had the hyperinflation that may on the web have been discussing as being in the future?

1) Firstly, we have had a 100-fold increase in prices in the last 90 years, since the inception of the Federal Reserve and the first ending of the Gold Standard in 1914.
2) Secondly, we have had hyperinflation in the notional value of derivatives transactions at a far higher rate than that of the traditional measures of money supply M1, M2 M3, MZM, TMS, Adjusted Monetary Base, etc.

It seems to me that the measures of traditional money supply are becoming irrelevant as the leverage increases and the derivatives streak ahead of all measures of savings, cash and GDP.

Taking $500 Trillion as total notional derivatives value, that is 40 times the US money supply, 40x the US GDP and 10x the world GDP. Would a 2.5% wipeout in derivatives notional value wipe out the US GDP? I don't know!

It would be fascinating to see the figures from the Bank of International Settlements (BIS) http://www.bis.org/ for derivatives transactions notional value for year end 2008, to see if they decreased in the second half of 2008 as they should have done with this present 'deleveraging' - or if they actually increased.

Try this link http://www.bis.org/statistics/derstats.htm and download Table 19: Amounts outstanding of over-the-counter (OTC) derivatives by risk category and instrument, i.e. http://www.bis.org/statistics/otcder/dt1920a.pdf.

As of June 2008, notional value outstanding of Over the Counter (OTC) derivatives was 683,725,000,000,000 (683 trillion) and the Gross Market Value of these was 20,353,000,000,000 ('only' 20 trillion). That presumably excludes all derivatives traded on exchanges, since these are just the OTC figures! What do these figures really mean?

Forecasts for 2009.

Well, not much happened since I last posted here. Apart from the near total collapse of the entire Western world's banking system and the near fulfillment of 'The Fall of Babylon' from Chapter 18 of the Book of Revelation in the Holy Bible.

Apart from that, pretty uneventful, then.

Everything that happened was predicted long ago on such talk radio shows as http://www.financialsense.com/, http://www.kereport.con/ and http://www.goldseek.com/ and by Peter Warburton's 1999 book 'Debt & Delusion', aptly subtitled ' Central Bank Follies that Threaten Economic Disaster'. Now all the things that were talked about by these much ignored Austrian school economists have come to fruition and appear on the mainsteam news almost every day. Though of course no-one there would give the predictors of the crisis any credit for their astute observations of the credit excesses of the last decade and the likely consequences.

We have gone from the danger of hyperinflation in early 2008 to the danger of hyperdeflation in late 2008. The Federal Reserve has underwritten about 8 Trillion US$ of non-performing 'assets' in the USA, though that is peanuts compared to the several hundred trillion US$ of derivative contracts outstanding.

With most of the world's investment money in US Treasury bonds and yields and Fed interest rates at or near zero, with a seemingly confortable gap since the last major bank failure, we are now almost perfectly set up for:

1) A collapse in the Credit Default Swap derivative market - a collapse of credit insurance.
2) The collapse of a massive banking institution that was deemed 'too big to fail'.
3) Total systemic banking failure and a halt in world trade along the lines of 'The Fall of Babylon' described in Revelation Chapter 18.
4) The default of the USA and many other countries on their sovereign debt leading to a collapse in public services due to unprecedented government debts and a catastrophic fall in tax revenues.

The above can be summarised as hyper-deflation of the derivatives pyramid - a total and instantaneous deleveraging. See next post.

This could all happen in a single day or even a single hour and no-one will be able to get out of the way. It will come like a thief in the night.

However, if the Fed succeds in stopping this process or event, it will mean that they will have committed hyperinflation to cover all these potential failures, having possibly had to underwrite or monetise all several hundred trillion of derivatives transactions.

Taking $500 Trillion as an estimate of derivatives' notional value, that would mean a 40x increase in money supply (M3 being about $13T - and US GDP being about the same). 4000% inflation guaranteed then, if the Fed succeeds.

So, be prepared, if that is possible.

GOLD: Bearish sentiment, bullish action? 2008-09-22

Monday 22 September 2008, 11:19 pm: GOLD: Bearish sentiment, bullish action?

I was just doing an eBay listing from a template that I originally created on 22 September 2007.

Look at how the gold price has changed since then, even despite the bearish sentiment over the summer! Look at the devaluation of the Pound!

US$ gold price gone from 731 to 902 !
£ Sterling price gone from 361.81 to 485 !

This is despite all the bearish sentiment over the last few months - the bull market is over and all that stuff. Or maybe it is because of it. Gold has remained above 2007 levels on a year over year basis, except for maybe one or two monents in the low 700s a week or two ago. I shall try to find out whether it was ever down on a y-o-y basis in 2008.

So what anyway?

Clive Maund the well known gold analys is also a Genesis fan. See his US bond chart here:
Clive Maund Gold Market Update September 21st, 2008 and look for the one liner from'The Lamb' - what a man of taste! I am going to listen to 'Deep in the Motherlode' now!

Since Kitco has been down for maintenance (of John Nadler's BS commentaries perhaps), I have gone here to look at the gold price instead:
http://www.bullionvault.com/gold_market.do
and
http://www.bullionvault.com/gold-price-chart.do

The price is holding above $900 this evening, also at £486 Sterling, just over €610. The recent sharp upward move has taken the price back over $1000 Australian $, too.

To get this in perspective, £486 is £100 above the old 1980 high in Sterling around the £380 level. A gold Sovereign is worth £114 in melt. That used to be a pound coin, so since the Gold Standard was ended, the Pound has devalued by more than 99%. Thank you, Central Bankers.

Please see these eBay auctions:

NICE 1884 SYDNEY SHIELD GOLD SOVEREIGN OF VICTORIA

DECENT 1862 VICTORIA SHIELD GOLD SOVEREIGN NO RESERVE !

LOVELY 1898 MELBOURNE MINT GOLD SOVEREIGN OF VICTORIA !

CHOICE 1916 (London) Gold Sovereign - RARE on eBay

RARE 1899 PERTH MINT GOLD SOVEREIGN OF VICTORIA ! EF