9-2-09

Something's Gotta Give

            I caught an interesting commercial on TV today. It was the chairman of the USA Mint endorsing an American gold coin and bullion seller to the public. The message from, essentially the United States government, was BUY GOLD as protection from inflation.

            There are those who say that in the Great Depression, the American government confiscated the gold belonging to its citizens and so owning gold in America is a dangerous proposition. I thought the same way at first but recently I'm changing my mind with the help of commercials like that; if the US is minting coins and the chairman of the mint is endorsing buying them, it would look pretty silly to take them back later and would be a tough case to get through (though the government does what it likes and the zombie-like population lets them get away with it).

So, why is the government encouraging its citizens buy gold? Why is the Chinese government doing the same?

            Dear reader, I think this is their veiled way of telling you that paper currencies are soon going to end up worthless and please get some gold to hedge against that so you won't be so angry when it comes to voting time again.

            Yes, it has to be veiled. They aren't going to admit that they plan to destroy the dollar, are they?

            Last week I touched on this battle between inflation and deflation (have a read). Ben Bernanke was just re-elected as Fed chairman and this means the argument for inflation just got a lot stronger.

            Bernanke is a man who will do anything rather than let deflation happen. By his own admission on record, he said he would drop dollar bills from helicopters if needed. Now, he's a politician and he knew he needed re-election so up until last week, I suspect he was going steady on his printing money efforts, but now?

            Bernanke stated openly that he saved the world. The fact that the Fed caused the crisis in the first place (with loose fiscal policy) seems to have been ignored, but the main issue is that he seems to think he's already beaten deflation.

            He's going to have to print a lot more money before he achieves that! And in the process, he will mortgage America's future away. Even the government themselves are stating that the deficit will soon be 10 trillion (and their numbers are always BS).

            I've already flogged this subject to death. If you haven't got some exposure to gold by now, you're a sitting duck in my view.

            What else?

            Well, it's plainly obvious that if you can see what the Chinese are going to spend their increasingly worthless dollars on next, you'll make a fortune. Think copper and oil recently. Word is they're now about to take advantage of the crazily low natural gas price and load up. Watch that space closely.

            What about the broader market? What's going to happen next?

            There's a rule you can all too easily forget and it always works: the market will try to embarrass the most amount of people possible. That's why it's best to try and figure out when there's a consensus on anything and to bet against it when that consensus reaches its peak. "When" being the real trick.

            There are certain 'conventions' that traders go by; general trends that always seem to apply through history. One example is the 'Sell in May and go away' rule. Traders who followed that this year got burned in that they missed a big rally!

            Over last winter, when every 'expert' including the IMF was saying commodities were heading for Hell, I recommended you load up. Now look: practically everything has gone through the roof.

            The next convention to apply is that September is historically a down month. Why? Because the junior traders have been left at the desks over Summer while the seniors go on vacation. Then, when they get back, they like to impose their seniority on the juniors by selling everything they bought over Summer (yes, office politics can drive markets more than you think!).

            September this year is going to be particularly interesting...

            Why? Because something HAS to give; either the bond market or the stock market. Let me explain...

            The bond market (people lending governments and corporations money) and the stock market are, and should be, diametrically opposed. One is considered high risk- the stock market- and the other, low risk.

            So, if one goes down, the other should go up and vice versa, make sense?

            But that hasn't been the case this Summer. Things are definitely out of whack and something's gotta give...

            As you well know, the stock market has rallied well over Summer. That should mean bonds were sold off. But they weren't. It appears many large funds are 'keeping their powder dry' in anticipation of the traditional September downturn as what is seen by many to be a bear market rally.

            So who's right; the bond market or the stock market?

            The correct answer to this question could make you a LOT of money over the next 30 days, so it's worth some examination.

            This could be one of those times when the market does what we least expect- to embarrass the most amount of people. If September doesn't take stocks down as expected, the bond holders will jump into stocks and send them soaring up, especially if we see a positive GDP for a quarter, which is likely, and will be seen as the end of the recession.

            But, the bond market is much larger and is generally considered to be a more sophisticated market and therefore more 'correct'.

            One thing is pretty much for certain: September should see some large moves one way or the other.

            Let's be guided by two things: the market itself and history.

            The market itself is saying: UP. The numbers to watch: Dow Jones Transports Index at 3774. If it CLOSES above that number within the next week or so, UP is a very good bet for September. The price of gold is also saying UP for the stock market.

            History is saying several things, especially:

1.      September is a down month (September DOWN).

2.      The market tries to embarrass the most amount of people (September UP).

And something else we know, that I've written about here regularly, is that a market will fall ONLY when almost EVERYONE has been sucked into the idea that the market will keep going up. That suggests we still have higher to go.

Also, no bull market has begun with values still as high as they were at the recent bottom in March. That suggests that we ultimately have lower to go.

So what to do? Keep an eye on the Dow Transports- if they close above 3774 soon, I'd say the "UPs" have it for September and everyone gets one last chance to sell everything before the next bear drop.

And by the way, I believe that when the last down phase is done, we truly will see amazing values and those with cash will make a fortune simply in the buying.

But, that time will only come when EVERYONE has decided the world will end.

Isn't this a sick game?

Until next time...

Mark Patricks

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