What The Debt Fools Are Up Against

As the ineptitude of our elected representatives continues to amaze regarding the debt issue, I think it's interesting to keep in mind what they are dealing with - the history of their own ineptitude. Its the bogus political "process" (the nicest word I could think of) that has created the nearly unsolvable problem they are working on. When you look back at history, you can see the political spats that accompanied each leg up in the debt parabola that is at a blow-off stage now:


This history shows how the recklessness of the 20s put us into the Depression in 1929 followed by a huge ramp-up in debt over the next 5 years. This reached an unworkable level and had to come back down out of necessity, but the recklessness and the debt that ensued went up out of political "process". The citizenry of that time saw no sense in doing the debt this way, but they had to watch helplessly as their elected representatives did it anyway.

Good sense prevailed for decades as the painful lessons of the '30s were practiced. Then we became entangled in the Cold War with the Soviet Union, and the political process was reckless budget balancing to out-arm and bankrupt the USSR. Then came the defeat of the USSR, but instead of the gigantic budget peace dividend that should have followed, we ran up against another enemy of the state - the banksters. They went on a creative binge of debt instrument "financial weapons of mass destruction" as Buffet calls them, and over the '90s they were the political process of choice. Standing in their way was not conducive to a political career.

If you gauge a time frame to a debt resolution to be similar to what happened from 1930 to the mid '30s after the start of the bear market, you see on the chart above that, if a secular bear market started in 2000, we should have had some kind of debt climb reversal around 2005, like the mid '30s. But perhaps because the fed has become more adept at funny money, things went on as usual.

But now another debt induced recession has resulted in another bear market, and five years from it takes us to about 2012 for some kind of dismantling of the debt mountain. That's what the fools in Washington are beginning to grapple with now and what will be dealt with in the 2012 elections.

The Hot Money In Silver

Silver, the hot headed more volatile twin of gold, recently did one of those stunning runs to the upside, briefly hitting $47, crushing the shorts and dumbfounding all those who sold an overbought condition at the base of the spike. This was a significant departure from gold, which did no such thing. Now since we have an R squared between silver and gold that very typically runs around 0.9 or higher, meaning that the two correlate extremely closely, we must ask ourselves just what the heck was going on here.

Silver's behavior has caused many, including Jim Cramer, to be negative on silver but positive on gold, because, as Cramer recently remarked on his show, silver still has too much hot money in it. He flatly stated to stay away because "silver is going to $28". Hot (overleveraged) money was certainly the nitro that fueled the one month spike to $47 before the margin rules were tightened. But what is the case now?

Silver is doing what markets do to an overbought condition - a correction. And corrections very typically follow the classic ABC pattern where an initial sharp pounding is followed by a pause consolidation and then the final sharp decline to a bottom. We have had "A", are now in "B", and are awaiting a "C" which would indeed take the price to about $28. This would be enhanced by the market's general jittery feel about the debt default situation in the US and Greece and its effect on all things economy sensitive, as silver is.

That plausible scenario, however, is looking less and less likely. Lets look at a side by side comparison between gold and silver:


First, we see gold went onto a consolidation trading range in April. Now lets look at silver:


Here we see that silver did essentially the same thing except for the hot money spike that lasted for a month, shown in orange above. If you take away that aberration, you have silver following what gold is doing very closely - compare the charts. The ABC correction of the hot money warp seems to be fading into the tight correlation with gold - and gold is clearly breaking out of the consolidation to the upside. The ABC correction would have silver going far below the 140 day ema (blue line above) which would bring into question the whole silver bull market. That is looking less likely now, and a more sustained advance is probably coming. I hate hot money as much as Cramer or anybody, but silver's harmful hot money seems to be mostly laundered out at this point.