Socialism In Bull And Bear Markets

Complaining about our presidents in the US of A is maybe second only to baseball as our national pass-time.   So allow me to indulge in a rant.  I want to take a somewhat spiteful look at the financial market history of our presidents since John Kennedy - an era that I think of as a Comedy of Errors, one of the Bard's great plays.   But it isn't so funny.  Then we will look at our upcoming election in the light of all this.

John Kennedy gave us a free market administration, with low taxes and a business friendly slant.  He felt that the tax and regulation burden on business was an economy killer.  His policies extended the great bull market from the late 1940s to 1966, the post depression recovery.  Perhaps his most famous wisdom was "Ask not what your country can do for you.  Ask what you can do for your country". This saying has a lot of significance in our present heated debate over what our government should be doing for our mess as opposed to removing over-taxing, over-regulation, and other short-term government fixes so that individual businesses can do their thing for our country.  It would have been a good Tea Party slogan had it not already been used by Kennedy.

Unfortunately, Kennedy's VP didn't have his partner's key wisdom very near to his heart.  Lyndon Johnson was probably best known for his Great Society programs, which were an over-done version of some of Kennedy's initiatives to help the poor.  Under Johnson, they became big government helping hands in a War On Poverty, as if it were government's job to regulate the economic status of individuals.  Some of these things survive to this day, like Medicare, and are a big help.  But many were bureaucratic boondoggles - and all began to be a tax problem.  By the time LBJ left office in 1968, the great secular bear market of 1966-1982 had begun.  You can't blame that whole bear market on one president, but an age of asking what your country can do for you had begun.

Then came Nixon.  A normal paper/hard asset cycle turn had begun away from paper investment and to hard assets (commodities).  The turn away from the 20 year stock bull market to the 16 year commodity bull market that began in 1966 was perhaps triggered, or at least abetted, by the bad business policy that came after John Kennedy.  Economy friendly government seems to have died with JFK's murder in 1963.  The commodity bull market had inflation running at around 4% in Nixon's time.   His reaction? - wage and price controls.  Was he a student of the Soviet Union?  This socialist intervention was a dismal failure.  It was a government engineered fix to a government engineered problem.  Sound familiar?  The economy truly went into the ravine under his socialist guidance.  And he took us off the gold standard in 1971 for good measure.  This was to facilitate the government's "helping" hands and loosen up its wrist for the dollar's printing press to follow.  By the time Nixon left office in 1974, the stock market had lost about 50%.  He was bounced out of office for lying before he could do any more damage.

Then came Ford and Carter.  Ford served only briefly and sadly, Carter was a damper on the economy.  His forte was, and is to this day, international peace negotiation.  He put together the Camp David Accords easing Mid-East problems for quite awhile.  But on the economy, he seemed to want to continue the post Kennedy legacy of bigger government, bigger taxes, and more departments (he added two right off the bat) and was the first bail-out president when he bailed out Chrysler in 1979.  Before Obama-care, there was "Carter-care", a government-run health-care system that went nowhere in Congress.  He created the massive Superfund to clean up chemicals in the ground wherever they could be found.  If there was a problem with the economy, government could fix it.

All of this string of socialist presidents, Johnson, Nixon, Ford, and Carter spanned the 15 years of the great secular bear market in stocks from 1966 to 1982, which saw the Dow unable to break 1000 and lose a lot of ground to stagflation. Then came the Reagan Revolution.  And it was just that - a very fundamental change in government, the first real change since Kennedy died.  Whereas LBJ declared war on poverty, Reagan declared war on big government.  Many presidents' worth of government helping hands had the Reagan campaign's "misery index" at such an unbearable high that he was swept into office in one of the most one-sided elections in history.  Reagan declared war on big government and big spending and was the first real business friendly president in 20 years.  And the markets picked up on it, sending us roaring into a secular bull stock market and economic growth.

The next chain of presidencies, when you think about it, was 5 terms covering 3 men and 20 years. They all pretty much sought to continue the Revolution. The Clinton terms in the middle wound up being free market and business friendly, not to mention, with the help of a good economy, budget balancing.  Clinton, either by the mandate of the mid-term elections or by a change of philosophy, or both, put together a pretty fair economic team by the time he left office.

But in the biggest socialism blight ever, we had a banana republic regime of central bankers imposing the greatest mountain of debt of all time on all of us.  All four men occupying the White House from 1981 to 2008 turned a blind eye to this fifth column as "market stuff" that they didn't need to worry about.  A new tyrant had taken over the bull/bear cycle, and the 1982-2000 secular bull was killed not by over-interventionist presidential socialism, but by financial weapons of mass destruction.

With Bush II and Obama, we have gone back to the post-Kennedy and pre-Reagan socialist world. Bush did not exactly have a revolutionary, business friendly congress, and Obama would confiscate every private business in the land if he could get away with it.  A secular bear market in stocks and all non-debt fueled paper assets began in the 2000s.  Robust economic growth now seems to be a thing of the past.  Obama is responding to these problems with the socialism of Nixon, and the government helping hands of LBJ and Carter.

As the over arching socialism of central bankers puts debt and currency issues front and center, the old fashioned president/economy relationship is fading.  The "socialist" Bernie Sanders is the only major US presidential candidate I know of to advocate reinstating Glass-Steagall.  This was the safeguard necessitated by Depression banking collapses that barred banking fools from gambling with depositors accounts in stocks or anything but the business forming loans they had been doing before the Roaring 1920s led them astray. 

We had many decades of banking peace after this 1933 Act.  Then came the banker inspired repeal of Glass-Steagall in the roaring 1999, and we have had one financial crisis after another ever since.  Fully reinstating Glass-Steagall is an issue in the election as detailed in an article at NerdWallet "Glass-Steagall Act: 1933 Law Stirs 2016 Presidential Race". Sanders' reinstatement would take away the $20 + trillion of speculation toys (all our bank accounts) from big banking.  But even this would perhaps be too little too late.  The point to consider is this: the era of the power of the president over our financial cycles has ended.  Getting it back may involve more radical upheaval than a US president can muster.

We would have to have a Reagan Revolution in every major country in the world, but even that would not solve the massive delevering cycle and global debt resolution problems we now must endure.  This problem did not exist in 1982.  So the unruly Trump/Sanders hoards are now a budding revolution not so much against big government, but against the new socialism of big "Wall Street" - the perversion of what free market capitalism used to be.  Main Street is becoming incensed by it, and this election campaign is showing it.

Sinclair's Point Well Taken

As I pointed out in my post "Gold Technical Update", before gold got to this $1800 level, Jim Sinclair had been predicting a major "swing point" for the gold bull market when it got to $1764 by his exotic squares math, which I don't really understand. But he tends to get it right, and he was saying that gold would encounter a more intense price action at this level. This was to involve some severe push-back, a pitched battle - one of the biggest in the whole bull climb- before a more powerful up phase takes over.

Well, what has transpired?


His silly prediction, based on nothing but math, seems to be happening as usual. When gold jumped the predictable channel it has been in for 3 years at about $1700, it went right to work on the swing point. It doesn't seem to want to spend much time either above or below $1764 nowadays. And the trading has intensified to a less tranquil pattern. If this is to be one of the big battles, we should expect a few more dips below $1764, more prime buying points for new positions.

The Crisis In Leadership

No, I'm not referring to the clowns on vacation from our congress. We have an astonishing lack of leadership when they're in town, too. I guess they're all tuckered out. Screwing up the world like they have done is hard work.

My title refers to the market leadership. The leader groups that have been signalling the future direction of the market for the last 3 years, the retailers (RLX), technology (QQQ), the consumer discretionary stocks (XLY), and the transports (TRANQ) have a conflict going right now. One says new bear market. Two say bull correction. And one is undecided. They've typically been in agreement up until now. Let's look first at the one screaming new bear:

This would be the Dow Theory important transports. They have broken down from any semblance of a continuing bull and are leading the charge down. The same can be said of the important financials. It's hard to have a bull market without the financials participating. Doug Kass, who called the March '09 bottom to a tee, is now saying the banks have bottomed. Jim Cramer says the group is still toxic.

If you look at the retailers, supposedly the sore point of the recovery, you see this:


A trend line from the March '09 bottom appears to be intact. But if you look at all the consumer discretionary stocks, you see a breakdown more like the transports:



The accumulation trend is beginning to break but holding, but the price action has already broken. As for technology:



This looks just like the retailers - a brief puncture of the 140/200 day ema moving average pair but on a bull trend support line.

This sets up a battle between these stock groups. Either the groups that are barely clinging to bull mode will be pulled down into what the transports are doing or the transports will be pulled back up into confirmation. Stay tuned.

Silver Technical Update

If you hate to chase anything at an all time high, and don't we all, then you don't really like buying much gold right now. But maybe we can cheat and buy gold's rocket ride via silver. This bifurcated metal constantly has to decide whether to follow its industrial use self and follow the stock market or to follow its monetary metal self and follow gold. The monetary self usually wins out over the long haul as is evidenced by the R squared for gold/silver being around 0.95 long term. So any straying of silver behind gold is a good buy-the-massacre move. Buy-the-massacre is so much better than chasing.

The massacre in silver has it nearly 20% down from its high now, right at the 20% decline bear market classification. But it will very likely slingshot to par with gold. This is after all a monetary crisis we are in.

The silver/gold ratio chart looks like this now: (click on charts to enlarge)


Silver is just now emerging from an RSI turn point where it begins outclimbing gold. Even if it stays bound in the horizontal channel it's in, it will match the climb in gold for awhile. You can't complain about that.

The price chart looks like this:



The consolidation of last year looks to be repeating and is probably ending now. The channel appears to be thoroughly broken. If we get a post consolidation climb like last time, we are at a prime buy point.

Gold Technical Update

Gold may be breaking into the next phase of its bull market. Jim Sinclair's math has a long history of correctly predicting gold, not just in this bull market but in the 1970s bull market. He is now saying that the $1764 level is a swing point into a steeper climb similar to $524 was in late 2005.


Then, as now, gold was faithfully obeying the 140/200 ema moving average pair (red and blue lines) as support and the trend line shown as resistance. Then a break of this resistance occurred with a move to $524, a test of old resistance as support, and a huge new move into the next bull phase. As a weird coincidence from an entirely independent means of analysis, David Nichols' monthly fractal forecast is currently putting gold into a 64 day growth cycle into early October that he says will be the strongest yet in the entire bull market. That's 64 trading days (closer to 3 months calender). For those of us who simply like to study lines of support and resistance, it is also obvious that a change has occurred:



This chart is very similar to the 2005 chart above with the $524 swing point, but with the new $1764 swing point. It shows a pretty stable 3 year phase of gold's bull where a persistent line of resistance turns all the rallies into declines. There was a brief breach at the end of the strong 2009 four month cyclical move. The current breach is occurring at the beginning of this typical August to November strong period. This all implies a big bust of the 3 year channel.

I have outlined my disagreements with David Nichols' fractal analysis in other articles. My only problem back in 2010 was with his 64 month fractal or about a 5 year time limit on the high growth part of the overall bull market for gold, which he reckoned was to turn to bear market in February, 2011. I argued that this parabolic bull fractal pattern had other variations longer in duration that would go well beyond February, 2011, and that the current gold bull seemed to be an example of these. Well, February has come and gone, and I think it's safe to say there was no arrival of a bear market. But I can find little fault with Nichols' month-to-month range fractals - they have been stunningly accurate over the years. Jim Sinclair's call about $1764, David Nichols' call for the strongest 3 month move up yet, and the above simple support/resistance map all agree - gold is entering a new phase, and it ain't a bear market.

The cold calculating methods above also agree with a phase change in psychology that I believe has occurred over the last 3 years. This involves the basic question "What is money?" Well, it's that green and gray stuff passed around or it's electronic equivalent you may say. But is it? Is it really? That's what we used to think back in 2007. Is that what they're thinking over in Europe today? You can see this sea change in a 3 year chart covering the last two mega market crashes:



Here we have the gold stock index / S&P 500 ratio charted from mid 2008 to now. It drops when the gold stocks are under-performing the broad market and vice versa. As you can see, there is a vast difference between then and now. Why? There is a fundamental change in view going on as to what is money.

I have posted a discussion of this rapidly changing view with some interesting testimony by Ben Bernanke last month before Congress over at seekingalpha.com - just put my name in their search bar. The post is "Gold's New Phase And The Coming Revolution". It should be up in a day or two if it's not there yet.

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.