Whenever you find yourself on the side of the majority, it is time to pause and reflect.
– Mark Twain
I think we’re being run by maniacs for maniacal ends and I think I’m liable to be put away as insane for expressing that.
– John Lennon (watch the video of Lennon actually saying it here)
We the people are the rightful masters of both Congress and the courts, not to overthrow the Constitution but to overthrow the men who pervert the Constitution.
– Abraham Lincoln
The Last Domino
With the U.S. Presidential election less than one month away, I think it’s a good time to take stock on what has occurred in 2012 so far and look forward to the period ahead, which I think will be one of increasing social and economic chaos in the United States. Earlier this year I wrote a piece titled Six Months Left…Can They Do It? in which I questioned whether the Administration and its cronies at the Federal Reserve and elsewhere would be able to hold things together in a relative calm until November 6th. I wasn’t sure of their ability to do so, but I understood that everything would be thrown toward this objective, legal and illegal, to make it happen. Well here we are, and to some degree they have held the undeniable disaster that is very apparent underneath the superficial surface of American society from exploding upwards. Back in May I wrote:
Well the past is the past and the future lies right ahead, so how should we be thinking about things? The assumption that is being made, and to some extent has to be made, is that if they have been able to pull off this total coup of the financial markets for the past seven months why can’t they keep it going until the election. Well if we are to assume this, it means we must assume they can pull it off for six more months, which would bring the total to thirteen months. This would be quite a feat. They know how difficult it will be to keep things “together” in the markets amid a real world that is falling apart. This is why the Fed is pretending there will be no more liquidity added to the system. In their minds, the best strategy is to talk down QE while at the same time attacking commodity markets behind the scenes. In their mind, this will give them the cover to create trillions more for their banker shareholders. I have stated that this would be the plan and as we can see in the markets lately, it has been executed to precision.
It was always my contention (and still is) that if they successfully kicked the can until the election then there would be absolute hell to pay afterward. That payment is now due. The best way I can describe what I think the next six months will look like is: Europe. Think the periphery countries. Everything that we have seen in Greece, Spain and the other “PIGS” will be coming to America. Investors have become completely lulled to sleep by recent benign trends in U.S. markets. There is this almost religious belief that treasury yields will move sharply lower in an economic downturn or stock market plunge. I am not saying this won’t be the case, but it is certainly not set in stone. In the PIGS nations, we saw both collapsing economies and stock markets as well as soaring sovereign yields. Can’t happen here? Never say never.
That said, my assumption is that in the initial stages of the forthcoming move we could see treasury yields move lower as stocks head down to reflect the reality of the the much deteriorated earnings and economic environment as well as the realization that no real stimulus is coming other than continued money printing (which will not help the economy one bit). However, the one assumption that I think will be proven incorrect almost immediately is the notion that precious metals must get sold off hard in an equity market drop. The metals have been officially capped by Central Planners in biblical fashion over the past 12-18 months, and a lot of physical has simply been taken off the market that will not be coming back. We have also seen the Italian and Portuguese populations fleeced of their metal in this year long correction, as well as lower income folks in the United States, when we saw earlier this year when EZCORP Inc. told us that pawn shops were running out of gold. Physical metal will not be available at these prices when people realize how much they need them and any manufactured paper dips will be bought aggressively.
Dow/Gold Ratio is the Tell
I know I sound like a broken record on this one, but I am completely convinced that this ratio tells you everything you need to know from a macro standpoint. I’m not just talking economics either, I mean from a societal perspective as well. Yesterday, this ratio started to breakdown and I think this marks the beginning of a major move lower toward my six month target of 5.5x-6.0x. This would represent a roughly 25% move from here to the lowest level since the secular bear market in stocks began in 2000/01.
The biggest mistake I made in the past year or so was a failure to realize the step by step fashion in which the global monetary and financial system would fall apart. It is certainly happening in a slower manner than I had anticipated, but make no mistake about it; it is happening. Like everything else, in retrospect, it becomes much more obvious. Since the entire world is linked into the fiat petro-dollar monetary standard, the entire world suffers as the system breaks down. While it was tempting to assume the U.S. would get nailed the hardest, what many people missed, including myself, was that the U.S. would be the last domino to fall. Whether people want to accept this or not, the U.S. has unfortunately morphed into a global empire. So as the empire crumbles, it is actually the regions of the empire that collapse first, one after the other. The first evidence of collapse occurred in North Africa with the “Arab Spring.” This makes sense as this part of the world is most vulnerable to the pressures evidenced by global systemic failure. They were in essence the “weakest link” in the chain. Shortly afterwards, the PIGS experienced similar economic collapse and social unrest. Unrest that continues to this day. Most recently, we have witnessed the collapse of China’s “economic miracle.” What people fail to comprehend is that China’s recent decline is completely linked to the decline of the monetary system itself as well. Let me explain. China is attached to the hip of the U.S. empire as a result of its foolish decision to put trillions of its fiat U.S. dollars into what are even more worthless treasuries (more worthless because you have to sell them before you can spend them and they can’t do that too easily). As such, they were unable to make rational economic decisions in the aftermath of 2008. Instead, they doubled down on a ponzi growth strategy. It was their trapped position in U.S. treasuries which gave them little room to detach from the petro-dollar empire, and as a result they tried to boost growth by “playing ball” and supporting an unsustainable system and they got what was coming. Collapse. Thanks for playing boys.
It is at this point that I want to compare two charts. The first is familiar to my readers. The second is not.
So the first chart is one all of you know very well. It charts the Dow Jones Industrial Average in real terms, and this thing has been in a bear market since 2000. Even over the past three years of “recovery,” you can see stocks in terms of gold are down over 20%. The more interesting thing is the chart of Chinese stocks in terms of gold over the same period. They have gotten absolutely shellacked. Down more than 60%, or three times as bad as U.S. stocks. The same would be seen if you priced let’s say Spain’s market in gold. In fact, it is even worse than China! The point is, this is what happens in today’s world when you are faced with a downturn. This is what is coming to U.S. markets next.
The Streets of Europe: Coming to America
So my message is clear. I think now with the election right around the corner, the chickens are going to come home to roost. Our ability to print our own currency and buy all the commodities we want with it is the exorbitant privilege that allowed us to export most of the problems within the monetary system elsewhere first. As Nixon’s Treasury Secretary John Connelly said when confronted by a group of European Finance Ministers: “it’s our currency, but your problem.” At the time he was correct, as we were at the very beginning of the fiat dollar standard. 41 years later the system is in its final days and our currency is about to become our problem as well.
There were always going to be massive consequences to keeping this ponzi alive. What is extremely unfortunate is the small number of U.S. citizens that actually understand specifically that the root of every problem we face right now is the fiat dollar monetary system, because it gives all the power in the country to the Federal Reserve and the TBTF banks that tell Banana Ben Bernanke what to do. Since 2008, many of the consequences of the fraud called American Crony Capitalism Inc. have been clear, but it has yet to hit the boiling point. I believe that the boiling point will be hit sometime within the next six months, and 2013 will see the streets of America beginning to look a lot like the streets of Spain and Greece.
Interestingly enough, one of the key signposts for the next wave of civil unrest and activism is coming from the employees of Wal-Mart. This is quite fitting considering the company is the largest private employer in the United States with approximately 1.5 million workers. Moreover, the fact it is happening at a company so anti-union makes it sure to have a sizable impact on the American psyche should it continue to grow. The strikes began in 12 states about a week ago, and although it is estimated that only 0.01% of Wal-Mart employees are involved, it is still the first multi-store strike in the company’s history (for a good summary of what is happening, read this Salon article). More significantly, strikers are now threatening stepped up action during Black Friday. Think it is a coincidence that right now in late 2012 is when Wal-Mart workers are pulling off the first such action in 50 years? Think that this is just a one-off situation? Not a chance. The main point here is one I was hammering on in my last piece The Global Spring. You can only push people so far into hardship before things snap. They snapped in North Africa. They snapped in Southern Europe. They snapped in China. They are about to snap here. Oh, and one last thing. What do you think all of this signals for corporate margins?
Peace and Wisdom,