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The Currency War Accelerates


 -- Published: Monday, 8 December 2014 | Print  | Disqus 

As suggested in last week, one should expect sovereign currency wars to do nothing but accelerate moving forward as more and more countries slip into recession, with China’s surprise rate cut on Friday the next domino to fall. And again, this trend should do nothing but accelerate as crack up boom process unfolds, which will continue until something like political revolution that destabilizes the establishment pops the bubbles. This move on the part of China was a result of Japan’s recent actions that forced the issue, which will in turn force other major players to react sooner rather than layer as well. The next distinguishable move should come from the ECB, which would also be surprising considering Draghi is being accused of impotence in this regard due to inaction.

No sooner are those words out of my mouth, and Draghi announces the implementation of direct asset purchases, which didn’t take very long at all – no? The question then arises, how long can the States keep up deception the US economy and corporate earnings are growing? Because it’s all a lie, achieved by statistical trickery and corporate buybacks. If these actions on the part of the PBOC, BOJ, and ECB are any indication (with more to come), the answer to this question is maybe not as long as central planners were hoping. Clearly the plan was to push the present agenda (propelling the dollar[$] higher) in the hope declining economies would strengthen with weaker currencies, however this is not working out due to larger structural / lifecycle issues, citing demographics at the core.


And while some would simply blame a failed Keynesian Model (think diminishing marginal returns on money printing) on what are now mature and floundering ‘modern economies’, such an accounting is too simplistic, while at the same time being a profound factor. No, the problem(s) are structural at the core, lifecycle related, that are being papered over with increasingly ineffective monetary policy. And again, nowhere is this more apparent than in Japan, where the yen has been cut in half over the past two years to no avail in the economy – now caught in the most profound liquidity trap in the history of mankind. But central planners (Keynesians), on the advice of ‘ideological hacks’ like Paul Krugman, just keep turning screws on the printing presses no matter how many times they are proven wrong.


Weather it be the yen’s (Japan’s) meltdown, or kabuki theater in Congress, or the statistical theater of the absurd in official numbers anywhere these days, there’s one thing you can say for sure – it’s not boring out there. But perhaps most interesting (meaning telling) when it comes to the ‘condition our condition is in’, is apparent S&P 500 (SPX) futures buying, along with the necessity to bang the VIX down every day in order to keep US stocks from falling, suggestive it might get a little more interesting sooner rather than later – surprising a great number of people. Of course this is just par for the course daily as part of the financial repression everybody supposedly knows about, but magically goes unnoticed and / or is not discussed except by ‘tinfoil hatters’ like me.


And it got worse this past week, where because of various things central planners were saying and doing, on Friday we had stocks up, bonds up, the $ up, the yen up, commodities up (including precious metals) – all at the same time. This, has not happened for a very long time, if ever, and is a reflection of just how broken our financially engineered markets have become. Be that as it may, this does not mean they are entirely unpredictable as long as you’re betting with the house, which in this case means our price managing (fixing) bureaucracy. Therein, the desire of the mob remains so high to maintain the status quo the public will continue to empower the establishment until they are not eating. What’s more, it will take something this dramatic (not eating) to dislodge the present power structure – which in today’s (Western) world – is measured by the stock market. (See Figure 1)

Figure 1


So, because Christmas is upon us, and living in a post bubble materialistic world is no fun, if one were a betting man, you would be foolish to bet against the flag in the SPX / CBOE Volatility Index (VIX) Ratio (pictured above) breaking lower in coming days despite the appearance of ‘toppy price action’ in the SPX itself (the hook that will draw in short sellers), because I can assure you, every effort will be made to keep stocks buoyant starting this week, running right through December, and into next year if this count is repeated. All we need is for tech stocks to take off, taking the nominal indexes back into the proximity of year 2000 highs, and something never witnessed in the history of ‘modern markets’ might occur, that being same generation manic highs (think year 2000 NASDAQ highs) being bettered. All we need to see is the large round number at 400 taken out on the NASDAQ (COMPQ) / NASDAQ Volatility Index (VXN) Ratio and all this becomes quite possible in another blow-off into a March top. (See Figure 2)

Figure 2


The signal such a move is underway, will be when the monthly NADSAQ / Dow Ratio (pictured below) breaks back into indicated ‘extreme bubble territory’, where again, one must remain open to the possibility new highs might be seen in the NASDAQ. The NASDAQ 100 / Dow Ratio tried to breakout of a noticeable diamond on Friday at options expiry but either failed or tested this possible bullish signal, leaving the jury out until this week. Any follow-through this week must be viewed as a bullish signal marked by continued positive end of month performance that is to continue to be expected until this pattern changes, marked by two consecutive months closing below the monthly ‘swing line’ (21- EMA). So again, watch these metrics closely this week, because the SPX / VIX and COMPQ / VXN Ratios are not even close to being overbought, which means although most of the price action may be as a result of ‘volatility banging’, where for example a close in the VIX below 13 could signal a collapse to 11, still, this could be enough to send the cash SPX above 2100. (See Figure 3)

Figure 3


In terms of precious metals, such moves could also result in the ascension on the Dow / Gold Ratio (DGR) up to the 38.2% retracement as well once the Swiss Gold Referendum (read here about it) is out of the way, setting the stage for the hedge fund related smashing into year end discussed previously. You should always remember, that until idiot paper market perma-bulls and promoters that populate the sector are killed, exhausted, or simply cease stupid gambling practices for whatever reason, this kind of thing remains a constant and ongoing risk with the machines controlling the vast majority of trade these days. Something tells me these buffoons will be halled out on stretchers one day, perhaps when the DGR hits the Golden Retracement to the upside, which is still a long way off price wise. The only good news I can give you in this regard is it looks like a lasting intermediate reversal should hit the sector some time in 2015, with the big questions being when and at what level(s) obviously. (See Figure 4)

Figure 4


Ignoring the time element, and as discussed last week, as per signatured precedent identified in our original harmonics studies, going past the 38.2% retrace (which is likely based on historic tendencies within the sector), once the DGR reaches the 50% retracement at 22.66, one would necessarily need to start betting in (non-derivative based) precious metals aggressively looking for a lasting turn. Because at this point it’s hard to imagine idiot speculators still betting bullish in the derivatives to the same extent as presently, which will turn the machines into a precious metal speculator’s friend. That’s right – the same dynamic that is killing precious metals right now (wrong headed derivatives betting fueling algo driven selling), would be reversed under such conditions, setting the stage for a rapid and profound recovery in the sector.


And while the extent of such a recovery is obviously not known yet, because a strong argument can now be made precious metals could be negatively affected by deflation collapse that is scheduled to grip the world during the second half of the decade, still, a big bounce (potentially multi-year) starting sometime next year is setting up, making participation for diehard precious metals speculators mandatory, at least until more is known.


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Good investing all.


Captain Hook


The above was commentary that originally appeared at Treasure Chests for the benefit of subscribers on Monday, November 24, 2014.

Treasure Chests is a market timing service specializing in value based position trading in the precious metals and equity markets, with an orientation primarily geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven to be very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested discovering more about how the strategies described above can enhance your wealth should visit our web site at

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