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Monday, November 14, 2016

Bond Yields, Gold, The Dollar and Deflation

(links to previous update post charts from tonight)

NOTE: Negative sentiment is reaching short term extremes in Bonds, Gold and (not quite yet) dollar which is why I felt I needed to talk about the longer term prospects of each. Bonds and Gold are reaching negative sentiment - according to Elliott Wave International - which suggests an eventual relief rally for prices in each.  You'll see the links to my charts will suggest those eventual relief rally in bonds and gold.


All the talk seems to be that rising rates will spark inflation as if this was the 1970's/early '80's all over again. They are likely very wrong. My thesis has always been that once rates start to rise again, it will spark the opposite: a massive deflationary spiral. The world is awash in debt unlike any other time in human history. The interest payments will be unbearable in a rising rate scenario.  This will cause massive defaults at the Federal, corporate, municipal and individual level.  Defaults = deflation.

Lets review what is actually money. Simply put, Cash + Credit = Money. Credit dwarfs cash in this fractional reserve lending world. As an example, if the world has $100 Trillion in debt (this is actually too low, just using round numbers here ) and bankruptcies, etc causes a 20% default, you now have a $20 Trillion loss at all levels; corporate, government, and individual. This theoretical loss will be real in that jobs will be lost, income will be lost, and thus more default and bankruptcies as a result. Once the cash flow is cut off its "game over". 

Loss of cash flow is what locked up the financial system in 2008. However the Fed followed the market and nailed interest rates to the floor which allowed the party (lending) to go on.  Yet at no level did anyone take advantage of low rates and get themselves out of debt. The opposite occurred! Corporations took loans and then bought back their stocks to enrich the CEO's and board members. Governments kept piling up debt. Individuals took advantage of low credit card rates and also piled up debt to include student and car loans. The situation is much worse 8 years later in the debt department.  Banks, though the American ones are better capitalized now than 2008, the European ones are not. But it won't matter for the American ones in the long run either because what's the difference really between 6% capitalization and 9% capitalization??  Nothing really when you think about the gargantuan levels of debt in the system!

Once rates rise in a negative trending social mood, who will be willing to give a loan to a corporate entity that should never be getting said loan? Who will lend municipalities money to cover their previous debt?

But some people say the Fed "controls" interest rates. Is that really so? No it is not. The Fed is subject to social mood just like everyone else.  When the market demands a higher rate, the Fed has no choice but to raise short term rates.  And the market seems to be in control.

If a deflationary spiral begins, it will feed on itself until it reaches its natural end. It will be a purge of all the previous 35 years of malinvestment and excess greed that has distorted the system for so long.


Gold's peak in a glorious 5 wave long term pattern signaled a corrective downwards must occur which is what has happened so far. My projection for Gold in the deflationary collapse is at least $475, or the "virgin wave space" of the total Gold pattern. But you say impossible! Well no, actually paper gold is leveraged by some estimates of 120:1 (Zero Hedge).  You are trading paper promises not gold!  Kind of like bonds. Its a promise that cannot be ultimately kept. So why would people pay high prices for something they can never actually get? Do you think they will ever deliver on your "claim"?
But what of the - I'll call it black market gold for now - or "physical" gold prices? I suspect that physical gold will always hold a "premium" over paper gold, but I suspect the paper gold market will drag down prices for physical. Why wouldn't it? If we get into a deflationary spiral, Gold will not escape deflation's clutches. 

I'm a big fan of Gold. Holding physical is definitely a good thing if all hell breaks loose. It has a track record since the beginning of social organization throughout time.  However, governments have been known to 'ban' holding physical gold which is what I suspect will happen eventually in a deflationary collapse. So what would be a good price to buy physical? That is on you, I am merely speculating that paper Gold projects to eventually $475/oz.


King Dollar. "The Dollar Will Collapse" is a common thing heard over the last 8 years. Not so much in the short term because sentiment is high due to its medium term consolidation and recent rise. But in the long run people are convinced the dollar is doomed. I say wrong. A deflationary collapse will spark a demand for dollars. Bankruptcies are mostly settled in the distribution of dollars. Social mood fear sparks a bank run which pulls out physical cash - dollars! 

Why would dollars be worthless before bonds? Bonds back dollars not the other way around.  It always makes sense to me that bonds would become worthless first before dollars. After all, your neighborhood grocery store may demand dollars in a deflationary collapse and ban credit cards. Would you be using bonds to buy food? I doubt it! If the government banned cash, the value of having physical cash would likely skyrocket. People are not quick to change monetary systems or their way of thinking about them at least not right away.

So ultimately my projection for the dollar is a continuous long term rise which will crush a lot of things economically particularly corporations who rely on a cheaper dollar for profit.


It didn't matter if Trump or Clinton had won. The market has been due for a major all-time peak for quite a while and its then due for a major all-time reversal as a result.  Too bad Trump will likely get blamed. Social mood will likely continue to deteriorate. Has it not been that way? Were there riots post election 2000, 2004, 2008, 2012?  No.  But we are seeing signs that the long term trend is starting to really take hold. The stock market is fractured. A historic top seems near enough.  Trade accordingly.

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