Gold, stocks, pandemic and war

Sometime in May, after nearly 2 months of quarantine, my wife and I made the executive decision to spend most of our summer in Lake Tahoe. There is something about Tahoe that never gets old, and with remote work becoming the norm, we couldn’t pass the opportunity. As such, we drove out here with our two young children in late May. In preparing for our trip, the best decision was changing our cell phone plan to include a hotspot on each of our phones such that the kids could occupy themselves. We would not have survived the 28 hour drive otherwise. Most days have been spent at the beach or hiking. We have found several “new” beaches, including one gem that requires a half mile hike to get to, and the kids have loved using the inflatable paddle board. My personal preference is to be outdoors as much as possible while maintaining a safe distance from people.

As we enjoy the mountain life for the summer, I continue to keep a keen eye on markets, the pandemic, geo-political events, and ongoing social unrest in the U.S. and many parts of the world. Regarding the pandemic, it is pretty clear to even the casual observer that it is not going away anytime soon. As I type this, states are scaling back or pausing reopening plans; for example Florida and Texas have closed down bars again. The surge in infection rates is no surprise to me given the re-opening and increased testing; however it is also a matter of personal responsibility and behavior. I am referring primarily to social distancing and hygiene. Many in the public view *masks* as the panacea to stop the virus (aside from lockdowns), however I view this as laughable, especially without social distancing and washing hands without constantly touching your face (see CDC website). It is not to say that masks do not provide any benefit, I just view it is a small incremental benefit that rides on the coattails of social distancing and hygiene. The other urban legend I find interesting is that lockdowns will *stop* or *kill* the virus. No, they will simply slow it down. The virus will run its course regardless. And as we have seen, there is a trade-off between lockdowns and the tangible human toll of a devastated economy. Some rationalize this as the US will simply print money to have people stay at home and collect a universal basic income. If someone can show me ONE example of where money printing did not lead to complete and total destruction of an economy and society, I might buy into this. There is no example, of course. Long story short, we are in between a rock and a hard place with the pandemic. We will have to ride it out and walk a tightrope without overwhelming our medical infrastructure OR collapsing the economy (jobs).

As the pandemic rages, we also face social unrest both domestically and abroad. In my view, the social unrest domestically is just a carry over of the ongoing civil war in this country that started years ago. And no, I don’t believe it started with *Trump*. Simply stated, there are drastically different visions on how to run this country and how we fit into the world, and we have now reached a fulcrum point. We head into this crisis completely divided as a nation which of course makes us weaker and susceptible. Based on the current rhetoric and sentiment, I honestly don’t know if we can exist as one country much longer. Further I will cut to the chase and say this, I view the notion of having all or part of what I have worked for my entire life taken from me in the form of reparations, confiscation or otherwise, to be unacceptable. I will let the reader use their imagination as to what lengths I (and many others) would go to avoid this outcome. Meanwhile, as the divide and conquer strategy works to perfection on common Americans, corrupt politicians continue to wage war against each other in Washington. The epicenter of all of this may be the Flynn case, which I urge people to watch closely. Not necessarily the outcome, which currently stands at a dismissal of charges mandated by the DC Circuit Court of Appeals; however the details of the case and notes which have been released. Without even looking closely, you will see a disturbing trend that led to the current years long debacle; i.e. an existing administration spying on and framing an incoming administration in an effort to either a) prevent it from taking power and/or b) delegitimizing it so as to be ineffective. No matter where you stand, this appears to be a political scandal of historic magnitude. Therefore keep on an eye on the Flynn case, AND the Durham investigation. I predict some kind of metaphoric mushroom cloud to blow in the next few months.

On top of internal disintegration and the pandemic, we have an ascendant China. When I say ascendant, I mean in terms of its impact on global trade as well as influence in the world. It is quite interesting that we have domestic propagandists that have recently put China in a positive light, both generally and with respect to its handling of the virus. Of course that assumes that China has been forthcoming about anything with respect to the Virus and its containment or simply…anything. Whatever the case, first tier diplomatic communication channels between China and the US are deteriorating rapidly. Historically this leads to bad things and “accidents”, which often lead to broader conflicts. Right now we stand in a very precarious position as people realize that the “phase 1 trade deal”, which I contended previously was impossible to complete anyway, is in jeopardy. This is aggravated by the fact we are in an election year with Trump seemingly cornered into “doing something.” What I think that means is either 1) a complete disintegration of the trade deal primarily due to China dragging its feet on agricultural purchases and/or 2) an actual kinetic military conflict between the two nations, likely in South China Sea.

The cherry on top of all of this depressing stuff is an unsustainable debt explosion in the US, China, Europe, Japan etc. Basically all of the developed nations (I consider China to be developed and no longer “emerging”). At minimum, this is setting the stage for massive inflation, AND the possibility of a complete systemic reset depending on who blinks first in this twisted game of monetary and fiscal insanity. Both outcomes will be ugly. The Fed and other central banks continue to exasperate the problem by enabling burgeoning deficits and not letting any big company or bank fail. So for those who cry about “capitalism”, you must be talking about some relic of a system that no longer exists. What we have now is nowhere near capitalism, where creative destruction is necessary and encouraged. That said, I tend to view all of these things in aggregate through the language of markets. My position continues to be short equities and long gold. After successfully shorting the initial plunge in February/March, I covered and then began to re-implement equity shorts in April. As it turns out, I was a little early however we are still on track in spite of a Fed driven spike.

Below I show charts of both Dow and Nasdaq futures as of around mid day today. The Dow appears to be impulsing down in a series of “1’s and 2’s” after reaching its intermediate peak a few weeks ago. You see a clear 5 wave move down followed by about a 70% retrace. This is an ideal setup for a big plunge, perhaps after one more mini short squeeze.

Dow futures – hourly chart with 50 and 200 day simple moving averages

The Nasdaq, on the other hand, has behaved quite differently as it actually set new highs after its initial plunge (wow!). One could easily chalk this up to supercharged Fed liquidity and rampant speculation for which the Nasdaq is known, however something bigger is afoot. In my opinion, the pandemic has accelerated the existing trend where our economy has become “virtualized” and completely dependent on technology moving forward. That is another way of saying that property in the form of software technology, AI, and the associated intellectual property will be more valuable than traditional “real” property, the latter of which will be under attack by tax authorities and eventually rising interest rates. In technical terms, the Nasdaq looks to be forming a head and shoulders pattern that is currently breaking. Translation = more downside.

Nasdaq futures – falling from a lofty perch

Lastly we look at gold. It is essential to own some gold right now, either synthetically via futures contracts or physical coins. I own both. Gold is a hedge against monetary insanity and systemic breakdown, both of which are occurring or rising in probability to occur shortly. I thought gold had broken out of a consolidation pattern back in May, however it retested lows of its consolidation pattern and subsequently formed a bigger flag pattern! Now it appears to breaking out again. In other words it has been coiling in a range for long period and poised to make a big move, which I contend will be upward.

Gold futures – 4 hour chart. breakout from flag formation

With that, I hope everyone stays safe and enjoys the summer and every day to whatever extent possible. We never know what tomorrow will bring, and as the past several months has taught us (again) the world can change in an instant.

Divide and Conquer…and the REAL looting

I had no idea that George Floyd’s death would serve as a catalyst for weeks of protest, civil unrest, and looting. Please note the use of the word catalyst, which I often use as the media often distorts reality with its causal assumptions portrayed as fact. His death was indeed horrible, and hopefully will bring about police reform in a meaningful yet sensible way. Beyond the peaceful protests, there are a group of people and an ideology that wants to destroy America. These people care little or nothing about George Floyd, and want to leverage the energy around his death to “bring down the system.” This has manifested itself in organized riots and looting across the country especially focused in big cities. Both subtly and not so subtly, some in the media and even government officials have endorsed the destruction which has caused loss of life, countless injuries, and vast property damage.

A lot of things have catalyzed the Floyd riots, yet not one alone is actually causal. One could say that the coronavirus lockdowns and subsequent unemployment created a tinder box of pent up energy. Maybe it is systemic racial inequality, or is it social inequality that preys on the poor no matter their race? It could also be an entire generation addicted to social media that lends itself to instantaneous mob action? And how about a legacy media that is so focused on destroying Trump that anything and everything becomes a distortion in order to create the maximum amount of political damage? When you look at this in its entirety, what crystallizes is a portrait of complete societal collapse. This does not happen overnight, of course. It is an accumulation of many factors over years and decades that leads one to abandon the social contract that binds us in a civilized society.

What “factors”, one might ask? Simply stated, we have one economy and legal system for the mega rich, and another one for everyone else. If you are a mega corporation and its large shareholders, financier, movie star, or professional athlete, life is great. Pandemic you say? These people can just sit around in their mansions and wait things out. Somewhere along the way of the US empire, social striation began to spin out of control. I am not referring to racial inequality, which is indeed real and in some cases overlaps with social inequality, I am referring to the fact that the US has become a plutocracy with a ruling class and everyone else. This outcome had its early seedings in the 1980s when US corporations began offshoring production in earnest to take advantage of cheap labor. Coincidentally, or not, the US then started its transformation into a “financialization” economy which on balance didn’t produce “things” but rather made money by speculation and moving money around, creating gigantic, rolling asset bubbles.

The real beginning of the current dystopia however goes all the way back to the Federal Reserve Act of 1913 which was then accentuated into overdrive when Nixon closed the gold window in 1971. The closing of the gold window allowed currencies to trade freely against each other without gold as an anchor, and central banks were then free to print money without constraint. Some might find these references wonky, impractical, or too “analytical”; however it is very easy to connect the dots from these events to what is happening today.

With that backdrop, we now have an “activist” Federal Reserve that has basically taken over capital markets and the economy. This activism started with Chairman Greenspan of “irrational exuberance” fame, and it has only increased in amplitude as each bubble has been created and subsequently burst. Some may or may not know that the Fed is currently purchasing corporate debt via ETFs. I am not sure people understand the profound meaning of this. The Fed is now explicitly backstopping corporate spending and moral hazard, thus keeping zombie companies alive that would otherwise fail naturally. The Fed maintained it is doing this to “save jobs” in recent congressional testimony. Nonsense. Corporations are now issuing more debt just to pay dividends to shareholders while millions are laid off. You will note that Fed is doing this without Congressional approval. Meanwhile laid off people get crumbs in the form of extended and surplus unemployment benefits, with an occasional stimulus check thrown in. Small businesses are offered loans that are mainly just an extension of the unemployment office. So hey, let’s take on even more debt in the face of collapsing demand (and in some cases limited supply) just so we can continue the charade a little while longer.

Circling back to my opening comments, what is easily seen is the classic tactic of “divide and conquer” to distract people from the REAL looting. The playbook is now very familiar. A crisis develops, manufactured or otherwise. Step 1 is to “do something”, namely loot the Treasury for the primary benefit of maintaining the status quo and enriching the richest people on earth. Step 2 is to hand out crumbs to the plebs in order to placate, and Step 3 is to create a diversion to distract from Step 1. Meanwhile the additional debt created (money printed out of thin air) creates massive inflation and also ensures debt servitude to current labor and future generations in the form of higher taxes. A sinister double whammy. If you don’t believe me, look at the now soaring stock market in the face of collapsing real economy. Eventually even that tactic will fail.

Lastly, I find it particularly striking that during this late stage of empire that America is being attacked simultaneously from both outside its borders and within. To me this unique and a large clue that we are now in the “sunset” phase of America. The attacks are not traditional in terms of combat, but rather unconventional in the form of treason, cyberattacks, trade, and possibly now, biowarfare (either intentional or otherwise).

So enjoy this brief respite, folks, which is not really a respite for most. Things are about to get very bumpy.

Shaky Ground

When I wrote my Twilight Zone post a few weeks ago, I didn’t realize how weird things would get, and quickly. The markets are one thing, although the speed and magnitude of this rebound wave in equities is not that different than many others I have witnessed over 25 years. This one is just big and is taking a while. What really concerns me, however, is the accelerating disintegration of our social fabric and polarization of everything. Recently an old man was beaten by an attendant at a nursing home, recorded on video no less so everyone could see the horrible act. A couple days ago a man was pinned down by police officers, and then later died. It is not clear how he died, but the officer appeared to be using excessive force on his head and neck area while holding him down during the arrest. The media reaction to these two events has been different, although I am not contending they have equal weights. One event was given very little press in the mainstream and very little commentary by government leaders. The other has been broadcast for 24/7 since it occurred, with various leaders speaking out and calling for immediate punishment for the officers who have since been fired. I actually saw one comment on social media stating the officer had intent to kill.

The varied reaction to these horrible acts is a great tell as to how divided and polarized we are as a society. It seems everything has to be viewed through a political and often racial lens. However is it about race, or is it something else? Is it a broader socio economic decay that is augmented along racial lines? A breakdown in civilized society? Perhaps it is just that these things have always occurred, with the exception being they are now caught on camera more often, intentionally or otherwise.

The media, in my view, is at the root cause as to why things have become polarized. Media correspondents no longer report the news, they want to make the news. Social media companies want to provide a narrative for everything. If you don’t agree with that narrative, you may be “fact-checked” or outright censored. I have a big problem with this as it has been going on for years, and accelerated during the Trump era. It is one thing to have a different opinion and a robust discussion on the pros and cons of an issue, but it is entirely another to completely dismiss another vantage point simply because it doesn’t align with a narrative. If facts need to be omitted, then so be it. To me this is a fundamental breakdown in a basic pillar of democracy…and completely unacceptable.

Does it mean our current form of governance is no longer sustainable? Stay tuned.

Money Printer in overdrive

Whoa, there was a big move up overnight in futures, first buoyed by Fed Chairman Powell’s comments on 60 minutes, i.e. “there’s a lot more we can do” which translated means they can print more money and possibly even buy equity ETFs outright. The optimism continued this morning on promising early results in a small scale human trial for a Covid vaccine conducted by Moderna. I welcome the news of a possible vaccine, however we have been this route before with the market overreacting to early stage results. Regardless of a vaccine or not, the macro issues remain that were present before the virus – too much debt, political chaos, and a new cold war emerging with China.

I present to you an updated Dow chart below, showing the big move overnight circled in blue on a four hour chart in order to give broader context.

These are the times in investing when money is made or lost. If you believe the financial media, it is all unicorns and rainbows and we are headed to new highs in a V shaped recovery. Not so fast, I say. This is the psychology of the market, it screams to buy at the worst possible time as the herd stampedes in one direction.

Therefore I am not only continuing to stay short but adding to my positions. We could go a bit higher, perhaps hitting the 61.8% fib line on futures which would equate to about Dow 25,148 (approx. 25,400 in the cash market). Until then, I will sit and wait patiently as earnings continue to collapse and debt increases exponentially.

Quick update

A lot of news flow lately, none of which is good. I will cover most of this over the weekend as I highlight four seismic events that are converging at once. Currently markets are gyrating a bit however the overall trend remains down in spite of the Fed and Treasury providing massive stimulus. Capital has a way of moving in a way such that it will force the hands of weakness and inefficiencies. For example after Chairman Powell downplayed the use of negative interest rates the other day, the market immediately started placing bets to the contrary. In other words, the credibility of his statement is weak and the “market” doesn’t believe him.

As it stands, the thesis of short equites and long gold is playing out well. Below is a daily chart of the Dow showing Fibonacci retracement levels.

You can see that the Dow retraced about 60% of the March crash at the peak of the retracement, and has oscillated around the 50% retracement level for about 6 weeks. If you recall, I closed short positions that I had accumulated from December to February on March 16th which turned out to be a few days prior to the ultimate intermediate low on March 23rd.. During the 2nd week of April I began accumulating new short contracts as we approached the 50% retracement line. The expectation of a 50% retracement or thereabouts came from review of the fractal from the initial wave down. To watch a wave scale-up from its fractal underling is an amazing and beautiful thing to watch. It’s like having a mini time machine that can see into the future. Currently, assuming we have started the next wave down which I contend we have, I expect this initial impulse to bring us down to approximately Dow 21K ish and SnP 2600ish. It is possible we have one more push higher before collapsing to those levels however I accept that risk. After the initial plunge I expect some kind of rebound which may be violent, followed by an even nastier plunge that may last years.

Gold has finally broken out of a multi week oscillating triangle as I show below.

If you can discern the notes on my chart, I expect gold to rise to 1940 at minimum, likely in the next couple months. It could go much, much higher. The gold thesis is simple. Gold has been used as an anchor to financial transactions and to financial systems for millennia, until the past 50 years. With governments increasingly becoming unstable due to massive debt and political chaos, central banks continue to do the only thing they know how to do, that is print money out of thin air and finance deficits. That of course is extremely bullish for gold. There is also a risk of complete system failure and reset, and an expectation that the new system may be tied to gold again. Maybe, maybe not. Either way, it is very wise to own gold right now, both physical gold and synthetic derivatives for speculation. It is protection against monetary insanity.