The Madness Of Crowds

June 20, 2014

Never in all my years as a market Observer Trader and Analyst have I ever seen so many People hanging so far out on a limb that is in danger of breaking OFF behind them.

“In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule.”  - Friedrich Nietzsche

“Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedged finance units to a structure in which there is a large weight devoted to units engaged in speculative and Ponzi finance. . . . The greater the weight of speculative and Ponzi finance, the smaller the overall margins of safety in the economy and the greater the fragility of the financial structure.” (The main fly in that ointment is we have not been in good times since 2006-7) AB  - Hyman Minsky, 1992

“Sometimes the law defends plunder and participates in it. Sometimes the law even places the whole apparatus of judges, police, prisons and gendarmes at the service of the plunderers, and treats the victim, when he defends himself, as a criminal. But often the masses are being plundered and do not even know it.”     - Frederick Bastiat

“It is an endlessly expanding list of rights —the “right” to an education; the “right” to health care; the “right” to food and housing. “The right to a well paying job” That is not freedom. That is dependency. Those are not rights. Those are the rations of slavery.

Democratic institutions awaken and foster a passion for equality which they can never satisfy.  This complete equality eludes the grasp of the people at the very moment they think that they have grasped it… the people are excited in the pursuit of an advantage, which is more precious because it is not sufficiently near to be enjoyed.  Democratic institutions strongly tend to promote the feeling of envy:  A depraved taste for equality, which impels the weak attempt to lower the powerful to their own level and induces men to prefer equality in slavery to inequality with freedom.  - Alexis de Tocqueville, 1825

“The whole gospel of Karl Marx can be summed up in a single sentence: Hate the man who is better off than you are. Never under any circumstances admit that his success may be due to his own efforts, to the productive contribution he has made to the whole community. Always attribute his success to the exploitation, the cheating, the more or less open robbery of others. Never under any circumstances admit that your own failure may be owing to your own Laziness’ or weakness, or that the failure of anyone else may be his own defects, to his laziness, incompetence, improvidence or simple stupidity.   - Henry Hazlitt on envy and Marxism

“One of the saddest lessons of history is this: If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It’s simply too painful to acknowledge, even to ourselves, that we’ve been taken. Once you give a charlatan power over you, you almost never get it back.”   - Carl Sagan


In his introductory statement, Mario Draghi unveiled: Targeted longer term refinancing operations (TLTROs). The initial size of TLTROs is about €400 billion and all TLTROs will mature in September 2018, or in about 4 years. Two successive TLTROS will be conducted in September and December 2014. “From March 2015 to June 2016 all counter parties will be able to borrow quarterly up to three times the amount of their net lending to the Euro area non-financial private sector, excluding loans to households,” said Draghi. (You believe that? We shall see)

The ECB is “intensifying preparatory work for outright purchases in the ABS [asset backed securities] market.” It will also suspend its weekly “securities market program”(SMP) sterilization.

The Q&A has begun. Here are the key highlights:

• There will be additional reporting requirement to ensure lending goes to the real economy. For all practical purposes, the ECB has reached the lower bound of rate policy, Draghi says.

• “The main reason to commit to sterilization by my predecessor first and by myself later was based on the effects that this additional liquidity might have on inflation,” says Draghi. “This decision takes place in a background characterized by low inflation, weak recovery and weak monetary and credit dynamics, that’s the reason for suspending this commitment.”

• “Being able to have unanimity on such a complex set of instruments means a very extraordinary degree of consensus,” says Draghi. “What is in this TLTRO that makes it different? The cost obviously, it is very low, the term maturity is four years, and the determination that this money not be spent on sovereigns and on sectors that have already experienced or have just come out of a bubbly situation, that’s whats in it.”

• We don’t see deflation says Draghi.

• “There is a deep misunderstanding here. The rates we’ve changed are for the banks, not for the people,” says Draghi. It’s wrong to think we want to “expropriate savers. …The concerns of savers should be taken very seriously.” Draghi however adds that the decision to lower rates for households is the decision of banks, not the ECB.


(The danger of the government producing phony numbers is that they cannot be used to formulate correct policy or anything else for that matter: The chickens will be shortly coming home to roost.)

Anyone who finds this surprising hasn’t been watching Europe’s inflation numbers. As most of the Eurozone including Germany slipped towards deflation, it was clear that the European Central Bank would have to launch a new currency war offensive and soon. So here it is: Negative interest rates on bank excess reserves (though not yet on consumer bank accounts) along with direct infusions of cash into the banking system.

This will have a modest effect on bank lending and economic activity, but it won’t stop the Euro zone’s downward spiral because liquidity doesn’t fix insolvency (not in Europe, America, China or anywhere else). In other words, if the system’s collateral isn’t as valuable as the debt it supports, then the system is in trouble. And coercing banks into making more loans against inadequate collateral will only make the situation worse.

So the next, equally inevitable stage in Europe’s offensive will be some form of QE and apparently the ECB has decided that asset backed bonds will be the instrument of choice. The idea is that by buying, say, mortgage backed bonds with newly-created Euros, the ECB will be able to direct those Euros back into the housing market, which will in turn get people spending again. (When and where have we heard that before?)

This, by the way, is the script the US followed in the first half of the 2000s which produced the housing bubble and the subsequent crash.

But before this bubble bursts, the Euro will fall due to rising supply, which is the same thing as saying that the dollar will soar. This will be deflationary for the US, producing a string of “unexpected” misses in corporate earnings, GDP and inflation and will leave Washington with no choice but to respond with renewed debt monetization and money printing and in all probability negative interest rates of its own. And so it will go, until we figure out that depreciating fiat currencies against each other is a zero-sum game that makes the super rich richer and everyone else much poorer.

One would expect Gold to be the main beneficiary of crazy policies like negative interest rates, and it did pop on Draghi’s news. But the ongoing manipulation of precious metals prices makes this far less of a sure thing than theory and common sense would normally dictate. Fundamentals always win out in the end, but in a world of manipulated markets the timing is very difficult to predict. But once the FUNDAMENTALS come back into play, jump back onto Gold and hang on with both hands.


The managed money Silver shorts is far too large relative to offsetting liquidity from the banks and commercial users of the market. By definition, they are more speculative than managed money longs. If we make the reasonable assumption that banks will take the opportunity to squeeze the managed money speculators, Silver has the potential to move sharply higher very quickly. In which case, a bear squeeze in this relatively illiquid market could accelerate a corresponding bear squeeze in Gold.

However, the expiry of the July contract could make the precise timing unpredictable. The first week in July, if not sooner, should see a significant recovery in Gold and Silver prices, based on the technical market position on Comex, and may well mark the point from which prices go considerably higher, given the extremes of negative sentiment in the managed money categories.


Thus far, stocks have followed the projected price path forecasted and annotated for the past several months. The S&P 500 hit another new all-time intraday and closing higher again Monday. Stocks should top very soon, as we are up against the upper boundary point for the Rising Bearish Wedge from October 2013. It can dribble a bit higher over the next few days, but the top should be imminent. Next should be wave d-down, which could be sharp and last into the July 16th and July 17th Phi date and Bradley model turn dates.

Now here is the key point: If stock prices do not top soon, if stocks melt up, it means stocks are in the final wave up, so that the Jaws of Death pattern is likely going to finish and top out, around the July 16th/17th turn period, and not later in 2014 as was initially expected. It would mean that one of the most devastating stock market and economic declines in centuries is five weeks from starting. So, what stocks do the rest of this week is going to be extremely important.

The stock market is severely overbought in most timeframes, so this is supportive of the above scenario calling for a market top soon. Furthermore there was another VIX stock market Sell signal Monday. There was also a very small change in the McClellan Oscillator Monday, suggesting a large price move is coming over the next few days in stocks.

I have been speculating that the S&P 500 could top in the 1,955 to 2,005 range this week.


Gold seems to be working through a corrective wave {2} up rally, within a five wave decline following the projected path I have been forecasting over the past several weeks. Next should be Wave {3} down taking Gold toward 1,200. Gold needs one more decline to reach a conclusion to its corrective decline that started in September 2011. The HUI 30 day stochastic remains on a Buy signal from Tuesday, April 8th, at odds with the HUI & PPI, which puts the HUI and Gold on a sideways signal. The HUI Mining stocks look to be heading toward 175ish, which should be strong support and possibly a bottom for the decline from September 2011.

With enhanced scrutiny and with the future of the daily fix in doubt, bullion banks are likely to be more cautious over taking aggressive, manipulative positions.

Trend-chasers have gotten themselves into a potential trap, with short positions totaling 214,020,000 ounces; equivalent to 25% of annual global mine output. Whether or not they can extricate themselves from this position will depend on the banks and commercial hedgers providing the liquidity for them to do so. To some extent, this extreme bear position has been balanced by an increase in Managed Money longs. These include synthetic ETFs so the net position is nearly always long; that is until the current bear raid which has turned this investor category net short 7,638 contracts. The impending run-off of the July contract will have an important effect in the next two weeks, with some 97,000 contracts to be closed or rolled.

There is uneasiness across a number of markets with moment-to-moment volatility grinding almost to a halt. It contributes to a feeling that this is the calm before a storm. It is not unusual for there to be a summer lull or for one market to suffer disinterest relative to another, but the current situation across the whole range of capital markets should be a major concern (opportunity for us).

The monetary background is also unprecedented, with all western central banks having depressed interest rates close to zero for a prolonged period, accompanied by massive injections of Fiat money. This has led to enormous amounts of liquidity bottled up in capital markets. Central banks have also directed how this liquidity is invested: This is what the Fed's Operation Twist is about, raising long maturity bond prices relative to shorts. And the ECB's "Securities Markets Programs" and "Outright Monetary Transactions", which have succeeded in driving risk premiums out of Eurozone government bonds. (Watch out for rationality to return to Markets.)

Manipulating bond markets and driving perceptions of risk out of them is only the start of deliberate intervention. The belief in central banking circles is that rising stock markets foster the confidence that gets consumers spending again. Falling bond yields are seen as the motor that drives this process. And as interventions have become more widely understood and accepted, investors have complacently concluded markets are solidly underwritten. (WRONG.)

Central banks also know that a rising gold price undermines confidence and so have taken action to keep it suppressed. We know this from the enormous flows of physical Gold into Asia that can only have come from liquidation of monetary Gold. So it's bullshit up the good stuff and dumb down the bad.

Market distortions from interventions have been accumulating since the Lehman crisis in 2008, moving ever further away from the path of market reality. Inevitably, private sector investors add to these distortions by anticipating all this will continue. Banks and investment funds feel safe investing in Spanish and Italian government bonds at ridiculously low yields knowing that the ECB must underwrite them. Similarly, so confident are investors in US stocks that they are borrowing to buy and have driven up total margin debt on the NYSE to a near record level of $437 billion in April. And at the same time, these confident investors have taken short sales of Gold and Silver to new levels. (What a nice time for rationality to return?)

Cracks in these market distortions are now becoming visible. Regulators are circling around the banks: First it was Libor, now it is Forex and Gold. The Fed is backing down on QE and China is trying to slow the pace of credit creation, while Japan and the Eurozone are still fighting economic collapse. It amounts to a reality-check for over-extended investors committed to making money out of on-going market intervention. No wonder volatility has slowed to a crawl, and diverse markets are on the point of stalling.

History tells us that attempts to manage markets usually result in crisis, and that time now appears horribly close. If so, the consequence will be a radical reassessment of bond risk, leading to widespread losses in the banking system and the rapid reversal of extended investment positions in a range of markets. Volatility will disrupt complacency and return with a vengeance.

They say that patience is a prerequisite for being a successful trader. Let us now hope that our patience is about to payoff big time.



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This letter/article, like all my others, is for education purposes only and is designed to help you make up your own mind; not for me to make it up for you. Although I include recommendations from time to time, being a bi-monthly publication, it is not meant to be a trading letter. Only you know your own personal circumstances, so only you can decide the best places to invest your money and the degree of risk that you are prepared to take.

Silver has the highest electrical conductivity and heat of all metals.

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