Tuesday, December 18, 2012

The Fiscal Cliff - A Beautiful Thing

Earlier today on Pretzel Logic's great site, a commenter posted a couple of charts for silver.  They give the impression that silver probably wants to fall further.  And judging by the weekly chart for silver it becomes apparent that it has basically been range-bound for about 15 months now, fluctuating roughly between $26 and $36.  True, that's a big range... one that has even been tradeable for those who don't mind a sideways market where moving averages become problematic and momentum indicators take over as the keys to finding entry and exit points.  But the point I'm driving at is that it appears silver will most likely be heading lower over the next couple of months at least.  Same story with gold.  It's even difficult to know which of those two would decline the most in percentage terms because the gold:silver ratio itself is also headed more or less due east.  But a closer look gives the hint that for a short while at least it will most likely be gold that outperforms silver.  A few weeks down the road though their rolls could reverse.  However, while all this is happening I think both metals will be falling.  Silver continues to under-perform for another 2 weeks or so, then gold takes over and begins to fall harder than silver, catching up.  Even if these views don't pan out exactly right, there's a much more important theme that I'm heading towards here.  On a side note, if you'd like to see an example of how 'great' analysis of Elliott Wave Theory should be presented take a look at the most recent installment by Jason Haver at Pretzel Logic's.  Amazing work.

Weekly chart of the Gold:Silver ratio.  Click here for a larger live and updating version.
If that brief analysis is correct, it would imply that the dollar should start to climb.  What in heck could cause that to happen?  The fiscal cliff, that's what.  I think the crackheads in congress are going to allow the budget to go over the cliff but I highly doubt that is going to be nearly as bad a thing as everybody seems to fear.  When was the last time your household suffered as a result of you tightening your spending belt?  In the short term, yes it causes some discomfort and probably a few weeks without your $7 Starbucks coffee and your favorite expensive ice cream before bed every night.  You'll eat ice cubes instead and pretend they're ice cream.  And somehow you'll survive.  Six months later you find out that by golly you've got one of those nagging debts already paid off.  A great start.

I think that's what's in store for the USA... the budget goes over the cliff.  Equities get slammed and probably hard and fast.  The dollar soars due to increased confidence overseas that maybe there is some fiscal sanity left in the USA after all.  So even though the mighty Thorin Bernankenbeard is going to print trillions more dollars, he's going to need them in order to continue buying up bonds... bonds that are likely to become even more expensive thanks to the fact that the entire global population will have earned a new respect for bonds as a proxy for slightly more fiscally responsible dollars.  If we go over the cliff, the following trades could pay off handsomely; long TLT, short gold and silver, especially silver, long the dollar and short equities.

The alternative to going over the cliff
That scenario does not represent anything even remotely resembling the end of the world for the USA.  It will at first but that would be a misguided view.  In the long haul it would be magnificent if the stupid bastar bastages in congress pull off the surprise of the decade and just let 'er roll over into the abyss... just like the party-boy who fell out the bedroom window of his girlfriend's apartment on the 34th floor, screaming like a 6 year old girl all the way down... and survived.  He survived because he only fell 3 feet onto the nice balcony just below her window sill.  He stood up, realized that he was still alive and had an instantly renewed appreciation for the beautiful view of the great city sprawled before him.  Then he barfed over the balcony.  But that was only because the bugger was pissed to the eyeballs... a totally irrelevant factor.  Why else did you think party-boy fell out the window?  But that's all that would happen I think... America falls out the fiscal window and crashes 3 feet below on a nice lawn.  There's hope after all.  Equities would get slammed but the country wouldn't.  The economy certainly wouldn't start to improve immediately, but over the long haul without a doubt it would end up far better off as compared to what it will look like if nothing at all is done to curb the annual deficits and the overall debt.

To me the views expressed above make the most sense "as long as we go over the cliff", which is what I think is going to happen. If that's what happens, then this article by Bill Patalon, executive editor of Monday Morning would go a long way toward explaining 'why' I could be right about all this.  I admit that I couldn't possibly quote the actual numbers like Mr. Patalon did so I wouldn't have been able to explain in defined terms why I hold the views I do... only in general logical terms such as "it makes sense that your household debt will become more manageable if you stop spending like a drunken sailor".

So don't fear the cliff my friends... embrace it.  Rejoice and short the hell out of equities for a while.   Not yet though, we have to wait until some time closer to the announcement that a deal has not been reached, that it's too late and that we're going over the cliff.  I'd fully expect equities to keep soaring almost until the last moment, based on hype, lies and spin stating that the likely outcome will be "Yay, we've all been saved!  Yay, we're not going over the cliff, we're going to go hopelessly further into debt.  Yay!  We're all saved!  Santa has arrived.  See, stocks are soaring.  Everything is great because we're stupid!  Yay!"  Horsepuckies... the cliff would be the best thing to happen to America in two decades.  But not for equities, at least not at first.

Merry Christmas from Alberta, Canada to friends of this blog from all over the world.
In case I don't publish anything else between now and Christmas, let me take this opportunity to wish each and every one of you the most beautiful Christmas you've ever experienced.


  1. The only good Christmas is a bearish one ;)
    RE: Silver/Gold, it was a real slap in the face to the metal bugs today. I'm not surprised though, as I've been touting GLD 158 for over a month - and I'm not the only one.

    The attached chart is based on Armstrong, of whom I am a sincere follower. Let me be clear, he has NOT stated what i've outlined in the chart, its just kinda 'based on' things he has noted, and partly my own outlook.

    That metal outlook - if correct would suggest a very deflationary early 2013 - with equities also getting slammed. Conversely, with a higher Dollar.
    If you see my closing post tonight though, you'll see a clear break lower on the USD monthly chart, and thats probably the second bullish chart out - other than the transports.

    Bears better see a reversal...soon.

    Good wishes from the bear bunker :)

  2. Nice call on GLD Permabear Doommeister.  How did you arrive at that level... was it based on a retrace back toward one of the May or June lows?  Oh, I see on your chart where you're getting your levels from.  Nice. 

    You know, that chart would coincide well with the notion of falling equities as soon as it becomes apparent that the budget is going over the cliff (as I proposed above could happen).  I don't think the idiots in congress are capable of cooperating with each other on anything.  That's probably why the US military goes to war these days without even the blessings of congress.  They just go to war when the bankers tell them to.  For that the US citizenry should be up in arms themselves and so should the military.  All together they should march on the White House and tell them where to go.  That would certainly help solve a gigantic chunk of the overspending wouldn't it?  Just stop warring without reason.  "Greed" does not qualify as a "reason".

    So I think we're going to be seeing equities run even higher as we approach the end of the year and then kaboom.  A very deflationary phase to follow.  I'm not sure if it would be the beginning of "the big one" or not though, because the reasons we could see a huge sell-off in equities with the turn of the year are not the same reasons that I'd expect for the kick-off of "the big one".  It doesn't matter though whether or not we know right now which deflationary event this approaching one would be... it's sufficient just to be able to call this right and get on board for a bear ride.

    Having said that though, I have to admit that I'm confused by that whole concept at the moment because when I look at a weekly chart of the S&P 500 I'm just not seeing anything at all that's bearish.  Even on the daily I'd be hard pressed to make a bearish case right now.  In fact it's just looking magnificently bullish right now but I'm also expecting that action over the next 10 days could possibly upset that AAPL cart pretty impressively.  Right now that's just pure speculation though.  Maybe they 'do' resolve the fiscal cliff issue and uber-bullishness would become the flavour for the entire year of 2013.  We'll have to see.  But as of this moment, to borrow from the Rudolph story, it's definitely "On, Gromet! On, Cupid! On, Donner and Blister!"

  3. What does the salt shaker say to the pepper shaker around this time of year?  Seasonings Greetings.

    My extremely anecdotal and cursory blogosphere jogosphere over the last week or so seems to reveal a lot of bullish conversion.  I'll be toasting to your alternative take, even if it is as stops are being run.

    Happy nutmeg to ya AR.

  4. What did the cranberry say to the grape?  'Tis the season to be jelly.

    The possibility that I expressed in the article above is purely speculative of course Zimmer.  From the fundamental (and speculative) perspective, I think congress could be setting us all up for what could be a gigantic disappointment.  But as of this moment I'm sure as heck not seeing anything bearish from the charts.  So we have no option other than to play it as we see it over the next 10 days or so.  It could still go either way... with gigantic moves in either direction I think.

    Happy nutmeg to you too Brother Nutbar.

  5. Oh boy, now I'm in a jam.  Is it possible to preserve the theme by spreading another punny holiday line?  I suppose I worry too much, what just the other night when I asked what the racket on the roof was, the old lady assured me, "it's just rain,dear."

    > with gigantic moves in either direction I think.

    There's a stink of penultimate waves to all the sidewaysness followed by bursts.  With some fifths and then falling down, such a diagnosis would fit your outlook better than a Christmas stocking.

    To fifths and falling down ;)

  6. Lardy, Lardy, Lardy... now you've gone and put me in an even bigger pickle.  How am I ever going to keep up with your word skills you nutty fruitcake you?  I'd butter come up with something good... there's little margarine for error here.  Lettuce see, what can I come up with next?  Hymmmm.  I've gotta come up with at least something because I don't want to insalt you in any way.  Let me think about it some more.  I'm sure I'll come up with something in thyme.  Wait, I'll ask my girlfriend... Rosemary.

  7. Lardy, Lardy, Lardy... now you've gone and put me in an even bigger pickle.  How am I ever going to keep up with your word skills you nutty fruitcake you?  I'd butter come up with something good... there's little margarine for error here.  Lettuce see, what can I come up with next?  Hymmmm.  I've gotta come up with at least something because I don't want to insalt you in any way.  Let me think about it some more.  I'm sure I'll come up with something in thyme.  Wait, I'll ask my girlfriend... Rosemary.

    To fifths and falling down :-)

  8. EWI's theory (chart attached) is that gold rising relative to silver suggests increasing conservatism (highest in 2008), while silver rising relative to gold means risk on (gold/silver ratio low in 2010). Given that the most probable count for US equities is that we are in the latter stages of a minor wave 2 up (of a primary wave 3 down) suggests that the upcoming 3rd of a 3rd down should favor gold/silver to rise, perhaps to new highs.

  9. Thanks David.  That's an interesting correlation, that the higher the ratio goes the more it is seen as a sign of "risk off".  I'd have to say that my attached chart would generally confirm EWI's theory although the lag time between a turn in the markets and a turn in the ratio can be as long as 3 years.  Interestingly, that lag is the longest at stock market tops.  When the equities have hit a bottom though, the top in the ratio is never very far away.  So if we're approaching a market top I wouldn't expect the gold:silver ratio to react in any way that would be meaningful due to the usual lag.

    The first chart you've attached has about 8 months worth of the latest data missing and EWI's chart has about a year and a half missing.  Unfortunately, the monthly chart I've included (which has all that missing data) doesn't really clear the picture up much does it?  So I'll just stick with the 'speculative' analysis I covered in the piece above for now and see how it all pans out.  But I'd say that if the ratio does head lower as I'd suggested it might, then that would suggest that equities still aren't finished rising quite yet.  The weekly charts for equities sure don't have any bearish features about them at all right now.  So I'd have to think that if the ratio does head lower, once it hits bottom that would surely represent the top for equities.  At the present moment though, I don't think the gold:silver ratio is signaling a top nor a bottom for equities.  If the ratio turns lower, I'll sure be looking for it to put in a bottom though.  I think you're suggesting that it's already in.  You could be right about that too although instead of lagging, they both turned at almost exactly the same time back in early 2011.  That's unusual.  Further, if the correlation was had any preciseness to it, back in early 2011 the gold:silver ratio should have put in a higher low, not a lower low because the equities market put in a lower high rather than a higher high.  In any case, it's an interesting discussion.  Thanks for the charts.

  10. Nice chart on GLD, and there's another channel of support that has been broken.  And your wave 2 retests the bottom of old support which is now resistance.  GLD in wave 3 looks likely with the serious distribution recently ... looks like volume confirmation that something serious is rumbling.  All those banks on the ropes could have some they are forced to sell for margin calls.

  11. Nice Article Dan, Thank you, and Happy Noel to you also!  Your blog is a nice oasis in a sea of trolls.  Ahhhh.

    I agree this cliff is a good thing for debt levels.  To put it all in perspective, this "cliff" is a tiny pot-hole to go over compared to the REAL CLIFF that awaits the US economy in a year or two when default fears push interest rates up to 8% and 10% (with the help of the eager to oblige vigilantes when they get to the scene), homes get cut in half again.  And debt costs explode for the US government.  The economy, housing, jobs, will all take a serious nose dive.

    Hey, I read Prechter's book recently and was very interested in a chart he had of the last few cycles.  He had us in nested 5 wave cycles.
    In that cycle (Millennium Wave) started in the Dark ages,
    the fifth wave of the Millenddium Wave (Grand Supercycle) started in 1789,
     and the fifth wave of that cycle (Supercycle) started in 1932,
    and the fifth wave of that cycle (Cycle) started in 1974.
    So he went back 1,000 years, and the Mayans had a bigger cycle going back 5,000 years, and that one ends in 2 days. 

    So clearly we are nearing the end of something huge.  Which made me realize that what's coming could be much WORSE than the great depression.  I'd thought for years we are headed toward a depression not a recession.  But the last depression was merely wave IV of the Grand Supercycle.  All this massive credit seizing up is way bigger than 1930. Surely the End of all that will generate much worse waves than IV GSC.  Like would we retrace 61.8% of the entire big Millenium wave in this huge ABC? 


  12. salt phobia leads to nutrient deficiency http://www.psychologytoday.com/blog/complementary-medicine/201108/iodine-deficiency-old-epidemic-is-back

    seasonings greetings

  13. For those that like long term wave counts then you might like this:

    (warning for bearish eyes only)


    Although I tend to feel it's more of an academic exercise than anything else, I've been warming to Sid's Elliott Wave Predictions view that the Great Depression crash was too sharp to be a wave 4 and was (could?) be a wave 2 in which case we are in the wave 4 now of grand supercycle 3. 

    I think supercycle 3 topped in 2007 and we're just starting the c wave of a running flat, or to borrow from the parlance of TBONE, theyzz rare expanded flat. 
    The reason I'm thinking this is we had a similar rare expanded flat in the 1837-1860ish wave (which I count as a wave 4 followed by an extended 5.

    Here is Prechter's chart with edits. The thing I'll be looking for is if sentiment gets to a negative extreme without making a low below Mar 09. That is, all the bad things we're talking about happen, i.e. credit markets seizing up, no one can buy a home, people moving in with extended families, etc and then a stick save. My one concern is that the stick save will turn out to be a big war. But hey, I wouldn't be a doomer if my silver linings didn't have a lot of dark clouds.

  14. Hey Greener.  I've been warming up to Sid's count as well,  Ever since the first moment I watched it I've been thinking "holy smokes, he's making a lot of sense there".  If we can totally forget about all the doom and gloom we're fearing right now, forget totally about why we think a deflationary collapse should be happening any week now (when it might actually be years from now) and just look at Sid's discussion from the purely EW angle, then I think he's probably a lot more right than Prechter has been for 40 years.  Here's a link to Sid's video for anybody else who might like to watch it.

  15. We hit 1389 last night in a flash crash, market settled around 20pts lower than its previous value as it regains its composure. Could be some fireworks at the open.

  16. Well by golly maybe things are going to pan out as I speculated in the piece above.  I knew equities wouldn't like the idea of the budget going over the fiscal cliff but I wasn't expecting quite that degree of violence to the decline.  Futures have settled down and I imagine they'll fluctuate not too far from the opening levels until Boehner speaks later this morning... about an hour after the open if I'm not mistaken.  But no magic bullet is going to be found before Christmas so I think we'll end up the day and week with some sort of bloodbath.  Like perhaps S&P closes down 30 and the DOW down 300?

  17. Nice stuff GF.
    Specific labels aside, I think this would generally fit with the Neely/neoWave long term forecast as well.

  18. Hey thanks Zim. 
    I don't know a whole lot about NeelyWave. I was trying to read up on all his rules awhile back but found them somewhat overly constraining. I do appreciate his work with all the bowties & hourglasses and whatnot. I think overlapping waves have a lot more to them then what is considered in orthodox Elliott Wave. I read once that he has the overlapping period from the 1870s to about 1920 as corrective. Maybe that was from his book? That period does present a problem for Prechter's count because he has it as supercycle (III). It did eventually take off like a third wave does, but not before hitting several speed bumps where we bounced  from one monetary crisis to another in a long stretch of deflation

    Anyway, Merry Christmas to ya. I was thinking about your work on the silver ratio recently, specifically Pell number 169 & Fib number 13. Maybe incorporating those numbers in my chart work somehow like with moving averages or grids. I think there's got to be some way to extract some information using them.

  19. Merry Christmas. I'm sure this time of year is really beautiful in Alberta, so I hope you have a wonderful holiday season. Thanks for maintaining this nice blog and for all your great analysis and for putting up with all of us.

    I wasn't sure if they would go over the cliff or not, but it looks like you were right. Good call. It's the first step to a long road back to financial sanity

  20. Thanks for sharing that very big picture, I think it helps to try to figure out where we might be in the count by going back to the beginning.  And if that other count is correct (in your link) ... GSC5 ended, with GSCA coming up, that's gonna be a real doozy (over many years).  Far worse than the great depression.

  21. Looks like your hunch was correctomendo!  The congressmen bailed.  And stocks cratered, and AUDUSD broke the uptrend (ending yet another 2-wave).  I suspect they don't really even want to solve the "cliff" because it will reign in spending and the deficits and that'll help their bonds appear more likely to be repaid.

    Thanks for your response ... very good stuff.  I think your doomer vdescription looks very reasonable.  The burning question is how to avoid the same fate as most will see?  A very tricky problem.  How to survive by accumulating wealth in a crash if currencies eventually become worthless?  How to stay protected from the mass of humanity that is very hungry?  Perhaps I will need to move to Canada afterall!  Or to the mountains .. off the beaten track for sure.

    But you are right ... not something we want to worry about continuously.  Money to be made afterall! 
    My nerves were frayed this week, and I sat out the audusd 180 pip fall.  Now I'm hoping we get a retrace for a good short entry.  Lots of indicators went off -- macd cross, DMI, final count, was at resistance 1.058 on the weekly.  Gold and Silver led the week off with their own plummet.  SP500 has a completed ii according to Daneric.  The ducks are lining up.

    Anyway, thanks good sir.  Merry Christmas, and may this new year be rewarding to you in many ways.

  22. Thanks back-at-ya GF.  Always appreciate the breadth of knowledge you bring...was looking at those extinction wave patterns again recently.

    My understanding of Neely is very incomplete, but I think we had nearly identical reactions.  It seems to me that there's a fractal inelegance to ad hoc rules--even traditional EW running flats make me feel that way.  Not to say the rubber shouldn't meet the road, it's just nice to have as little friction as possible.

    Neely's Sept/Oct 1988 Cycles Magazine article where he presents his long term count is included as an appendix in his book.  Only place online I found it reproduced was here (p 269), but it's basically unreadable.  Gist of it is:  1835-1860 flat W, 1860-1929 X, 1929-1949 triangle Y; 1835-1929 double-three (II).  In that article, he proposed a triangle off the 1987 peak, to complete an analog of the 1835-1929 period (1835-1929 :: 1966-199X).  Having turned out otherwise, the permabear in me sees only bias confirmation and says, "aha, we have unfinished business down/back there--the business/debt/whatever cycle was not allowed to run its course!"

    Found this in the process of searching; excerpt:
    According to NEoWave, on two different scales, we are in a bear market, which means the stock market is likely to go down or sideways predominantly for the next year or two, not day-to-day or week-to-week. Based on current timing and structure, it appears it’s almost impossible for the stock market to actually bottom around December 2012. However, I think we’ll be in a market decline by then.

    The real low probably won’t happen until 2013, maybe as late as early 2014. It doesn’t look like it’s possible for the bear market to terminate in December 2012, although we might experience a significant low due to “end-of-the-world” fear.

    Merry Xmas to you too & all the best in 20-THIRTEEN.

    Oh yeah--I've often wished StockCharts kept as long a history of half-hourly data as they do hourly.  That at least 1 in 7 hourly bars are actually just a half hour long is annoying.  The reason I bring it up?  There are 13 half-hour bars per trading session :)

  23. Awesome work Zim. 
    As you know, the Great Depression/ WWII triangle was originally RN Elliott's count. It really looks clear in the inflation adjusted Dow.I think we're now probably reliving the 1800s with it's technology destruction & creation cycles

  24. Greg, if they are right then we're in another dark ages. I don't favor that view though. I still think we've got some juice left in the tank to keep the show on the road, but anything's possible with our crazy world these days.

    Who knows for sure, but I was wondering about this doomer view. What if instead the Dark Ages were the first few legs of a thousand year triangle. After all 1000 AD to 1700 were certainly no cakewalk. The printing press for sure was a game changer but The Renaissance was over rated in my opinion plus European subjugation of the new world was a mixed bag depending on which side you were on.

    Spanish inflation

    The General Crisis

    perhaps weren't the kinds of things you see in a multi century third wave.

  25. Not to barge in here, but on a side note... every time I read GF I think "girlfriend"... as in "right back at ya girlfriend".  And I think to myself "who in hell is Zimmer talking to?".  I think I've got it figured out now :-)

  26. Aud/usd closed below channel support friday. Aud/jpy on the ledge but not broken yet. COT positioning backing off.

  27. http://www.aaii.com/sentimentsurvey/sent_results/

    Bullishness is high but its been high for weeks now.

  28. Market Manipulation – Driving the Market Down

    Banks or Funds
    can profitably
    drive the gold market down
    by first buying puts or selling calls
    or selling futures
    then dumping large quantities of gold or gold stocks
    in a short period of time.


    Then buying in, or covering
    at the new lower price level.

    There will come a time
    wen they cant driv th mkt dn any further,
    cause *sentiment is at an xtrm*
    and no one wil buy their protective calls
    or sel them protectiv puts
    and no one wil buy their future cntrts
    so they will not be able t hedge
    a large short position
    in order t continu th driv dn.
    Then th mkt must rise
    as they cvr their shts,
    in order to reset sentiment.

    But there r xceptns eg.
    an investment bank/broker
    could driv prices dn
    without shorting from their own acct
    by selling out [redeeming] client shares:

    "MORGAN STANLEY’s Wealth platform unit has finally,
    after months and months of considerations,
    pulled the plug on the fund [A PAULSON & CO FUND] that for the second year in a row
    is one of the three worst performing in the weekly HSBC report
    What however is notable is that
    MS withdrawing HUNDREDS OF MILLIONS in feeder capital
    may well explain why gold has seen such a dramatic dislocation [ie BIG DROP]
    in the past week.
    Recall that at Paulson & Co, gold is not simply an investment -
    the bulk of direct gold investments at the once legendary investor
    are in the form of (largely underperforming) gold mining stocks -
    but an actual investment class.
    In other words, instead of being denominated in USD,
    investors are actually denominated in (paper) gold,
    with a fixed conversion into GLD at inception.
    This means that upon liquidation of gold-denominated shares,
    any gold-denominated shares,
    he has no choice but to sell GLD,
    and by virtue of this being the most liquid paper instrument in the PM space, gold.

    "Does the massive gold dislocation [ie BIG DROP] in the chart below


    now make more sense
    especially since Paulson was aware of MS’ intentions days in advance and traded,
    or in this case liquidated, appropriately)?"