Tuesday, June 21, 2011

Shortage of Commodities? er...ummmm....shortage of U.S. Dollars? MAJOR U.S. Dollar Bull Market setting up

Many people are talking about a shortage of commodities and peak oil and how that will send commodity prices to the moon. These same people are also talking about all the "Money Printing" that is going on, causing an abundance of U.S. Dollars (and other fiat currencies) and how that will also send prices skyrocketing. In my view, the situation is EXACTLY the opposite. There is actually a massive shortage of U.S. Dollars, due to the fact that there is large sea of unpayable debt in the global monetary system. This debt is denominated in fiat currencies, but there is more U.S. Dollar denominated debt than any other currency in the world. Creditors want to be paid in U.S. Dollars, not Gold or Silver or other commodities. So essentially there is not enough money in the world, and too much debt. Debt satisfaction creates a demand for the currency it is denomninated in, while at the same time all the contracting debt is diminishing the supply of U.S. Dollars. So there are two forces at work here

1. An increase in demand for Dollars to satisfy debt payments

2. A MASSIVE reduction in the supply of available Dollars due to debt contraction that can collapse much faster than the Fed can counter it.

This money dynamic is extremely Bullish for the U.S. Dollar going forward. As  the world's debt money system collapses, deflation will take hold and send the value of the U.S. Dollar skyrocketing, and the value of U.S. Dollar denominated assets to virtually ZERO. This does sounds extreme, but what has already occurred since the inception of the Federal Reserve since 1913 is the real extreme that most people don't even take notice to. It is the Massive inflation of our money supply through Credit Inflation. the crash will correct this extreme.  In addition, Since most all of our money is debt (with the exception of coins, which make up about 5% of the money supply), for the Federal Government to "Pay off the debt" would be to contract the money supply and cause a depression. Since an ultimate default by the U.S. Government is virtually inevitable (unless they decide to print their way out of it, which they are not likely to do until after the collapse happens, using 1929-1932 as an historical precedent), a massive contraction in our money supply is also inevitable. This has already begun in 2008, and is the first contraction in the money supply since the 1930's. The difference this time is, the bubble leading up to the 2007 top is much bigger than the one leading up to the 1929-1932 crash. This means we should expect a decline greater than 1929-1932. DOW 570 would equate to a 96% decline, greater than the 89% decline of 1929-1932. While all this happens, the U.S. Dollar will be in a Super Bull Market as credit contracts and the few dollars that are left in the system will be scrambled for by debtors. The U.S. Dollar does not appear to be finished with its bear market, however, contrary to what I previously thought. While it could just take off from here, it is likely to get down to the mid-to upper 60's on the U.S. Dollar index, fool everyone into this Dollar Collapse Scam, and then take off in a Super Bull Market. This should last until the debt collapse is over, most likely 2020-2023, although the chances are high for a final low in the stock market in 2016 or 2017.

Market Update

As it turns out, the stock market did move on to new highs, but only in three waves, not five. That could have marked a weak end to the bear market rally, or the other option is that the market has been corrective mode for most of 2011. It is possible that the market is in an expanded flat correction from the 1344 high in Feburary 2011. Under this scenario, the market should ideally retest the SPX 1249 low, although it is not required in this type of correction. If this is the case, then the bear market rally will continue after this correction is over, and likely top in early to mid 2012.

As Bob Prechter points out, the only thing holding up the market is the 7.25-year cycle and the Federal Reserve's accommodation to speculators by adding reserves to the banking system  through the purchasing of treasury bills that has allowed banks to speculate in markets rather than lend the money out. This has been the driving force behind the recent rise in commodities and other inflationary assets (including stocks). However, in my view, when this cycle tops out, and investor psychology turns negative again, the Fed will not be able to stop the decline in what I belive is the worst portion of the bear market yet to come. They will pull all sorts of tricks out of the hat, but the coming collapse in credit will be too fast and too strong for them to handle. The FDIC may even have a hard time honoring all the claims from patrons of failing banks. Whether or not this bear market rally is over, it is still a bear market rally, and it is very important that people understand the risks inherent in this market and stay CLEAR of all traditional investments and get positioned in the safest possible cash equivalents. This includes Short-term t-bills (anywhere from 1-month to1 year), swiss money market claims, as well as physical cash. I believe the U.S. Dollar is at the very end of its bear market that has lasted so long, and will go through a massive short-squeeze where debtors are being forced to liquidiate assets to pay off their debt. As the U.S. Dollar gets stronger, it will be harder and harder for debtors to maintain their position, and will either have to pay their debt off, default or restructure. The size of the credit bubble that is bursting is the biggest in human history. This financial debacle we are in is one for the record books and has highly deflationary implications. As I have stated int the past, my target for the final low of this bear market is below 800 on the DOW, and most likely below 570, the 1974 low. The Social implications of this are extremely negative as well, and since this is a much bigger bear market than the one that ended in 1974, the social unrest should be that much worse. We are already seeing this manifest around the world, especially in the middle eastern countries (such as Bahrain and Libya), and Greece, where leaders are being overthrown because Social Mood is decidedly negative. This is all implied by Robert Prechter's Socionomic Theory of Finance. The Following is a great presentation done by Prechter on Socionomics. The link includes parts one and two. To view parts 3 and 4, you will need to register for free using the link at the bottom of the page.