Consumers Are Both Confident And Broke - The Last Time This Happened...

Authored by John Rubino via DollarCollapse.com,

Elliott Wave International recently put together a chart (click here to watch the accompanying video) that illustrates a recurring theme of financial bubbles:

When good times have gone on for a sufficiently long time, people forget that it can be any other way and start behaving as if they’re bulletproof.

 

They stop saving, for instance, because they’ll always have their job and their stocks will always go up.

Then comes the inevitable bust.

On the following chart, this delusion and its aftermath are represented by the gap between consumer confidence (our sense of how good the next year is likely to be) and the saving rate (the portion of each paycheck we keep for a rainy day).

The bigger the gap the less realistic we are and the more likely to pay dearly for our hubris.

Where are we today?

Worse than in 2006 and nearly as bad as 1999.

Both of those years were followed by several really bad ones.

An Accountant Smells a Rat

Written by Peter Diekmeyer, Sprott Money News

Twenty years ago, Doug Noland was so worried about imbalances surrounding the dot.com boom that he began to title his weekly reports “The Credit Bubble Bulletin. Years later, he warned the world about the impending 2008 crisis.

However a coming implosion, he says, could be the biggest yet.

“We are in a global finance bubble, which I call the grand-daddy of all bubbles,” said Noland. “Economists can’t see it. They can’t model money and credit. However, to those outside the system, the facts are increasingly clear.”

Noland points to inflating real estate, bond and equity prices as key causes for concern. According to the Federal Reserve’s September Z.1 Flow of Funds report, the value of US equities jumped $1.5 trillion during the second quarter to $42.2 trillion, a record 219% of GDP.

Noland’s Credit Bubble thesis

Noland may be right. A report by the International Institute of Finance released in June estimated that global government, business and personal debts totaled $217 trillion earlier this year. That’s more than three times (327%) higher than global economic output.

Adding to the complexity is the fact that not all debts are fully recorded. For example, according to a World Economic Forum study, the world’s six largest pension saving systems – the US, UK, Japan, Netherlands, Canada and Australia – are expected to experience a $224 trillion funding shortfall by 2050.

Noland’s warnings come during a time of exceptional public trust in governments, central banks, regulators and other institutions. Market volatility is trending at near record lows.

In June, Federal Reserve Chair Janet Yellen spoke for many when she said that she did not see a financial crisis occurring “in our lifetimes.”

Unburdened by “econometrics groupthink”

So why would Noland, who during his day job runs a tactical short book at McAlvany Wealth Management, see things that government, academic, and central bank economists don’t?

One possibility is because Noland, who studied accounting and finance in college and began his career as a CPA at Price Waterhouse, is not an economist.

He is thus not burdened with the “dismal science"s" limitations.

Although Noland eventually completed an MBA and some doctoral studies, he was never forced to buy into the econometrics groupthink that plagues the profession.

Noland is thus free to incorporate historical, financial, geographical and other data into his analyses.

Another possible reason is that Noland (unlike almost all professional economists who missed both major market implosions/recessions of the last two decades) doesn’t hide it when he makes a bad call.

Stepping away from the pack

Indeed, the Credit Bubble Bulletin web-site hosts issues dating back to the late 1990s. This policy of tracking how previous forecasts play out over time enables Noland to learn from previous prescient calls, but also from ill-timed projections or mistakes.

It has also spawned a consistently-constructed narrative that identifies credit growth as the key metric surrounding systemic instabilities, which strengthened over time.

Noland’s ability to step away from the pack is far from unique. Indeed, almost all of the loudest and most eloquent warnings related to the global financial system come from non-economists.

Jim Rickards, author of The Road to Ruin, The New Case for Gold and Currency Wars, also got his initial training as an accountant. Ian Gordon and Niall Ferguson both studied history.

Robert Prechter, founder of Elliott Wave International studied psychology. Nassim Taleb, author of The Black Swan and Antifragile, did his Ph.D. thesis on the mathematics of derivatives pricing.

A $10 trillion Fed balance sheet, military confrontation?

So how will this all play out? Noland believes that markets will eventually seize up as in 2008. Interest rates will then rise sharply as the much ridiculed “bond vigilantes” finally appear on the scene.

The practical effect will be that the Federal Reserve’s balance sheet, far from shrinking as is currently projected, could actually expand, to as high as $10 trillion and possibly more.

Noland’s track record in this respect is impressive. The last time the Fed talked about unwinding its balance sheet back in 2011, he inked a column titled “No Exit” which predicted that the policy would fail (it did), an article which remains on his web-site to this day.

The inevitable unwinding of the global credit bubble, whether done through inflation or debt write-offs, could create considerable misery, the kind of which most Americans living today have never seen.

Noland fears that in a worst-case scenario, this could lead to war, as politicians seek to distract the public from their oversight failures.

Few constraints on credit growth

It all comes down to the massive explosion in system credit, says Noland, which has expanded far beyond the traditional fractional reserve system to include repos, reverse repos, government sponsored entities and other shadow banking system products.

“Back in the old days, you had some constraints on the amount of credit in the system,” says Noland. “However, many of these institutions now have the ability to create literally unlimited leverage.”

Whether the ex-accountant will prove right is an open question.

However, if Noland does turn out to have bungled his call, we will at least be able to study where he made his mistakes - by reading those old Credit Bubble Bulletin back-issues.

Questions or comments about this article? Leave your thoughts HERE.

Written by Peter Diekmeyer, Sprott Money News

 

Update:Project $1550 Gold Hints a Bottom is Near (But We're Nervous)

$1247 gets you $1220, but above  $1214 and the $1550 target is still in play

via Soren K. Group for Marketslant

It should be noted that we are concerned that Gold under $1247 gets us to $1220. But the wave count we have been following says that a sell-off above $1214 still keep it intact. It is just hard for us to buy dips on short term trades. We"d rather buy a bounce off the lows. But as long as Gold remains above $1214 both the wave  count and our own feel corroborate each  other. It is just a matter of a person"s time frame.

Chart HERE

The only other thing we can  add to the excellent analysis below is that there is now a double  bottom on the 30 minute chart. That is something we like to buy with a stop out right below that level for a bounce swing trade in a bearish mindset. it would be nice if what we see as a swing trade  is in fact really a bottom as Enda says it could be.- Fay Dress writing for SKG

GOLD bullish at 3 degrees of trend

via Enda Glynn and Bullwaves.org

My Bias: Long towards 1550
Wave Structure: ZigZag correction to the upside.
Long term wave count: Topping in wave (B) at 1550
Important risk events: USD: Existing Home Sales, Crude Oil Inventories. 

Downside momentum in GOLD has now flatlined after todays sideways action.
Wave "ii" brown is now likely complete at the lows of the day of 1241.23.

Remember this market has now completed a rally and decline to higher lows at three degrees of trend over the last six months.
I believe we are now on the cusp of a serious acceleration higher in the GOLD price.

The momentum situation is very bullish again on all three charts.
And this setup coupled with the bullish wave count
should make even the most skeptical onlooker sit up and take notice.

Wave "iii" brown will begin with a break of 1259.09 and a correction to a higher low.
I have shown that possible rise as waves "1" and "2" pink.

For tomorrow;
Look for signs of a turn higher,
And an Elliott wave buy signal off the lows.

30 min

4 Hours

Daily

More analysis at Bullwaves.org

Previously:

Bob Prechter Warns Market Correction "Larger Than The Malaise Of The '30s" Looms

Authored by Avi Gilburt via MarketWatch.com,

I recently interviewed Prechter, who released a ground-breaking book, “The Socionomic Theory of Finance,” at the end of December. In the 813-page book, which took 13 years to write, he proposes a cohesive model that takes into account trends in sociology, psychology, politics, economics and finance. I highly recommend the book.

As I’ve explained here, Elliott Wave theory says public sentiment and mass psychology move in five waves within a primary trend, and three waves in a counter-trend. Once a five, or V, wave move (the waves are sometimes described in Roman numerals) in public sentiment is completed, it is time for the subconscious sentiment of the public to shift in the opposite direction, which is simply a natural cause of events in the human psyche, and not the operative effect from some form of “news.”

As one reviewer on Amazon wrote about Prechter’s new book: “This [cohesive] approach allows a measure of prediction on the basis that social mood fluctuates in fractal waves, and knowledge of them allows one ‘to achieve some measure of success in forecasting the direction, extremity and character of financial, social, political, cultural and economic trends.’ ”

Here’s an edited version of the interview, in which Prechter gives his outlook for the U.S. stock market, the general theory of Elliott Wave analysis and his new projects.

Avi Gilburt: You’ve said that, once the stock market tops, you expect a major bear market and economic contraction to take hold. What is your general timing for this to occur?

Robert Prechter: The true top for stocks in terms of real money (gold) occurred way back in 1999. Overall prosperity has waned subtly since then. Primary wave five in nominal terms started in March 2009, and wave B up in the Dow/gold ratio started in 2011. Their tops should be nearly coincident.

Gilburt: What do you foresee will set off this event?

Prechter: Triggers are a popular notion, borrowed from the physical sciences. But I don’t think there are any such things in financial markets. Waves of social mood create trends in the stock market, and economic and political events lag behind them. Because people do not perceive their moods, tops and bottoms in markets sneak right past them. At the top, people will love the market, and events and conditions will provide them with ample bases for rationalizing being heavily invested.

Gilburt: You’ve said we will be mired in a “depression-type” event. How long could that last?

Prechter: I don’t know. All I can say for sure is that the degree of the corrective wave will be larger than that which created the malaise of the 1930s and 1940s.

Gilburt: How are conditions going to change from what we have now?

Prechter: The increasingly positive trend in social mood over the past eight years has been manifesting in rising stock and property prices, expanding credit, buoyant pop music, lots of animated fairy tales and adventure movies, suppression of scandals, an improving economy and — despite much opinion — fairly moderate politics. This trend isn’t quite over yet.

In the next wave of negative mood, we should see the opposite: declining stock and property prices, contracting debt, angry and somber music, more intense horror movies, eruption of scandals, a contracting economy and political upheaval. That’s been the pattern of history.

It’s all relative, though, and it’s never a permanent condition. Just as people give up on the future, its brightness will return. The financial contraction during the negative mood trend of 2006-2011 was the second worst in 150 years. Yet, thanks to the return of positive mood, many people have already forgotten about it. Investors again embrace stocks, ETFs, real estate, mortgage debt, auto-loan debt and all kinds of risky investments that they swore off just a few years ago.

Safe havens

Gilburt: Where do you suggest people “hide” during this event for financial safety, and why?

Prechter: Short-term notes of the least unstable governments, held in the safest manner possible. The plan is to trade those investments for stocks, property and precious metals near the bottom. You can be calm and avoid suffering financially if you’re prepared. The trick to maintaining personal prosperity is to avoid popular investments at the turns. It’s not easy to do, but at a minimum, you need a fractal perspective on social trends as opposed to a linear one.

Algorithmic trading

Gilburt: With the advent and proliferation of computer-executed trading, what effect have they had on Elliott Wave analysis, other than the speed at which trading is done?

Prechter: Virtually none. People build their errors of thinking into their programs.

Stock market changes

Gilburt: How have markets changed, if at all, in the decades you have been analyzing Elliott waves.

Prechter: Markets have changed in superficial ways but not in any essential way. They still trace out Elliott waves. But that doesn’t mean it has been easy. Wave V from 1974 has been unusually large in both price and time relative to waves I and III. The closest thing to it in the record is the 1932-1937 rise, in which wave five lasted 15 times as long as wave one. Also, from 1987 to 2007, pullbacks were shallow and skewed upward in the Dow    and S&P 500 which threw me off.

Some analysts credit the Fed’s inflating for these market attributes. But even as the Fed was expanding the money supply at a record rate, the 2007-2009 drop in the Dow was deeper than one would have expected for wave C of a Primary-degree flat. So, that causal argument is spurious. Here in 2017, even the Dow/PPI is at an all-time high. I chalk it all up to Grand-Supercycle-degree optimism. That’s why we have record credit expansion, too, along with cooperation among members of the Federal Reserve Board and political support for the Fed. All that will change when mood turns negative.

Modifying the original theory

Gilburt: I have seen many analysts attempt to modify Ralph Nelson Elliott’s original structure, but none with any degree of success. If there were any aspect of Elliott’s structure to be its weakest link, where would you see the potential for such modification to find success in the future?

Prechter: You’re right. I have seen two attempts by others to change Elliott’s fundamental observations, and I have not adopted either of them, because I don’t see them dominating prices.

I have suggested three variations on forms: the leading diagonal (in which the odd-numbered waves can subdivide into five), the expanding diagonal and the skewed triangle. I remain skeptical about the legitimacy of all three of these forms. I suspect the patterns I described are more likely artifacts of imperfect mood recording than legitimate formations.

On the other hand, over the years I and my colleagues have made a number of valuable observations about wave forms that Elliott never noticed. Some have become well-known, others not. They are:

1. Wave three is most often the extended wave.

2. Peak acceleration occurs at the structural center of each wave, i.e. in wave 3 of 3 of 3.

3. In the stock market, fifth waves are always weaker than third waves.

4. B waves of contracting triangles often reach a new price extreme.

5. Even so, E waves of triangles in the wave four position always end within the territory of the preceding third wave.

6. Double flats are somewhere between rare and non-existent; I’ve seen flat-X-triangle serve as double three.

7. The barrier triangle is a more useful idea than the idea of independent ascending and descending triangles.

8. Zigzags often adhere to channels.

9. In zigzags, A waves tend to be steeper than C waves.

10. In flats, C waves tend to be steeper than A waves.

Useful indicators

Gilburt: While we use various technical indicators to support or show the weakness in any wave count, my favorite has been the MACD. Do you have any favorites that have been most useful to you over the years?

Prechter: Nearly all momentum indicators provide the same basic information. There are hundreds of them, because they are easy to construct, especially with computers. I don’t chart rates of change anymore because I can tell what they look like just by looking at prices. But momentum analysis is not simple. In the stock market, slowing momentum nearly always precedes reversals, but slowing momentum does not mean a reversal must follow. The 1985 and 1989-1994 periods are classic examples. In each case, the market slowed its rise — looking terminal from a momentum standpoint — and then accelerated. In the first case, I knew wave 3 of 3 was dead ahead, so I was really bullish. The second one threw me off. The most consistently useful momentum indicator is breadth. If I had to rely on only one momentum indicator, that would be it.

Markets as ‘fractals’

Gilburt: Do you have any specific time frames in charts that, in your experience, have provided the most insight into a specific market or commodity?

Prechter: No. Markets are fractals. Nothing quantitative is meaningful or useful.

Gilburt: There is a debate among various schools of thought as to what is more important — price or time. What’s your perspective?

Prechter: What matters most is form. Form involves both price and time, although arguably price is the more definitive component.

Improving accuracy

Gilburt: I am sure you have seen a lot of time-cycle analysis in your career. In my experience, I have not really seen any that have been better than 50/50. I am just wondering why you think we are unable to develop the same accuracy percentages in timing models as we do in pricing models using Elliott Wave?

Prechter: I think the reason for your observation is that cycles are not the essence of markets. They are artifacts of the fractal form. They appear for a while and then disappear. Usually by the time someone recognizes a cycle and bets on it, it is poised to vanish. As you say, the success rate is about 50/50, so I don’t rely on them anymore.

I think Fibonacci ratios between the prices and durations of related waves are meaningful. I wrote a book about Fibonacci relationships called “Beautiful Pictures.”

Reaction to socionomic theory

Gilburt: I have personally noted how I view socionomics as the ground-breaking work that will eventually lead market analysis into the future. But I also understand how old habits are hard to break, and most still desperately cling to the old Newtonian-based exogenous-causation theories of market analysis. What sort of reception has the socionomic theory been receiving from the world of academia?

Prechter: It has had wisps of success. We have had several academic papers published, and another was accepted by a journal [recently]. A ranking member of the Academy of Behavioral Finance and Economics commented to me that the term socionomics was becoming part of the lexicon, which was encouraging to hear. Several professors at mid-level universities are including it in their courses, and several top professors have been kind enough to provide a good word for the book. But most economists don’t know socionomics exists, and most of them would dismiss it if they did. Socionomic theory explains why such a reaction is, generally speaking, imperative: People are built better to participate in waves of social mood than to analyze them. So it’s very hard to get the word out. People like you, who do pure market analysis, have been the quickest to get it.

Education and resources

Gilburt: As new studies into the socionomic aspects of financial markets are performed all the time, are there any other resources for us to follow to gain continuing insight into this perspective?

Prechter: The Socionomics Institute puts out tons of interesting material. The website is full of studies, articles, events and videos. People who like this field should become a member.

Gilburt: What are your top three arguments to present to those who do not believe in socionomics but still hold fast to the old exogenous-causation theories?

Prechter: It took 800 pages in “The Socionomic Theory of Finance” to present arguments. But I can make three brief statements:

1. Events and conditions that are often labeled “fundamentals” have no predictability with respect to the behavior of financial markets, so they cannot be causal. (See chapters 1, 2 and 22.)

2. Financial markets differ in numerous fundamental ways from economic markets, implying that their behaviors spring from different causes. The key difference is that in economic markets the context is one of relative certainty with respect to one’s own personal values, which allows for rational decision-making, whereas in financial markets the context is one of pervasive uncertainty with respect to others’ future actions, which prompts people to herd. (See chapters 12 and 13.)

3. Postulating unconscious waves of social mood as a hidden variable explains a persistently compatible relationship among myriad social actions, from popular musical tastes to changes in the economy to political actions to women’s fashions to trends in the stock market. (See chapters 8 and 10.)

Why Most Analysts' Gold & Silver Price Forecasts Are Wrong

By the SRSrocco Report,

Precious metals investors are being misled by most analysts" price forecasts because they do not understand the critical underlying fundamental value mechanism.  Furthermore, there seems to be a great deal of animosity from the short-term trading analysts who view many in the precious metals community as pandering hype and conspiracies.

One of these analysts is Avi Gilburt of the Elliottwavetrader site.  He criticizes the "Gold bugs" in a few of his more recent articles, Who Do You Allow Yourself To Be Manipulated, Did Your Mother Write An Article On Gold, and Damn Manipulators.

Feel free to check out these articles as Avi Gilburt condemns those precious metals analysts who continue to regurgitate the "manipulation" theme over and over.  On the other hand, Avi truly believes the value of the metals, and other commodities are based upon looking at the "tea leaves" or studying "goat entrails" as it pertains to the Elliott Wave theory.

Most certainly, he will defend the Elliott Wave theory to the death.  While I admire that sort of conviction, Avi Gilburt is just as guilty in his forecasting of the "value" of gold and silver just as much as the precious metals community that he constantly criticizes.

That being said, there is a difference between the two camps, in my opinion.  While I am frustrated with the precious metals community in their lack of understanding of the true value of gold and silver, the short-term trading analysts such as Avi Gilburt and Dan Norcini are quite vicious in their critiques.

This is also true for CPM Group"s Jeff Christian.  I heard from a source that when Jeff Christian was apart of a precious metals round table, when the question was posed to the group to the number of individuals who believed the metals were being manipulated, he blurted out, "Anyone in this group that follows my work, YOU BETTER NOT RAISE YOUR HAND."  Now, that isn"t the exact remark... but close enough.

The subject of precious metals manipulation is quite complex, so I"d rather not get into it in this article.  However, I will show where the precious metals community and the short-term trading analysts are incorrect in their approach for forecasting the value of gold and silver.

What Has Been The Real Driver Of The Gold & Silver Price

Even though I have discussed this in prior articles, new information confirms my analysis.  While most economists, traders and the those in the precious metals community believe that "Supply & Demand" have been the leading factor in determining the value of gold or silver, it"s not, rather it has always been the "ENERGY FACTOR."

Here is an updated chart showing the relationship between the price of silver and oil since 1900:

As you can see, the price of silver and oil remained flat (on the chart) until 1971.  Actually, the price of oil and silver stayed below $2.00 (except for a few years) from 1900-1970.  When President Nixon dropped the Gold-Dollar peg in 1971, this significantly changed the value of the precious metals and oil.

Even though the movement of the oil and silver price are not exactly related, we can definitely see a high degree of correlation.  Thus, as the price of oil skyrocketed in the 1970"s, so did the price of silver.  Moreover, the same thing took place in 2000-2016.

Does Avi Gilburt have a chart showing this to his members?  I doubt it.  Of course, the short-term price movements of silver and oil are not as precise as the longer term valuations shown in the chart above, but we can clearly see that the forces of "Supply & Demand" are less of factor than the changing value of oil.

This is also true for gold.  This chart shows the price of gold versus oil since 1940:

Again, we can clearly see that the price of gold and oil remained flat-lined until 1971.  As the oil price shot up in the 1970"s, so did the gold price.  When the oil price declined and stayed low in the 1980"s and 90"s, so did the value of gold.  However, as the price of oil surged to $112 in 2012 from $20 in 1999, so did the value of gold.  Gold jumped from $279 in 2000 to $1669 in 2012.

There"s no coincidence that the value of oil and gold jumped 500+% from 2000-2012.  While the silver price jumped seven times from $4.95 in 2000, to $35 in 2012, its current price is 3.5 times higher than 2000 and gold is 4.5 times higher.

Which means, there are more factors in determining the gold and silver price than just the metals relationship with the oil price.  That being said, supply and demand factors play a "ROLE" in impacting the price of gold and silver... BUT ONLY AS A MINOR PART compared to the overriding oil price dynamics.

What I am saying here is this... the value of gold and silver has been, and will continue to be tied to the oil price dynamics, however, supply and demand factors are contributor... BUT TO A MUCH LESS DEGREE.

Gold & Silver Are Beginning To Disconnect To The Value Of Oil

Something interesting has happened recently in the price movement of gold and silver... they seem to be now disconnecting from the value of oil.  If we take a look at the two gold and silver charts below, we can see that as the price of oil has remained flat in 2015-2016, the gold and silver price has turned higher, especially the gold price:

While the gold price has jumped up higher than the silver price (in relative terms), they are both moving up as the oil price remains flat.  To understand why this is happening, I have to explain two KEY FUNCTIONS;

    Market Sentiment
    The Coming Oil Price Crash

Short-term trading analysts suggest that "Market Sentiment" plays a role in determining the price of a commodity, stock or bond.  While I would agree with them to a small degree, they are correct for the wrong reason.

Let me explain this as it pertains to the value of gold and silver.  At the beginning of the year, the stock market crashed 2,000 points quickly, so investors moved into gold and silver in a big way, especially the institutional investors who bought the Gold ETFs.  So, the "Knee-Jerk" reaction by most traders and investors is that market sentiment turned around and the movement of funds into gold and silver pushed up their price.

Again, I agree with that on principle, but for a very different reason.  "Market Sentiment", as it is used as a tool for determining the price of gold and silver, is only working to the extent that it is "WAKING UP INVESTORS TO THE TRUE FUNDAMENTAL VALUE", but just for a brief period of time.

You have to think of precious metals market sentiment similar to when a spouse believes their partner might be having an affair.  When something very suspicions happens, the spouse gets very angry and the partner tries to calm them down by giving a reason (excuse) why is not true.  So, in a few days, the spouse believes the partner and everything calms down.

This type of "UP & DOWN" sentiment continues in the relationship causing a great deal of volatility in the marriage.  However, one day, the spouse finally catches the partner in the act and the TRUTH finally comes out.  Then there is no more lies, deceit, excuses or manipulation of the facts to keep the spouse believing that everything is fine.  The spouse has now taken the RED PILL, so to speak, and cannot unlearn what they now know.

This is a perfect example of what is taking place as it pertains to "MARKET SENTIMENT" in the precious metals market.  When investors start to get fearful or extremely worried about the Stock & Bond markets, they rush into the precious metals... for a brief period of time.

When the Fed and Central Banks pump Trillions of Dollars of liquidity into the financial system, they bring calm back into the markets easing investors fear and worry.  Thus, gold and silver demand declines.

Unfortunately, this is a game that is hiding the truth.  So, when investors finally realize the Stock and Bond Market are the biggest Ponzi Schemes in history, the MAD RUSH into the metals will begin.

Now, the reason the Stock and Bond Market are nothing more than HOT AIR and the typical Ponzi Scheme, can be seen in this chart by Louis Arnoux:

The value of U.S. GDP per head, in Oil & Gold all went up together until 1970.  While U.S. GDP has continued higher and higher, we can clearly see that the gold and oil (red & blue color) trend lines behaved much different;y.  I would advise watching my Thermodynamic Collapse Interview with Dr. Louis Arnoux to explain the details:

However, the only way for real wealth to be generated, it has to coincide with the value of gold and oil.  Unfortunately, the value of gold and oil in GDP per head for each American crashed (2012), while stated GDP continued to record territory.

Thus, the real GDP value reported by the U.S. Government is highly inflated.  This is based on understanding the "Thermodynamic Oil Collapse" and its impact on the entire global economy.  According to Louis Arnoux and the Hills Group work, the price of oil will continue to crash to a MAXIMUM PRICE of $12 by 2020.

This is due to their calculation of the "Remaining Value" of oil in a barrel.  You have to think about it like an automobile.  When the car is brand new, the value is say, $30,000.  However, after 15 years, the car is only worth $5,000.  The economic value of that car has been "DEPLETED."  While it still works, the 15 year-old car does not contain the same "embedded" energy as a brand new car.... so the value is much less.

The Hills Group ETP oil model has calculated that the value of a barrel of oil is behaving similar to a used car.  The costs of producing a barrel of oil is so high now, when we consider the entire Oil Industry & Support Systems",  there won"t be much value left to the Globalized Industrial World in five years.

I will be writing more on this going forward as gold and silver investors will benefit the most as the Thermodynamic Oil Collapse goes over the cliff.

Why Will The Value Of Gold & Silver Surge When Most Everything Else Implodes

While the oil price has been the leading driver in the value of Gold & Silver for more than a century, it is beginning to disconnect.  Why?  Because the gold and silver price have been valued as "commodities", rather than as "high-quality stores of value." 

I will be writing an article showing this more in detail, however total Global Assets are estimated to be $373 trillion, according to a report by Savills World Research.  The majority of those assets are real estate.... mostly residential real estate.

As the price of oil continues lower and lower, it will destroy the value of most Stocks, Bonds and Real Estate.  These assets only derive their value from burning more energy each year.  However, the cost to produce a barrel of oil has become so high now, there isn"t much value left over to support the $373 trillion in global assets.

Which means, the collapse in the price of oil, will be the FACTOR that finally wakes up the world that they have been investing in the wrong assets.  It will be the MOTHER OF ALL MARKET SENTIMENT moves.

I gather Avi Gilburt will discard this article as just another complete waste of time, but he is undoubtedly blind to the oil-energy dynamics.  So, I would bet my bottom Silver Dollar that Avi will continue to read the tea leaves and goat entrails of the Elliott Wave Theory right up until the point the system disintegrates.  And maybe he should, because when the PHAT LADY SINGS, he will have to find some other occupation.

Lastly, if you haven"t checked out our new PRECIOUS METALS INVESTING section or our new LOWEST COST PRECIOUS METALS STORAGE page, I highly recommend you do.

Check back for new articles and updates at the SRSrocco Report.

The Coming Bond Market Crash - An Interview With Eric Hadik

First introduced to the financial markets in 1979, Eric Hadik is a trader and analyst who has been intimately involved with commodities and investing for over 35 years. His work gained wide recognition from the outset, where throughout the late-1980"s Eric worked closely with and provided market analysis to major institutions such as BP, Arco, Occidental, Royal-Dutch Shell and Chase Manhattan as well as AMAX Gold and Handy & Harman. In the early 1990"s Eric laid the groundwork for what is now INSIIDE Track Trading - founded in 1994.  In that capacity, Eric publishes research, analysis and trading strategies with the expressed goal of teaching, educating and sharing his insights with thousands of individual and corporate traders around the world. His articles and interviews have been featured in major financial media over the years, including CNBC, Forbes, Inside Wall Street and Investor’s Daily.

E Tavares: Thank you for being with us again today. Last time we spoke we discussed some stock & commodity market calls you had made in terms of timing and magnitude which seemed to go against consensus and yet were remarkably accurate. You have recently followed suit calling for a major gold price correction, beginning in July 2016 at a time when the charts and indeed many renowned investors were suggesting that it was going higher. Before we get into the main topic, can you briefly remind us again of your methodology for trading the markets?

E Hadik: My approach to analyzing and trading the markets is a multi-stage process that begins with the more subjective cycles and indicators and then moves through to more specific and objective indicators that repeatedly hone this analysis and ultimately formulate it into a usable trading strategy.

I believe in approaching trading like a business, not a mere speculation or coin flip. Here are the building blocks of the strategy I have developed over 35+ years of trading commodities:

Foundation:  My cycle research (as well as some basic Gann and Elliott Wave techniques) provide the foundation for the rest of the analysis. They set the stage for the event that is expected to unfold, but that is only the first step and I constantly warn NOT to trade just off of the cycles or those other approaches.

First Stage:  Corroborating those cycles is the inclusion of my first stage of technical indicators - those that determine culmination in the evolving (waning) trend, the trend that is maturing, and setting the stage for an impending new trend. These are very specific indicators that first show when a move has reached an extreme and then when it is primed for a reversal. Those two phases - reaching an extreme and the ultimate reversal - are usually different and are best illustrated by the Elliott Wave Principle and the peaks of the ‘3’ and subsequent ‘5’ wave. (I should stress that these clarifying indicators are NOT Elliott Wave in nature although they do help filter wave counts.) The ‘3’ wave is usually the dynamic and accelerated move that pushes a market to an extreme - the penultimate peak. Once that occurs, a market usually pulls back before retesting the highs (the previous extreme, if referring to an uptrend). That retest, and or spike high, is the ‘5’ wave peak - the ultimate peak. 

Second Stage:  Those indicators help me to exit remaining (long) positions and then prepare for the possibility of new (short) positions in the future. That is when my second phase of indicators kicks in: after a top has taken hold (or after a bottom, if a downtrend has just reached fruition). Indicators like daily and weekly 2 Close Reversals TM, Double-Key Reversals TM and 2-Step Reversals TM signal reversals from those peaks. They are the initial triggers.

Third Stage:  In a valid, larger-degree reversal, those indicators will soon be reinforced by the next phase of indicators - the confirmation (lagging) indicators. These include my daily/weekly trend indicator (a proprietary pattern), 21 MAC and intra-period trends.

Final Stage:  Finally, the acceleration indicators should kick in and signal the impending escalation of the new trend - a time when the underlying market is expected to powerfully validate the cycles and preceding indicators and ultimately spur a drop to extreme downside objectives. These include specific applications of Hadik’s Cycle Progression (when it signals a shift from highs to lows), of the daily or weekly 21 MARC and of the daily/weekly trend pattern.  In many cases, I will wait for this time to enter a trade since I am looking to enter positions when the greatest synergy of factors are working in their favor and hoping to have my capital working most efficiently (as opposed to sitting idly while a lengthy topping or bottoming process plays out). It has often been observed that markets trend about 20--25% of the time and congest or consolidate (effectively trading sideways) the remaining 75--80%. I want to be in during the 20--25% of the time when a convincing and directional move is unfolding and out (but into other markets) when a market is choppy and volatile - often frustrating the majority of traders and consuming or distracting a lot of valuable focus and mental/emotional energy. In many cases, 70--80% of a market’s price move will occur in a very short period of time (sometimes 10--20%) within a given trend and that is when these culmination indicators should begin to materialize… toward the end of that accelerated move. 

Every market and every trend goes through these stages and analyzing them in this manner helps me to pinpoint some forthcoming moves. At each of the transition phases - from trigger signals to confirmation signals, etc. - the risk and money management factors shift, narrowing risk points and/or trailing stops in the prevailing trade. The culmination indicators also help identify when and where to begin exiting a position (taking profits) so that those funds can then be devoted to a new trade (in a different market) that is poised to enter a new trend or accelerated trend.

Sorry, that was probably not what you would call ‘brief’ - even though it is only a basic outline of my approach - but I wanted to give enough information to at least begin to grasp the approach. I strive to begin with the theoretical and subjective and then move that to the practical and objective - where the rubber meets the road, so to speak.

ET: The charts below come from a recent IMF report on the massive increase in debt around the world, in absolute terms and also as % of GDP. We note that since 2008 government debt has been the major driver of that increase, particularly in the developed world. Pursuant to your analysis of this debt super-cycle, what comes to your mind when you look at these graphs?

Note: “AE” means Advanced Economies, “EMEs” means Emerging Market Economies and “LICs” means Low Income Countries

EH: The first thing that jumps out at me is a perfect illustration of what I just described. The debt surge in 2007--2009 is like the accelerated or dynamic ‘3’ wave advance, in an overall wave structure. It is when debt surged to unprecedented extremes. However, it is NOT the ultimate peak, it is merely the penultimate peak. The debt levels subsequently consolidated in 2009--2014 before resuming their uptrend and heading to new highs. 

Those charts corroborate what I have been discussing and why I believe 2017--2021 will represent the end and reversal of that multi-decade trend - as the debt bubble bursts and bond markets begin to crash. They also validate what I have been emphasizing in recent years - the parabolic phase of the 40-Year Cycle and how it is portending an intensified battle between hard money and fiat currency (which is rapidly deteriorating in value, due to this governmental debt orgy).

Every 40 years - since the founding of America - this battle has raged. It began with the Continentals (America’s first experiment with fiat currency) - that quickly plummeted from 1776--1781 - and then moved ahead to 1816--1821 (2nd Bank of US charter, quickly followed by Panic of 1819). From there, it was on to 1856--1861 (devaluing and then suspension of silver and gold currency), to 1896--1901 (Election based on battle over Gold Standard, followed by re-implementation of Gold Standard), to 1936--1941 (affirmation of gold confiscation and subsequent loosening, then tightening of credit - leading to 1937 crash), to 1976--1981 (Jamaica Agreement, delinking all major currencies from gold; led to skyrocketing inflation as the corresponding value of US Dollar plummeted). 

2016--2021 is the next phase of this uncanny 40-Year Cycle and promises to resurrect this battle (intensifying in 2017) as the debt bubble bursts and the backing of fiat currencies evaporates.

ET: Focusing on those imminent long term cyclical changes, today there are over $10 trillion worth of bonds around the world trading with negative yields. Of course this is not sustainable. As such, the longer negative yields remain in place the higher the likelihood that a growing number of investors and financial institutions will lose money here, possibly badly, once there’s a recovery in yields, even a small one. Do you agree? And looking at yields specifically, are you anticipating any cyclical reversal to the massive decline we have seen over the last 30 years?

EH: Yes and yes. The negative yields are a perfect confirmation that this trend has reached an extreme: an uber-extreme.

This reaffirms that we are in the parabolic phase of a mania, very near the peak. However, just because a market has reached an extreme does NOT mean the trend will immediately reverse. It usually takes time. I have described long-term cycles - including the ubiquitous 40-Year Cycle AND a 70-Year Cycle (as well as a sequence of descending cycles) - that all project the culmination of a MAJOR bull market in Bonds, and bear market in rates and yields, for 2016/2017. I will then be looking for specific reversal signals - and corresponding evidence of a fundamental reversal - in the months and years that follow.

I am still convinced that one of my other primary outlooks - for an inflationary surge in commodities, metals and oil from 2017--2021 - could be the impetus behind that reversing trend as governments and policymakers are forced to bump up interest rates in reaction to those rising prices. Since the markets are built on perception, it would only take a convincing threat of that potential for the markets to unwind.

There is one specific year based on the greatest synergy of cycles in and out of the markets when I believe the accelerated phase will take hold… which is also when the debt bubble is most likely to burst. It represents the tipping point in almost all of my cycle work (not just in bonds).

ET: Let"s review some of those catalysts. We recently discussed how a major food crisis may be looming in the not too distant future, where you outlined an 80 year cycle that has governed such crises with stunning regularity. While our grain situation globally appears to remain healthy for now, this could change very quickly because of weather, water, diseases, human disruption or any combination thereof. And if indeed it does, what sort of magnitude move could we see and could this translate into higher inflation around the world?

EH: The Food Crisis Cycles are certainly one of the factors I am watching. But, I think that those cycles are likely to be fulfilled with a combination of natural and man-made stresses. That has often been the case, with a perfect example being the 1930’s - when worldwide drought and crop challenges like the Dust Bowl created shortages but governmental policies (in the USSR) led to one of the 5 worst famines in history in terms of lives lost - the Soviet Famine. 

A different form of global Food Crisis emerged in the 1970’s, exacerbated by the manmade debacle of fiat currency chaos (Nixon Gold Shock of 1971, the collapse of Bretton Woods in 1973, oil weapon and then oil de-facto backing of US Dollar in 1973--1975 and Jamaica Accord of 1976). Multiple global droughts in the early-1970’s culminated with California’s worst drought (until recent years) in 1976--1977.

Combined with a collapsing Dollar, all that sent food prices skyrocketing with many commodities doubling and tripling in price… in 1--2 year periods.

2016--2021 is the next phase of that recurring 40-Year Cycle of Food Crises that I have documented back to the 1770’s and even earlier and the corresponding cycle of commodity inflation. Ironically, or not so much, this natural cycle dovetails perfectly with the economic and currency crises cycle I just described.

So, whether it is Dollar/currency-triggered (man-made) or crop stresses (natural; including droughts, floods and/or freezes, disease or super-pests) or both - which I believe is the most likely scenario - the resulting, escalating price movement should be the same. And, yes, that is likely to impact interest rates.

To compound my assessment, there are other long-term natural cycles that are likely to play a role - including sunspot/solar storm cycles and volcanic eruption cycles. And they, too, focus on that one year when I believe acceleration is most likely… even though preceding and ensuing events are cyclically probable as well. It is a Perfect Storm of multi-year, multi-decade and multi-century cycles converging.

ET: Food crises tend to affect emerging economies the most for various reasons. However, we could see something different this time. Western Europe is already buckling under a mass migration influx, and a severe food supply disruption could expand it several fold. This would further deepen societal and economic impacts all over the Old Continent, particularly at the core. How would you view a food shock impacting both developed and emerging markets this time around?

EH: You touch on the manmade aspect of these recurring food crises. Complicating it is the evolving banking debacle throughout Europe, ranging from Spanish and Italian banks to those in Portugal and Germany. Some of those banking crises are so near the tipping point that they could actually represent one of the triggers for the debt bubble bursting - and also exacerbate a potential food crisis. Greece got a small taste of this potential in 2014/2015.

Historically, banking, economic and/or currency crises have repeatedly spurred massive strikes and social upheaval that could disrupt the distribution of food and other necessities, if the pattern is repeated. But that is just one possibility. I do NOT want to sound like I am yelling ‘the sky is falling’, because I am NOT, but I am also not willing to stick my head in the sand and ignore some ominous developments across the globe. Intensifying cyber-attacks could provide another contributing factor as they have already done on a smaller-scale and shorter-lived basis.

Paraphrasing the immortal words of Patrick Henry, I don’t want to listen to the song of the siren until she transforms us into beasts. I would rather recognize the threats looming on the horizon and to prepare for them.

ET: What about an energy shock? Do you see any cyclical factors that could spark a massive crude oil price rise and thus also cause a spike in inflation? The disinvestment in new production infrastructure resulting from the recent significant price correction could play a role, along with increased economic instability.

EH: Eventually, I do expect a new energy shock… but not just yet. Oil prices plummeted to downside extremes - in early-2016 - but were/are expected to undergo a 1--2 year bottoming process before a sustained uptrend is expected. One particular energy market is projecting a multi-month peak for late-Oct.--late-Nov. 2016 and that could usher in a final decline (a type of ‘5’ wave to the downside) - leading into early-2017.

Ultimately, I expect the oil markets to corroborate - and probably lead - Middle East Unification Cycles that I have discussed the past 10--15 years. Those cycles come into play in 2018--2021 and are expected to lead to some form of Arab or Middle East Union, as has been attempted a few times in the past century. I discuss that in related articles and reports.

ET: There is an important economic interplay here. When we talk about the 2008 financial crises we often forget that the large spike in crude oil prices beforehand certainly helped to flip over the world economy. A recession normally keeps yields in check, but there are some cyclical factors that suggest otherwise this time around. The graph below shows historical US corporate funding gap as % of GDP (smoothed) and high yield bond yield spreads (versus AAA credit rating) on a quarterly basis. We can clearly see that the former tends to lead the latter by some quarters, and as such we should expect higher spreads going forward at this juncture. Does your analysis support this?

EH: At this point in time, my analysis does not support OR contradict it. It is ambivalent. Until trigger signals are activated, it is hard to determine the expected width of the yield curve. Due to other analysis - in other arenas - however, I suspect that could be the case. I am just not comfortable giving any definite answer at this time.

‎ET: The modern financial system and its interplay with the wider economy are inherently deflationary. As long as there is some slack production, logistical and financial capacity anywhere in the world there will always be arbitrage that mitigates some of these price increases. This could help manage any transmission effects into the bond markets via higher inflation (except if these occur in the form of a shock of course). However, national trade balances and related currencies could be severely affected. What are your thoughts here?

EH: The relationship between currencies and bonds is certainly expected to play a key role. However, the question becomes more of a ‘chicken or the egg’ syndrome… which comes first and/or which leads the other. I have very distinct expectations for currencies - particularly the Euro and US Dollar - but I always analyze each market on its own before assessing any possible causal relationships.

Once I have reached specific conclusions on individual markets, I will certainly consider the potential correlations but it can be dangerous to become too tunnel-visioned on one specific correlation (since it often blinds us to recognizing a more imminent and ominous - but unexpected - correlation). The markets are notorious for throwing curveballs, which brings up an important point.

Out of 11 Trading Axioms (in my Tech Tip Reference Library), the one I quote most often - and the one which I emphasize most frequently to my readers - is the Axiom on Market Correlations (which I can make available to anyone who contacts me via my website). The crux of that Axiom is that inter-market correlations are fickle and ever-changing and should not be relied upon as the primary signal for trading. There is always a new and more urgent correlation right around the corner that ends up usurping or overtaking the first one and pushing related markets in unanticipated directions.

ET: You also talk about another recurrent crisis cycle which relates to the European Union and also the UK. ‎And this one may already be upon us. How does this relate to a possible bond market crash in light of what we discussed above?

EH: For the last decade I have laid out the case for why I expected a developing and intensifying Euro Crisis (and EU crisis) from 2008, more so from 2011, even more so from 2014 and that reaches a tipping point in 2017 (note the 3-Year Cycle that has governed the Euro). My conclusion has been that Europe was destined to undergo multiple crises that would push the EU to the brink and force dramatic concessions from the nations that would ultimately be a part of the (new) EU moving forward.

I identified 2018--2021 for the time when I believed the EU would undergo a Major transition and a re-unification that yields a significantly different EU than what it was in 2008. Leading into 2016, and right up into June 2016, I explained how an uncanny 8-Year Cycle was projecting another meltdown in the British Pound and how that was likely signaling that Brexit would be approved. That was projected to be the next ‘straw’ flung on the back of the staggering EU.

That ‘8-Year Cycle of Pound Pummeling’ timed Sterling crises in 1968 (8 years after France and Germany surpassed the UK as the economic leaders of Europe), 1976 (Britain forced to go to IMF for Pound bailout), 1984, 1992 (George Soros sunk the Pound and forced the UK out of the EU Exchange Rate Mechanism), 2000 (inflationary meltdown in Pound led to fuel crisis and brief food rationing) and 2008 (35% plummet in 14 months). The Pound was projected to do the same in 2016, stretching into 2017.

Sure enough, Brexit was approved, the Pound plummeted and the Euro is under renewed selling pressure (even as other nations seriously contemplate their own EU-exit). At the same time, Europe is plagued with intensifying banking crises - in Spain, Italy, Portugal and Germany - with Deutsche Bank recently named (by the IMF) as the greatest risk to a global crisis. 

Considering the enormous levels of debt, and the rapidly deteriorating value of that debt, one can envision a scenario where a crashing debt market enters the fray and the EU is thrown into chaos - at least for a time.

ET: If indeed we see that major bond price correction, if not outright crash as everyone runs for the exits at the same time, could central banks absorb it for instance by purchasing a huge amount of bonds? Any type of bonds, even equities at that point perhaps. They certainly seem omnipotent these days…

EH: The big problem is that they are already doing that. They print more money to buy debt and then repeat the process… over and over. The culmination of Draghi’s debt-buying binge keeps getting extended but there is a tipping point in the future (perhaps the not-so-distant future) reinforced by the deteriorating value of the Euro throughout this process. It is nothing more than a giant, debt-based Ponzi scheme. The last ones in are really going to regret it.

The deflationary environment is one thing masking this craziness… as are the consolidating equity markets. But, there are slowly developing signs of that transitioning as well. Since early-2015, I have explained why I was convinced that US equity markets would enter a 15--18 month topping process (with sharp 2--3 month drops and strong 1--3 month rallies) before entering a serious bear market in late-2016. Nov./Dec. 2016 has been my primary focus for that shift… and we are almost there!

So, what happens if/when the next shoe drops in global equities and then some price inflation returns shortly after?! It could be a form of ‘Stagflation’… and is not a pretty picture.

ET: So what should investors do? If the bond market goes down hard this will affect everything, starting right in the financial institution where they deposit their cash. How can you protect yourself in that event?

EH: First of all, I should stress that we are not at the acceleration phase. First, we have to complete the culmination phase (which is expected to reach fruition in Dec. 2016/Jan. 2017). I suspect that a final spike high could be a flight-to-quality if equity markets see a sharp sell-off in late-2016/early-2017.

Then, we have to go through the initial trigger phase. And then, eventually, we get to the acceleration phase. Here again, I am looking at one specific year when I believe that acceleration is most likely… but we have a little time. I do think that gold and hard assets play a key role in that protective approach but there are complicating factors, this time around. 

In the interim, I think 2017 is going to see a battle between deflationary forces (as paper assets like stocks and bonds begin to rollover to the downside) and inflationary forces (as deteriorating currency values and natural resource challenges steadily push commodity prices higher) - the next stage of this multi-generational seismic shift.

ET: Final question. Do you have any plans to publish a book with your methodology one day, or will you just keep on focusing on www.insiidetrack.com and your INSIIDE Track and Weekly Re-Lay publications?

EH: I do have the skeletons of two books compiled - one on cycles and one on my trading approach - but time is the elusive factor. Ultimately, yes, that is my goal. But I cannot tell you when that goal will reach fruition. In the interim, I do provide a ~100-page trading manual (Eric Hadik’s Tech Tip Reference Library) as a bonus with several of my subscription packages. That explains the 11 Trading Axioms I cited earlier, as well as detailing the published indicators I use and key aspects of my cycle approach. (There are a couple proprietary indicators, whose calculations are not revealed.)

ET: Eric, as always many thanks for sharing your thoughts. Fascinating how you bring so many technical, historical and inter-market factors together.

EH: It’s my pleasure. Thank you.