Closing the 2008 'Gap'

A disclaimer:  I am long and/or trading several regular 'bull stocks' (as well as short a couple).  Don't interpret the sober message below as a 'sell your stocks right now!' style bearish warning.  Indeed, after an expected choppy start to December I think more bull market mania, errr… rally, could still be ahead.  But it would be just dandy if people would keep their perspective along the way.

From the December 1 edition of Notes From the Rabbit Hole (NFTRH 267):

In 2008 market and economic participants suffered a hard downside 'gap' in the prices of their assets and in the levels of their expectations.  The bull market that began in March of 2009 is doing a fine job of closing that gap and fully resetting the herd from the utter fear mode of Q4, 2008 to a 2007 or even 1999 style greed mode today.

The chart of gold vs. the S&P 500 [below] shows a gap up in 2007, presumably as Lehman knocked down the first of many dominoes that would fall until the previously inflated cyclical bull market totally fell apart in Q4, 2008 and bottomed in Q1, 2009.

Gold is 'risk off' now.  It is so risk off that many of its supporters are frightened of the monetary metal because today market risk is decidedly 'on', at the behest of policy making that has created a sea of liquidity going straight to equity assets.  Think about that; people have been so thoroughly conditioned by the 'risk on' atmosphere of the current bull market that they are afraid of insurance.  Insurance against what?  Insurance against market risk and monetary policy induced systemic maladjustment.

Gold has gone 'risk off' and that is where you want your insurance to be.  You don't cheer lead and root for insurance.  You hold it and hope it is not needed.  That is what gold is and maybe the current situation for speculative minded gold bugs (i.e. just another flavor of casino patron) is filling a gap in their expectations as well.  When enough people have learned that gold is about value only, not price, maybe this phase can end.

au.spx

Visually, the gap in Au-SPX appeared after the system began unraveling in 2007.  Is it so hard to imagine that the psychology (gap) of that time (as fear gapped up into what would become a historic market top and meltdown) should be 'closed' by the current bear market in sound thinking and bull market in risk taking?

Gold stopped making higher highs and higher lows in SPX units a long time ago.  It then triggered important moving averages down and has made some genuine technical signals that imply an end to its bull market and also I might add, a beginning to a new era of ‘risk on’ that by long-term signals at least, appears as though it has much further to run.

Appearances… isn't that what the brilliant Bernanke Fed has been all about?  Here is a picture of what most people thought they knew in 2008.  It is Time Magazine's picture of a 1930's depression era soup line included in NFTRH #9, from November 22, 2008.

time

Time Magazine, October 2008

NFTRH was launched in late September, 2008 just before the acute phase of the crisis and I considered myself lucky to have such great contrarian signals coming in clusters, day after day just after launch.  It was the contrarian bullish opposite to today’s developing bearish contrarian structure.

From NFTRH 9 (11.22.08):

"Okay, everybody’s got the memo; deflationary depression it is. Well not everybody… I’ll go with the old pros and stick to my story that there will be recovery – born of inflation – and there will be places to invest and places to avoid. With the entire world now expert on deflation and 1930’s history, I have got to believe we have a huge counterparty of 'sissies'* waiting to take the other side of the trade.

I personally believe any coming stock market rebound is a trade only [ed., it was, as the bottom was ultimately in spring, 2009] and things could get worse [ed., they did] before they get better. But if I were a deflationist I would be uncomfortable with the level the major media and by extension, the public are up to speed on the concept just as I was uncomfortable with every Tom, Dick and Harry on board the inflation express [ed., in the run up to the 2007 top]."

So the point of NFTRH 267's opening segment is to simply remind all of us what is actually happening out there.  Expectations have been realigned.  In 2008 there were long-term technical breakdowns as well.  For instance, the Dow and S&P 500 each made lower lows to their 2002 lows.  So gold (insurance, monetary common sense, what ever label you want to place on it) is breaking down in stock market terms and making big picture technical violations.  Does this at least provide some context?

The utter fear and angst of the 2008 time-frame is being corrected.  Most people do not currently see it that way.  They want to make 'coin' in stocks and now gold is not even on the radar of most people.  I am not here to cheerlead insurance.  I am here to point out that something opposite to 2008 is going on.

If in 2008 the idea was to get separate from fearful masses and be bullish for coming asset price opportunities, should the idea today not be to think about getting separate from them again in their new guise as increasingly manic US stock market bulls?

* 'Sissies' references an email note I received from my late friend Jonathan during the crisis.  NFTRH's earliest subscribers may remember this…

"Yes Gary, I spoke last night with one of the legendary street traders from the old days (pre 1990). He wants to leave Miami and work free at our shop because he has never seen a time when there is more money to be made the old fashioned way…picking off the sissies."

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One thought on “Closing the 2008 'Gap'

  1. Why are gold and silver prices behaving the way they are? As I see it, two main reasons:
    1.- [email protected] IS BLISS:
    [[email protected] of Economics and/or its Principles leaves investors and traders at the mercy of Fed pronouncements and trumped up numbers].

    The ECONOMICS definition of INFLATION and DEFLATION is: “An INCREASE or DECREASE in the money supply.”. That is IT. There is no other “inflation, deflation or disinflation”. Prices and wages rise or fall accordingly in a “normal” (untampered) economy. By the latest Federal Reserve Release copied below, we see that INFLATION IS STILL ACTIVE. It is running at 8.4%/yr by M1 and 6.4%/yr by M2 in the latest 12 month period.

    PROOF OF INFLATION [By The Fed's own numbers!]:
    Federal Reserve Statistical Release H.6
    MONEY STOCK MEASURES
    November 17, 2013
    Billions of dollars:
    M1 M2
    2011 Nov 2163.9 9597.3
    2012 Oct 2410.0 10205.5
    2013 Oct 2622.2 10896.6

    Percent change at seasonally adjusted annual rates
    M1 M2
    -------------------------------
    3 Months from June 2013 TO Sep. 2013 8.3 8.2
    6 Months from Mar. 2013 TO Sep. 2013 8.9 6.4
    12 Months from Nov. 2012 TO Nov. 2013 8.4 6.5
    Copied from: http://www.federalreserve.gov/releases/H6/Current/
    True latest INFLATION yearly rate: 8.4% by M1, 6.5% by M2.

    Yet, they faithfully accept The Fed's trumped up statement that 'inflation' remains tame at 2%.
    The Fed should be saying instead: “ The commodities which are included in the CPI are rising at only a 2% annual rate due to very low demand by a STAGNANT ECONOMY”. How many of those people involved in buying and selling gold (investors and gamblers) know Economics, Economics Principles and much less, how Economics fundamentals relate to The Fed's New Economy Model and gold? It looks like relatively very few. It is the knowledgeable people that provide the base price support for gold and that level is being tested now.

    2.-MENTALITY OF PARTICIPANTS
    There are two main types of participants in the gold market: investors and gamblers. The gamblers are traders, speculators, hedge funds and 'me too'. Investors know what they are buying and why. Gamblers don't care. They will jump on anything that is moving (Momentum).

    -References:
    1.-http://www.federalreserve.gov/releases/H6/current/default.htm
    2.-http://www.kitco.com/ind/Arora_corner/2013-10-09-Why-Gold-And-Silver-Do-Not-Run-On-Government-Shutdown-Debt-Ceiling-Rancor-Yellen-Nomination-Taper-Postponement-And-Indian-Diwali.html by Warren Bevan.

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