| As another tidal wave of Corona smashes America, the nation’s stock market investors beg the government and central bank for more stimulus and QE welfare handouts.
“Will markets believe that central banks can simply decouple valuations from fundamentals for another round? It’s all about conditioning. It’s all about behavioral finance right now.” – Mohamed El-Erian, president of Queen’s College (Cambridge) and chief investment advisor for Allianz (parent company of PIMCO), Oct 26, 2020.
Mohamed sums the situation up well; it’s all about conditioning and behavioral finance.
 
Unfortunately, the US stock market has become America’s fake economy. This theme began in 2008 and it’s accelerated since then.
An ominous broadening pattern is in play on the weekly Dow chart. The market is clearly out of control, both fundamentally and technically. The glue that holds it together is debt, money printing, and propaganda.
This disgusting socialist game can continue, but deflation is over and the dawn of a stagflationary era is here.
The T-bond chart. The Fed has operated a program of what I call “Interest rate welfare for government and stock market socialists” since 2008, and arguably since 2000.
The US government bond market resembles a giant credit card. Ominously, the national debt ceiling has become a floor.
What’s changed now, versus the past few years? Well, the Fed can keep rates low and stop T-bond prices from collapsing, simply by continuing to print money and buy bonds with it.
That hasn’t changed, but fiscal policy is now a player in the “stimulus” game. The US government is beginning to funnel borrowed and printed money not just to itself and Wall Street, but also to Main Street.
That’s going to put pressure on interest rates. The fed is going to have to buy more bonds or rates will rise.
Stock, bond, and OTC derivatives market inflation has been the dominant theme since 2008, and that will change in 2021… to Main Street inflation.
The amount of money flowing to Main Street means that inflation will rise even if the Fed raises rates modestly, and it will likely skyrocket if the Fed keeps rates low.
The GDX advance/decline chart.
Unfortunately, the head and shoulders pattern that I highlighted at the July highs has continued to develop as projected. Clearly, even with the emerging inflation theme, bullion and mining stock investors need to exhibit patience.
The bottom line: institutional money managers are not going to commit ongoing funds of size into mining stocks until inflation is in their faces. Even projections of shocking inflation from legendary investors like Paul Tudor aren’t good enough; the money managers need to see that inflation and it’s just not here yet.
On the good news front, value stocks are showing signs of a bottom against growth stocks, and the miners could see some capital (albeit modest) flow into them if the value stocks begin a trending move.
Unfortunately, value-related buying of the miners is more likely to simply cushion reactions than create the kind of bull run and nostalgic gold bugs remember from the 1970s. Inflation will do that, and it’s coming!
The GDX daily chart. It could be argued that the reaction from the summer highs has featured two down legs and a third is currently in play.
The key weekly gold chart. After a big rally, reactions are normal. As they develop, moving averages (like my important 5,15 series shown here) flash sell signals and the 14,5,5 Stochastics series does too.
A pullback to $1788 should not cause much emotional stress in a properly positioned investor. Unfortunately, there’s no fever like gold market fever, and amateur investors often take positions on a big rally or small dip that are far too big for them to emotionally handle.
If that is the case, there’s no harm in trimming positions to “sleep at night” levels. I sleep like a baby so I’m a light buyer here, but not everyone is in that position. Each investor must ensure their positioning is in sync with their psyche, not just their price projections.
A good rule of thumb is that a 20% dip in the price of gold bullion, a 30% dip in the silver price, and a 40% dip in mining stock prices should not cause significant emotional distress to an amateur investor.
If that stress occurs, positions need to be trimmed. That’s mainly because this is not a gold bull market; it’s a gold bull era. Proper positioning is critical… if investors are to experience all its glory!
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