At the beginning of the year, I let our subscribers know that the stock market did not show any signs of breaking out to the upside before May and that there was still a risk of a correction but foreign capital inflows would temper any decline.
So far that has proved to be correct. Nevertheless, I believe we are going to get a head fake to the downside shortly, maybe even a pretty good one. However, here is my issue.
This head fake will set the stage for the bond bubble because people with desire a flight to quality. In other words, we may yet see a scare in the share market that sends cash running into the bond market to create the top. We do not see a break in the market that long-term in nature, just a break that gets the majority anticipating a change in trend.
Keep in mind that May has been a target since the start of the year for the end of this consolidation phase. We should begin to see more interesting trading patterns and if we get a correction that sets the flight to quality in motion for the bond market to rally.
Keep in mind, that banks want to see cash eliminated. That will prevent bank runs, as they see it. This will mean that the only place to put cash will be outside of the banks.
This is not going to be a walk in the park. We are going to have to follow the trend and let the chips fall where they may. Clinging to old theories will only cause losses at this stage in the game.
We appear to be entering into territory that has not been seen for hundreds of years. This is not a Great Depression scenario. This is a lot more difficult to deal with.
Equities have remained steady due to capital inflows. Domestic retail investment remains at record lows. The future will be the decoupling of stock prices from earnings because we are dealing with capital preservation. Those who constant harp that the stock market is over priced would imply buy bonds. That is the opposite side. But rates are nothing to negative.
Of course you will have those who will yell buy gold . . . just before another decline into the low. Even equities are grossly under weighted within the world economy compared to debt. That is where the BUBBLE really lies and that is what we must pay attention to.
What happens when confidence collapses in government? It is a complete new game.
To make it clear, nothing has changed. A bull market is something that rises in terms of all currencies. The paper dollar and gold are ending up on the same side of the fence with this war on cash that is brewing. J.P. Morgan is looking to charge money to people who have cash on deposit beyond what they deem to be necessary as of May 1st.
Oddly enough, hoarding paper money is a hedge against the banks. This is why many are now advocating abolishing paper currency and moving towards electronic. The key to a future bull market in gold is not “fiat” nor is it “inflation”. Those theories are really meaningless.
The key to a reversal of fortune occurs when the M A J O R I T Y lose confidence in government. With recent polls stating that 75% of Americans distrust their government, we are getting there.
The end game is that gold is likely to break the $1,000 level on the benchmarks. This is more likely to be the final phase transition of capital rushing into the bond markets and out of the commodity/stocks. When capital moves to the extreme, then we can see the reversal.
If you do not have a system to manage this, or your advisor does not understand this, you better be paying close attention because this is not going to be pretty and virtually everyone with 401k plans or retirement accounts are going to be scrambling!
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Livio S. Nespoli has been a broker, registered investment advisor, and financial publisher since 1985.