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Are We Heading Into a Hyperinflationary Storm?

By Graham Summers      Printer Friendly Version Bookmark and Share
Oct 19 2010 12:33PM

www.gainspainscapital.com

In the last month and a half, stocks have COMPLETELY returned to the atmosphere of March-April 2010: an atmosphere in which stocks are overbought, overstretched, and yet KEEP rallying.

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As you can see, the daily RSI has just touched “overbought� status at 70. From a strictly technical standpoint, the next lines of resistance are 1,180, then 1,205 on the S&P 500. We’ve now got layers upon layers of support as well:

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Most market analysts would look at this set-up and say that we’re in a new bull market. I do not think that is the case. Instead, I think the market is discounting major inflation and possibly hyperinflation.

Indeed, if stocks are overbought and overextended, their performance is nothing compared to that of Gold:

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And of Silver:

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As you can see, the two precious metals have erupted higher since mid-August. As I write this, our bullion holdings are up 23% and 37% respectively since March 2010. Compare this to the S&P 500’s performance of 1.3% over the same time period, and it’s clear which asset class is the one to own. Indeed, priced in Gold, stocks have done nothing since April.

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This final chart is key to understanding what’s happening in the markets. In plain terms, stocks are NOT creating wealth, they are rallying based on Dollar devaluation, If you price them in non-paper currency (Gold), they are LOSING purchasing power.

This is also clear when you compare the S&P 500’s performance to that of the US Dollar over the last few months.

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As you can see, we have a near perfect inverse correlation here, with stocks rallying as the US Dollar falls. With that in mind, we need to focus on the US currency, since its drop is what’s fueling this rampant speculation in stocks and commodities.

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The US Dollar is now oversold and nearing its multi-year trendline. If we DO NOT bounce here, then the next line of support is at 74. After that, it’s the 2008 low (also the 20 year low) of 71. 

I have to be blunt here: if the US Dollar DOES NOT bounce soon, a hyper-inflationary scenario is INCREASINGLY likely in the US.

Indeed on a weekly basis a break down past 74 on the US Dollar would trigger a MASSIVE Head and Shoulders pattern which has a downside target of 40 or so (roughly 50% lower than where the US Dollar is today). If this collapse were to occur, you would see hyperinflation erupt in the US similar to that of Weimar Germany. Precious metals would erupt higher and the US Dollar would no longer be the reserve currency of the world.

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What’s truly worrisome is that the Fed is hell bent on enacting the exact same policies that have created the Dollar collapse (and the rally in stocks) over the last few months, namely, additional Permanent Open Market Operations (POMO) ramp jobs. The name sounds clever, but it really just consists of the Fed buying US debt from the large private banks, which in turn take the Fed’s money and buy stocks.

Indeed, the Fed just announced it will be monetizing an additional $32 billion worth of US debt in the next few weeks. The schedule for these ramp jobs is as follows:

  • October 15:
  • October 18:
  • October 20:
  • October 22:
  • October 26:
  • October 28:
  • November 1:
  • November 4:
  • November 8:

In plain terms, the Fed is going to keep doing what it’s been doing: trashing the US Dollar to pump stocks. And it’s going to do this to the tune of some $10 billion per week over the next month.

Thus, as ridiculous as it sounds, the stocks up/ US Dollar down trend of the last two months is likely to continue into early November.  But if the US Dollar doesn’t bounce soon and start rallying with force, we’re heading into a VERY nasty period.

Good Investing!

Graham Summers

 

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I call it The Financial Crisis “Round Two” Survival Kit. And its 17 pages contain a wealth of information about portfolio protection, which investments to own and how to take out Catastrophe Insurance on the stock market (this “insurance” paid out triple digit gains in the Autumn of 2008).

If you enjoyed this piece and would like to see more of my views and articles, swing by http://www.gainspainscapital.com/ for more!