The Implications Of The Pending Collapse Of Fiat Paper Money (Part I)

Part Two of this article is HERE.

"It’s very difficult to make predictions, especially about the future."  Former New York Yankee catcher Yogi Berra.  When it comes to the financial markets, predicting their futures is compounded by the fact that they are all rigged. (See Ian's Investment Insights, November 28, 2014). Following that publication, I intended to write a continuation of the price manipulation in the gold markets. Maybe I have already made my point on that account.  Since this publication is slated for issue in January, I think I should discuss how I see the year unfolding particularly as it relates to the investment markets with an emphasis on stock markets and the price of gold bullion and gold equities.

The Deciding Battle in the War between Paper and Gold

This year, perhaps, the most crucial issue that we have to determine is how Vladimir Putin will respond to the economic and monetary war being waged on Russia by the Western nations led by the United States.  I think it is wise to assume that Mr. Putin is not going to let this belligerence go unanswered. You can bet that his determined course of action will attempt to cause as much damage as he can to these western economies and to the U.S. dollar.  Mr. Putin has many options and most importantly Russia is being funded by super rich China.  "If the Russian side needs it, we will provide necessary assistance within our capacity." Wang Wi, Chinese foreign minister.

If Mr. Putin could somehow engineer a dollar collapse much like these western nations have done to the Ruble, that would likely lead to America's bankruptcy.  I can think of only one way that might be achieved; that is if Russia and China jointly tied their respective currencies to gold.

The United States professes to own approximately 8,100 tonnes of gold, which is highly unlikely.  She has been conducting a war on gold in defence of the dollar for the best part of 50 years.  U.S. gold holdings have not been audited since the Eisenhower Presidency.

In 2011, Congressman Ron Paul wanted an independent audit of US gold holdings.  He said "If there was no question, you'd think they would be very anxious to prove to us that the gold is there." Congress deemed that such an audit was not necessary and anyway, it would be too expensive.  Asked if there was any truth to the claims that Fort Knox has no gold, Ron Paul answered, “I think it is a possibility." Kitco News, August 25, 2010.

A story published by the European Union Times in 2011, noted that Russian Prime Minister Putin had been issued a report by the Russian Federal Security Service (FSB) which stated that the former International Monetary Fund (IMF) managing director, Dominique Strauss-Kahn was charged and jailed in the U.S. for sex crimes after his discovery that all the gold held in the United States Bullion Depository at Fort Knox was 'missing or unaccounted for.'

According to the FSB, Strauss-Kahn became concerned that the U.S. was stalling on its pledged delivery of 191.3 tons of gold to the IMF.  Mr. Strauss-Kahn flew to the U.S. and raised the issue with senior U.S. government officials. Apparently, the IMF chief was contacted by rogue elements within the CIA who told him that all the gold reported to be held by the U.S.. Using this trumped up charge as an excuse for Strauss-Kahn's removal as IMF managing director, true U.S. gold holdings remain unknown.  Obviously, that is how the U.S.  Government would like it to be.

As many of you know, I have long been a reader of Dr. Robert McHugh’s Elliott Wave technical analysis of the investment markets (www.technicalindicatorindex.com).  As I wrote in the opening paragraph of this letter, "When it comes to financial markets predicting their futures is compounded by the fact that they are all rigged." In spite of this, for the most part, Dr. McHugh has been accurate in his market calls and his trading strategies.  His track record for those who subscribe to this service has been outstanding.  The following chart from Dr. McHugh's latest newsletter projects a price of 40.00 for the U.S. dollar, which is 55% from its current level. Such a collapse would be in keeping with some sort of concerted effort to destroy the U.S.  dollar's 'exorbitant privilege.'

Source: McHugh's Market Forecasting and Trading report, December 31, 2014.

We must now wait and see what might be the response from Russia and China to the Western attack on the Russian economy. They have been working together these past few years to reduce the dollar's role in international trading amongst not only themselves, but many countries that are sick of the dollar's inordinate privilege. Nevertheless, most countries still use the dollar as the commodity currency. Bringing these countries out of the dollar camp is likely to be a very difficult and long term process.

The Chinese leader, Zi Jinping and Vladimir Putin may see this as the opportune time to put the coup de grâs to the petro- dollar's reserve status.

In each of the previous three Long Wave winters there has been a monetary crisis or at least a major monetary reset.  At the onset of the first winter the currency reset occurred in the United States after President Andrew Jackson in 1836 vetoed the bill that would have renewed the charter of the Second Bank of the United States. From that year the U.S. would be without an official central bank until 1913 when the Federal Reserve Board was introduced.  At the start of the second Long Wave winter in 1873, the United States joined all major countries in adopting the gold standard international monetary system. Between 1931 and 1933, at the beginning of the third winter, the international gold exchange standard system collapsed and was replaced by a hodgepodge of fiat currencies.

As this current winter moves into its frigid state, the evolving monetary crisis is focussed on fiat currencies which have been the means by which the world is drowning in an ocean of debt. This crisis is coming to a head, as desperate central banks resort to the printing press in an effort to reduce the overwhelming debt loads of their respective governments. This is always the sign that fiat money is reaching its final death throes. (John Law's Mississippi scheme in France in 1720 and the French revolutionary paper Assignat debacle of the 1790s).

Meanwhile, Russia and China have been aggressively building their gold reserves. They can only be doing this because they are anticipating the coming collapse of fiat currencies under the leadership of the U.S. dollar. With that collapse, the gold which they have accumulated will assume its traditional role, which is money that can be trusted.

In the event that gold is reintroduced as money, the world would likely be divided into two currency blocs.  One of these blocs would be comprised of those countries with gold to back their currencies and the other would comprise those countries with little or no gold.

Countries unable to join the new gold standard system would be shut out from trading in the world markets. Interest rates on their debt would rise to astronomical levels because no one would lend them any money. Prices would rise and they would encounter shortages of all staples, indeed they might not be able to obtain staples like food and energy to provide for their consumers.  Credit would cease to operate, bringing about a complete collapse of their banks. The end result would be a devastating economic depression leading to excruciating unemployment and likely widespread civil unrest.

Which way will the European countries go? Will they keep their currencies closely aligned with the failing dollar or will they bravely cut their financial, monetary and political ties with the United States and realign themselves with developing wealth and monetary power of the BRICS and the countries closely allied with them?

A Stock Bear Market for the Ages 

An accumulation of evidence strongly suggests that U.S. stock markets are on their last legs. Obviously, a fiat paper money collapse would be devastating for traditional stock markets, nevertheless, U.S. stock prices are in a massive bubble courtesy of the Federal Reserve. For the gamblers it is playing in a can't lose casino, where the Fed, the dealer, shows its hand before the start of the game.

"Tulips, the South Sea Bubble, the new economy, the housing bubble-at some point the greatest fool -has bought into an absurdity and a market that can only go one way goes the other way, precipitously. If the tech wreck was a jump off a thirty-meter platform and the 2008 financial crisis a plunge off the cliffs of Acapulco, the end of this multiple-absurdity mania of manias will be a swan dive from the top of the Empire State Building into a two foot wading pool." Robert Gore, A Mania of Manias, Straight Line Logic.

"The pattern below would never occur in an honest free market. Nearly six straight years of continuous vertical lift just wouldn't happen in a setting where the GDP of the underlying economy-US and Europe-has grown virtually not at all since 2007 pre-crisis level, and where earnings are facing massive headwinds from global cooling, deflation and the heavy anchor of 'peak debt.' David Stockman, Contra Corner.

        

I have written previously about the technical evidence that is supportive of the notion that  U.S. stock prices are constantly being manipulated to the upside, but let me refresh your memory on this account. 

I have been drawing your attention over the past few publications of these ‘Insights’ to the reliability of key point reversals in projecting a reverse in the direction of a price trend. "A key point reversal top/high is made when a price makes a new high but closes below the closing price of the previous bar. A key point reversal bottom/low is signalled when the price makes a new low and closes above the closing price of the previous bar."

"The most important key point reversals occur in monthly or long term price charts, because they generally indicate a reversal in the long term trend." Ian's Investment Insights, “The Natural Behavioural Patterns of Economic Cycles within the Investment Markets”, November 22, 2013.

One of the most important points which can be made about these key point reversals is that they are seldom counter reversed by the following price bar.  Now, look at this monthly chart of the S&P500 from January 2014 to December 2014.  Each bar represents the complete price from low to high during each month.  The horizontal line on the left of the price bar is the opening price at the start of the month and the horizontal bar to the right of the vertical price bar is the closing price of the month.

S&P500 Monthly Price Chart Jan 2014- Jan 2015

The key point reversal low in February was a reversal of a two-month downtrend in the ongoing uptrend.  Shift you eyes to the right and notice the key point reversal high that occurred in July. The June numbers are shown in the bar immediately to the left, because the June S&P500 high price of 1,968 points and the June closing price, the horizontal bar on the right of the price bar, of 1,931 points are relevant to the S&P500 July price action. In July, we note that the S & P 500 made a new record price high of 1,991 points, which was well above the record high price recorded in June. The last trade for the S&P500 in July closed at 1,905 points, which was also the monthly low price; which in itself is bearish. That closing price level was well below the closing price of the S&P500 in June.  These two July prices, the record high and the closing price well below the June closing price were a confirmation of a monthly long-term key point trend reversal and the likelihood that the S & P 500 stock bull market had ended. As I wrote in an Ian's Investment Insights 'Alert' published on August 1, 2014, ...”The key point reversal monthly high reached in July is almost conclusive evidence that the stock bull market of March 2009 to July 2014 is now finished."  Not so, I was wrong.

The S&P500 record price peak in June 2014 was followed by a key point reversal in July, which was countered by a key point reversal low in August, which was then countered by a key point reversal high in September; that signal of a trend reversal to the downside was itself countered by the October key point reversal low.  Four key point reversals in a row is not a coincidence, I don't believe in coincidences. Anyway, I went back ten years studying the monthly chart of the S&P500 and could only find two occasions during that time  that the there had been a key point reversal signal that was reversed in the following month.

From my perspective, the most blatant manipulation of stock market prices occurred with the October key point reversal low. The following daily chart of the S & P 500 from July 2014 to the present is, I think, convincing proof of this. On September 9, 2014 the S & P reached a record high level of 2,019 points. Within 18 trading days prices fell by 10%; 7.5% of that decline occurred in the final 5 days. Clearly, this suggests that selling was reaching panic proportions. The 'Powers that Be' could not afford to allow the selling to continue for fear that once set in motion there would be no stopping the decline. Their hand is evident in the final price bar. The S & P opened at 1,874 points on that 18th day of the decline on October 15, 2014 and dropped to a low level of 1,821, which was almost 3% below the opening price. It closed the day at 1,862.50 points, only 0.6% below the price at which it had opened. Within 12 trading days the S & P price had surpassed the point from which the earlier decline had started.

Like many independent analysts (Stock Investment Money Managers are not independent analysts), I am very bearish on the stock market outlook for 2015. I know that many of you will say that I have been a stock market bear for many years.  That is true.  However, I am a student of the Long Wave or Kondratieff Cycle. With my knowledge of this cycle, I know that every autumn stock bull market, which is the biggest of the cycles, is followed by a devastating winter stock bear market. We just haven't experienced the typical winter bear market, because the 'Powers that Be’ haven’t allowed it to occur as it did after 1837, 1873 and 1929. For example, following the autumn stock bull market peak in September 1929, the ensuing winter bear market lasted until July 1932. While that's only 34 months, in that short time the Dow Jones Industrial Average shed 90% of its value. The Transportation Index was down by a whopping 93%.

This constant interference in the natural process of the markets will culminate in massive retribution, which is likely to lead to a bear market more horrendous than the 90% bear market experienced between 1929 and 1932. Indeed, the two Elliott Wave theorists, Robert Prechter ( Elliott Wave Theorist, www. elliottwave.com) and Dr. Robert McHugh (Main Line Investors, Inc. www.technicalindicatorindex.com) both write that from an Elliott Wave perspective that  this winter stock bear market will be one degree greater than  the 1929 winter bear market.  The Elliott Wave Theorist's target for the DJIA is 400, yes that is 400 points with, as the publication puts it, 'significant to U.S. survival'.

 In his December 31, 2014 report, Robert McHugh wrote, "The multi-decade Jaws of Death stock market pattern is calling for an economic collapse and a market collapse. This is a Bear market for the ages coming, which we believe is already starting in stealth, masked by the artificial stock market rally whose main purpose has been to hide the truth about the underlying economy's collapse, including the unannounced disintegration of the middle class in America.  Part and parcel with Bear markets are social strife issues – a negative psychological state of mankind."

Below, I show Dr. McHugh’s Elliott Wave analysis of the DJIA from 1900.

There comes a time when poor economic conditions forces stock prices to reflect this reality.  Fudging numbers to project the economy to be better than it really is stops working once it is apparent to the general populace that these numbers are not a reflection of the true facts. Once that is the case, driving stock prices higher just doesn't work anymore. In 2015, stock prices are likely to face the harsh reality of a Long Wave winter. They have been propped up for 14 years by massive infusions of fiat paper money, which is itself on its last legs. As a consequence of this ongoing manipulation, this bear market is going to be, as Dr. McHugh writes, "One for the Ages."

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Note: In our February 20, 2015 publication of 'Economic Winter', which will bear the title "The Implications of the Impending Collapse of the Fiat Paper Money System" we will explore in some detail what might be the consequences of this paper money failure.  For example will privately owned Central Banking continue to operate? 

For my take on Silver read ‘Economic Winter’ Volume 60, Issue 1, June 17, 2014 “Gold vs Silver”

DISCLOSURE

This information is not intended to be investment advice.  Members of the Longwave Group may acquire, hold or sell securities referred to in this document.  The companies referred to herein may pay a fee to be listed on the Longwave Group website or referred to in this publication.  See the disclosure under the heading “Disclaimer” on this page for further important information.

Ian A. Gordon, The Long Wave Analyst, www.longwavegroup.com

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