Managed Markets

We are entering a period that will require nerves of steel for investors to weather. The technical evidence is mounting that prices are behaving contrary to expectations (if you are a rational investor) or strangely (if you have a tendency towards paranoia)

Take the latest behaviour of the 30 year Treasury Bonds as an example (Charts courtesy Decisionpoint.com)

From a technical analyst's perspective, the PMO gave a buy signal four days ago as the price jumped up through the 20 and 50 day MA's, only to plunge downwards yesterday back through those MA's.

Now, today's rise in bond yields (fall in bond price) was quite understandable from a rational investor's perspective, given the behaviour of the oil price - see below - which gapped up to a new high (Exhaustion gap or breakaway gap? Can't tell yet):

What is in question from a rational investor's perspective is: " Why did the bond price rise so dramatically PRIOR to its most recent fall? It wasn't particularly oversold, and "normal" market behaviour would have called for either a sideways, downwards, or slightly higher move - but certainly not a dramatically higher move".

Then there's the falling wedge on the US Dollar chart below. The break-up from that wedge was quite within the bounds of normality, and if we go back four days, the rise on that day was particularly strong. But there was no buy signal on that day - and note that the PMO is just peeking up through the zero line even as the price is bouncing down from its 200 day MA.

From a Technical Analyst's perspective, there is a much more important question that needs to be addressed that arises from the above chart and that is: "Why was there a falling wedge in the first place?"

Some background is needed here.

There are many people who do not fully understand the underlying rationale of technical analysis. TA is not about lines crossing over other lines and drawing trendlines and looking at "mechanical" means of trading the markets - such as using complex mathematical algorithms on supercomputers. That view is held by the "get rich quick" crowd who have convinced themselves that trading on the markets can be automated; or by the inexperienced who don't know any better.

From this analyst's perspective, Technical Analysis reduces to "pictures" the interplay between "optimists and pessimists" in any market. Forming views on this interplay is an "art" as opposed to a science, and requires some understanding of the dynamics of social behaviour.

Take the wedge pattern, as an example.

A wedge is typically a pattern that occurs as a "pause" in a Primary or Secondary Trend, prior the price continuing along this same Primary or Secondary direction.

What causes a wedge to occur is that it reflects the "battle" that is ensuing between the optimists and pessimists; and what is significant about a wedge is threefold:

1. Trendlines can be drawn on the outer boundaries of the upper levels and the lower levels of price extremities as they zig-zag along the time scale
2. These trendlines will both be pointing either up (rising wedge) or down (falling wedge)
3. The bearish wedge (paradoxically rising) will have a lower rising trendline (drawn below the rising lows) whose angle of incline is steeper than that of the upper trendline - indicating that the bulls are more emotional than the "stable" bears. Alternatively, in a falling wedge (paradoxically bullish), the upper falling trendline will have a steeper angle of decline than the lower one - indicating that the bears are more emotional than the "stable" bulls.

It follows that a falling wedge occurs within a rising Primary or Secondary trend, and that it reflects anxiety amongst the bears who have an irrational fear that the price "should" be falling, and the shallower line reflects intellectual stability amongst the bulls who understand that the price has a higher probability of rising than falling; when the reaction is completed.

Why am I going into this theoretical BS?

Quite simply, because the falling wedge in the US Dollar chart as drawn above would therefore imply that the US Dollar has now entered either a Primary or Secondary RISING trend.

Now, one has to stop and ask one's self: "What is the probability that the above statement is true - ie is a result of "normal" market forces?

Here are the facts:

• The US Government is running its financial affairs at a deficit size that flies in the face of the word "sanity" - let alone "logic"
• The US as a sovereign state is currently the largest debtor nation in the world, - with a Current Account deficit that virtually guarantees that this indebtedness can only grow larger in the foreseeable future
• The US economy is founded on technologies which are oil dependent, and is now forced to import the majority of its oil requirements - in the face of an oil price that is reaching for new highs because:
  • No new refinery capacity has been added for decades given the clear understanding that pumping of oil has reached a peak, and that oil reserves are dwindling
  • The current US Government has (mind blowingly) moved to BLOCK the development of alternative energy technologies which are less dependent on oil (By its failure to ratify the Kyoto Protocols)
• The two responses of the current US Government to the above have been:
• To declare war on terrorism throughout the world (an admirable sentiment provided the evidence supports the base assumption that Terrorism is the most important threat being faced by Society as a whole).
  • To declare that it will be devoting more of its attention in future to escalating the "Space Race"
  • A "rational" person would look at the above facts and conclude that the US Dollar is a currency that should be avoided like the bubonic plague.

However, there are differing levels of rationality. From the perspective of an equally rational cadre of the World's Central Bankers, a collapse in the US Dollar is to be avoided like the bubonic plague.

Hence, it is quite reasonable to conclude from all of the above that the US Dollar is being "managed" by the world's Central Bankers.

Now, you might argue that NO SINGLE FORCE can manage prices against the combined forces of the market as a whole and, "normally" you would be right. But consider the following:

The World's Central Bankers have an unreasonable advantage: THEY CAN PRINT AS MUCH MONEY AS THEY LIKE. In short, they have a "bottomless pit" of financial resources with which to manage the markets.

So, let's see if there is any evidence that there may be other markets that are being managed. Yup, there shore is. (Brought up on a small holding. Can't help the Johnnie Hayseed approach J)

Here's a weekly chart of the gold price:

Note the "sudden-ness" with which the PMO fall the week before last - just as it appeared to be moving towards a buy signal.

Note also, that whilst the fall in the gold price at that time was both unexpected and sudden, it was within the context of a rising trend that will provide support either at the $375 level or at the $335 level.

Now, against this background, let's take a closer look at the weekly chart of the US Dollar:

There are two factors of interest about this chart:

1. The PMO showed a "rising bottoms" in early 2004 even though the price of the Dollar itself showed steeply falling bottoms.
2. The Moving Average lines appear to be flattening and converging - indicating a slowdown in the "rate of decline"

So the above might lead to the conclusion that - despite all logic based on economic fundamentals - the Central Bankers of the World are working furiously behind the scenes to protect the world's financial infrastructure.

I want to differentiate here between the meaning of the word "Manage" and that of the words "Conspiracy" and "Manipulate". Conspiracy and Manipulate are emotive words which imply joint clandestine action or antisocial behaviour, whereas Manage implies joint overt, and legitimate action. There is no secret that the world's Central Bankers are involved in "Managing" markets. After all, it is the mandate of every country's Central Bank to protect the integrity of its own country's economy. Why would anyone be surprised if the Central Bankers were to join forces in an attempt to protect the World Economy? To the contrary, one should be surprised if they did not.

So, in simple terms, the question arises as to whether or not they will succeed.

For this, we can look at the charts of the mightiest market of them all - the US Industrial Equities market; specifically, at its famous representational index, the Dow Jones Industrial Index.

The above chart shows the Dow Jones Industrial Index dating back to 1920. It can be seen that since around 1942, the market has been in a clearly rising trend, and that from about 1982 the angle of incline of the trendline increased dramatically - thanks largely to a decision of President Ronald Reagan to turn a surplus country into a deficit country as a means of driving (and protecting) the World economy.

Logic dictates that when a chart such as the above eventually peaks out there can only be one of two outcomes. Either:

1. It will go sideways for several years - just as it did from 1968 - 1982, or
2. It will "collapse" - just as it did from 1929 - 1932.

If the World's Central Bankers succeed in their bid to manage the markets, then the probabilities favour a sideways moving market for many years to come. However, the risk exists that they might fail and that the markets will collapse, and it is against THIS risk that we are taking out insurance in the form of an investment in Precious Metals.

However, those of us who are interested in Social Behaviour understand one thing above all else. The "Winners" in life do not PLAN for failure. They plan for success and they INSURE against failure. I have never met a successful Captain of Industry or other Leader of Society who plans for failure. That is the behaviour of losers.

It would be against the interests of Society as a whole if the World's Central Bankers were to fail; and you can bet your bottom dollar that they will not give up without a fight. THAT is the extent of the forces that we are up against if we are "betting the farm" on a rise in the price of Precious Metals.

However, there is a risk that cannot be "argued" away, and that is that the dwindling reserves of oil will give rise to a deterioration in standards of living in the event we do not move to change our technological focus.

Which brings us to focus on the real Achilles Heel of the World's Financial Infrastructure: Greed on the part of vested interests.

There are those - and it looks suspiciously like George W Bush is one of them - who will take decisions that are counter productive to the welfare of Society as a whole in order to ensure a maintenance of the vested interests of a small subset of greater Society. They rationalise that these people have superior capabilities and that they therefore "need" to be protected so that they can "get on with the job" of "saving the world". There is a word that describes such a rationalisation, and that word is "arrogance".

The real problem we are facing in the West is that we have become fat and happy, and there is no passion for improvement.

Unfortunately, the hard fact is that Life is dynamic, and unless we move forward, we will die. The "real" problem is that the political substructure of the World's developed countries is populated on BOTH sides of the political spectrum by people who will only get into power if they are seen to want to improve or maintain the lot of the voting haves, as opposed to the non-voting have nots. In short, the POLITICIANS are all effectively planning for failure.

Unfortunately, voting Society in the Western World is more focussed on maintaining what we have, than in welcoming the pain of change to prepare for future possible economic dislocations - thereby protecting our children against a bleak future..

It is for this reason that the risk of failure on the part of the World's Central banks is rising.

The appropriate behaviour of the voting plebiscite is not to hope and pray that the gold price will rise, but to move to take action to kick out the corrupt leaders and replace them with leaders of integrity - who will undoubtedly take decisions that will cause us pain in the short term.

Unfortunately, I'm not holding my breath on that one - which is why fully 25% of my net worth is invested in Precious Metals at this moment in time. I am also devoting a disproportionate amount of my energy to "entrepreneurial" (as opposed to "investor") actions which are calculated to generate cash flow into the future.

Brian Bloom

Australia, July 30 ^th 2004.