All year we have been warning that a Phase Transition is coming, but when could not be ascertained until after September 2014. At some point everything must flip. Why? Because this is a Sovereign Debt Crisis not the normal plain vanilla decline. This is why retail participation is at historic lows and liquidity is at historic lows. We have a Phase Transition coming largely because when the majority of people begin to figure out the problem is government at all levels, then capital will panic and flee to the private sector.
Such panic shift from Public to Private vary in degree historically. This is actually what takes place in a hyperinflation where people move to private assets and dump the currency. But that is only one version for revolutionary type affairs following the overthrow of a government. This was the Communist Revolution in Germany during 1918, the French Revolution, and the American Revolution. Each experienced varying degrees of hyperinflation with either a default on the previous government debts or the currency. Today, we have governments with outstanding debt that did not exist in Germany or France since the new government defaulted on the previous government debt leaving only currency. The American colonies also assumed no portion of the English national debt.
This shift from Public to Private assets is WHY we could see the US share market extend into 2017-2018. The traditional business cycle decline you have the flight to quality with capital fleeing back to government bonds selling stocks. But what happens when it is government bonds that crash and burn? This is when the capital flows reverse and will shift back into private assets. For this immediate correction, cash is fleeing back to government bonds. This may be the last rally in bonds setting the stage for the extension.
So far we have the peak with the ECM in September right on target. In theory, if the market were to invert all the way into a low for 2015.75 next year, then we would be looking at a full blown cycle inversion with stocks moving up with the drop in the ECM. This would be a tremendous rally, but it would come at the cost of a real serious collapse in the confidence of government. This may be what we are facing. Instead of a Phase Transition that doubles the Dow Jones from the 2009 low of 6,440 (12,000), which we have already achieved, we are looking at a rally into 2017-2018 with the Dow reaching the 25,000-28,000 level. That would be the minimum target objective. To match the rally between 1921 and 1929, the Dow would need to reach 39,482. We have been looking at a 4.3 rally (430%) which is half the 8.6 year frequency.
This inversion pattern we have begun to see in the metals. Gold rallied in a sharp advance ONLY when the ECM turned down 2007 and it peaked in 2011. Gold appears to have made that transition and it should rally with the downturn in the ECM.
Completing this inversion process in stocks now will be interesting indeed. However, it also means we are about to face some very, very, very wild times ahead. Yes there will be money to be made – but we also have to be worried about the results.
We must pay close attention here. If this week closes higher in the Dow above 16544, then we may see a reaction into early November during the first week. However, we have another key turning point shaping up for the week of November 17 targeting the days of the 19th/20th.
We will let you know when is the best time to go back in. So far the September high with the ECM to be followed by a November low appears on target.
