THE WORST POSSIBLE OUTCOME:
It is possible that in spite of their every effort, the central banks of the world might not be able to contain a bond market sell-off. In that case they would surely just crank up the printing presses even faster in an ever-failing effort to hold rates down. That would just feed into the inflationary theme, at least as pertains to the CRX. However, rising rates would be devastating for the bond markets and for the economies of the world. And if funds were to flow out of the bond markets, well… you know where they end up. At the end of the day if the bankers were to lose the bond battle the result would almost assuredly be an inflationary depression in many aspects of our lives, like in the cost of things we need but don’t have such as food and fuel. Those items would soar. But deflationary in things we already have but don’t necessarily need… like a piece of land to park our trailers on. The value of real estate would crumble. In either case, whether the central banks are ultimately successful or not, the outcome would probably be best described as stagflation. Which would ultimately lead to a depression of the most horrid kind. Because if the world economies are sputtering while rates are at zero, with unemployment already as high as 25% in some countries (Spain) imagine what would happen to them with rates at 4%, 6%, 8% and higher. I dare say that’s one scary scenario we’d rather not walk into. Ultimately we may not have a choice. As of this moment though, thankfully that outcome is no more than just a mere ‘possibility’.
So at this early stage of what ‘could be’ a major inflection point, we have to consider the inevitable question; “Is the ratio just back-testing the 13 year long rising trend line?”. I dare say the answer is; “No, that prospect is exceedingly unlikely. The ratio is likely to break up through that trend line with inflation resuming yet again. Bernanke as much as promised that outcome.” Nevertheless we need to respect that all options are still open and that the central bankers of the world might indeed fail in their quest. We have no choice but to simply monitor these charts in the weeks ahead. One thing we know with 100% certainty… they will not lie to us.
To that end, I’ve included a daily chart below so that we can watch these critically important developments over the coming days and weeks. Feel free to bookmark this chart as it will update in real time. What we’re watching for is whether or not the ratio climbs back up above the rising 13 year old trend line. Beyond question the Fed’s goal, if successful, would ensure that outcome. All that remains to be seen is whether or not they succeed.
$CRX:$XPX ratio Daily: Click here for a live and updating version. |
From the Elliott Wave perspective, one important aspect seen on the daily chart above is that the current rise in the ratio could still just be a 4th wave higher which would imply that there would be at least one more thrust lower. But I have a rather difficult time accepting that as the likely outcome since it would also imply that equities would be falling fairly hard over the next few weeks. Right in front of a US presidential election that is only 6 weeks away? I don’t think so! But stranger things have happened I guess. For example, as a teenager I had a friend who had a big wood screw in his belly button. I asked him what it was for. He claimed he didn’t know so I suggested he take it out. So he unscrewed it and his ass fell off. But I digress.
So there we have it. We’re absolutely at a critical inflection point. Either the $CRX:$SPX ratio is going to explode higher from here which would be the logical outcome if the Fed’s policy succeeds – OR – the ratio is going to plunge in a 5th wave lower (at least) and the deflation genie will officially be out of the bottle. More than likely this ratio and this study are going to provide a concrete answer earlier than most other indicators out there. At least that’s the goal.
On a final note, what kind of a father would I be if I didn’t take this opportunity to wish my son a great day on this, his birthday. Happy birthday big guy. Can’t wait until we can finally get together again and try out your sail boat. Love ya!
Thanks to all for reading and until next time… smooth sailing!
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