Thursday, March 17, 2011

3/17 The Great Dunces Ball

Coming into tonight with 6% SSO.  I1 is up for the next 6 market days.  The SP futures 30-minute M/A is in buy mode but the DJI 50-day and DJI critical M/A are in sell mode.
DJI 50-day indicates resistance at 12,012.

DJI 5minute, 370-unit M/A will not be broken until prices rally 1.35% beyond.

I intend to sell SSO at 11,995.  If the market barrels through 12,200 then it will demonstrate staying power up to the I1 top March 25 and a new high beyond 12,400.

I expect gold and silver to benefit from the expected stock rally.  The PM1 is coming into a small corrective mode but the Elliott wave count is complete to the upside.  The big peak does not occur until the end of April.  Even if this is not the absolute peak it should coincide with a secondary peak.

There are periods, sometimes prolonged, when markets are not ruled by supply and demand.  Kuwait declared this condition today for the oil market.  Stock markets, commodities, real estate, wherever speculative forces have the conditions to overwhelm market forces, are subject to what we term "bubbles". 

The South Sea bubble was due to the availability of credit and a government drowning in debt.  England, 1711-1717.

The Mississippi bubble France, 1718-1720, same availability of credit and a government drowning in debt.

The Tulip Mania, Holland, 1636-1637, in response to debasement of gold and silver coinage.  Kipper- und Wipperzeit is the name given to a financial crisis during the start of the Thirty Years' War (1618–48). Starting in 1600, city-states in the Holy Roman Empire began to debase currency in order to raise revenue for the Thirty Years' War, as effective taxation did not exist.

The Great Dunces Ball, United States, 1982-present, where the slightest whiff of economic contraction was met with overwhelming fiat force.  The failure to institutionally learn from the mistakes of the 60's and 70's meant that Volcker's stand was for naught and spiralling debt is the cost of fiat reactions to contractionary periods.  

In the classical economic systems there were checks and balances that prevented bubbles from emerging when governments maintained the specie content of their coinage constant and avoided excessive debts. While we think of the gold standard as having been adopted by Bank of England in 1821 it was already increasingly being adopted to world trade 50 years prior. Gold or silver standards were in place in the great civilizations throughout time and, as those civilizations sought to spend beyond their means, were debased concurrent with their fall from prominence. Subsequent to the debasement their economies and societies went into nadir, typically for centuries, until the collective wealth and security had stabilized at a permanent lower plateau. Gradually, as new technologies enabled low-cost entry into profitable modes of production and the currency/coinage was created anew with reliable bases (that is, specie) that their citizens could trust. Generations had to pass for collective memory to die away.

I1 measures the degree to which speculative forces emerge in markets overall, but particularly in the stock market.  I don't know if I1 will work within a market structure embedded in gold or silver standard.  I suspect that it will still operate but the swings would be much less than today.  I hope to find out in my lifetime.


  1. Very well said. I would like to find out in my lifetime too (I'm 63) but really don't expect to. These things have a way of grinding away for a long time. But as we know, the longer the real problems are ignored, the bigger the upset when the Day of Reckoning arrives.

  2. Thanks for the History lesson. I have studied this before and I forget most of it as the years pass. I need to right this down and I will use your comments as the starting point.

    I became worried of the effect of a FIAT monetary system when Continental Illinois Bank collapsed overnight in 1984. Did a little study then (and if I remember correctly) there was seven instances in written global history of a FIAT monetary system (over thousands of years). The previous six failed and our global FIAT monetary system is the seventh.

    I remember back then asking a wise smart man what was our chances of "this time our FIAT system will be different". He responded with something to the effect that human emotion has not changed, we still struggle with the same faults.

    Once again, THANK YOU for your insights!