This morning the European Central Bank tried something different. As Bloomberg reported:

Draghi Takes ECB Deposit Rate Negative in Historic Move

The European Central Bank cut its deposit rate below zero and said it would announce further measures later today as policy makers try to counter the prospect of deflation in the world’s second-largest economy.

ECB President Mario Draghi reduced the deposit rate to minus 0.10 percent from zero, making the institution the world’s first major central bank to use a negative rate. Policy makers also lowered the benchmark rate to 0.15 percent from 0.25 percent.

The promise of further measures today “has stoked up hopes that the ECB is going to unleash a huge bazooka on the market in the press conference,” said Philip Shaw, chief economist at Investec Securities Ltd. in London. While he thinks that quantitative easing is “very unlikely” now, “it may well be that what the ECB just said is stoking up hopes that QE could be on the cards after all. ”

Later in the day, Draghi fleshed out his thoughts in the aforementioned press conference. From Business Insider:

Mario Draghi Explains The Decision

In his introductory statement, Mario Draghi unveiled targeted longer term refinancing operations (TLTROs). The initial size of TLTROs is about €400 billion and all TLTROs will mature in September 2018, or in about 4 years. Two successive TLTROS will be conducted in September and December 2014. “From March 2015 to June 2016 all counter parties will be able to borrow quarterly up to three times the amount of their net lending to the euro area non-financial private sector, excluding loans to households,” said Draghi.

The ECB is “intensifying preparatory work for outright purchases in the ABS [asset backed securities] market.” It will also suspend its weekly securities market program (SMP) sterilization.

The Q&A has begun. Here are the key highlights:

• There will be additional reporting requirement to ensure lending goes to real economy. For all practical purposes the ECB has reached the lower bound of rate policy, Draghi says.

• “The main reason to commit to sterilization by my predecessor first and by myself later was based on the effects that this additional liquidity might have on inflation,” says Draghi. “This decision takes place in a background characterized by low inflation, weak recovery and weak monetary and credit dynamics, that’s the reason for suspending this commitment.”

• “Being able to have unanimity on such a complex set of instruments means a very very extraordinary degree of consensus,” says Draghi. “What is in this TLTRO that makes it different? The cost obviously, it is very low, the term maturity is four years, and the termination that this money not be spent on sovereigns and on sectors that are already experienced or have just come out of a bubbly situation, that’s what in it.”

• We don’t see deflation says Draghi.

• “There is a deep misunderstanding here. The rates we’ve changed are for the banks, not for the people,” says Draghi. It’s wrong to think we want to “expropriate savers. …The concerns of savers should be taken very seriously.” Draghi however adds that the decision to lower rates for households is the decision of banks, not the ECB.

Some thoughts
Anyone who finds this surprising hasn’t been watching Europe’s inflation numbers. As most of the eurozone including, recently, Germany slipped towards deflation, it was clear that the European Central Bank would have to launch a new currency war offensive, and soon. So here it is: negative interest rates on bank excess reserves (though not yet on consumer bank accounts) along with direct infusions of cash into the banking system.

This will have a modest effect on bank lending and economic activity, but it won’t stop the eurozone’s downward spiral because liquidity doesn’t fix insolvency. In other words, if the system’s collateral isn’t as valuable as the debt it supports, then the system is in trouble. And coercing banks into making more loans against inadequate collateral will not help the situation.

So the next, equally inevitable stage in Europe’s offensive will be some form of QE, and apparently the ECB has decided that asset backed bonds will be the instrument of choice. The idea is that by buying, say, mortgage backed bonds with newly-created euros, the ECB will be able to direct those euros back into the housing market, which will in turn get people spending again. If this sounds familiar, it’s the script the US followed in the first half of the 2000s, which lead to the housing bubble and the subsequent crash.

But before this bubble bursts, the euro will fall due to soaring supply, which is the same thing as saying that the dollar will soar. This will be deflationary for the US, producing a string of “unexpected” misses in corporate earnings, GDP and inflation, and will leave Washington with no choice but to respond with renewed debt monetization and money printing and in all probability negative interest rates of its own. And so it will go, until we figure out that depreciating fiat currencies against each other is a zero-sum game that simply makes the rich richer and everyone else much poorer.

One would expect gold to be the main beneficiary of crazy policies like negative interest rates, and it did pop on Draghi’s news. But the ongoing manipulation of precious metals prices makes this far less of a sure thing than theory and common sense would indicate. Fundamentals always win in the end, but in a world of manipulated markets the timing is completely unknowable.

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Stocks: the leading American indices (S+P 500, DJIA, DJT) closed at new All Time Weekly Highs…again…as did the German DAX and the Dow Jones World Index…which is up nearly 300% from the lows it hit in 2009.

Record high stock buy-backs in the USA…VIX at 7 year lows…Central bank money printing has been a wonderful thing. Stocks look to be headed higher…anticipation that the ECB may go to negative interest rates to provide stimulus to the European markets is fuel for the fire.

Bonds: Yields continue to fall with the 30 year Treasury at the lowest yield in a year. Bond market sentiment: no central bank tightening anywhere on the near term horizon…and if there is any tightening in the distant future it will be cautious.

Everybody and his institutional dog was short bonds into year-end 2013…we are clearly seeing short covering as 2014 progresses and “rebalancing” from stocks into bonds (Gartman estimates as much as $500 Billion switching from stocks to bonds on institutional rebalancing.) Sentiment is that global growth is weak…this inspires bond buying…also geo-political concerns inspire bond buying….and…IF the stock market had a “correction” bond buying would increase…short covering could become intense.

Currencies: We’ve had a Daily, Weekly and now a RARE Monthly Key Reversal Down in the EURUSD. The US Dollar index is making gains…after hitting a 14 month low in early May. Markets await a much anticipated ECB meeting next week…are they are finally going to do something?…expectations are that they may move to negative interest rates…however, if they sit on their hands (again) Euro may pop on short covering…providing a good opportunity to sell it short.

Gold: In a liquidation phase…Open Interest fell on big volume this week as prices took out the April/May lows ($1270)…gold market look set to challenge the 2013 lows of $1180. Silver is even weaker…closing at a weekly 4 year low.

Crude:  WTI rallied from $98 in early May to a high of $104.50 this past week. $105 has been a “roof” on prices on 3 separate occasions over the past year. Supply/demand fundamentals appear bearish (Schachter) but prices are at risk of a geo-political shock which could reduce supply…however…a perception that supply is growing while a weakening global economy reduces demand could pressure prices lower.

Our Trading positions:

Stocks: No positions…looking to get short on the first signs that the rally is running out  of steam…patience may be required!

Bonds: No positions…might short them if they jumped higher on a break in the stock market.

Currencies: 1) We’ve had long US Dollar positions on for over a month. Looking to add if the Euro jumps on “no action” from the ECB…anticipating a long term bull market in USD.

2) Long CAD against AUD. Basically a bullish bet on America, bearish China.

Gold: We’ve maintained short gold positions for 3 months…waiting for this break…anticipate more selling…will try to add to our short position.

Crude Oil:…short…new position this week. Will cover if WTI trades up through $105…the supply/demand story is compelling…large speculators are heavily long…could see prices break $20 or more.

Copper:…short…new position this week….anticipate weakness from other metals to hurt copper…also anticipate weaker Chinese demand. Copper rallied 30 cents from 4 year lows the past 2 ½ months…but it’s been in a downtrend for 3 years…looking for that downtrend to continue…could see 50 cents or more on the downside.

What does the truism ‘stupid is as stupid does’ mean? It means an intelligent person who does stupid things is still stupid. This saying comes from the movie Forest Gump, used as a metaphor to show that despite his lack of intellectual prowess, Forest did smart things, and prospered in life. Fast forward to today, and we have another instance this saying fits well in describing North American precious metals investors, few and far between as they are, which adds further layers of irony onto the situation. Because not only are precious metals investors a distinct minority in the West, with fiat currency regimes running amuck since we went off the Gold Standard in ’71, the few there are involved in precious metals today participate via derivatives of the commodities (gold and silver), markets developed since then to aid in price management by creating artificial supply. Here, we are speaking of futures, ETF, and the derivatives of the derivatives – options.

In a related vein, while gold and silver shares expand the universe of precious metals ownership past the less than 1% of American’s thought to own bullion, still, it’s plain to see the West’s investing public is not interested precious metals – not with manias in tech stocks, and bitcoin, and Kardashians. So in understanding the implications of this embroil, where the truism ‘stupid is as stupid does’ definitely applies, one should also realize the degree of future economic instability and financial pain for the average American will be substantial. Because Americana is broke and has sold its gold, and now depends on the printing press and any other form of fraud it’s thought will fly, which will eventually bring total and complete collapse to the good U S of A, as the world is increasingly realizing the dollar($), as is the case with all fiat currencies, is a fraud. But hey – there are a lot of stupid and desperate people out there, so the farce goes on, with the Fed and their ilk still looking like sugar daddies.

Because if people were forced to live within their means, not borrowing future earnings on credit for present consumption, you would have a lot less investment bankers and a lot more gardeners than is currently the case. Of course time stops for no man, so in spite of efforts to avoid such an outcome it’s coming – and it’s coming fast now because the situation is out of control. Just because the American public chooses to live in a dream world, please, don’t expect everybody to embrace your magnificence with the same bravado. Certainly the Russians have made it known they have no love for America. Russia wants to get paid for its wears, and is no longer willing to subsidize the West’s inflated living standards by accepting non-market driven prices for its oil and gas, evidenced by recentnew deals inked with eastern allies who share the same views and are willing to pay ‘fair market prices’. Because of this, Europe (the West) will be forced to either pay up, by as much as 50% more, or go without.

For the West, the bad news does not end there however, nor the stupidity. Of course you would never know it looking at the markets right now – or if you asked a status queer. Stocks are up and interest rates down, along with gold of course. Because who needs gold with such a bright future dead ahead right? So you would think speculators would be betting on healthy and growing economy based on this picture, but nothing could be further from the truth. As you may know from following my sentiment studies, where even though the status quo would have you believe ‘the future’s so bright you gotta wear shares’ because of the ‘recovery’ since 2009, speculators remain stubbornly skeptical regarding the stock market’s prospects, evidenced by open interest put / call ratios generally far exceeding unity, not to mention short interest (viewed here) for the DIA and cubes (QQQ) have both shot up to two year highs, which is of course a large part of the real reason stocks are higher. (i.e. because of the perpetual short squeeze.)

So what’s the bad news then? And what about the stupidity? With the distraction of a veracious stock market for the public to excess over, Western authorities, attempting to maintain the illusion of stability, have been increasing the export of meaningful quantities of gold to the East in order to keep prices subdued, where it is speculated supplies are now running short, which is the bad news for the status quo. What’s worse, this is also the stupidity we were alluding to above, because one need realize that the West, and more specifically the US, is dishoarding itself of all its official gold reserves, which will become a ‘sticking point’ when it becomes necessary for sovereigns to independently audit such reserves in the future in order to set trade currency ratios. The stupidity part is the US thought it can continue to lie about their official gold reserves, which at present are on the books as the largest in the world, without the rest of the world never calling their bluff (yet), predicated on keeping gold subdued in negating the ‘barometer effect’. Therein, and in this regard, it should be noted that gold has never been cheaper against the US monetary base – never. (See Figure 1)

This is because like a junkie, the West is addicted to all of the vulgarities associated with their fiat currencies (free money), centered in the Seven Deadly Sins. What’s more, if you think of the West, with the US at center, and specifically the Fed, as a fiat currency pushing drug dealer, then one should realize the golden rule has been broken, where they are getting high on their own supply, and have been doing so for over 100 years. The fact of the matter is when you debase the currency, the fabric of society is not far behind. So again, the bad news is the West is boxed into a fiat currency corner (dependency) on the verge of collapse that will be triggered when they stop sending gold to the East, which again, is quite possibly getting very close based on observations associated with dated gold bars now being sent to Switzerland for refining. This is why Western authorities continue with their Houdini act. Please, look over here (at the stock market), while we debase the currency, hoping the ‘stupids’, which they think is you and me, don’t notice. (See Figure 2)

And for the most part they have been surprisingly successful over the past few years with the combination of ZIRP, pumped up (falsified) economic statistics, and rigged market mechanisms, which in the end, have produced the desired results. (i.e. higher stocks and lower commodities / precious metals.) Again, for those of you who don’t follow my ‘true sentiment’ studies, where we focus on open interest put / call ratios because 1) they are not commonly followed and therefore not acted on by the hoards of speculators; and, 2) because open interest put / call ratios measure exposures traders / hedgers are willing to hold overnight, meaning these are ‘high conviction’ trades. The net result of this is apart from the ratcheting higher of stocks that the bureaucracy’s price managers would do anyway, they have a wind at their back in this regard because common sense would tell you stocks are overbought and should be lower; and, the opposite for precious metals. So, accordingly speculators predominantly / stupidly bet with these propensities, time after time, enabling the perpetual short squeeze in stocks (selling of precious metals), as the algos (machines) exploit these inefficiencies devoid of emotion. (See Figure 3)

As you can see above however, these tactics (algo related buying and selling) have consequences, which in the case of precious metals, and more specifically the Rydex Precious Metals Fund, which is a precious metals stock fund, has had the effect of selling it out, not that it can’t be cut in half again in a ‘liquidity event’, which as you may or may not know, is a distinct possibility. (i.e. if not probable.) Such an outcome would be similar to the year 2000 sequence, where precious metals stocks were already ‘washed out’ when the broad stock market (provider of liquidity) topped out in March, but were still cut in half over the next six-months as margin debt related selling produced a ‘scorched earth’ outcome. And while its true investors have been raising cash lately, which will likely delay such an outcome (perhaps in the Fall), still, such a possibility should be kept in mind. With investors so in tune with such data these days one does wonder just what needs to happen to trigger a rout, especially with all the liquidity floating around, which is undoubtedly the question of the hour – fuelling the present mania to dynamics not witnessed previously.

For the rest of the story, please visit our site and subscribe.

We have been providing this service for over ten years now, and our subscribers have been able to stay ahead of the curve in trading the various markets we cover, with a focus on US equities and precious metals. Coverage includes cutting edge fundamental, technical, and sentiment-based studies that have proven pivotal for our subscribers throughout the years.

So, give us a try. One will not regret it if looking for insightful big picture thinking that keeps you on the right side of the trade.

Good investing all.

Captain Hook

The above was commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, May 20th, 2014.

Treasure Chests is a market timing service specializing in value based position trading in the precious metals and equity markets, with an orientation primarily geared to identifying intermediate-term swing trading opportunities. Specific opportunities are identified utilizing a combination of fundamental, technical, and inter-market analysis. This style of investing has proven to be very successful for wealthy and sophisticated investors, as it reduces risk and enhances returns when the methodology is applied effectively. Those interested discovering more about how the strategies described above can enhance your wealth should visit our web site at http://www.treasurechests.info.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Do your own due diligence regarding personal investment decisions.

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To be clear on the whole matter, we must realize that fundamentally there can be only two views as to the purpose of money. There may be a thousand intermediate shades of opinion, but, eventually, one is forced back into the position of having to decide whether money exists for man, or man for money; whether money is merely a symbol of real wealth enabling commodities and services to be exchanged, or whether it is the determinant of all industry by the criterion of which production and distribution must be regulated…”

– William Joyce (“Lord Haw-Haw”) from his book Twilight Over England

…the first chart in this article HERE tells a remarkable story in itself  – Editor Money Talks

Quotable
“The European single currency is bound to fail, economically, politically and indeed socially, though the timing, occasion and full consequences are still unclear […] The most important priority for non-Europeans is to see that European policies do as little harm as possible now or later to the world economy”.
                                                                               
                                                                                                                 Margaret Thatcher, 2002

Commentary & Analysis

FREE TRIAL: Follow up on GBP/USD…a winning trade.

Last Thursday, 22 May, I told you and showed you this:

The pound has been on a tear as you likely know; for good reason given the surprising rebound in the UK economy.  Technically a case can be made the high is in place at 1.6996—time will tell.  But given how far and fast the currency has run against the dollar, a decent and “playable” correction would be no surprise.  That’s why Black Swan Forex subscribers entered this trade short today—the risk/reward looks quite good.  Take a look at our hourly wave chart of GBP/USD:

Here was the recommendation to my Black Swan Forex subscribers on that same day:

RECOMMENDATION: Selling GBP/USD below 1.6855 [last 1.6865]

22 May 2014/7:04 a.m. ET 
Issue #1131

I suggest you sell GBP/USD below 1.6855; risking to 1.6906; targeting 1.6552

Jack Crooks

Black Swan Capital

Today I told our subscribers to lock in some open profit, as here is what GBP/USD is doing now; it is testing key support at 1.6729 (so we have about 135 pips open profit on this position now):

We recently grabbed about 78 pips profit on a short AUD/USD position and have re-entered this morning; we have some open profit in short EUR/USD and looking for a gift from Mr. Draghi and are still like USD/CAD long, though we are taking some heat there. 

If you would like to sample our forex service, I will set you up for a two week trial and you can see more of what we do and determine if Black Swan Forex could be a resource to help you make real money in the currency market.

Please click here to request a free trial. 

We simply need your name and email address.

Thank you.

P.S. The US dollar reserve status and case for a continued bull market webinar went well last Friday.  I will be sending a link to view the recording once it is setup by TopStep Trader.

Regards,

Jack Crooks

President, Black Swan Capital

www.blackswantrading.com

info@blackswantrading.com

Twitter: @bswancap