Euro – Cycle Inversion or Phase Transition

Domino-PreventingTheChainReaction

QUESTION: Martin

In your latest post you go into very good detail of how the Euro continues to be strong(although it has been noted the model expected it to fall) and that when the Euro does fall it will take the European markets with it. Are we to assume that if the dollar does rally it will take the DOW with it as well?  Any update on the cycle inversion?

Regards,

JCL

ANSWER: This whole extension of the markets is early. But it is not yet complete and it is still not certain if we are getting the Cycle Inversion or the Phase Transition.We may not know this until February. Ideally, the Euro would normally have declined into Jan/Feb and so should have the share markets. We warned last summer that the Euro could rally into Jan/Feb, which was based on the preliminary capital flow trends. That has been the case, but the euro has not blasted up to new highs – it has just traded sideways while remaining strong thanks to deflation yet stuck between the Reversals at 14700 and 12950. It has neither elected Bullish or Bearish Reversals. The model has provided no buy or sell signals as of yet.

The share markets have rallied. But look closely and you will see the Dow just backed off with January. So it is not yet definitive. February is a turning point. We should get the opposite trend thereafter into the Spring. The timing never changes which is why I specify these are TURNING POINTS not specific highs or lows. It is a chain reaction process of extraordinary dynamic complexity. Absolutely every market movement around the world combines into creating the OVERALL trend. Nothing moves in total isolation.

If we get the Cycle Inversion early, that would push the rally beyond 2015 and we may then see the market rising when the ECM declines for capital would then realize government is the problem and it then has no choice but to move into private assets. The question is do we get this now or on the next wave where Panic Cycles are already projected for 2024 the top of the next wave.

To some extent, this is what happens in a hyperinflation of a revolutionary government where people neither hoard cash nor keep money in banks. The hyperinflation is spending money as quickly as you get it so the VELOCITY of money rises tremendously. Deflation is the hoarding of money and assets. This has nothing to do if money is fiat or not since in truth all money is fiat when when it is gold coins. The gold standard was fiat where the government dictated gold was $35 and never changed it. In that case, they undervalued gold. Fiat historically has worked both ways and the Swiss pegging the franc to the euro is again a dimension of fiat dictating the value of money.

We are not in a hyperinflationary situation but deflationary where established governments are trying to hold on to power and hunt down everything and everyone in the private sector. This is the opposite of a revolutionary government that has defaulted on all national debts of the prior government. They have nothing to pay off and no assets so they print to cover expenses. We are in the nasty government phase where as Herbert Hoover said when a government becomes enraged, it will burn down the bard to get the rat.

Capital is already shifting from bonds into equities in the USA at the pension fund level (not retail) because they have no choice. We are UNLIKELY to see the Dow decline when Europe fails, but this will be more akin to the Nikkei rising into a bubble for 1989 after the 1987 US Crash.

1900$X-M 1931 Sovereign Debt

We have a convergence of several trends. First there is the chaos in Europe from the insanity of government self-destructing the economy, but that domino has not yet fallen over. When it does, it will send cash pouring into the dollar as it did in 1931. Secondly, we have the crisis in pensions that is driving money away from bonds and into equity just to survive, The third major aspect yet to materialize will be the classic bubble with the retail market buying the highs on hype. Thirdly, there is the change in energy that has indeed impacted the global economy as 15 refineries in Europe have been forced to close as the USA no longer imports from Europe.