I posted this at Rambus and am pasting this to the tent for those interested:

I thought this was a good time to review some principles and market dynamics and to give what amounts to a Bull market pep talk

First off you should know I am not and have never been a gold bug perma-bull. I was one of the early bears in the last bear market and stayed bearish all the way through to the end, unwaveringly. I actually stayed bearish 3 weeks too long, but saw the light by the first week in February. (thank you Spock for the polite nudge).

I do believe we are in a bull market which started in December 2015 for gold and January 2016 for the stocks. I have written on why I believe this correction of the first leg up has turned so brutal, its likely because the first leg up is early in the 8-year gold cycle so the wind is still in our face. It should swing around and be at our backs by Feb 2017. So until then we likely will simply chop or could even, worse case, go down enough to double bottom….ouch.

But, I suppose it started early because its going to be so strong that it just couldn’t wait, but once it got going it got too far ahead of the cycle.

I continue to recommend one hold his core position through all of this because no one really knows, and as I like to say “you got to be in it to win it.

So things have become somewhat discouraging for us bulls and our convictions have been shaken. So its time to examine the difference between conviction and overconfidence time to reexamine our basic premise. First let’s review the quote our new guy, Wazcam reminded us of since it describes right where we are in this early stage bull market.

*In the first stage of a bull market, stocks begin to find a bottom and quietly firm up. When the market starts to rise, there is widespread disbelief that a bull market has begun. After the first leg peaks and starts to head back down, the bears come out proclaiming that the bear market is not over. It is at this stage that careful analysis is warranted to determine if the decline is a secondary movement (a correction of the first leg up). If it is a secondary move, then the low forms above the previous low, a quiet period will ensue as the market firms and then an advance will begin. When the previous peak is surpassed, the beginning of the second leg and a primary bull will be confirmed.*

So here is the pep talk:

Let’s play a game, a mental exercise of sorts. Let’s say we are appointing you as the country’s financial czar. You’ve been granted the powers currently embodied by not only the FED Governor and board, but also that of the Sec of Treasury and the Congress. The POTUS has your back and will rubber stamp whatever you want to do. You have full authority in shaping policy. You can’t perform miracles of course but you can design policy which will determine the eventual course in the economy. So here is your task:

Design an economic policy that will lay the foundation and later continue to fuel the biggest bull market in gold and gold stocks in history. We all know that economic policy takes years to have its effect and to work its way through the economy due to the lag effect.. Recall, back in 1980 when Ronald Reagan became President his policies took 2-3 years before they had any positive effect on the economy. Once the initial post election Reagan Rally exhausted itself a vicious bear market settled in lasting 18 months and didn’t bottom until Aug 1982. Since markets discount the economy by about 10 months it took another year before the positive effects were visibly evident. So that was about a 3 year lag.

OK, so what would be some of the policies you would come up with to kick start a bull market in gold somewhere down the road?

1. First and foremost you would create a massive money printing program. One that even Rudolf E. Havenstein (ReichsBank President 1908-1923) would be proud of. It would have several phases with the last one nicknamed something like “QE to infinity”- Check

2. You would make the bond market so ridiculously over valued as a result of purchases by a broke government (QE) that once it rolls over it would precipitously decline for years to come- Check.

3. Before the bond market finally peaks you would introduce a policy of negative real interest rates, just to make sure the public takes all of their money out of the bank looking for somewhere else to put their cash.-Check.

4. Once that is done, you declare a war on that cash. Anyone who goes into a bank asking for it you treat him like a criminal and report him to the IRS via suspicious reporting forms.- Check.

5. With this done, you now engage in psychological warfare against the average saver who after fleeing the banks hides his currency in his home while serendipitously realizing he can stay below the radar by withdrawing using ATMs. Your first act is to have the Indian government declare certain small denomination bills no longer legal tender under the “if it can happen there it can happen here principle”– Check.

6. You would artificially depress the gold price through a paper contract scheme for years so as to dry up actual mine output due to uneconomic conditions so that when the bull market finally does come supply would be curtailed for years, thus insuring years of limited supply thus powering the trend to the upside-Check

7. Along these lines you would pick up the phone and use your pen (Obama) to sick the EPA onto any prospective new project and kill their permits and stop their development cold, thus limiting supply for years into the future. Can you say Northern Dynasty…Check.

8. After completing this policy mix you kick back and browse through the latest OMB circular where you find that the first cold reality the new President Trump will run into is the fact that 83% of the governments budget is set by law thus limiting his options. You also see that the governments debt ceiling is reached in March 2017. The governments budget baseline projects 35 Trillion of debt by the year 2025 and that’s assuming there is no recession between now and then. We are currently 94 months w/o a recession where the longest in history is 118 months and the average is 60 months. A recession of course will blow out the budget. You reflect on the fact that Reagan found it difficult and when he started the government hadn’t even crossed the $1 Trillion debt level yet. I am behind Mr Trump and wish him good luck….he will need it.

So that in theory is what you would do to lay the foundation for a rip roaring bull market in gold in the future years to come….Oh, I see you have been very busy already as you have already done all of that!

So keep the faith knights. The bull market has begun, but the 8 year cycle needs to finish its turn and put the wind at our back. Patience please. Use these next few months to build out your portfolio for the long term. You don’t need to watch the scoreboard all the time. Its ok to see your stuff under water as that’s what shakeouts do. Everyone suffers drawdowns from time to time. This could very well be the aberrant “gentleman’s entry” Don’t get discouraged and don’t forget to be right-sit tight.

Side note: For those who want it straight-up, my point here is that you couldn’t design a more focused policy to insure the long term outlook for a bull market in gold than what the FED has already done. It’s just that these things take time to play out.
Said differently Ben Bernanke IS Rudy Havenstein. Our current era is a monetary fractal of the 1914-1945 timeframe.