by JDH on February 18, 2012

I like sardines.  My mother, who left this earth 12 years ago, also liked sardines. As far as I know we are the only people in my family who liked sardines. My wife doesn’t. My kids don’t (although they have never tried them, presumably because the strong smell prevents them from getting close to them).

Sardines are very healthy. They are high in Omega-3 fatty acids, which are good for your heart, may help reduce the chances of getting Alzheimer’s disease, and sardines are a good source of vitamin D, B12 and calcium. Unlike large fish that live long enough to absorb mercury and other crap that we dump in our oceans, sardines are small and young, so they don’t have time to absorb much bad stuff.

It’s not the health aspects that cause me to eat them; I like the taste.

So, about two weeks ago, I decided to have sardines for lunch. I was working at one of my satellite offices for the day, to save the hassle of having to dispose of the sardine can, I packed them in a plastic container (what we used to call Tupperware), and put them in my insulated lunch bag.

Big mistake.

By ten o’clock in the morning I noticed a strange, not-entirely-pleasant order in my office. After some searching I realized it was my lunch bag. To avoid the smell, I took my lunch bag and placed it in the back storage room at the other end of the building. By lunch time, two hours later, the storage room stank of sardines.

I ate them, and they tasted great.

Little did I realize that sardine smell can permeate everything, and it’s virtually permanent. That night I emptied by lunch bag, and realized the smell was everywhere. I removed the removable lining and washed it, and washed the rest of the lunch bag as well as possible. It still stank, so I put in the garage (in the sub zero temperatures of a Canadian winter) for the night. It still stank in the morning. And the next day. And the next.

The smell is gradually fading, but it appears I will have to invest my cash in a new insulated lunch bag, since it does not appear that the smell will ever leave.

Time for some smelly sardine analogies

This experience leads me to draw many conclusions.

First, a few minutes of pleasure can lead to days of smelly pain.

Second, it’s often not until much after the fact that you realize the full consequences of your actions.

Conventional wisdom in the U.S. economy was that home ownership was a good thing, and therefore encouraging people to buy homes, even if they couldn’t afford them, was therefore a good thing.  It tasted good at the time.  But today, many years after the peak in 2008, we can still smell the results of that foolish policy, as the number of homes “under-water” in the U.S. reaches record levels.

And yet, with the housing foreclosure stench permeating the market, the markets are doing great:

The massive double top that lead to the mini-crash last fall has been exceeded.  The peak in May, 2011 of around 12,250 is but a distant memory, as the Dow continues to make new highs, and is now in spitting distance of 13,000.

If all you saw was this chart, and you knew nothing else, you would have no choice but to conclude that this market is a strong buy.  The overhead resistance is gone, and happy times are here again.

The sardines taste great, and they are good for you!  Wait a bit, and you’ll smell it.

That’s my worry about this market.  It looks great.  Interest rates are low.  The Greek problem is solved! (I know, I read it in the newspaper). And yet you can’t take the smell out of a sardine.  You can’t ignore high unemployment, no job growth, high foreclosure rates, and massive levels of personal debt.

So why do the markets look so good?

Could it be that this is an election year?

Could it be that everyone knows if the president’s approval rating is about 50% he will win the election?  And that his approval ratings are entirely dependent on how the economy is going?

Is it possible that the Powers That Be, or the Plunge Protection Team, are doing everything in their power to keep the balloon inflated until November so that things look good and he gets re-elected?

Is that even possible?

I don’t know.  I just write a blog, and expound random theories.

How’s gold doing?

Not bad.  The long term uptrend remains intact, and gold is up 10% year to date.

However, we are also experiencing a series of lower highs, so something’s “gotta give” at some point: Either we break out to new highs, or we trend down towards the blue uptrend line.

If in fact the Bib Boyz are holding up the stock market to make things look good, it naturally follows that they are depressing the price of gold to make it look less appealing.  They don’t want the price of gold rocketing to new highs, since that would only serve to confirm that we are all screwed.

What smells most in the gold market is not the price of gold, but the action in the underlying stocks.  It’s almost as though someone wants to keep them depressed, to prevent the mania from taking hold.

Here’s G.TO – Goldcorp Inc., a solid blue chip gold stock, that had a decent week:

I drew a bunch of lines on the chart, but the lines meaning nothing.  The stock price is virtually unchanged over the last year, and since the most recent peak around $55 in December it’s obviously in a downtrend.

The uptick on Thursday was thanks to decent results and an increased dividend, but the trend since December is still down.

Again, it would appear that the Big Boyz want to manipulate us out of gold stocks, to disguise the underlying strength on the physical metal.  If they can keep pushing the paper lower, and drag stocks with it, no-one will notice how bad the underlying economy really is.

They hope that no-one will notice the smell.

So, this week, on strength, I began to sell.  I’m now sitting at 40% cash, and I plan to build my cash position more.

Why? Because I worry that this house of cards will collapse at some point, and if it does I’d prefer to be in cash, and physical metal.

Hopefully then I won’t have to clean up the smell.

Thanks for reading; happy holiday on Monday; see you next week.


{ 1 comment… read it below or add one }

kilowatt February 18, 2012 at 4:05 pm

Me too love sardines .. and also kippers …!!
Using your analogy, finding that the smell of the US debt/deficit is getting stronger, because of the politicians who who just won’t deal with the problem because their voters will not accept the medicine. The same applies to Europe but the smell is reduced because of the distance. Somehow the Greece crisis has increased the masses’ awareness so maybe we are closer to break point or maybe some action; like you seriously reducing my market exposure each time the market goes up
I try to ready John Maudlin most weekends; I find that he is one of the clearest writers about and has a good practical understanding of the problem: