The Federal Reserve Board finds itself back in a quandary of its own making. When Fed chair Janet Yellen pushed through an interest rate hike this past December, she confidently cited an "economy performing well and expected to continue to do so." The Fed set the stage for more rate hikes in 2016. But something went awry along the way - namely, the Fed's upbeat forecast.
On January 12, America’s central planner-in-chief gave his State of the Union address. The president promised nothing less than to feed the hungry, create jobs, shape the earth’s climate, and make everyone a college graduate. There’s nothing new here, though. We’ve heard variations of this silly song and dance every year under both Democrats and Republicans. The president lambasted naysayers as fear-mongers that were too partisan to admit we have a booming economy. The fact that the Dow Jones cratered roughly 9 percent in the same thirty-day period President Obama gave his address did nothing to quell Obama's optimism about America’s future. In fact, he labeled the US economy “the strongest and most durable in the world.”
Despite our leader’s unwavering confidence in America’s fortunes, a quick peak under the hood reveals a pretty grim state of American commerce.
1. The Federal Reserve and US Government Have Warped the American Economy
In just the past decade, the Federal Reserve’s balance sheet has grown from roughly $800 billion to over $4 trillion. Our central bankers engaging in massive asset purchases to pummel interest rates downward is not news to anyone. We’ve been living in a world of falling interest rates since the 9/11 terrorist attacks. Yet, few mainstream economists have taken a good look at the destructive effects of this unprecedented monetary expansion. The calamitous distortions Fed policy has created for actors on both Main Street and Wall Street since 2008 have laid the groundwork for yet another crash.
Low interest rates stemming from a growing money supply are the only reason the US government has managed to service its gargantuan debt in recent years. The Congressional Budget Office itself has pointed out that even a slight rise in interest rates could potentially result in anywhere from $700 to $900 billion in annual tax payments just to service the interest on our debt. At this pace, paying the republic’s creditors will become our largest government program in no time. Future Americans might go to work and have 50 percent of their paychecks seized not to pay for government services, but simply to service debt forced on them by central planners.
But public debt is far from the only distortion artificially low rates have wrought. Mortgages, auto loans, credit cards, and student loans have ballooned total consumer debt to $12 trillion, and this number is only trending upward. The easy credit economy manufactured by central bankers has obliterated American savings and replaced them with debt. The average American consumer has less than $1,000 in his bank account. He lives praying for no car trouble or a broken arm. There was a time when Americans were rewarded for saving their earnings with double-digit interest rates but this is a distant memory. If Americans want to earn a return nowadays they must play the central-bank sponsored stock market casino. In fact, calling the stock market a casino is a little insulting to casinos — at least Blackjack has consistent rules.
Last week, I discussed the boost the market received as the BOJ made an unexpected move into negative interest rate territory combined with end of the month buying by portfolio managers. To wit:
“However, the announcement by the Bank of Japan (BOJ) to implement negative interest rates in a desperate last attempt to boost economic growth in Japan was only the catalyst that ignited the bulls. The “fuel” for the buying came from the end of the month portfolio buying by fund managers.” But more importantly, was the push higher by stocks that I have been discussing with you over the last couple of weeks. To wit:
“Over the last few weeks, I have suggested the markets would likely provide a reflexive rally to allow investors to reduce equity risk in portfolios. This was due to the oversold condition that previously existed which would provide the “fuel” for a reflexive rally to sell into.
I traced out the potential for such a reflexive rally two weeks ago as shown in the chart below.”
Last year was a tough one for investors. Gold was down 10 percent. The Dow Industrials fell 2.5 percent, and most bond indexes finished down by at least that much.
One institution that performed remarkably well in 2015 was the Federal Reserve. It just finished its most profitable year on record. The $100 billion in net income earned last year was a slight improvement over the previous year. That total was also roughly three times higher than the Fed’s income from 2007, the last year before it initiated its Quantitative Easing programs in the wake of the financial crisis.
The insidious nature of the war on cash derives not just from the hurdles governments place in the way of those who use cash, but also from the aura of suspicion that has begun to pervade private cash transactions. In a normal market economy, businesses would welcome taking cash. After all, what business would willingly turn down customers? But in the war on cash that has developed in the thirty years since money laundering was declared a federal crime, businesses have had to walk a fine line between serving customers and serving the government. And since only one of those two parties has the power to shut down a business and throw business owners and employees into prison, guess whose wishes the business owner is going to follow more often?
Willem Middlekoop, author of The Big Reset – The War On Gold And The Financial Endgame, believes the current international monetary system has entered its last term and is up for a reset. Having predicted the collapse of the real estate market in 2006, (while Ben Bernanke didn't), Middlekoop asks (rhetorically) -can the global credit expansion 'experiment' from 2002 – 2008, which Bernanke completely underestimated, be compared to the global QE 'experiment' from 2008 – present? - the answer is worrisome. In the following must-see interview with Grant Williams, he shares his thoughts on the future of the global monetary system and why the revaluation of Gold is inevitable...
It is a hybrid of national security and law enforcement agencies: the Department of Defense, the Department of State, the Department of Homeland Security, the Central Intelligence Agency and the Justice Department. I also include the Department of the Treasury because of its jurisdiction over financial flows, its enforcement of international sanctions and its organic symbiosis with Wall Street.
All these agencies are coordinated by the Executive Office of the President via the National Security Council. Certain key areas of the judiciary belong to the Deep State, such as the Foreign Intelligence Surveillance Court, whose actions are mysterious even to most members of Congress. Also included are a handful of vital federal trial courts, such as the Eastern District of Virginia and the Southern District of Manhattan, where sensitive proceedings in national security cases are conducted.
The final government component (and possibly last in precedence among the formal branches of government established by the Constitution) is a kind of rump Congress consisting of the congressional leadership and some (but not all) of the members of the defense and intelligence committees. The rest of Congress, normally so fractious and partisan, is mostly only intermittently aware of the Deep State and when required usually submits to a few well-chosen words from the State’s emissaries
This week reminded me of the recent AFC Championship game as the Denver Broncos defeated the New England Patriots in the final seconds of the game by foiling the 2-point conversion attempt. The market, like the Patriots, struggled all week with any ground gained one day, lost the next.
Fortunately, for investors, instead of the final play of the game being an interception sending the Patriots into defeat, it was the BOJ completing the conversion and sending the “Bulls” on a rampage on Friday.
However, the announcement by the Bank of Japan (BOJ) to implement negative interest rates in a desperate last attempt to boost economic growth in Japan was only the catalyst that ignited the bulls. The “fuel” for the buying came from the end of the month portfolio buying by fund managers. As I wrote Thursday evening:
“But where could that lift come from? The first is month-end window dressing by fund managers after a brutal start to the new year. After much liquidation, fund managers will need to rebalance holdings.
The second is the potential for Central Banks to intervene which could embolden the bulls as further support could temporarily delay the onset of a bear market and recession. Note: I said temporarily. Pulling forward future consumption is not a long-term solution to organic economic growth.
Not to be disappointed, the BOJ announced a move into NEGATIVE interest rate territory to try and boost economic growth in Japan. (Interestingly, however, was the lack of increase in QE.) The announcement was a shock to the markets as the BOJ had just stated last week that negative interest rates were not being considered.”
While on any given day, stocks may tumble or surge as marginal buyers send increasingly illiquid indices lower or higher on ever lower volume, a more important question is what is taking place below the surface: are large holders looking to offload large exposure (by selling), or vice versa.
For the answer we go to Bank of America, which has models to measure precisely this.
The first one, the Volume Intensity Model (VIM), measures short-term accumulation (up volume or buying) vs. distribution (down volume or selling). According to BofA, VIM remains negative across the board since distribution crossed above accumulation in mid-Nov. Accumulation remains low and has reflected a “buyers’ strike”.
Of all indices, the selling is most pronounced among tech-heavy names, with distribution in the NASDAQ highest since Sept. 2011; NYSE distribution is highest since Oct. 2014 with similar extremes on the S&P 500 and Russell 2000.
As BofA's Stephen Suttemeir notes, this is tactical oversold reading similar to the Williams %R and VXV/VIX ratio. However, he adds that "any near-term oversold bounce as a "sell strength" rally as bullish "mean-reverters" take temporary control from more bearish "trend followers". He concludes that "weight of the evidence supports the trend followers."
The simple fact of the matter is that gold is no longer money and hasn’t been treated that way in decades. It is a frustrating and often woeful outcome, but deference isn’t a reason to color judgement. As an investment, which is more like what gold has become, it isn’t all that straight, either. Gold behaves in many circumstances erratically; often violently so. In 2008, gold crashed three times; but it also came back (and then some) three times. The metal remains stuck in some orthodox limbo of duality, sometimes acting an investment while at others, more rarely, as almost reclaiming its former status.
Dreams don't always come true for TV singing show contestants or gold enthusiasts. As Santiago Capital's Brent Johnson explains, precious metals remain in a long and painful bear market... so why continue to own gold? Simply put, despite all the cries of "you suck" and feelings of loneliness and depression, "if you have done your homework" this will lead to conviction because all the reasons to own gold are still there and are now even more compelling...
Contrarians, by definition, spend most of their time bring wrong "until the moment they are not and the big pay off comes."
I recently received an email from an individual that contained the following bit of portfolio advice from a major financial institution:
“Despite the tumble to begin this year, investors should not panic. Over the long-term course of the markets, investors who have remained patient have been rewarded. Since 1900, the average return to investors has been almost 10% annually…our advice is to remain invested, avoid making drastic movements in your portfolio, and ignore the volatility.” First of all, as shown in the chart below, the advice given is not entirely wrong – since 1900, the markets have indeed averaged roughly 10% annually (including dividends). However, that figure falls to 8.08% when adjusting for inflation.
It’s pretty obvious, by looking at the chart above, that you should just invest heavily in the market and “fughetta’ bout’ it.”
If it was only that simple.
There are TWO MAJOR problems with the advice given above.
BALTIMORE – The Dow rose on Wednesday morning… after Janet Yellen made soothing remarks about a “gradual” return to normal interest rates. Then investors must have realized that returning to normal is not on the Fed’s agenda. The Dow finished the day down 99 points.
We haven’t seen normal central bank policy since the Nixon years. Normal is a currency backed by gold, not by PhD economists. Only briefly and episodically, over the last 2000 years, has the world flirted with pure paper or “fiat” money. Every time, the affair was over in a short time… and regretted for a long time.
Everyone knows the Titanic sank in April 1912, and if they didn’t they were reminded only a few years ago at its centennial. Less well known, for good reason, is the novel Futility, written by Morgan Robertson in 1898 years before Titanic had even been conceived. Robertson’s book includes the largest vessel ever constructed and he even offered it the name “Titan.” And much like the real Titanic, Titan carries only about half the lifeboats necessary for all the souls onboard and even strikes an iceberg in the Atlantic closing in on Newfoundland. The physical descriptions of the ship in the novel were eerily close to what Titanic would eventually become; including
Senator Richard Shelby (R-Alabama), the Chair of the U.S. Senate Banking Committee, has announced a hearing on March 3 at 10:00 a.m. to examine “Regulatory Reforms to Improve Equity Market Structure.” To appropriately conduct that hearing, all the lights should be turned out in the hearing room and the senators and witnesses should have to fumble and stumble their way to their seats in the dark, since that’s what American investors have been forced to do since the 2008 crash – a tortuously long seven years of make-believe financial reform.
Following the 1929 crash, whose economic impact was also swift and devastating, the Senate Banking Committee spent the years of 1932 through 1934 holding comprehensive hearings and investigations on the structure of the stock market. The hearings unraveled, day by day, the frauds that the Wall Street titans of that era were inflicting on a gullible public. The initiating Senate resolution to undertake the hearings was worded thusly:
“A resolution to thoroughly investigate practices of stock exchanges with respect to the buying and selling and the borrowing and lending of listed securities, the value of such securities and the effects of such practices.”
As each devious fraud was revealed, the details landed on the front pages of newspapers in bold headlines. That provided the strong public momentum for the Banking Act of 1933, known as the Glass-Steagall Act, to separate the fraud-prone Wall Street bankers from the banks taking deposits from savers.
Where are we now? Dow down 296 points on Tuesday – or just under 2%. Cruz and Clinton win the Iowa caucuses. Oil is back below $30. An election has been described as two wolves and one lamb voting on what to have for dinner.
We’re going to make a difference on election day! Or maybe not…
Actually, there was never any doubt about what was on the menu. An election is really when the wolves scrap over who gets the choicest pieces. To bring new readers fully into the picture… It doesn’t matter who won in Iowa. Major policies are not determined by the voters but by the more or less permanent elite who run the government, aka the “Deep State.”
In observing the enormous triple digit percentage gains achieved amid Crude Oil’s northward thrusts versus its debilitating double digit losses during its major spills, it becomes rather clear why market participants prefer buying low in a newly forming bull market vs. selling short at the onset of a bear market.
On a relative basis, in the not too distant future, a cyclical bottom will form and the long-term trend in Crude will reverse to the upside – providing bullish speculators with yet another rare opportunity at the chance of humongous triple digit upside returns.
The current melt-down of the world's debt bubble is likely to continue in the course of the next months. The secular trend to expansion of credit has morphed into contraction and liquidation. It is my opinion that the new trend is now established and no action by any of the Central Banks (CB) that issue reserve currencies will do anything at all to reverse that trend. Sandeep Jaitly thinks that the desperate reserve-issuing CBs - the US Fed, the ECB, the Bank of England and the Japanese CB - may resort to programs of QEP, by which he means "Quantitative Easing for the People". This quantitative easing will mean putting money into the hands of the populations by rebates on taxes, invented make-work schemes or any other excuse to furnish the people with the famous "helicopter money", to get them to spend. As the present crisis deepens and given our experience with the way our so-called “economists” think, we can reasonably expect such programs to be launched. Nevertheless, the present trend of world economic contraction will not be reversed by any ad hoc program. The world’s expectations - positive for growth since WW II - have turned negative. This is an event of such magnitude that no “QE” will have any effect upon the final outcome: debt collapse.
Introduction: Professor Antal E. Fekete is an author, mathematician, monetary scientist and educator. Born in Budapest, Hungary in 1932, he graduated from the Eötvös Loránd University of Budapest in mathematics in 1955. He immigrated to Canada in 1957 and was appointed Assistant Professor at the Memorial University of Newfoundland in 1958. In 1992, after 35 years of service, he retired with the rank of Full Professor. In 1983 he was resident scholar at the American Institute for Economic Research in Great Barrington, Massachusetts. In 1995 he was resident fellow at the Foundation for Economic Education in Irvington-on-Hudson, New York. In 1996 he was Visiting Professor at the Francisco Marroquín University in Guatemala. He is the founder and Chairman of the New Austrian School of Economics in Hungary. His website is www.professorfekete.com.
Professor Fekete is a proponent of the gold standard and an outspoken critic of the current monetary system based on irredeemable currency. His work falls into the school of free-market economic thought inspired by Carl Menger. He claims that his theory of interest is an extension of Menger's work. Menger championed the theory of direct exchange morphing into indirect exchange; in the same way Professor Fekete is championing the theory of direct conversion of income into wealth and wealth into income (read: gold hoarding and dishoarding) morphing into indirect conversion (read: selling and buying gold bonds). Professor Fekete is an advocate of Adam Smith's Real Bills Doctrine that he calls the Gold Bills Doctrine.
“Should I stay in the stock market? After all, staying in the stock market always seems to pay off over the long term. Or should I move to gold and cash?”
We have been telling people there is “no shame in staying in cash” until the market finds a bottom. If we’re wrong and prices shoot upward, we will miss the upside. But the risk of missing substantial gains seems slight. Earnings are going down. Almost all the signals from industry and commerce seem to be pointing down, too.
Meanwhile, U.S. stocks are still expensive. The CAPE ratio looks at the inflation-adjusted average of the previous 10 years of earnings relative to stock prices. On that basis, the S&P 500 has been a worse deal only three times in the last 100 years. Those were just before the 1929 Crash… the dot-com bust in 2000… and right before the 2008 meltdown – hardly auspicious precedents.
Following years of QE-inspired excess returns, investors in 2016 suddenly find themselves embroiled in a broad and brutal bear market. As BofAML's Michael Hartnett notes, the 10-year rolling return loss from commodities (-5.1%) is currently the worst since 1938...
There had been an eerie silence at the Comex in recent weeks, where after registered gold tumbled to a record 120K ounces in early December nothing much had changed, an in fact the total amount of physical deliverable aka "registered" gold, had stayed practically unchanged at 275K ounces all throughout January.
Until today, when in the latest update from the Comex vault, we learn that a whopping 201,345 ounces of Registered gold had been de-warranted at the owner's request, and shifted into the Eligible category, reducing the total mount of Comex Registered gold by 73%, from 275K to just 74K overnight.
(1) A policy of maintaining artificially low interest rates has been in place in the US for over 13 of the last 15 years (only from mid-2007 into 2008 was the Fed not buying. From mid-2004 to 2007 the Fed “raised rates” but this is a misleading way to refer to rate policy, as the Fed was still buying securities to suppress a faster, market driven rate rise). Many discussions of economic cycles begin in the post-crash phase, thus conveniently ignoring the prior bubble. Make no mistake about it, QE was an attempt to solve the post-2008 recession by reverting to the policy that had caused the 2000s bubbles and the 2008 crash.
Joe Russo's insight:
Somethin's happenin' here, what it is, is very clear...
"Give a small number of people the power to enrich themselves beyond everyone's wildest dreams, a philosophical rationale to explain all the damage they're causing, and they will not stop until they've run the world economy off a cliff."
"Wall Street is not being made a scapegoat for this crisis: they really did this."
"My daughter asked me when she came home from school, “What’s the financial crisis?” and I said, it’s something that happens every five to seven years."
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