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Guest Post: The FED Cannot Keep Stocks Up
From Mike Krieger of KAM LP
What the future will hold is such a dramatic sharp burst to astonishing new price levels of several thousands of dollars. This does not even require hyperinflation. It is not likely that the United States would enter a hyperinflation mode. The system would collapse long before that takes place. The much more likely result will be a complete currency default with a replacement of a new currency. This is one way government defaults by using a shell game so that the average person does not understand he was just taken to the cleaners.
- Martin A. Armstrong on Gold
The FED Cannot Keep Stocks Up
What a difference a month makes. As I prepared to begin my Labor Day weekend in late August the financial media was abuzz with predictions of stock market doom. You could barely read anything without being confronted with several references to the dreaded Hindenberg Omen and how the appearance of several of these had all but guaranteed an imminent stock market collapse. There were plenty of reasons to be bearish. The market performed horribly in August and the economy was clearly still in the dumps despite a continued endless propaganda to the contrary. Nevertheless, the constant predictions of doom was indeed a great contrary indicator and barring some monster reversal today we are about to finished the month of September +10% in what is typically the worst month for stocks. It is set to be the best September in 70 years.
The truth of the matter is while the relentlessness and strength of the rally did surprise me a bit the fact that we bounced hard did not. Ironically, the reason I thought this could happen is because I am SO bearish. At the end of the day, if you are coming from the angle that I am you need to assume the stock market is a political tool for those in charge. I have said this time and time again. The manipulators cannot stop the cycles of markets any more than they can the cycles of nature in the end, but in the interim they can create a lot of problems and seriously damage your P&L if you do not know who you are up against. When it is the system itself that is fighting for survival as it is today, the system will fight back with everything it has. People in positions of power in the United States today are much more Machiavellian than most good natured citizens could ever fathom. If you do not wake up to who your leaders really are you will be led to the slaughter with the rest of the sheeple. I want this to happen to as few people as possible. This is the main reason I write.
Ok, so all of this action in the market is ancient history and the bigger question is what happens next? What I find so interesting about sentiment right now is that it has done an complete 180 from just a month ago. Those that have bought significant out of the money protection on stocks are suffering big losses on their insurance due to the rally and the action in the VIX. From a sentiment and positioning standpoint, this was where the pain trade was into September and therefore it has happened. Bears are terrified to short and this notion that the soon to be extinguished Federal Reserve can prop up stocks forever has entered the psychology of investors and traders everywhere. This is DEAD wrong.
What I find so hilarious about the last week or so is the amount of complete garbage that has come out of people’s mouths, which then gets spun by the media and others to justify higher stock prices and keep this ridiculous rally going. I don’t care if someone is worth $100 trillion dollars and made $5 trillion last year, if what comes out of that person’s mouth is Orwellian 1984 style 2+2=5 drivel I don’t simply accept it like some mindless drone. I don’t check my common sense at the door because of someone’s paycheck and neither should you. I also don’t mindlessly worship a billionaire who acts like some dopey/humble grandfather figure in front of the television cameras all the while lecturing us serfs that it was necessary for the government to bail out the elites at the taxpayer expense. The good news for us is that when I watch many of the elites and power players I see fear behind their veneer of arrogant self-righteousness. Their statements while seemingly brimming with confidence are becoming more desperate. They are losing and they know it. The stock market and money printing is all they have left as a tool to keep people asleep and it’s not working. What I find so hilarious is that no one seems to ask themselves why a big money manager might come on CNBC and tell everyone stocks can’t go down. Perhaps in a market with little to no liquidity someone needs liquidity to dump their garbage on some unsuspecting sucker. Based on the volumes in the market I shudder to think what happens if someone actually tries to sell positions in size.
Are We Near a Major Top in Stocks?
I typically do not talk about the broad market in aggregate unless I feel we are at some sort of major turning point. I think we may be at one currently. When you have a stock market up this much on vapors and the belief that the Fed can keep it up you have nothing short of a disaster waiting to happen. Let’s just think about some of the nonsensical logic out there. So people think the Fed can just launch QE2 and push stocks higher. Really? First of all the market just surged 10% this month and is trading at the highest level since May. Food prices are soaring, gold is above $1,300/oz and silver is above $22/oz (gold is at a nominal record and silver is at the highest price in 30 years). Does anyone realize how ridiculous an announcement of QE2 would look in that context? It would probably freak people out and stocks could collapse. Ok, so if I am right and they can’t do QE2 with asset prices at these levels what do you think is going to happen to stocks once people realize QE2 is not about to be launched. Whereas in late August the pain trade was the rally we just had, the pain trade may be an equally powerful although much quicker plunge down to the 1,000 level in the S&P500.
Oil Closing in on $80/b
This is almost a perfect setup for a big selloff in stocks. As I have pointed out for several years now, the broad stock market has never sustainably rallied as oil breaks the $80/b level. We are trading just under that now in WTI, Brent is nearing $82/b and Asia Tapis is above $85/b. What’s worse is that other commodities are way higher today that than they were the last several times oil approached the $80/b mark.
Mortgage Gate
If you are not up to speed on “Mortgage Gate” I recommend you get there and fast. While the whole issue of put-backs to the banks has been in the news for a long time I don’t think too many people appreciate the implications of all of this. What is so interesting to me is that many people seem to think the fraud that happened earlier this decade is behind us and we can just brush it all under the rug like a bad dream. Wrong. This is only NOW starting to really hit a head and for once in my life I am happy that we have an excess supply of lawyers in this country because we need an army to go through all these documents and put people away. If they had succeeded in reflating housing perhaps a lot of this stuff would have just gone away but they didn’t and it hasn’t. Once people find out how much trouble they will be in they will sing to the authorities and rat out those above them. This is going to get really ugly really fast. The best quick summary I have heard on this issue is by Chris Whalen. The interview is here and is a MUST listen.
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2010/9/24_Chris_Whalen.html
GDX/SPX Trade Should Take Off Shortly
One thing that almost nobody thinks can happen is surging gold share prices amidst a falling equity market. In fact, I see no more attractive trade currently although I do acknowledge that in the initial sell-off (look at today) the gold shares could take it on the chin. Nevertheless, I wouldn’t try to be too cute about timing it since I do not think we will see the 2008 trade again. Like I said, I think gold shares will surge as the stock market languishes. This is because big money will buy physical gold on dips while paper longs panic. I expect this spread to be one of the most powerful trades we may ever see later this year and into 2011.
All the best,
Mike
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The *banks* have been tanking for 10-15 days ... DB,GS,JPM,WF....
Get those shorts on.
Must we expect a "nominal" crash/correction due to all the shenanigans?... or maybe we need a reality check? A nominal crash can occur if the dow/s&p falls, but cannot a "crash" also occur if the index remains relatively stable but our purchasing power falls? Near 2000, the dow was not far from what it is now, yet I paid $1.60 per gallon gas, under $2 for a gallon of milk, and gold was near $300/oz. Why can't it be that 5 years from now the dow/s&p are not far from where they are now but I will be paying $8 gal of gas, $8 gal of milk, and gold over $2000 /oz. Can someone explain to me the difference? Why is not this scenario considered a long drawn out crash in the market? Just because nominally the index numbers didn't fall? Isn't the measure of wealth really about your purchasing power which is difficult to quantify, and its this difficulty which allows government/bankers/politicians to move all the other variables to screw us over?
Yup. That is exactly why gold keeps climbing. It's called crumbling purchasing power. THe dollar simply can't be traded for the amount of "stuff" that it could in 2000. The trend started way back but the key is that it has undergone an acceleration. So the new trend is for more rapid deterioration in purchasing power. There is always the risk of a big meltdown where gold would go to the moon, but that's not what most investors are expecting or betting on. Just a down hill course. Protect your wealth.
Pun...
This market doesn't even remotely reflect the economic reality of what actually is. I am mindful of the great rally that took place after the big un in 1929. It lasted about a year. This one is similar. Eighteen mos now with artificial aids that were not available in 1930.
Its essentially the same story with a bigger first aid kit. Ultimately, the coma is gonna set in...we are simply able to prolong it a while longer.
All right! Everything's hunky-dory! Look, the patient is ambulating up and down the corridors (pay no mind to the blood spurting out the ear!)
Loved this piece. Agree with all of it.
I'm just out. I was always a year early calling capitulations and I underestimated that absolute determination of the FED, Gov, and CNBC cartel to put lipstick on this pig. But I still can't short the beast. I can't time the collapse and I sure as fuck don't need to live with the day to day insanity of watching a market go up on bad news, BS, and vapors.
I still sleep well at night.
Whether or not the FED can keep it up may end up being dependent on who has the fastest printing presses. The FED has been winning the race to the bottom, meaning the US$ drops faster than its competitors. This allows the market to "hover", even though it pays off in debased currency.
Someone pointed out that the dollar index has dropped 11.4% over the last 60 days. That's change you can believe in. (I've lost the link, sorry)
This guy and I are on the same page. I see and feel the desperate pull they try to do....I feel the desperation and they are not winning. WHERE THE FUCK would this market be without this huge liquidity pump?
seriously...so good to know others are not buying this bullshit either!
and he is so flipping right about david tepper...first, anyone listening to him for advice is a loser. He made 4B last year..he doesnt give a frogs fat ass what the fuck happens. He is in gold and cash.
He goes on to talk his book and sell into this rally...I know CNBC has a hard time getting people on....they are not lined up. The jokers who are on are 4th or 5th at best...nobody wants to go on that worthless channel EXCEPT when they need something....
it makes no sense for him to go on....
I am so great! Ah the ego of Tepper, loved this snip. You love you.
He should rename his football team Teppers Steelers.
On March 19, 2003, Tepper announced that he would make a single donation of $55,000,000 to Carnegie Mellon University's business school (then called the Graduate School of Industrial Administration—GSIA). [9] This donation was made after he had been encouraged by Kenneth Dunn, his former professor (who became dean of the school). Tepper accepted the suggestion but made the contribution a “naming gift” and suggested that the school's name be changed to the David A. Tepper School of Business.[10]
The title answers its own statement.
The application of FED liquidity to move equities is an unhealthy use of capital for the country. A symptom of FED monetization born of greed. The FED is and will continue to fund government. The FED needs buy leverage to meet Treasury cash flow while manipulating rates. Interest, after FED real expenses, goes back to Treasury so the more chrun the FED controls the better in terms of interest expense, but risky for discouraging outside buyers beyond trade offset inflows.
The previous 10 year trend in equities show the problem in exploiting share price sentiment, and at the same time destroying the economic base that created past historical norms. Essentially the american economic system is collapsing under its own weight.
So in this environment the FED's primary objective is to keep Treasury cash flow positive with some buffer room to spare. In looking at the MBS buy it is clear the FED should have bought Treasuries. A mistake they are fixing now by conversion. Any QE2 program will be targeted at Treasury buys. The FED must control rates, and needs leverage to do this.
If for example, the FEDs T balance rises to $4T, how will the FED tighten without losing control of rates? Under what scenario will the FED backout? It is obvous the FED must monetize any increase in interest expense, and do so on a continuing basis. The FED must control Interest expense or bonds will collapse.
Obviously, everyone has there own spin on the area of greatest QE sensitivity, but the discussion itself shows the sad state of affairs.
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So how does QE and QE2 help the economy? It may prop up the financials, but the program does not address our structual economic problems.
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The question we should be asking is, what happens when there is no one to pay? At some point the FED will reach a debt transition point and the momentum will shift back to net revenue relative to costs. What programs will be cut? Perhaps more interesting, is how will they be cut? By what Washington protocol? The magnitude of the decisions will be devastating in some respect.
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Is US economic growth really just debt? Borrowed prosperity?
So we ask, what are the costs to propserity when the debt comes due. How do you back out without default?
Mark Beck
Well done. The answer obviously is, they can't. The world is starting to realize that default is the agenda. All that one world currency talk, which I thought was BS, now starting to worry me a bit.
What should really worry you is the Katrina Krew logistics of feeding the 50 million of .gov assistance.
Most of that 50Million are located in large cities -- near guns -- not gonna be a good place to live.
Now I know why some people don't get around to fixing double posts.
Hey where's Robo with a stock boner of the day chart and a pic of some diseased crack whench?
Fed "fears" the rise of PM's due to it's ability to replace fiat in times of crisis.
Hard to collect taxes on sales made with non-approved currency - did I just say black market?
The Govt's gonna do a Cartman: "Respect my authority!"
I'm guessing my wife's salary is gonna consist of Chickens, eggs and produce for a while.
good luck being on this guys side
what i find crazy is they're dropping money out of helicopters and people boo
i don't think they should throw money into the air but ding dang it all, i'm gonna try to run around and grab as much as i can
Me too, because toilet paper is going to be hard to come by, post-collapse.
From the article, " People in positions of power in the United States today are much more Machiavellian than most good natured citizens could ever fathom." And, "When it is the system itself that is fighting for survival as it is today, the system will fight back with everything it has."
I say again the risk for gold is political not economic. The foreigners buy a lot more than we do and when they get too much we will use the police power of the state to minimize the influence whch means outlawing it here. Forced settlement at pennys on the dollar. In short what they should have done with derivatives but did not, they WILL do with gold and the reason is simple. The currency tied bankers have 42 Senators in thier pocket compared to zero for the goldies. In the media they will cast you as anarchists. The system is that corrupt. Beware.
they'll bid gold up too. central bank could start buying up all the gold and people would probably complain because they always wanted some but now it's too expensive.
it doesn't make any sense ... why would our government waste presious dollars on something you can't eat .. it's a conspiracy
you didn't really think they'd drop it from helicopters?
Chart: SPX
We Won't Get Fooled Again!
http://99ercharts.blogspot.com/2010/09/spx_30.html
http://www.youtube.com/watch?v=Rp6-wG5LLqE
'To say of what is that is not, or of what is not that it is, is false; while to say of what is that it is, and of what is not that is not, is true.' -Aristotle
'The greatest part of mankind have no other reason for their opinions than that they are in fashion.' -Samuel Johnson
'A man can get to love shit if his livelihood depends on it, if his happiness is involved.' -Henry Miller
'Free your mind.' -Morpheus
Just for giggles took a look at the Investment Company Institutes Long term Mutual Fund Flows Historical Data at http://www.ici.org/pdf/flows_data_2010.pdf
April 2009 through August 2009 : 55.832 billion in
September 2009 through December 2009 : 23.271 billion out
January 2010 through April 2010 : 39.131 billion in
May 2010 through September 2010 : 72.958 billion out
So since April 2009 we have net approx... 1 billion out. With the week ended 9/22/2010 being 1.9 billion out that means we broke even (from April 2009) a few days ago.
Bwahahahahahahaha!
You just have to hand it to 'em. When it was clear to many of us discerning folk that the wheels were going to come off hard, the silver lining perceived was that sobriety and propriety would return. In fact the exact opposite has occurred. The Federales turned the psych ops up to 11, the plutocracy expounding the Big Lie in a manner and scope that has truly beggared the imagination of us mere surplus eaters.
Lies of course have consequences. When this ends is known to no one. How it ends seems fairly clear. The denouement of the trusted, the sound of great applause lauding folly, and then a long period of silence.
In many ways it is the age old story of Emperors and Pirates, deflation being the Jolly Roger, and a headlong drive into oblivion with the argument that forcing the issue will resolve it. Rummy's chestnut of "If you can't solve a problem, make it bigger' is exemplified by replacing mojo with POMO and the fraudulent conveyance that is gubmint statistics.
But there are unknown unknowns.
What we do not know that we don't know is how the continuing liquidation of Main Street and bifurcation of America will interact with the bankrupt ideology of the rich that had greatly succeeded in drafting the inner monologue of regular folks so that they would vote against their self interests and are trying to do it again.
What we do not know we don't know is what the long finger of instability from the Hand will ultimately do to the markets and the economy that are still the home of the brave but alas are now a different land.
The Pump and Happenstance that is the bedrock of Nancy Capitalism is killin' Sam, the wafting asset values per debasement lubricating sovereign democrats that are hell bent to seek rent.
The elitist insouciance of thanking the heavens for the bank bailouts as Bernanke promises to monetize cows to increase the price of milk is manufacturing a chasm of contempt at recession's end... er scratch that... depression's bend.
Eventually something's got to give.
With arms extended, if it may please the court, I present the real unemployment rate in this country.
Over 30%.
Have been following (http://cwcs.ysu.edu/resources/cwcs-projects/defacto) for awhile ... kids say the damnedest things don't they?... and what is germane for historical purposes is that the defacto rate of 30% is actually 5 percentage points higher than the worse unemployment levels experienced in the Great Depression Volume 1. In addition, at least per this fella's research,the defacto rate is the most similar measurement to the metric used back then which was as follows: individuals who had at some time worked in an occupation in which they earned money or the equivalent, or in which they assisted in the production of marketable goods, whom were unemployed. The only caveat is that back then, in some instances, 14 and 15 year olds were included in the unemployment rate.
Let me tell you why you're here gentle reader. You're here because you know something. What you know you can't explain, but you feel it. You've felt it your entire life, that there's something wrong with the world. You don't know what it is, but it's there, like a splinter in your mind, driving you mad. It is this feeling that has brought you to me. Do you know what I'm talking about?
It is the splinter of our disconnect.
Free your mind.
"Woah."
Thus spake AnonymousMonetarist!
Hang on Dorothy, Kansas is going bye-bye!
The title of this piece excited me with hopes of finding reason for ending the current (POMO) madness. Unfortunately, I was disappointed by the time I finish reading.
The only two points made by the author are asset prices are high now, and banks will continue to be in a deep hole for years to come. NEITHER is a sound argument against the Fed's ability to keep goosing up the equity market (for the forseeable future).
In order for the market to go down, there has to be sellers. The majority of flight from equity to bonds is already behind us. Meanwhile, banks' purchase of equities on behest of the Fed in the POMO scheme persists. The ONLY time the equity market goes down TEMPORARILY is when the banks need to raise cash to buy Treasuries on behest of the Fed (like TODAY!). But then when the Fed is ready to take the same Treasuries off the banks' books again (likely the very next day!), the banks will be given money to goose up the equity market again!
Perversely, the Fed is in an ideal place and in perfect control. It gets to monetize debt (with stealth even) AND prop up the equity market AT THE SAME TIME. And there is no opposing force than can change that. Sadly, the content of this piece (long on rhetorics and short on logic) does not live up to the boldness of the title.
RL
True, but Thermodynamics sez: "There ain't no FREE lunch!"
What are the best names in physical gold? I don't own any, but am interested. Any comments helpful, thanks.
Apmex.com
LearCapital.com
Bulliondirect.com
Local coin shops
This article was originally printed in Numismatic News.
Asking whether the U.S. dollar should be backed by gold prompted many reader responses to our poll. Dealer Steve Album very thoughtfully did some calculations. He concluded there isn’t enough gold.
“According to the Federal Reserve M1, current number of dollars is about 1.75 trillion. After doing the calculation, I found that at the current gold price of about $1,280 per ounce, we would need about 48,000 to 50,000 tons of gold to back up all the dollars. That is about one-third of the amount of gold that has been mined since ancient times, about 150,000 tons according to an article that appeared in The Economist a few months ago.
“There is absolutely no way any government could acquire that much gold. The alternative would be for the price of gold to rise to something like $5,000 per ounce, at which point only about 350 million ounces would have to be stashed in Fort Knox. No wonder the goldbugs are hungry for the gold standard. But if we take the M2, then we are talking about 8.65 trillion dollars.” Those are very large numbers.
Readers who suggest there is enough gold do so on the basis that we simply set gold’s price at $10,000, or even $30,000, as one reader did. Certainly anyone who buys gold at today’s $1,280 would love to see an official price set at $30,000.
I’ve decided to jump into the numbers game this week, too.
During the classic operation of the gold standard before World War I, what was required was that all government paper money be exchanged on demand for the official amount of gold each note represented.
Now the economy of the period was almost as sophisticated as the current economy. Banks made loans. People wrote checks. Credit was extended (maybe not with modern debit and credit cards) but certainly with merchants running tabs for customers that were settled later. Bank loans were not backed by gold in the sense that there was gold sitting in a vault covering the money lent. Checks were not backed by gold. Private credit was not backed by gold. Only paper money was backed by gold.
Currrent U.S. paper money outstanding totals $952 billion (M1 includes checking accounts). Whatever gold there is has to add up to $952 billion with 100 percent gold backing. The U.S. official gold reserves are 261 million troy ounces. To make them worth $952 billion would mean an official price of $3,647.51.
In 1968, near the last point that the gold standard was functioning, it was called the gold exchange standard because of all countries, only the U.S. had to exchange its notes for gold (others exchanged their paper for U.S. paper money).
That was the year the Congress repealed the requirement that there be 25 cents in gold for every $1 note issued. Such a backing requirement implies that a successful gold standard can be operated by the United States with its present resources at an official price of $911.88, though to start off at the lowest point possible probably would not generate confidence that it could work.
However, the $911-$3,600 range shows that whatever reasons there are not to adopt a gold standard, the quantity of gold is not one of them. It is a matter of will and a question of price.
§
Excerpted from What Price Gold in a Gold Standard? Reload Original Pagehttp://www.numismaster.com/ta/numis/Article.jsp?ad=article&ArticleId=141...
Issue a new currency and limit the redemption of the old currency to a set limit per person.
Aren't you scared of owning gold if a new US currency is issued with buying and selling limited to the new currency iether electronically or with tax reporting schemes? The Fed is not going away quietly.
The people have rejected the FED, buh bye now.
Why are you junking me? I'm just giving out ideas. I want the Fed ended and interest free money issued by Congress. The debt is going to be defaulted on so something new has to be done.
Contemplate the why.
Why would government confiscation of (free) gold stabilize anything?
Except the freedom to interact.
International trade operates on an exchange of balances. Confiscation (if) is only needed if external pressures build to the point of voluntary delivery, instead of boots on the ground.