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No, There Is Nothing Strange About The Surge In The Adjusted Monetary Base In The Past Two Weeks

Tyler Durden's picture




 

In the past two days, both UBS Andy Lees, Dennis Gartman (of the world renowned Gartman ETF which is just off its all time lows), and now even Art Cashin, have been stumped by the "dramatic" increase in the M2 and the Adjusted Monetary Base. To wit, per Art Cashin's take of Andy Lees' recent note: "US M2 money supply surged by USD88.7bn for a 2 week gain of USD165.6bn without any compensatory rise in the Fed’s balance sheet. Andy goes on to ponder whether this has been conscientious attempt by the government to beef up as QE2 ends. There is some evidence but not fully conclusive." Actually no, there is no evidence, and unlike many other instances of shadiness involving the Fed, this is not one of them.

Here is some more from Cashin's note today that explains the confusion:

Trading pit veteran, Dennis Gartman, took note of the continuing surge in the monetary base (or stock).

Finally regarding “economics,” we’ve included a chart at the bottom of p.1 this morning of the Federal Reserve Bank of St. Louis’ adjusted monetary base. Once again we shall refer to this figure as the “stock” from which the broader “soups” of monetary aggregates are derived. As is clear, the base is still expanding despite the ending of QE II at the end of June. The Fed is not contracting the base, and it will not do so, but certainly we can expect the growth of the base to halt rather quickly for right now it is “hugging” the green line in the chart which is 30% simple growth in annualised terms. That is obviously unsustainable… impressive perhaps… but unsustainable.

It is very important to know what the components of base are. If a large part of the growth is cash (currency), as it was a year or so ago, that is deflationary (that’s what led to QE2). We asked our old pal Dennis if he had examined the components. This was his reply:

Since May of ’10, the adjusted base has risen from $2.000 trillion to $2.722 trillion, a gain of 36% and $720 billion. The currency component of M1 has risen from $880 billon to $965 billion, an increase obviously of “only” $85 billion, so it is clear that nearly ever single bit of the increase in the base has been high powered money: real purchases by the Fed of agencies and Treasury securities from fed dealers. IN fact, in the past three weeks, the currency component has fallen ever so slightly, while the base has gone on to new highs.

The sharp spikes in money bear careful watching. It is not dangerous of and to itself but has the potential to explode into
an inflationary fireball. That would occur if it suddenly gained velocity (lending and spending). Let’s keep an eye on
monetary velocity.

Lots of wordy speculation there. Here's what actually happened, and in this one case there is absolutely nothing ulterior.

Simply, between July 1 and July 13, as we pointed out before, the Treasury's cash balance plunged from $130 billion to $39 billion. This is cash that is held at the Fed, and represents a liability on the Fed's balance sheet under the "U.S. Treasury, general account" entry. This can be found each week int he Fed's H.4.1 update. And while the Fed's assets have been flat now that QE2 has ended, the only plug to compensate for this major move is to adjusted the Excess Reserves held at the Fed, which as everyone by now knows is the most abstract concept known to man, and is much more of a Fed balance sheet plug than actual representation of cash (hard or electronic) held in bank vaults.

Anyway, since the Adjusted Monetary Base fluctuates exlusively due to fluctuations in the Fed's Reserve balance, the rapid drop in Treasury cash is what prompted reserves to surge even without any change in assets whatsoever.

This can be seen on the chart below, which shows the balance of Fed reserves since 2010.

What are the implications: simply, that next week when $66 billion in new bonds settle we will see a drop in both the M2, the Adjusted Monetary Base, and most importantly, the Fed's Reserve Balance will drop by a comparable amount. The irony is that on a synthetic basis, as the Treasury runs out of money at an ever faster rate courtesy of increased cash burn due to not rolling bills, the transposition into the monetary base is an increase in actual 1s and 0s in bank vault currency. And vice versa.

The truth is that since the Treasury needs to keep at least $10 billion in cash at any moment, there is both a lower and an upper bound as to how much cash can fluctuate in the Reserve balance account, and thus Adjusted Monetary Base, on a weekly basis.

Regardless, readers now know, and don't have to speculate, why the surge in the monetary base in the past two weeks happened, and why there is nothing really ulterior about it.

As for those looking for Fed shadiness, look no further than the Fed's "Other Assets" which last week hit a fresh all time high of $136 billion, and which still nobody really knows what they are.

 

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Fri, 07/15/2011 - 13:46 | 1460187 NOPOMO
NOPOMO's picture

Well...it went into the stock market.  FED rally pump was buying shares to kill the shorts.  Nothing worse than a government that colludes with WS to defraud the public.

Fri, 07/15/2011 - 14:06 | 1460253 hedgeless_horseman
hedgeless_horseman's picture

From the article:

...the chart which is 30% simple growth in annualised terms. That is obviously unsustainable… impressive perhaps… but unsustainable.

Makes me think of this:

Inflation is always and everywhere a monetary phenomenon. 
                                 —Milton Friedman

                                    September 16, 1970

Fri, 07/15/2011 - 14:06 | 1460260 Arius
Arius's picture

i am afraid the way they look at it they are protecting the public.

Sat, 07/16/2011 - 08:05 | 1461879 disabledvet
disabledvet's picture

more than likely it went into the black hole called "government" actually. with 40 cents on the dollar going towards the debt we now have "the legacy." simply put: "no government." time to see which of the various States in the Union are "swimming naked." Welcome to "naked political/economy."

Fri, 07/15/2011 - 13:47 | 1460192 Bartanist
Bartanist's picture

Could it have anything to do with the Treasury monetizing government pension funds?

Fri, 07/15/2011 - 14:16 | 1460289 ml8ml8
ml8ml8's picture

+1

Fri, 07/15/2011 - 14:54 | 1460417 knukles
knukles's picture

No.

What is sold in one account, (pension holdings of SLUGS (state and local nonmarketable government securities) raising cash is then offset by an expenditure of the cash so raised on the purchase of the marketable treasury debt. 

The two cash flows "sterilize" one another. 

Pass the KY jelly, please.

Fri, 07/15/2011 - 13:48 | 1460193 mt paul
mt paul's picture

"other assets"...

 

peas 

lotz of peas

Fri, 07/15/2011 - 13:56 | 1460197 FunkyMonkeyBoy
FunkyMonkeyBoy's picture

That was the money used to pay the final payment to the creator of the Obama "Birth certificate" .pdf... a job well done. Flawless i tell y'all, worth every cent!

Fri, 07/15/2011 - 13:49 | 1460200 firstdivision
firstdivision's picture

SPY and Euro Bonds?

Fri, 07/15/2011 - 13:49 | 1460201 virgilcaine
virgilcaine's picture

something bad is out there.

Fri, 07/15/2011 - 13:53 | 1460215 kridkrid
kridkrid's picture

the second or third to last gasp of a failed monetary system... of course I've been saying that for a while now, but I'll be right eventually.

Fri, 07/15/2011 - 15:13 | 1460481 TapperIsTicked
TapperIsTicked's picture

Eventuality is a bitch in a transitory world.

Fri, 07/15/2011 - 15:15 | 1460487 TapperIsTicked
TapperIsTicked's picture

Eventuality is a bitch in a transitory world.

Fri, 07/15/2011 - 15:59 | 1460682 francis_sawyer
francis_sawyer's picture

...just as 'transitory' is a bitch in an 'eventually' world

Fri, 07/15/2011 - 13:49 | 1460203 NOPOMO
NOPOMO's picture

FED & Government want to win on both sides....you the public eat your peas.  Obama administration is complicit with the FEDs actions and has been working to defraud the public.

Off with their heads.

Fri, 07/15/2011 - 13:50 | 1460205 Sudden Debt
Sudden Debt's picture

Now we know who is buying Google stocks like crazy :)

+600$ for a no dividend stock. Who else would be so stupid to do so.

Fri, 07/15/2011 - 14:01 | 1460241 Joeman34
Joeman34's picture

How do you get a moving avatar?  Just curious as it's currently beyond my computer capability threshold.  Thanks.

Fri, 07/15/2011 - 14:10 | 1460263 Sudden Debt
Sudden Debt's picture

Step 1 : First you have to save up 10.000 junks and insult every race on this planet.

Step 2 : Then, you take a animated gif, scale it to a pic size (may not auto resize or animation is gone) ET VOILA!

 

 

Fri, 07/15/2011 - 14:19 | 1460304 wandstrasse
wandstrasse's picture

I have a question: how can you wave your arms all night/day without falling down dead from exhaustion?

Fri, 07/15/2011 - 14:42 | 1460385 Dr. Richard Head
Dr. Richard Head's picture

Anger is a powerful energy conduit.  He's really mad and rightfully so.

Fri, 07/15/2011 - 16:01 | 1460696 francis_sawyer
francis_sawyer's picture

he's broken the perpetual motion riddle...

Fri, 07/15/2011 - 15:23 | 1460520 fuu
fuu's picture

I don't recall you getting junked that often. Except for the folks that think youa re an American who can't type. But those people will likely think you just said 10 junks not 10000.

Fri, 07/15/2011 - 15:57 | 1460672 dark pools of soros
dark pools of soros's picture

i thought he was a machinist that likes to be exact to three decimal places

Fri, 07/15/2011 - 16:05 | 1460729 francis_sawyer
francis_sawyer's picture

Here's where the junks came from...

http://www.youtube.com/watch?v=19fcN3VaXs4

Fri, 07/15/2011 - 14:29 | 1460343 cdude
cdude's picture

Probably an animated GIF.  

http://picasion.com/

Fri, 07/15/2011 - 16:33 | 1460834 MajorityRules.
MajorityRules.'s picture

600 a share means nothing without using other data to understand its cost. Look into why citi's stock went from 4 dollars to 40 dollars and you'll have a better idea why.

Fri, 07/15/2011 - 13:52 | 1460209 NOPOMO
NOPOMO's picture

Market is telling you candy canes and unicorns are abound.  US Markets are now nothing more than a ponzi scheme by the FED for the Banks. 

I suggest you all take you 401Ks out as quickly as possible. 

Fri, 07/15/2011 - 14:04 | 1460257 impending doom
impending doom's picture

Not sure about 401k's, but i tried desperately to liquidate my 403b a year or so ago and was pretty much told "No, read the fine print, asshole."

Fri, 07/15/2011 - 23:38 | 1461621 shesalive
shesalive's picture

right...though you should be able to take it out in the event of hardship, with only a 10% take from the irs. can't get my 403a though - it's only good for loan collateral.

Fri, 07/15/2011 - 13:53 | 1460213 Dr. Richard Head
Dr. Richard Head's picture

"Other Assets" - wouldn't you all shit if it was gold...not that it's money or anything.

Fri, 07/15/2011 - 14:10 | 1460272 sitenine
sitenine's picture

+1

Fri, 07/15/2011 - 14:25 | 1460326 LowProfile
LowProfile's picture

Ever wonder what the sound of 1,000,000,000 toilets clogging at once was?

"Yep, it's gold!"  "PPPPPFFFFFFTTTTDDDDDD!!!!!...  ...Splat!"

Now you know.

Fri, 07/15/2011 - 14:43 | 1460392 Dr. Richard Head
Dr. Richard Head's picture

And knowing is half the battle - http://www.youtube.com/watch?v=WkJQ3seomLo GI JOE!!!!!!!!!!!!

Fri, 07/15/2011 - 13:56 | 1460221 Hindsight2020
Hindsight2020's picture

The Fed misleading the public and acting shady?  Blashphamy!  It's not like they are a private corporation trying to look out for their stakeholders while trying to maximize profit....oh wait, they are and most people are too stupid/lazy/disinterested to put the story together.  I continue to look forward to each paycheck when I can take my excess pay and turn it into PMs.  Only for "traditions" sake of course and not because I don't like collecting worthless newspaper that's considered legal tender. 

Fri, 07/15/2011 - 14:28 | 1460335 wandstrasse
wandstrasse's picture

...and turn it into PMs.  Only for "traditions" sake...

so, you are long tradition?

Fri, 07/15/2011 - 13:57 | 1460225 NOPOMO
NOPOMO's picture

FED now monetizing all equities with PEs greater than 80.  Obama saying yes we can....have a bubble greater than the .COM.

FED & Government have no place in equity markest.  They only serve to distort and then defraud the public.

I feel bad that they are forcing those who make contributions into the 401K to buy overvalued equities.  Who loses...well the public loses.

Fri, 07/15/2011 - 13:59 | 1460227 gorillaonyourback
gorillaonyourback's picture

its simply,,,,, all the bonds they bought have interest payment,,, they are printing money to pay the interest payments,,,,, and also retire the principle on expiring bonds that they also bought,,,, with newly printed money

Fri, 07/15/2011 - 14:06 | 1460261 Tyler Durden
Tyler Durden's picture

If it is an accrued to cash divergence it would collapse on itself every 6 months when the coupon payment was made.

Fri, 07/15/2011 - 14:20 | 1460307 JW n FL
JW n FL's picture

where is Mr. Big Mouth HFT from 2 nites ago? he had a crew here running their mouths the other day but things have certainly quieted down from them as of late.

 

hmmmm? looks like they are trying to cover and get out of things? before shit gets real ugly like i said huh?

 

Mr. 3,700 to 1! where are you!! we miss you! come back! LULZ!!!

Fri, 07/15/2011 - 14:00 | 1460229 vast-dom
vast-dom's picture

at least the fed and govt had the presence of mind to create abstract accounting columns back in the day; if they knew what kind of mess we'd be in today there would be other more abstract (read: even more egregious unaccountable/unverifiable/nebulous) columns outnumbering the "real" accounting.

 

Let's see how long this charade can hold up. China will prop us up for only so long until they have to buy $140+ barrels of oil while their banks and local cities default etc etc etc. Exciting times.

 

Who needs industry when we have finance¿

Fri, 07/15/2011 - 15:40 | 1460583 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

I have a fix for the current debt situation:  Sell California to the Chinese.  Take the Baja Peninsula from Mexico by force (100 minute war).  California citizens and illegals (now legal) who wish to move to the Baja Peninsula.  Debt problem solved plus L.A. freeways unclogged.  Oh! Sorry Hollywood!

 

Tuco Benedicto Pacifico Juan Maria Ramirez

Fri, 07/15/2011 - 13:57 | 1460230 buchesky
buchesky's picture

This is why starving the government will be stimulative to the economy.  When the Treasury stops borrowing so much money, investors will find other productive means of investment (i.e. business investment).

Fri, 07/15/2011 - 14:15 | 1460287 kridkrid
kridkrid's picture

The treasury isn't borrowing money... it's printing money (mostly) and taking recycled dollars from places taking fake dollars in exchange for oil and worthless crap (some).  Starving the gov't won't stimulate anything.  It will only speed up the eventual collapse.  I think it's important to know that because when it happens, we shouldn't look at the government as the saviour.  They can't control the spin of what it was that just happened.  all just my opinion, of course.

Fri, 07/15/2011 - 15:34 | 1460563 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Congress needs money.  The U. S. Treasury sells bonds to the privately held Federal Reserve at interest.  In return out of thin air the Fed provides the U. S. Treasury with Federal Reserve Notes comprised of cotton and linen.  Nice gig since 1913.  Oh, as you know those notes have lost 98% of their purchasing power in a little less than one hundred years.

 

August 15, 2011 marks the 40th anniversary of Nixon's closing the gold window.  Maybe the demons have some special plans for us on that day?!

Fri, 07/15/2011 - 13:58 | 1460232 Stoploss
Stoploss's picture

S&P goes straight up, M2 straight up same time, not hard to see where that went.

Fri, 07/15/2011 - 13:58 | 1460234 Juice Box
Juice Box's picture

The money was spent to pay for Michelle Obama's 2012 clothing allowance.  The also planned on gassing up the 747 for another Obama vacation.

Fri, 07/15/2011 - 13:59 | 1460235 mt paul
mt paul's picture

silver

high of the day 

39.08 $

forty plus close

for the weekend ..??

Fri, 07/15/2011 - 14:01 | 1460243 vast-dom
vast-dom's picture

silver will hit $55 by end of summer. guaranteed. 

and oil will reach $112 shortly thereafter. guaranteed.

 

 

 

Fri, 07/15/2011 - 13:59 | 1460239 virgilcaine
virgilcaine's picture

Strange it looks just like a chart of gold and silver.

Fri, 07/15/2011 - 14:01 | 1460242 Bastiat
Bastiat's picture

"It is very scary: the flight to gold is accelerating at a faster and faster speed," said Peter Hambro, chairman of Britain's biggest pure gold listing Petropavlovsk.

"One of the big US banks texted me today to say that if QE3 actually happens, we could see gold at $5,000 and silver at $1,000. I feel terribly sorry for anybody on fixed incomes tied to a fiat currency because they are not going to be able to buy things with that paper money."

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8638644/Return-of-the-Gold-Standard-as-world-order-unravels.html

Fri, 07/15/2011 - 14:02 | 1460247 vast-dom
vast-dom's picture

i don't know about silver at $1k but she'll hit $55 by end of summer. guaranteed. 


Fri, 07/15/2011 - 14:06 | 1460262 Bastiat
Bastiat's picture

Works for me.  I don't think $1K is is impossible but I think it corresponds with $15K gold.  We could be there in a couple years, the way things are going.

Fri, 07/15/2011 - 14:02 | 1460245 mfoste1
mfoste1's picture

bullish, here we come dow 16k

Fri, 07/15/2011 - 14:04 | 1460258 Gubbmint Cheese
Gubbmint Cheese's picture

my brain hurts.

Fri, 07/15/2011 - 14:14 | 1460282 Sudden Debt
Sudden Debt's picture

whatever your wife may tell ya, that are your balls.

 

Fri, 07/15/2011 - 14:37 | 1460370 wandstrasse
wandstrasse's picture

leads me to: why are women are so bad at parking?... because men all the time tell them that [gesturing the length of your boner] are 50cm / 20 inches.

Fri, 07/15/2011 - 15:27 | 1460539 Tuco Benedicto ...
Tuco Benedicto Pacifico Juan Maria Ramirez's picture

Reminds me:   Why are women like hurricanes?

 

They come in wet and and wild and when they've  left they have taken your car and home.

 

Tuco

Fri, 07/15/2011 - 14:17 | 1460291 JW n FL
JW n FL's picture

Transitory Printing! nothing to see! keep it moving! Corporate owned News T.V. says all is well!

 

Bye the Dip!

Fri, 07/15/2011 - 14:17 | 1460293 JW n FL
JW n FL's picture

http://www.youtube.com/watch?v=etpHKueh6S0

 

Immm alright.. nobody worry about me!

Fri, 07/15/2011 - 14:18 | 1460296 ebworthen
ebworthen's picture

 

1's and 0's, binary dollars, spun like cotton candy, fluffed or dissolved in seconds.

Send in the Clowns...

 

Fri, 07/15/2011 - 14:23 | 1460316 JW n FL
Fri, 07/15/2011 - 14:26 | 1460329 infinity8
infinity8's picture

Accounting as Art!

Fri, 07/15/2011 - 14:33 | 1460355 the grateful un...
the grateful unemployed's picture

so cash is rising, as bonds are repatrioted? this is not really inflationary, according to Bob P, printing cash is a much less inflationary than simply expanding credit. When the great Chinese bond scare came up a few years ago, UST printed a trillion or so real dollars, to ostensibly call China's bluff. China backed off.

Point here, ducklings, if something isn't inflationary, or it is less inflationary than the previous allocation, then it is what? If you are thinking the D word you have said the secret word.

Fri, 07/15/2011 - 23:17 | 1461588 StychoKiller
StychoKiller's picture

You all know what to do when you hear the secret word?  That's right, SCREAM REAL LOUD!

http://www.youtube.com/watch?v=2jl3cKWuJVc

Fri, 07/15/2011 - 14:53 | 1460416 Sutton
Sutton's picture

I think the man meant HUNDRED dollar silver, not THOUSAND dollar silver(for now).

Fri, 07/15/2011 - 14:57 | 1460434 EB
EB's picture

Nearly all of this activity is happening through the NY Fed (not surprising).  The correlation between changes in deposits held by depository agents at the NY Fed (negated) and changes in the Treasury General Account (also held at the NY Fed) has been 0.54 over the last three years.  Since May 4, it has been 0.85.  That is, whenever Treasury pulls money out of the NY Fed, it has ended up as member bank deposits (likely primary dealers), and when Treasury puts money into its account at the NY Fed, there is a corresponding decrease in member bank deposits.  The process is simple: Treasury lets Bills expire.  Banks (PDs) get the cash and deposit it with the Fed.  Those member bank deposits at the NY Fed are reserves and, therefore, directly affect the monetary base, as Tyler points out.  The connection with M2 is less direct.  Conceivably, the dollars, when in T-Bill form could be pledged as collateral, while that is not the case when they are used as reserves.  Accordingly, with a transition of dollars to a purely sterile asset, I would expect the effect on M2, if any, to be to the downside.

Another interesting phenomenon is the apparent quarterly window dressing that occurs two weeks before the end of each calendar quarter.  The last, as of June 15, 2011 represented a $101.7 billion drop in bank deposits at the NY Fed with a corresponding $102.9 billion increase in the Treasury General Account:

 

Fri, 07/15/2011 - 15:09 | 1460468 f16hoser
f16hoser's picture

Perhaps an increase in M2 to cover the imminent Iraqi Dinar Revaluation? A lot of folks will be casnin-in soon.....

Fri, 07/15/2011 - 15:10 | 1460473 slewie the pi-rat
slewie the pi-rat's picture

other possible "causes" might include persistent rumors of a credit crunch about this time  (incl. china's overnite rate's upsky), and stocks being sold, for cash, as ^margin^ upskies send people to liquidity.  it was also the end of the quarter, with sizable protfolio adjustments in a world of uncertainties, some deflationary.

these wouldn't be bad reasons for the FED to ^ the money supply, or just accept it doing so for other reasons for a while.   

 

Fri, 07/15/2011 - 15:15 | 1460488 SeverinSlade
SeverinSlade's picture

I'd really like to hear how the Fed launches QE3 with commodities (namely oil) trading at these price levels.

I'm just not understanding it.  Without further easing and stimulus the economy will drop (as it currently is) which will surely apply downward pressure to oil.  Inflation will likely [temporarily] slow and deflationary risks will re-emerge [until Bernanke launches QE3].  Am I missing something?

Seems like lately everyone believes that gold and silver will continue to rocket up from here without any dip leading into QE3. 

Thoughts?

Fri, 07/15/2011 - 15:41 | 1460562 vast-dom
vast-dom's picture

Yes you are correct if you do NOT include what the financial sector and bond markets will do. When you factor in a CRASH then PM's will go parabolic which in turn will reinforce inflation which in turn pushes oil up. 

 

Of course, if your model omits financial sector as a whole plus US debt, then yes everything will deflate ;)

 

And when QE3 is introduced it will net result in the same, with the exception of wall st. and the scam russell indices as well as S&P being propped up for that much longer until there is no more QE (read: China leverages us while ceasing to prop up Europe/PIIGS and the game is up with UnN getting globally even more grim). Ergo every time Teh Fed postpones the necessary CRASH it essentially generates a much WORSE upcoming CRASH. It's called pressure-relief and it must blow off at some point and implode. 

Fri, 07/15/2011 - 15:43 | 1460597 SeverinSlade
SeverinSlade's picture

No, I completely understand that.  If I'm following you correctly you are stating what will happen to PMs AFTER QE3 is launched.

To quote you:

"Yes you are correct if you do NOT include what the financial sector and bond markets will do. When you factor in a CRASH then PM's will go parabolic which in turn will reinforce inflation which in turn pushes oil up."

So walk me through it.  What do the financial sector and bond markets do after the Congress reaches a debt ceiling deal?  I would imagine that investment capital would again flow into treasuries given the problems in Europe.  Poor economic data and easing inflation (CPI and PPI came in lower than expected..) would only spur the demand for treasuries and ease the demand for PMs, commodities, etc.  Again, am I just being stupid and missing something?

My question is what happens leading UP to QE3.  We all know what happens to metals AFTER Bernanke rolls it out but the only way he's allowed to do that is with a market sell off.  Will gold and silver really be immune given there's no further easing [yet]?

Fri, 07/15/2011 - 15:58 | 1460653 vast-dom
vast-dom's picture

Bond markets will tank/Yields will rise, irrespective of any decisions. The magnitude as function of QE3 is the question. And remember, interest rates can't go up or the interest on US debt will destroy America so Teh Fed has zero choice re: interest rates.

Financial sector fundamentals are wretched = they desperately require life support in the form of QE3. Euro problems are similar to USA problems so the flow over time is unclear into anything but PMs, including treasuries. 

Gold and Silver have gone up quite a bit. Silver has begun its recovery since COMEX's (illegal) manipulation. I believe gold and silver will ON AVERAGE continue to go up due to worsening econ conditions coupled with ASSUMPTION investors have that QE3 is not an if but a when. And when QE3 is official is when the uptrend will go parabolic as the sheeple take upward ride plus the perception of fiat will be reinforced as such and gold standard is re-re-reinforced. Thereafter, a CRASH will come and it will be grizzly as banks will not have enough gold against their junk/toxic assets (housing in particular in the US). 

Stagflation will be a strong if not inevitable possibility. At market trough US commercial real estate at discounted prices will be interesting play.

 

 

Fri, 07/15/2011 - 15:59 | 1460688 SeverinSlade
SeverinSlade's picture

Hmm...So when you say "ON AVERAGE" do believe that a dip in gold and silver is still a POSSIBILITY?  Or is merely a day to day type thing with the overall direction being positive?

My confusion arises from a few things.

All week the stories regarding gold and silver have been as follows:

1. Eurozone problems
2. Potential US default
3. Anticipation of QE3

Europe isn't going to change; that's a given.  The US isn't going to default because the debt ceiling WILL be raised one way or another.  As you have pointed out, QE3 will happen but so far everyone is banking on it happening sooner rather than later.  If the assumption persists but economic data continues to come in negative and the Fed doesn't blink, isn't that potentially a trigger for a significant dip in metals?  Not suggesting that gold will drop to $1400 and silver to $25 or anything, but could we see a pullback to $1525 and $33-35?

Fri, 07/15/2011 - 16:04 | 1460714 vast-dom
vast-dom's picture

We are speculating. There may very well be dips, even a larger one as late as August. I believe even so the trend will be upward.

 

My belief is that silver will near $55 by end of summer. But I could revise that many times and contradict contradict contradict myself....... If there are dips then you know what to do! If you dollar cost average and then load in on the dip then you are even better. Proceed with caution in any case.

Fri, 07/15/2011 - 16:06 | 1460730 vast-dom
vast-dom's picture

And furthermore the US could raise their debt ceilings dozens of times and then some. It still does not change the nature of fundamentals. Teh FeD cannot bend reality enough to circumnavigate next CRASH. 

Fri, 07/15/2011 - 16:10 | 1460748 SeverinSlade
SeverinSlade's picture

I think the tell will be how metals react when Congress reaches a deal on raising the debt ceiling.

If metals remain relatively unchanged then your original assessment is accurate.  Metals will continue to rally even as equities sell off.

If metals immediately begin to trade down considerably, then the threat of deflation may indeed create a dip that will precede QE3.

Hmm...Decisions, decisions.

Fri, 07/15/2011 - 16:24 | 1460775 vast-dom
vast-dom's picture

the is a sound position SeverinS.

it's funny how the reality of raising a debt ceiling really has very little to do with fundamentals as does QE3. Perception is reality in this our grand pyramid scheme. It's certainly entertaining to say the least.

I can't wait to see what Teh FeD does with their vast ILLEGAL derivative positions. That will sure be a doozy......

 

general rule: QE3 goes = $ goes DOWN = Oil goes UP. China slows even more. Deflation, right? PMs still go up. Bonds tank thanks to QE3. Still pressure on food commodities as your $'s buy less of it and oil. Stagflation looks probable in the face of propped up financial sector until it again runs out of $ with golden parachutes littering the blackening skies.

Fri, 07/15/2011 - 15:59 | 1460684 ffart
ffart's picture

When the fed defaulted on their gold certificates they swapped the gold backing for debt backing and inflation was very high. If the fed defaults on the debt backing the new dollar then just like before there will be very high inflation as the market tries to redeem as much of their debt-money as possible. The current price levels are just reflective of how little confidence the market has in being able to redeem their debt-money.

Fri, 07/15/2011 - 15:35 | 1460569 Byte Me
Byte Me's picture

Other Assets == "shadows"

Fri, 07/15/2011 - 18:20 | 1461093 dehdhed
dehdhed's picture

why monetize the debt when you can directly monetize the deficit

Sat, 07/16/2011 - 09:53 | 1461884 bart.naf
bart.naf's picture

Why the huge growth in monetary base has not created much inflation so far:

 

The excess reserves portion of base has been locked up via the Fed paying interest on it:

http://www.nowandfutures.com/images/base_less_excess_reserves.png

 

Sat, 07/16/2011 - 09:45 | 1461935 Thinkor
Thinkor's picture

why monetize the debt when you can directly monetize the deficit

Assuming I understand you, this occurred to me, too.  The Fed could just materialize more money into the Treasury General Account, as much as needed for government spending.

No doubt that's illegal, but why pick nits?

Investors will figure out sooner or later and the dollar will tank more, but in the meanwhile the day of reckoning has been postponed.

 

 

 

Sun, 07/17/2011 - 10:01 | 1463439 flow5
flow5's picture

Under a reserve's based operating procedure, flucuations in legal reserves are automatically "washed out" by the frbNY's "trading desk".   But the Treasury was pilfering money from, for example, Federal pension funds, to stop-gap the Congressional delay/approval in raising the debt ceiling, money might have flowed into the Treasury's TT&L accounts at the commercial banks skewing deposit stratification.  

I have my doubts that the "trading desk" was unable to offset any Treasury "put & take".

DENNIS: " Let's keep an eye on monetary velocity".

Dennis isn't watching.  I.e., velocity is both a cause & an effect. In this instance it is a cause. The money stock's growth accelerated after velocity's inflection point.

Even so, monetary flows (Mvt) are peaking on a seasonal basis.

Sun, 07/17/2011 - 13:38 | 1463944 flow5
flow5's picture

The expansion coefficient doubled from 1947 to 1975 (28 years). It doubled again from 1975 to 2003 (28 years). From 2003 until today (8 years), it has almost doubled again (.88%).

I.e., contrary to the pundits, the money multiplier hasn't contracted, it has expanded (i.e., the denominator has fallen).

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