Stephen Roach Explains How The Fed Is Pulling The Wool Over Our Eyes

Tyler Durden's picture

"Bernanke is betting the ranch on open-ended QE and zero interest rates and it worries me" is how Stephen Roach of Morgan Stanley starts this must-see reality-check interview with Bloomberg TV's Tom Keene. The reason for his concern is simple, the current Fed modus operandi is a framework for rescuing economies in crisis but does little to sustain economic recovery. Roach agrees with Cal's Eichengreen that the European and US central banks are indeed in a policy trap, committed to a path of action that has to be perpetually ante'd up to maintain the dream. With Europe in recession already in his view, Roach does not expect the tough structural action until we see greater social unrest or overwhelming unemployment and reminds us of how close we got when Greece threatened the referendum in the late summer. He goes on to discuss China (positive on their efforts and 'solid strategy') and it's relative success as a regime which he contrasts with our "central bankers who pull the wool over our eyes with ZIRP and magical QE". Taking on the mistakes of Greenspan, letting capitalism go unchecked, and his incredulity at the 'glide-path' charts we were treated to yesterday by the Fed's bankers ('accountability'), Roach sees the painful process of deleveraging from excess debt, insufficient savings, and over-consumption as likely to take a long time as we should not assume investment will be the driver as Obama goes 'protectionist' (in the SOTU) on our 3rd largest export partner - yes, China.

 

 

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redpill's picture

Makes you feel a little QEasy doesn't it?

Future Tense's picture

QEasy?  Makes me feel excellent. The Fed's speech yesterday was a gift to precious metals.  The second best gift of the month was given to anyone who took advantage of the Sprott PSLV NAV compression.  Here is a good article discussing the NAV, which you now have to think about when making buying decisions.

http://www.ftense.com/2012/01/sprott-physical-silver-trust-nav-pslv.html

DavidPierre's picture

The "MANIA" stage.

 

The action in precious metals yesterday was significant and the 3rd and final "mania stage" has been kicked off.

First look at the fundamentals. The Fed told that they will foster a policy of negative ... if they could create negative nominal rates they would... real interest rates for 2 more years. Watch reported ... fake... inventories of precious metals continue to drop. Central banks have become buyers of Gold. In the U.S. and Canada, sales of 1 oz. coins are now running at a faster pace than TOTAL production of all mines combined. Silver inventories in the U.S. and Canadian mints are nonexistent. If these coins are to be minted, the mints become buyers. Nevermind industrial demand, jewelry demand, investment demand of bullion bars or anything else, the sales of 1oz. coins are eating up all supply.

Then of course "rehypothecation" to the tune of over 100-1 in all sorts of scam paper products from ETF's to futures, options, pool accounts etc. To add to the "perfectness" of this storm, Sprott Asset Management pulled the trigger on a 10 million ounce order with another $1.2 Billion remaining shelved for future purchases.

Let's not forget the biggest "fundamental" of all, good 'ole common sense.

Common sense tells you that while governments are getting stuck in the quicksand of bankruptcy the natural action of "protect oneself" has the demand of precious metals exploding. Remember that 5 years ago, nearly no one differentiated between the fraudulent paper Gold and Silver products and the real thing. This siphoned real demand away from the real thing, this is changing rapidly and enough "big money" finally "gets it"!

So fundamentally, the perfect storm has arrive. Technically or "psychologically" the set up is equally bullish. Just one month ago the average investors in PM's were suicidal to put it mildly. Short positions... many naked and illegal... in the mining shares ballooned and COT numbers show the commercials less short and the specs less long than in many a moon. Bullish consensus numbers got as low or lower than the bottom days in 2008 while "cash for Gold" shops spring up like lemonade stands. The mental malaise or funk did exist and shook many investors off the bull. If you hung in there, you deserve to pat yourself on the back because NOW it looks like you are going to really get paid for your pain!

Jim Sinclair put a piece out last night...

http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/1/25_Jim_Sinclair_-_Mainstream_Entities_Will_Now_Enter_Gold_Market.html

... where he says that "mainstream entities will enter the Gold market". He is absolutely correct and will be joined by "The Public". The public will have a much larger impact on the Silver market ... poor man's Gold... while institutions will devour Gold itself. Let's not forget India's "Gold for oil" deal and other major countries like China, Russia, France etc. setting up trade deals without using the Dollar for settlement.

The Sun is setting on the Dollar!

ALL of this has come together at the same time to create a perfect storm that just happened to kick off the day before an options expiration that surely has the shorts licking their wounds! The "2% rule" was soundly broken yesterday with an outside reversal day, the size of which has not been seen throughout the 11 year bull market.

Yesterday saw a bottom to top move of well over $60.

 

We are also getting upside follow through today which has NEVER happened ... been "allowed" ... in the past. Something is different now. Whether "they" have lost control or "allowed" yesterdays movement is a moot point because it "happened" and the genie cannot be put back into the bottle!

Bill Murphy says that "price action makes market commentary". It will now begin to work in favor of precious metals as opposed to against. The 3rd and final "mania stage " has kicked off. In the words of Richard Russell, "there is no fever like Gold fever" and that is in "normal times". These are not even close to normal times. We are living through the end of an era where governments are going broke including the issuer of "the money". "The money" has gone bad at the same time investors own little or no "real money". Years of brainwashing. Capital has been concentrated at one side of the ship and has very slowly been moving back to the empty side.

It has taken 11 years to get where we are today, it could very well only take one more year to clean up "all the marbles". What lies ahead price wise is anyone's guess.

We could very well see a double, a ten fold, a 100 fold OR an "infinite move" in Dollar terms if the Dollar is lost. A "revaluation" of paper money vs. real money is mandatory and has been necessary for a very long time.

THIS is it!

The "revaluation" that has been working it's way through for the last 11 years has changed gears and with today's abilities of information and leverage ... options, futures and OTC crap... has an additional boost! The computerized turbos and leveraged nitrous buttons will make what is to come in Gold and Silver legendary stories that will make the Dot Com/housing booms look like 2 pimples on an elephant's arse.

The biggest "difference" is that there will be no crash to follow the boom. When a currency dies ... ALL paper currencies... real money steps in and is "valued" to whatever new currency that is introduced. Or at least this is the way they would like you to perceive it, the reality is that the new currencies are valued by how much Gold or Silver they can "buy".

The important thing is that whenever a new currency is introduced, anyone sitting at the table with real money, ALREADY has "all the marbles". You will be entering the "next monetary system" wealth intact AND enhanced!

"Payday" is much closer than many expect.

This is the start.

 

www.lemetropolecafe.com

NuYawkFrankie's picture

Re. THIS is it! ....This is the start

Zzzzzzzzz..... Zzzzzz... Zzz...

gmrpeabody's picture

+1... too funny

This rocket is taking off....

The train is leaving the station...

To the moon...

Sorry if I left one out, but most of us have heard all of this before. The only thing I really expect is the unexpected. Hope for the best, but be ready for the worst.

gmrpeabody's picture

And yes, the fundamentals are on gold's side..., but yesterday was too easy. Really..., I smell a rat.

Michael's picture

Iceland explains the proper procedure for dealing with unruly international banksters.

 Iceland Declares Independence from International Banks

By Bill Wilson – Iceland is free.  And it will remain so, so long as her people wish to remain autonomous of the foreign domination of her would-be masters — in this case, international bankers.

On April 9, the fiercely independent people of island-nation defeated a referendum that would have bailed out the UK and the Netherlands who had covered the deposits of British and Dutch investors who had lost funds in Icesave bank in 2008.

At the time of the bank’s failure, Iceland refused to cover the losses.  But the UK and Netherlands nonetheless have demanded that Iceland repay them for the “loan” as a condition for admission into the European Union.

In response, the Icelandic people have told Europe to go pound sand. The final vote was 103,207 to 69,462, or 58.9 percent to 39.7 percent.   “Taxpayers should not be responsible for paying the debts of a private institution,” said Sigriur Andersen, a spokeswoman for the Advice group that opposed the bailout.

A similar referendum in 2009 on the issue, although with harsher terms, found 93.2 percent of the Icelandic electorate rejecting a proposal to guarantee the deposits of foreign investors who had funds in the Icelandic bank. The referendum was invoked when President Olafur Ragnur Grimmson vetoed legislation the Althingi, Iceland’s parliament, had passed to pay back the British and Dutch.

Read more at NetRightDaily.com: http://netrightdaily.com/2011/04/iceland-declares-independence-from-international-banks/#ixzz1kc8u6r00

flacon's picture

Who is the masculine looking sorority girl who obviously has been scraming all night at the dance clubs with the fucking big fucking glasses who is interviewing that short dude? Oh... shit! never mind.... sheena was a MAN! FUUUUCK!

 

And was that Jamie Dimon I saw in the infomercial ? Holy fucking shit! He speaks English like he was an American! I always thought he was some kind of friggin foreigner. Thank God JP Morgan is run by an American, I was getting scared for a moment. USA! USA! USA! USA! lol!

trav7777's picture

Who cares what some goddamned economist like Roach says?

None of this shit MATTERS.  OIL MATTERS.

The banker idiots keep insisting the problem is somehow that the numbers on these ledgers are altering physical reality.  WTF does it matter what the USG's national debt is or the Fed's balance sheet?  It could be eleventy kabillion...makes no fucking difference at all.

flacon's picture

This is what the homosexuals at Davos are discussing: 

 

> "Sessions will range from scientific discoveries expected to shape 2012, to a discussion on the differences perceived when a Beethoven sonata is played on historic and modern instruments, to how virtual games can be harnessed for innovation in the real world." 
 

Great! Fuckin' great! We get to learn about fret boards and strings. I know the Romans provided bread and circuses, but did they also talk about Martha Stewart's latest recepie and how adding too much beer to your diet can lead to beer goggles? Highyly unlikely. That's why we are better than every one else. We absolutely Rule! Now... where's my pen to sign this credit card statement?! 

 

trav7777's picture

I may just have to move there

spinone's picture

Don't confuse volatility for mania.  Its more like manic pression.  Pick your entry points.

The Monkey's picture

Mania is right. The Fed has pursued reflative policies aimed at stable prices via the conduit of credit expansion. Whatever your hard asset flavor, the prices have been distorted. This mean more incentive to grow supply and more manic games for the greater fool.

Doesn't matter what your flavor your asset. In this enviroment no one knows what the true value of ANYTHING. Things we do know:

--Credit extended is near is all time highs.
--Personal savings is near it's all time lows.
--Real household income shrank by 3% in 2011.
--Housing is continuing to deflate.
--Distorted high prices lead to oversupply, overproduction and gluts.

The whole credit ponzi game is nearing an end. How much more do we have to go before deleveraging must begin in earnest form? At best, we have about 100 more basis points in the 30 year treasury and the Fed's games with nominal interest rates are fully cooked (i.e. no more refinancing stimulus, no more new marginal buyers taking advantage of lower rates, because they will have bottomed).

Then, we probably get something nearly no one expects, rising interest rates in the form of DEFLATION. Take the effect of falling nominal rates and refinaning out of the equation and the velocity of money will fall. There is nothing the Fed can do to stop it.

JeffB's picture

"Then, we probably get something nearly no one expects, rising interest rates in the form of DEFLATION. Take the effect of falling nominal rates and refinaning out of the equation and the velocity of money will fall. There is nothing the Fed can do to stop it."

---

Couldn't they stop it with inflation, or hyper-inflation?

 

The Monkey's picture

Why would you want to stop it with hyperinflation? A 2% annual deflation should do the trick. Let's say 3% with some public sector deleveraging. This is what happened during the Long Depression in the late 19th century. When you get right down to it, a lengthy shallow deflation beats hyperinflation anyday. At some point, a period of falling prices will be offered up in the Fed's debate if it has not already.

Betting on Bernanke is a sucker's bet. We have a long way to go to fully deleverage. Longer than politically tenable for the Federal Reserve's existing policies.

JeffB's picture

"Why would you want to stop it with hyperinflation?"

---

I didn't mean they would want hyperinflation, nor deliberately cause it. I think it is a possibility, though, if things get away from them. I believe Bernanke has stated publicly that the Fed had the power to prevent deflation via the printing press, and I suspect that is their strategy. It is what seems to make the most sense to me. In any event, I was disagreeing with this sentence in the post above mine:

"Take the effect of falling nominal rates and refinaning out of the equation and the velocity of money will fall. There is nothing the Fed can do to stop it."

---

I think it is within the Fed's power to prevent deflation if they want to. Printing more money should do the trick.

A long slow deflation might be a viable option under some circumstances, but this doesn't seem to be one of them from my point of view. Why would they want deflation when the U.S. is largest debtor nation in the history of the world? That just makes the real value of our debts that much larger. A long slow inflation that exceeds the nominal interest rates would seem to be the ideal they would be aiming for. It would reduce the value of the debts we already owe.

That may be easier said than done, but that would be the strategy I expect they would attempt anyway.

 

cranky-old-geezer's picture

 

 

ALL of this has come together at the same time to create a perfect storm that just happened to kick off the day before an options expiration that surely has the shorts licking their wounds! The "2% rule" was soundly broken yesterday with an outside reversal day, the size of which has not been seen throughout the 11 year bull market.

Yesterday saw a bottom to top move of well over $60.

We are also getting upside follow through today which has NEVER happened ... been "allowed" ... in the past.

I noticed it too, the normal hammering of gold / silver into opex DIDN'T HAPPEN this time.

The Sun is setting on the Dollar!

Yes, I believe it (finally) is.

I beleive Russia / China / India telling USD fuck off, they're buying Iranian oil in their respective currencies (and gold?), is the catalyst for this perfect strom of confidence collapse in USD and flight to gold / silver.

Great summary of this sea change ...if you understand the significance of that phrase.

StychoKiller's picture

The Sun is setting on the Dollar!

ALL of this has come together at the same time to create a perfect storm that just happened to kick off the day before an options expiration that surely has the shorts licking their wounds! The "2% rule" was soundly broken yesterday with an outside reversal day, the size of which has not been seen throughout the 11 year bull market.

Excerpted from:  http://news.goldseek.com/GoldenJackass/1327611600.php

[quote]

The USDollar ship of sea is adrift, soon a derelict vessel.  The signs are clear. The sovereign debt system that serves as foundation is a rotting corpse.  The East is working feverishly to build the alternative system.  Look for barter to be its backbone.  By the Ides of March, it should be more clear.  Any controlled demolition of PIIGS debt and bond writedowns will make for quite the event to watch.  The upcoming funding needs of Italy are an order of magnitude greater than the bond market or the Euro Central Bank can manage.  The game breaker events are nigh.  Just this week, India and Iran announced settlement of oil trade in gold bullion. The workaround seems unique and novel, but with historical precedent.  Before the USGovt unilaterally broke the Bretton Woods Accord that established the Dollar Gold Standard, settlement in gold was the norm.  The world might be soon coming full circle.

[/quote]

Whatta's picture

The second best gift of the month was given to anyone who took advantage of the Sprott PSLV NAV compression.

Yup.

I bought long shares of PSLV at 13.22, sold puts on SLV, and added a roll of Kookaburra's just for fun....well ahead on all of them already.

HD's picture

I enjoyed that redpill

Don Birnam's picture

Roach is decrying central bankers from within the posh, moneyed confines of Davos ? Plutocratic heresy, taking his peers to task. Stephen had better attenuate the rhetoric, lest he be condemned by the Lord High Justice Soros, to be put to the stake atop a pyre of conflagrating fiat.

The Monkey's picture

Over the next two years, ZeroHedge will be taken over by deflationists. Gold bugs need to find a new home.

akak's picture

Over the next two years, the remaining few deflationary flat-earthers will have their much-abused anal sphincters handed to them on a silver (and gold) platter.

StychoKiller's picture

"deflationary flat-earthers"  are right in that the VALUE of FRNs/Euros/etc. will deflate, but WRONG in that the QUANTITY of FRNs/Euros/etc. will explode exponentially!

The Monkey's picture

We'll see. No one has a crystal ball, but I think there are more than a few people here that are fixing to be surprised when the Fed's actions become impotent and politically unacceptable.

Time will tell, as always.

gravedestruction's picture

"Makes you feel a little QEasy doesn't it?"

Quantitatively of course.

Really liked the "Chart-a-Palusa"

meatball's picture

So far, whatever they did has been working, if you have lots of money in the market.

 

If you (the poor and the middle class) have little in the market and you are taking a much bigger hit at the stores and the gas pumps, oooops.

A Lunatic's picture

The new rule of thumb will be, for every five hundred points of market gains, the price of a loaf of bread will double.

xela2200's picture

Then you, sir, are a terrorist.

jcaz's picture

Has it been working? 

Inflating stock prices does nothing-  just misdirects the simpletons.

That's the only tool Bernanke has left.

Sad.

 

brewing's picture

middle (class) squeeze... rising inflation and low savings rates...

Pitchman's picture

The ongoing saga of saving the TBTF Banks while leaving the real economy to wilt on the vine continues as Bernanke pegs inflation at 2%.... further economic damage will eventually lead to a strong public reaction and constructive change, albeit via a highly troubled and sometimes dangerous path.... - Keep Bailing

 

The Monkey's picture

Working in the same way another heroine shot works for an addict. Bernanke is pursuing policies that mislead pension funds, private investors and Grandma. These destructive policies will be the Fed's undoing.

Let them eat iPads's picture

Why are they sitting outside in the cold?

TheDriver's picture

It's not cold there. There are piles of burning fiat just off camera keeping their feet warm.

akak's picture

Being closet goldbugs, they were counting on cold-induced shrinkage to hide their QE boners from the camera.

Money never sleeps's picture

Bernanke trades at this place: http://bit.ly/wZ7orO Do not tell anybody.

mattu13048's picture

Armada Markets IPO is the next big thing in Europe.

eucalyptus's picture

Tom Keene Surveillance Midday is IMO the best financial show on any of the cable networks.

Reggie needs to go on it. 

NuYawkFrankie's picture

The show runs at midday? 

Aw schuks! I'm usually crackin' open my first brew o' the day & watching Cougartown re-runs at that time!

SillySalesmanQuestion's picture

Were those "glide-path charts" cleared and approved by the FAA...? Tower...we have a small problem. We're burning through our jet fuel much faster than our flow charts show we should be...?

StychoKiller's picture

More cowbell! (oops, I mean...)thrust!  The Fiat Mountain range is dead ahead and closing fast -- WE NEED ALTITUDE!

hannah's picture

china is 'solid'....right.

vast-dom's picture

china policy is exact opposite of what US/Eurozone has done to date. the sinkhole nation may stay somewhat more solvent as the west folds...

Melin's picture

"letting capitalism go unchecked"

"Failing to let Capitalism bring prosperity as it does when left unchecked"

There.  Fixed it for you.

jplotinus's picture

""Failing to let Capitalism bring prosperity as it does when left unchecked"
There.  Fixed it for you."

Wait. The above quote is a specimen quality of genus 'cognitiveum dissonanceism.'

Capitalism has been unchecked in recent decades. Greed was good. Capitalism failed in the US all on its own.

Here's another specimen: "borrowers took out loans they couldn't afford."

That is bull. The only way for that to happen was through debasement of normal loan qualification. In all other similar criminal schemes, the law comes down hardest on the dealer. Users have a hard time turning down drugs when offered and money when given on the basis of a wink and a nod.

It is a huge fallacy to blame borrowers; or, if you do, they get 30 days in jail when the banksta dealer pimps should get life without parole.