Originally posted at Investment Research Dynamics [12],
This is a world where nothing is solved. Someone once told me, ‘Time is a flat circle.’ Everything we’ve ever done or will do, we’re gonna do over and over and over again. - Nic Pizzalotto, “True Detective”
The Fed has formally “ended” QE, but it hasn’t really. The Fed will continue reinvesting interest on its portfolio in more bonds and it will rollover maturities. We saw what happens to the stock market a few weeks ago when Fed official James Bullard asserted that the Fed needs to start raising rates: the S&P 500 quickly dropped 8%. Right at the bottom of the drop, the very same Bullard issued a statement suggesting that QE should be extended. This triggered an insanely abrupt “V” move back up to a new record high for the S&P 500. Bullard either did this intentionally or is a complete idiot.
The stock market can’t function without Federal Reserve intervention. The stock market lost 8% quickly on just the thought that the Fed might start raising rates. Imagine what would happen if the Fed decided to “experiment” by shutting down its market intervention operations – both verbal and physical – for a month…
As for QE, if the Fed has achieved its objective of stimulating the economy, why doesn’t it start removing the $2.6 trillion of liquidity that it has injected into its member banks (LINK [13])? This was money that was supposed to be directed at the economy. How come it’s sitting on bank balance sheets earning .25% interest? That’s $6.5 billion in free interest the Fed continues to inject into the Too Big To Fail banks. But why? What would happen if the Fed decided to “experiment” by removing this massive dead-pool of money from the banks? The money isn’t really “dead,” it’s keeping the banks from collapsing.
I’m interested to watch the Government Treasury bond auctions now that the Fed is not there to soak up anywhere from 50-100% of each issue. I wonder if the banks will be moving their $2.6 trillion in Excess Reserves into new Treasury issuance. Obama is going around broadcasting the lie that the Government’s spending deficit in FY 2014 was something like $600 billion. Yet, the amount of new Treasury bonds issued increased by $1 trillion over the same period. Either Obama is lying or the accountants at the Treasury committed a big typo. Either the Fed has found a way to continue opaquely monetizing new Government debt issuance, or the market is soon going to force U.S. interest rates up much higher.
By continuously intervening in all of the markets, the Fed has destroyed the information transmission system that is built into freely trading markets. If the Fed left the gold market alone – instead of hammering away with the naked shorting of Comex paper gold – the price of gold would be significantly higher than where it is now. This would be the market’s signal that our system is indeed terminally broken.
Instead, the Fed keeps interest rates artificially low in hopes of stimulating a recovery in consumption and housing. But if this is working, how come the country’s two largest retailers have begun Black Friday shopping discounts on November 3rd (LINK [14])? And the Fed keeps pushing stocks higher to new record highs in order to “stimulate” confidence and faith in the system. The fact that the stock market craps its pants when the Fed steps away for a split-second tells us just how broken this transmission mechanism is. That 8% drop 4 weeks ago is the real signal that our system is terminally broken.
And now it’s emerging that the Q3 GDP report was greatly inflated by a statistical error [15]which erroneously boosted the Government spending component. It was this component that juiced the GDP report because residential investment (housing) and personal expenditures (consumption) both tanked. Imagine that – a statistical error artificially boosted the GDP report right before a national election…
A colleague of mine has concluded that the QE infinity policy implemented Friday in Japan is the market’s signal that the entire western fiat system is getting close to imploding. I’m inclined to agree with him. Wall Street, the financial media and politicians are pointing at Europe and Japan as the source of the problems. But the heart and nerve center of the western fiat currency/debt Ponzi scheme is right under our nose in this country. The U.S. financial system is in worse shape than both Japan and Europe. The only difference is that the U.S. officials do a much better job hiding these problems.
Time is starting to run out for ability of the U.S. to keep kicking the can of collapse down the road. I really believe that the full-on intensity of the recent intervention in the precious metals market is the most obvious signal of time expiring. China has been accumulating physical gold at a stunning rate and now some research indicates that China’s Central Bank may have accumulated significantly more gold than anyone previously thought (LINK [16]). China has most likely maneuvered itself into owning the world’s largest stock of gold, which is where the U.S. had positioned itself after WW2. China has done this to a large degree by buying massive quantities of western Central Bank gold.
We’ve come full circle, only with China in the Midas throne this time around. Eventually the world is going to revert back to a gold-backed currency system. When this happens, the U.S. will be required to demonstrate that it possesses the amount of gold that it reports to own. The only caveat here is that I believe that the U.S. will start WW3 before it’s forced to reveal the truth about its empty gold vault. That’s how broken our system really is…
