The following is a commentary that originally appeared at Treasure Chests for the benefit of subscribers on Thursday, August 13th, 2009.
Far too many look for easy ways to get rich quick these days, only to be disappointed or shocked when reality bites in the end. Because of this there are no shortage of Ponzi like schemes characterizing the financial landscape, one by one being found out to be frauds, with Bernie Madoff at the top of the list in history thus far. The public was shocked when they discovered the size of the Ponzi scheme he was able to put together and perpetuate for so long, as usually, operations like this fall apart much quicker. Of course the reason for this was because a far larger Ponzi scheme of which the public remains oblivious enabled Bernie to maintain the illusion for as long as he did as it is at the very heart of our fiat currency based monetary system, that being the Fed. The Fed (and Treasury) have been issuing credit and printing fiat currency on an increasingly unhealthy basis for years now, since Nixon went off the gold standard in 1971, putting the US (and world) on the fiat currency system we find ourselves today.
In case you have not realized it yet in knowing this, it should also be understood that because US credit is issued in USDollars ($), that it too is a Ponzi scheme like bubble as well, to go along with all the other bubbles in stocks, bonds, and real estate. So you see, because of the Fed's easy money policies all these years, the entire financial system is in fact a giant de facto Ponzi scheme, and that because the $ is presently the world's reserve currency, the entire global economy has been built on this house of cards. What's more, and like Madoff then, it should also be realized that although it could still take a few years, we are also coming to the point where the rest of the Fed's Ponzi schemes will be recognized for what they are as well, with it's fiat currency printing shenanigans central to the fraud. You should notice I do not use the term 'fiat money' when referring to what the Fed does because it does not print money. In order to qualify to be called money, whatever is being exchanged must hold some sort of recognizable value, which the $ does not in being fiat specie backed by a country that owes more than it owns.
So you see, it's the Fed's Ponzi scheme that's the biggest and central, where they are now having to create copious amounts of new currency at break neck speeds in order for Peter to pay Paul in all the smaller Ponzi Schemes that are the result of the Fed's unbridled printing presses. In knowing this, the next question that naturally arises is 'how long can they keep this up'? In order to answer this question, one must first understand there is a difference in the Fed's Ponzi scheme (and other central banks) compared to others, which is why it has gone on for so long. This difference lies in the fact it does not need to find a new batch of suckers on a regular basis to perpetuate the illusion like Madoff and the others must do in order not to get caught. No, all the Fed has to do is expand its balance sheet whenever needed (print currency), which in effect creates the cash flow it needs to feed all the smaller Ponzi schemes down the chain. This keeps everybody fed, which in turn keeps them happy, and maintains the illusion something of worth besides pushing a whole lot of paper around is actually happening.
Thus, in answering the question 'how long can they keep this up', appropriately, we must respond 'far longer than a logical man might think'. This is of course because like Bernie, our self-serving bankers, bureaucrats and politicians will allow the deception to go on for as long as possible no matter how many are financially destroyed along the way, which is why an end to this insanity might be more violent than most are prepared for. And while it's true the world still accepts the $ in exchange for goods and services, and in turn foreigners issue fiat currencies of their own they expect to be honored on the same basis, pressures are mounting in this respect due to rising prices and supply concerns that are largely created as a result of the mal-investments improperly allocated capital in fiat currency economies tends to sponsor. And again, while it may not happen today or tomorrow, put in simple terms, at some point the worthlessness of all these fiat currencies floating around will be exposed, having hit the limits of their own Ponzi scheme like limits, and trade will breakdown on a global basis.
Will this be the result / cause of war? Who knows? The only thing I know for sure is when this occurs, and because international trade will of course not completely break down, a new means of international exchange will need to be devised to replaced the fiat currency based system we have today, one based on a new trust. And as you may know if you are already well versed in these matters, history teaches us there is only one way to accomplish this, that being gold (and as process unfolds silver) backed currencies. This is when the intrinsic value stored in precious metals will be released. Counties, wealthy individuals, and the general public who have been ignoring the warning signs in this regard will be caught 'flat footed' and forced to buy at higher prices. Moreover, whether we arrive at such a point due to inflation or deflation it will not matter in real terms, as the purchasing power of gold and silver will endure either scenario given tight supplies, declining production, and the hoarding that will take place.
Perhaps this is why longer duration precious metals charts continue to look attractive, because it just doesn't matter. Obviously there are enough people out there that know once the Fed's Ponzi scheme blows up the demand for gold and silver will literally explode overnight. All that has to happen in order to trigger this is a bank holiday in the States. This would turn the lights on for the 'dazed and confused'. And all we need for this to happen is for the credit markets to begin freezing up again, which is in fact happening as we speak. In terms of who is the chicken and who is the egg within the formula, the credit markets are a function of the asset bubbles, and the asset bubbles are a function of the Fed's ability to maintain the illusion it can create wealth. Once this illusion is shattered for the masses, which would happen in a bank holiday revaluation, even the dazed and confused will get it at this point and stop believing in the Fed and its worthless currency. Once the Fed looses the faith of the people, it will be all over for the usury and corruption that it represents, even though it would take time for radical change to appear assuredly.
That's what I think will happen in the not too distant future based on the way things appear to be unfolding. Sooner or later the Fed will have used all the arrows in its quiver, as clever as they have been to this point. Increasingly, they will find it difficult to expand their balance sheet, especially if it's to keep increasing monetization practices. They already have a healthy mortgage portfolio, now rivaling Treasury holdings, as can be seen here. What's next - commercial loans, credit cards, and then more Treasuries as foreigners see this madness and react accordingly. What's more, if the Fed begins monetizing more and more items (as the real economy continues to unravel), won't this put its shareholders out of business? After all, the Fed's primary purpose is to aid the banks in lending, not replace them because the public is broke. If this were to persist, how would banks increase their balance sheets, allowing them to stay in business? The scary part of all the supposed temporary actions on the part of the Fed is they are not temporary at all, and as process unfolds, one by one its member banks will be put out of business by the very actions it now hopes will re-stimulate an exhausted consumer / borrower. (See Figure 1)
And as you can see above, the bank index (BKX) may be very close to an important top, a top that could take the stocks of the Fed's remaining members (Lehman Brothers is gone) down to what may appear as unimaginable levels at this point. If the count is correct, then both bank stocks (financials) and the broads (because financials are such a high percentage) have one more minor degree wave higher directly ahead before completing the corrective bounce (zigzag) off the March lows, potentially setting the stage for a higher degree move lower in the fall. It should be noted the longer stocks rally without a correction here the more bearish the prognosis moving forward no matter what Fedsters and their buddies down at the Treasury do to attempt stopping a slide later on. This is what I would expect to see if the rumors of a bank holiday in September were to become a reality, as the more overextended conditions get right now, the harder it will be to stop a collapse later on. And the problem this time around concerning a collapse is it could become profoundly systemic, which would make what may appear as 'crazy talk' above, very pertinent indeed.
As for the Fed Statement yesterday, the bottom line is they are trying to make it appear the $ will go up by their design when they see fit (because they did not suggest monetization practices will be increased / widened/ extended), and not because they are losing control of credit conditions again. All I can say to anybody who believes this malarkey is ' I've got a bridge in Brooklyn for sale if you are interested'. What I mean here is they cannot control the imploding credit cycle, as evidenced in collapsing demand for loans of all varieties, so, in order to save face for as long as possible, and to make it appear they are in control, yesterday's Fed Statement was worded to make it look like a rally in the $ was their idea, as will be the case when they reverse it. Right now they can 'talk tough' because people believe an inventory rebuild during the second half is coming and because demand for real estate loans has not collapsed. This is what they think could keep equities strong through the second half of the year.
The problem is the markets already know all this and could reverse lower anyway considering how overbought they are, not to mention valuations. In fact it would likely be the best thing for the bulls if this were the case temporarily, however whoever is pulling the strings behind the curtain (the Fed, Treasury, etc.) is so worried about letting a slide get started, which is apparently being measured by the S&P 500 (SPX) at 1,000 and NASDAQ at 2,000, that every effort is being made to keep prices above these levels no matter the damage to market internals and sentiment, not that these crazy people pay attention to such mundane considerations. This would get in the way of their plans for continued global domination and fleecing of the public. (i.e. via the Ponzi schemes.)
Perhaps the thinking is once prices get comfortably above these thresholds (SPX at 1,000 and MASDAQ at 2000), then a correction will be engineered. Right now they are attempting to have their cake and eat it too by keeping stocks buoyed while the $ tries to correct higher. This could prove a fatal mistake in light of the BKX chart above however, because if bank stocks top out here, so will the broads, and a potentially uncontrollable slide lower could ensue. It should be noted that although this would be at odds with our historical analog based comparisons (see Figure 1), such an outcome would fit the post election pattern well, where a big slide in September could turn ugly, lasting right through the fall and testing the March lows.
Again, it's important to understand the longer this rally goes on uncorrected, the more bearish the ultimate outcome, making the rumor of real trouble in the banking system more probable sooner than later.
Good investing means gold investing to offset currency / systemic risks these days.
