The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, February 18th, 2014.
We've all heard the term 'one trick pony', which was spun into a classic pop (and movie) hit for Paul Simon back in 1980. Quite a catchy tune for sure. But for our purposes, which is to take a satirical look at the Fed (yes my life insurance is all paid up), we are interested in its classic meaning, that being "someone or something that is skilled in only one area"; or, "someone or something that has success in one area". It is from this we coin the term 'one trick phony' to describe the Fed, both the title and focus of this essay. Because in spite of all its apparent complex inner workings, when reduced to its primary modus operandi, in the end, all the Fed does is devise increasingly creative ways of debasing the currency, which if you understand these things, means they print copious amounts of fiat currency, better known as Federal Reserve Notes (FRN's), or dollars($), which can be characterized as 'phony money' because they essentially has no hard basis.
So you see, this is how we conjured up the title for this essay, One Trick Phony, because we wanted to make a strong statement about how the Fed, and its global counterparts, have been increasingly destabilizing the now 'financialized' larger economy, which has brought us into a state of 'constant crisis'. Of course if you were to ask a Fed official, they would say that the Fed is in place to promote price / system stability, with its mission changing throughout the last 100 years to incorporate increasing duties in the management of the economy. (i.e. because currency debasement has increasingly hollowed it out.) Moreover, despite what they say, what the Fed actually does, is create phony money for an increasingly debased society that condones this activity because it's 'easy', which is where we get the term 'easy money', which the new Fed head, Janet Yellen, the first woman in this position, was eager to promise the other day.
Why could her comments be perceived this way?
Like Greenspan and the potential for a Y2K disaster, the 'unknown' if you will, right now (and although it may not be obvious), Janet Yellen is actually facing a similar problem she must feel needs to be dealt with as well, that being the 'unknown' again, in the midst of the biggest bubble economy(s) man kind has ever known. So, although money supply growth rates are basically flat on a year over year basis at the moment, where in fact it is being said the Fed is currently engaged in 'defacto tightening' with quantitative easing (QE) 'tapering', you can bet what she has to work with, whether included in official money supply growth rates or not (think of all the QE poured into stocks not included in money supply growth rates this is potential latent inflation), will eventually end up in real goods and services.
That being said, it would be reckless to characterize Yellen's embroil to that of either Greenspan or Bernanke in my opinion, where in fact she has more likely inherited a poisoned chalice as opposed to a prestigious position, with the larger Fed cycle now fully mature. (i.e. characterized by greater instability.) What's more, and with the average life expectancy of a reserve fiat currency being approximately 27 years, it could be argued the Fed has lived on far past it's useful function measured by any standard. Because it must be realized the Fed holds no useful function in our society past enriching itself and its crony owners (it's member banks), counter parties (other central banks), and comrades (think high level business leaders and politicians). They are a 'one trick phony' that could be easily replaced with sovereign currency issuance at no interest cost to the public. There's only one problem with such a strategy - the last two guys that tried this, Lincoln and JFK, were assassinated.
So don't expect to see either Obama or Yellen rock the boat (act responsibly against the status quo), as they are both bought and paid for bureaucrats. If this is true, then why is the Yellen committed to continue tapering if the economy is sluggish on the whole? Answer: Because It's the second year of the Presidential Cycle, and as per tradition the Fed is tightening, along with the understanding it can because it's deficits are shrinking. What's more, such policy is said to support the status quo's BS story that the economy is recovering, which is of course the bureaucracy's modus operandi in maintaining legitimacy in the public's eyes. Moreover, and on the international front, tapering is America's attempt to re-enforce the legitimacy of the $ as the world's reserve currency. Of course one day the $ will lose its reserve currency status when foreigners are no longer willing to trade worthless FRN's for real goods and services (when China is strong enough militarily which should not be much longer), which will jag domestic interest rates higher, along with necessitating a turning of the screws on the printing presses. This will be the last straw for an already besieged American consumer, middle class, etc. as prices spiral higher out of control.
And again, you should remember the Fed does not need to print a whole bunch of new money to see general price levels take off, as there is already a great deal of latent inflation resting in the stock market and other assets that will eventually find its way into goods and services prices. But of course the Fed (and friends) will print copious amounts of new money the next time stocks take a tumble being the meddling stooges they are, which will just add to the distortions, mal-investment, and price inflation down the road. Yes, 'Generous Janet' is likely a term that will be heard frequently in the future once the public 'sees how she rolls', loved by the mob while the party rages on, then loathed for her unwitting moral ineptitude. Of course one could argue she (and the Fed) is only doing the will of the people, printing all this unsubstantiated currency (FRN's are not 'money' in terms of having intrinsic value), and you would be right, although it should be pointed out the Americans are the most drugged and delusional people in the history of the planet - not to mention hell bent on self-destruction.
Now we could go on to bore you with an extended discussion on the differences between 'currency' and 'money' (done many times before), but you will be spared this today save these few choice words recently penned by John Rubino on how bitcoin fits into the grand scheme of things. I like this accounting by John because it exposes the frailties associated with crypto-currencies, which are essentially just another variety of fiat currency, bitcoin down some 50 to 60% depending which exchange you are looking at (and was down some 90% at one point last week), which you should know could happen (likely to a lesser extent) to any fiat currency, even (especially) the $. Because the backlash of issuing all that currency (debt) in the end is collapse, as the usery takes its toll on an over-extended and debased public. In the end, the Fed will need to monetize everything from stock and bond markets to little Johnny's shoes, with a check in every mailbox, or you will have anarchy.
Impossible - no way - this is what the consensus thinks today. The powers-that-be simply have the situation too well controlled. To these people I say look east my friend, because the real 800-pound gorilla in the room is not the US, but China. Like bitcoin, the Chinese are the relatively new and unproven currency in the system, both unpredictable and unstable due to this inexperience, not too mention the corruption. So, like the Fed in the 20's, they have gone 'too far' and cannot pull back without collapsing the system, which would be felt around the world given the degree of connectivity today, a process that is already underway. This instability in Chinese capital markets is eerily similar to what was happening in North American markets in 2007, a process that began in February of that year as well. Overall however, the set-up in stocks right now is more like that of the year 2000 with tech blowing off into March. The break higher in Nasdaq / Dow Ratio into the 'last ditch' resistance before it breaks into 'extreme bubble territory' is the clue in this regard, where apparently aggregate liquidity conditions are still 'just fine' (think China) at the moment. (See Figure 1)
As you may remember, and as annotated above, such an outcome must be considered unlikely given we still reside within the same generation that participated in the last tech bubble. So to have tech stocks vex the 2000 highs once again would be unprecedented in history for a wide participation market where the general public is fleeced. But could it be that people are so deranged and desperate these days we in fact have this first; or, is it the Chinese (new market participants) doing the buying here (apparently not); or, is it the bureaucracy's price managers and the machines the reason it looks like tech stocks are ready to trip the light fantastic again? Your guess is as good as mine in this regard, where the only thing that matters is the price action. And again, with the timing of this sequencing being so similar to that of 2000 it's hard to ignore the possibility of a 'moon shot' here, so beware, as stocks look set to tear the bears a new one - one more time. (See Figure 2)
Referencing mention of a negative divergence in key indicators possibly being necessary before a price top is vexed, you may remember such an observation concerning the monthly plot for the S&P 500 (SPX) made some weeks back noting this same likelihood here as well; again, as was the case in the year 2000. Given money supply growth has rolled over and margin debt levels have never been higher such an expectation may seem both improbable and reckless, but hey, that never stopped the good people (heavy on the sarcasm) on Wall Street before, so why should it be any different this time. (i.e. have you seen the movie Wolf Of Wall Street.) I mean we're talking about a bunch of crazy people here right, so anything is possible. If the investing public is stupid enough to give these guys their money, expect it to be invested no matter how overbought the market. Apparently Yellen's comments this week soothed nervous investors, who poured their money back into stocks, raising the specter of new highs in coming weeks. (See Figure 3)
And again, if the sequencing is reminiscent of the year 2000, then timing calls for the advance to last well into March, led by tech stocks. Obviously such a move would cause a divergence away from the 1929 analog pattern, but it would not hurt the rather large 'three peaks and a domed house pattern' that calls for a move back below 10,000 on the Dow in short order, possibly making up for lost time once it begins. This is the thing one must be wary of in spring - the risk of possible catch-up moves (fractals) to the downside. Because if this thing ever gets away from the authorities that's exactly what could happen, where margin debt must be purged from the system at some point. This time around, with the machines such an integral part of the formula, we could see something akin to 1987, a very quick move to the downside that fills the vacuum.
Of course with market management and manipulation paramount on a good bureaucrat's mind these days, one does need wonder just how far they would let things go before announcing an intervention, perhaps something like closing the stock exchanges, and then announcing a doubling of QE. And it's not just what Yellen will do anymore as well, where the ECB is already close to announcing its own QE program, and Japan would undoubtedly not be far behind, not to mention China. So, perhaps it's better to think in terms of 'real returns' in knowing this no? Perhaps it's better to think of how everything stacks up against gold because if equity markets are going to be supported indefinitely, which is the script according to the powers-that-be, then at some point gold will need to play some serious catch-up of it's own considering the Dow / Gold Ratio (DGR) has apparently turned south for real once again, meaning any gains / strength in stocks will be amplified in the metal of kings.
Either way things turn out, gold (and silver) are the place to be moving forward, with a smattering of high quality precious metal stocks perhaps, in order to participate in the mania that will come in the shares once bullion becomes unavailable to the public. (i.e. just in time for inflation to finally become evident no doubt.) It's a funny thing when you suppress the price (supply) of commodities as demand is actually rising; a 'powder keg' is lit with the only question being when she blows. This is the case with precious metals right now, and growing, which will add a great deal of fuel to the fire as the mania builds running into 2021. (i.e. think Fibonacci 21-years from the year 2000.) Of course you should also be wary of the observation precious metals (not just the stocks either) appear to be positively correlated to the stock market right now, where again, if stocks do blow-off into March, would mean they are at risk with the broader spectrum going into spring as well, so keep this in mind.
And I will say it again because it's important. While precious metals shares may not be overbought (except on some short-term measures), now that the large caps have rallied 40%, small caps 80%, and some (many) juniors doubled off the lows, it's safe to say precious metals shares are also no longer oversold, and for this reason possibly subject to deleveraging / liquidity / forced margin selling risk, especially if they maintain a positive correlation with the broads running into a blow-off top in March. Even if the top is in for the DGR, this would mean precious metals shares would be subject to 'accident risk' running into summer that could see many of them revisit the their lows, if not worse, depending on whether this is 'the' big deleveraging event or not. Good market historians will remember it took six-months for precious metals shares to find their respective bottoms in 2000 once stocks topped out in March, and if this sequencing and correlations remains in tact, this time may be no different.
So, bottom line is the traders appear to still be in charge, where aside from accumulating bullion for the long-term, the shares still appear risky past shorter-term timeframes. Of course if Dave is right and stocks don't blow-off into March, but instead grind higher for an extended period of time (which again must be viewed as unlikely given present record margin debt levels), precious metals might just bumble along for the ride under such a scenario. Again, nobody can say for sure exactly what is going to happen in this regard, making portfolio planning that much more important at this time. Therein, based on the possibilities, it makes sense to continue to accumulate physical bullion for the long-term, but trade non-core paper holdings at what appear to be 'high risk points' (like at options expiry in March, which marked the top for stocks in 2000) and overbought situations. This week looks to be one of those situations, where a combination of overbought conditions and peaked sentiment going into options expiry should sponsor a correction.
Again however, if the script is to be maintained, both the broads and precious metals should find a bottom by Friday, looking for new highs for their respective moves running into month end, and beyond. The Registered Retirement Saving Plan (RRSP) contribution deadline (in Canada) that is looming on March 1 will aid the juniors in this respect; so again, watch yourself! Don't buy into this strength. Buy a pullback this week if you are into the shorter-term speculation game.
Just wanted to point that out to you because nobody else on the web is talking this way anymore, where it appears all caution has been thrown into the wind due to blind greed and / or avarice.
See you next week.