Tuesday, September 27, 2011
September 27, 2011
By Brandon Smith
The psychological effects of the Dow are undeniable. When the average investor or even consumer sees green, life is good, even if every other indicator in the economy clearly says otherwise. For the common Dow lemming, “green” supplants reason, mathematics, instinct, and blatant logic. If mushroom clouds came in that particular shade of bull market green, nuclear holocaust would be welcomed with beers, barbeque, and jubilee. Green in the Dollar Index is no different. Many market joyriders and MSM parrots decree victory for Team Dollar without even a remedial understanding of the implications of dollar strength being measured against multiple faltering currencies across the globe. Just because the Euro, for instance, is nearly as superfluous as the greenback, this does not mean the dollar is a stable or healthy currency by default. They are BOTH screwed. But hey, as long as that little ticker points up, all is right with the world……right?
Red is the ultimate party stopper. Red makes Americans pause and reflect. It makes them question their economic sensibilities, their political loyalties, their futures, perhaps even their choice of marriage partners or favorite football team. The sight of red in the Dow brings to mind thoughts of recession, depression, collapse. At bottom, red makes our government and the people charged with safeguarding U.S. financial good-time-tootie-fruitiness look bad. Red?!Red?! Vote the bums out!
Given this American predisposition to ignore all other indicators except the Dow and sometimes the DXY, you can imagine why the private Federal Reserve in tandem with the U.S. Treasury has focused so much of their attention on stimulus measures designed to keep these two indexes predominantly in the green since the derivatives crash of 2008. They have done this through direct and indirect injections of fiat into market systems which have acted as a buffer; multiple yet temporary patches in the hull of a scattershot ship on the verge of being swallowed by the voracious waters of the briny deep. The problem is, after over three years of this activity, the opiate of fiat is starting to lose its euphoric aftertaste. Like some dirty track-marked heroin fiend, the U.S. economy is now nervously scratching its rancid fiscal sores and screaming for more of that sweet sweet fiat juice. The more we get, the more we need later down the road to satisfy our dependency.
Obviously, QE1 and QE2 accomplished nothing. The bailouts and TARP accomplished nothing.The ongoing U.S. bailouts of the EU at the American people’s expense continue to accomplish nothing. All we have received for trillions upon trillions of inflationary dollars created has been a few years of static 20% real unemployment, higher food and energy prices, an endlessly imploding housing market, virtually bankrupt states and municipalities, and the first ever downgrade of the U.S. credit rating in history. Oh….and a wonderfully fake bull run in the Dow, which I suppose, makes up for all the previously listed annoyances, at least, until recently…
In past articles, I have often pointed out that if the investment community EVER caught even the slightest inkling that the Fed might end stimulus measures and let the markets stand on their own, they would jump ship and the Dow would collapse back to levels seen in 2008 or worse.Well, with the highly inconclusive and vaporous announcement of “Operation Twist”, a program designed to sell short term treasuries in exchange for long term treasuries (???), the Fed sent just such a message. One might wonder, especially after the U.S. lost its AAA credit rating, why the Fed would bother to hesitate to announce QE3 and keep the markets plugging away?They’ve never had any qualms about revving up the printing presses before, so why change posture now?
Answer: Sometimes there is advantage in allowing the markets to bleed red too. Here are some reasons why…
Stimulus Ignoramus: Though most Americans now understand the basics of bailouts and quantitative easing, including many of the risks, most still think that these programs are somehow limited, or exclusive. In reality, there is no QE1, QE2, TARP, etc. These are not separate stimulus efforts that actually started and concluded independent of one another. They are all a part of one long fiat injection into our economy that never ended. The insanity is that a large percentage of investors actually believe that because Bernanke did not yet announce QE3, there is no stimulus going on today! The Fed is ALWAYS creating fiat. Some of it is reported, most of it is not. Ask yourself this: Are interest rates still at near zero? If the answer is yes, then the fiat still flows. The Fed has allowed the public to assume that injections have ceased even though they most certainly have not.
Stimulus Impotent: Even before the S&P downgrade, the markets had begun to strain and tremble. In any Keynesian inflationary effort on the part of government, there comes a point at which the force of debt and the force of fiat reach a climactic peak. From then on, even the illusion of stability becomes impossible, and both centers of gravity tear upon one another and spiral out of control. The Fed knew full well this point had been reached, and so, reversed its rhetoric to give the impression that it was stepping back. Actually, the markets will deteriorate despite any Fed intervention from now on. Stimulus at this juncture will only serve to keep the government functional through treasury purchases while the rest of the system collapses. This is what happened in Weimar, Argentina, and to some extent Russia after the Soviet breakdown.Cleverly, the Federal Reserve covered its own tracks by making it appear that the inevitable Dow disintegration was somehow caused by the lack of QE.
Deflation Cheerleaders Return: Like mythical mucous addled hobgoblins drawn to the cries of helpless newborns, rabid deflationists have oozed back out of the muck after a long hibernation in response to the current Dow descent to proclaim yet again that the dollar is “too strong”, and that even more printing is called for. As stated, they fail to understand the nature of the Fed, and the fact that stimulus is always ongoing. Simultaneously, they actually serve Fed interests, whether they know it or not, by promoting even more dollar devaluation as “practical”. For some reason, many deflationists have adopted the strange and unsupported assumption that debt somehow “cancels out” overt currency creation. This is simply not so. Yes, fiat dollars can be used to pay off a debt, but those dollars do not suddenly disappear after they have entered the system. They stay, and circulate, and collect, like mold, or a beard of bees. Neither is pleasant to clean up. Hyperinflation of the money supply is not only possible during unregulated stimulus of a highly indebted system, it is a sin qua non. In America’s immediate circumstance, the likelihood of stagflation is high. This process combines the worst elements of deflation and hyperinflation into a single, enormous, and incredibly painful boot in the ass. Deflationary purists will feel the sting soon enough…
Dollar Primacy Nostalgia: While much of the rest of the world is slowly but surely walking away from the dollar and dollar denominated assets, many American investors still cling to the old days, when sour markets meant a dash for the greenback safe haven. Could the dollar index reach as high as 77 or 78 in the course of the next four weeks? Absolutely. Does this make the dollar a legitimate safe haven? No. The secret of the dollar index magic trick is rooted in how it is calculated; using comparisons to world currencies that are also in dire straights. As multiple currencies fall WITH the dollar, they make the dollar index appear as if it remains stable, or even superior. On top of this, we still have a very active Fed printing to prop up treasuries, which also artificially strengthens dollar sentiment, at least until other countries which own our debt begin to dump it completely.
Trade War Blitzkrieg: Last Tuesday, U.S. representatives sought trade restrictions against China in poultry markets, which might not seem like much, but the move, in my view, was to test the waters for even further confrontation with China. A crumbling Dow has the advantage of adding pressure to the renewed issue of economic warfare. A trade war is the perfect trigger for a treasury and dollar dump by China, which is on the cusp of taking such action anyway because of the violent nature of inflation within its own borders. After several failed attempts to soften inflation by raising bank reserve requirements, the only option left to the Chinese now is a sharp valuation of the Yuan to increase the buying power of the citizenry. This kind of valuation is most easily achieved by a dumping of their vast dollar holdings, a steep devaluation in the dollar, leading to rapid foreign capital redirection into the Yuan. China denies they would take such action, though they have openly admitted the possibility. Don’t buy it. If price inflation continues at similar levels, the Chinese will have no other choice but to take extreme action.
Thinning The Commodities Herd: Its funny, but every time there is a pullback in commodities like gold and silver, the same people come out of the woodwork to announce the death of precious metals. Metals then, of course, make an astonishing comeback despite all odds, and these men disappear again into their respective hovels. The reason they always get it wrong is simple; they are incapable of looking at the big picture, and few, if any, have memories that go past last week. Firstly, in an economy at the edge of utter disaster, commodities are invariably erratic. Expect to see 10% swings in gold and silver up or down CONSTANTLY from here on out. This is not unusual. It is normal considering the circumstances. Another element that is unfortunately deeply ingrained is the ETF markets, which are entirely fraudulent, and not representative of true physical metals values. However, lets get some perspective here; during the 2008 Dow drop, silver hit lows between $11 and $13. Today, even after a severe drop, it hovers near $30. There is a big difference, and that difference is due to dollar devaluation. Weak hands will buckle. The cheap silver and gold will be snapped up by smarter buyers (Asian investors and central banks, most likely), metals will climb back to the mid thirties, QE3 will be announced (eventually), and from there, the sky is literally the limit. In the meantime, the Fed has just deprived a few more people of their sound money. Silver at $30? Gold at $1600? That’s called a buying opportunity, folks, not a last chance to sell.
Fear Makes The Heart Grow Fonder?
Resistance to Fed liquidity measures has been substantial. Three years ago, no one knew what the Federal Reserve was, or even cared. Today, most of America is at least aware of its existence and not enamored of its purpose. The latest downturn in markets, as well as seeming Fed indecision, I believe, not only signals the next aggressive leg down in the ongoing collapse of the U.S. economy, but also a very deliberate strategy on the part of our central banking elite to drive the public towards a consensus desire for further intervention. That is to say, the Fed wants us to beg for more QE, instead of fighting against it.
There is quite a bit of practicality to this tactic. If we demand stimulus measures out of fear just to slow the Dow hemorrhaging, then the Fed is able to deflect most of the blame when such measures eventually go awry. The American people become the cause of dollar destruction, instead of the Fed, and this blame will permeate into international opinions and world views.Make no mistake, QE3 is the end of the line, and it will be announced, or at least quietly enacted. At this time, our government is operating upon the fumes of Fed fiat, and nothing more.Without it, the lights go out. The only tool that exists, or ever existed for the government to influence the appearance of the economy is fiat creation through the Fed. Whether we ask for it or not, this tool will be utilized. They would just prefer that we went along with the program willingly…
We cannot forget that the Fed is a haven for open proponents of globalism. The eventual goal of central banks has always revolved around a weakening of the U.S. system for the sake of “harmonization”. This project ends with the debasement of the dollar and the loss of its world reserve status to a basket of currencies represented by the IMF’s SDR. For this end to be reached, the Fed MUST continue liquidity measures like QE. We don’t need to ask for it, nor should we ask for it. They will certainly pursue QE3 regardless. The trick to winning this game is in refusing to participate, or at least, refusing to play by their rules.