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When will the
Fed's folly and madness come to an end? Perhaps next year, we'll begin to see
big changes at the Federal Reserve, including the sacking of Fed chief Ben
Bernanke, and his henchmen of addicted money printers, who have tossed aside
the notion of "Moral Hazard," a long time ago, and instead, are
engaging in "financial repression" in the bond markets, and the
rigging of the stock market, much to the chagrin of believers in free
markets. However, in order for this shake-up at the Fed to occur, the Republican
Party would have to beat the odds, by capturing the White House, and
majorities in both chambers of Congress.
Perhaps the
most important piece of legislation to come down from Capitol Hill this year
was HR #459, sponsored by Texas's Ron Paul, a long-time critic of the Fed. By
an overwhelming 327-98 vote, the House on July 25th voted to authorize
Congress' chief investigators to begin a forensic audit of the Fed's secret
activities in the markets, including its dealing with crony capitalists on Wall
Street and in Europe. Nearly half of the Democrats in the House voted for the
passage of HR #459, supporting the high-water mark for Mr
Ron Paul, who has been pushing the slogan "End the Fed" for many
years, and more recently "Audit the Fed."
Before the
House vote, Mr Paul noted that since the 2008
financial crisis erupted, the Fed has in essence, become the fourth branch of
the US-government. "Today we have a combination of a secret Federal
Reserve dealing with private banks who collude with private banks to set
interest rates. At the same time they collude with the executive branch. They
claim, they say we can't have an audit of the Fed because it would make it
political," Paul said.
"Well,
how can it be more political if the Treasury Department from the executive
branch gets together with the Fed and bails out their friends? And then they
want it kept secret. And they say it would be chaotic. Yea, it would be
chaotic for those people who have been ripping us off. That's why they don't
want to have it. They talk about, 'I want transparency.' And they talk about
independence. Independence to them means secrecy," Mr
Paul declared.
Mr Paul also got political support from a far-left
leaning Democrat, who is retiring from Washington politics at the end of this
year. "The Fed wants to be spared a full audit," said Rep. Dennis
Kucinich, Ohio Democrat on July 25th. "They want monetary deliberations
private. They then use that privacy shield to keep irregularities from
regulators and from congressional view, exposing investors and consumers to
massive losses. When things fall apart, to whom does the banks come to clean
up the mess? Congress! " Kucinich said.
"The Fed
creates trillions of dollars out of nothing and gives it to banks. Congress
is in the dark. The Fed sets the stage for the subprime meltdown. Congress is
in the dark. The Fed takes a dive on LIBOR. Congress is in the dark. The Fed
doesn't tell regulators what is going on. Congress is in the dark.It's time that we stood up to the Fed that right now
acts like some kind of high, exalted priesthood, unaccountable to
democracy," Kucinich added.
Despite the
broad support in the House, a senior Democrat in the Senate signaled that
bill #459 isn't likely to go anywhere in that chamber in the near future.
With the US-economy teetering on the brink of a "double-dip"
recession, after muddling through the most anemic recovery since the 1930's,
the White House and leading Democrats, see the Fed as the only savior left,
that can prevent a sharp slide in the US-stock market before the Nov 6th
Elections. After all, a sudden slide in the US-stock market indexes of -10%
or more, if left unchecked, could raise anxiety levels among a jittery
American public. A sharp drop in the stock market could dampen consumers'
spirits further, lead to further cutbacks in spending by business, and usher
in a new round of lethal jobs cuts.
Historically,
the process of "price discovery" in the US-financial markets, has
been determined by the collective judgments of millions of individual
investors, and thousands of money managers, analyzing streams of news and
information, used to set market prices. Likewise, the US-government's policy
towards the "price discovery" mechanism in the financial markets
was summed up by the term, - "Laissez-Faire," or leave it alone.
Today however, the value of a wide range of bonds and stocks that are traded
electronically on US-exchanges are increasingly determined by a handful of
central bankers sitting on the Fed's Board. There are wide spread suspicions
that the Fed is actively intervening in the stock index futures markets,
cushioning the market after sharp declines and engineering short squeeze
rallies.
"Allowing
the Fed to operate our nation's monetary system in almost complete secrecy
leads to abuse, inflation, and a lower quality of life for every
American," Mr Paul warns. Indeed, in March of
2011, the Federal Reserve, under judicial order from the US Supreme Court,
posted details of its "shadow bailout" scheme, in which it doled
out upwards of $20-trillion of electronically printed monies, to rescue Wall
Street bankers from the results of their own recklessness speculation. The
Fed's Primary Dealer Credit Facility, started in March of 2008, has lent $9-trillion
in overnight loans to the largest investment banks.These
vast sums were loaned out at rock-bottom interest without any strings
attached.
Since then,
over the past 3-½-years, Mr Bernanke has
been experimenting with several "Unorthodox" monetary schemes, -
that are designed to artificially inflate the value of the stock market, and
simultaneously boost the value of various types of marketable bonds, which
are the principal assets held by the Wall Street banking Oligarchs.
Essentially, the Fed is utilizing the blueprints designed by the Bank of
Japan (BoJ) - the pioneer of several radical
schemes, such as the "Zero Interest Rate Policy," (ZIRP),
"Quantitative Easing," (QE), and large scale purchases of exchange
traded funds in Tokyo, linked to the Nikkei-225 index.
Although the BoJ hasn't succeeded in engineering a rally in the
Nikkei-225 index above the 10,000-level, with the nuclear weapons in its
toolbox, the Fed has been enormously successful with its intervention
schemes. By leveraging $2.35-trillion of QE injections into the coffers of
the Wall Street Oligarchs, since March of 2009, and more recently, mixed with
ZIRP and "Operation Twist," - a $665-billion scheme to drive
long-term bond yields lower, the Fed has engineered an improbable doubling of
the market value of the S&P-500 index.
The
Russell-2000 index, which measures the value of the 2,000 smallest publicly
traded US companies, has also doubled from its crisis bottom low hit in March
of 2009.The USsmall-cap companies are more of a
homegrown variety, earning less than 20% of their revenues from outside the
US's borders. That's less than half of the exposure of the larger cap
S&P-500 companies that collect about 45% of their earnings from overseas.
Thus, the Russell-2000 index, should in theory, be less susceptible to the
business cycles in foreign economies, and instead, should be mostly
influenced by consumer and business demand in the US-economy. Still, while
there are variations at the margins, the swings in the Russell-2000 index
usually track the gyrations in the broader S&P-500-companies.
What's most
remarkable about the post-March 2009 recovery rally on Wall Street is that it
marks the first time ever that the US-stock market has doubled in value in
such a short time frame - of just three years. Since 1956, the average gain
for the S&P-500 index, after three years of recovery from a Bear market
low, has been +65-percent. Strangely enough, the US-stock markets' outsized
gains over the past 3-¼ years were accompanied by the weakest economic
recovery since the 1930's. Since the "Great Recession" officially
ended in June of 2009, the US-economy has grown by +6.7%. That's far less
than the Reagan recovery, when the US-economy grew +18.5% over a three-year
period, after the 1982 recession ended.
Clearly, the
US-stock market's outsized gains, blowing through the headwinds of an anemic
economic recovery, is an anomaly that's best explained by the Fed's
ultra-easy money policies. Today, the US-stock markets are under the
"command and control" of the Federal Reserve, and in coordination
with the US Treasury - wielding its powerful influence in the markets,
through its ability to print unlimited amounts of US-dollars, and according
to conspiracy theorists, the Fed also engages in clandestine intervention
forays in the marketplace, through strategic purchases of stock index futures
contracts. Only a complete "Audit of the Fed" can uncover the trail
of the central bank's secret dealings, and either
confirm or deny the validity of long held conspiracy theories of clandestine
Fed intervention.
With only
100-days before the upcoming Presidential election, the Obama White House
cannot afford to suffer through a crash in the stock market before Nov 6th.
Yet Macro traders are baffled by the resiliency of the US-stock market,
including the Russell-2000 index, even in the face of mounting evidence that
the US-economy is sliding into a recession. For example, US-retail sales have
declined for 3-straight months. Since the end of World War II, there's been
27 occasions when retail sales fell for three months in a row, and in 25 of
those instances, the US-economy was already in recession or was within
3-months of entering into a recession.
A big reason
that US-economic growth is so weak is the decisions of US-consumers to save
more and spend less. Personal saving rose by $56-billion in the second
quarter, almost equal to personal spending of $60-billion. However, spending
in Q'2 was sharply less than the $143-billion of outlays in Q'1. In effect,
consumers decided to save nearly one out of every two dollars in additional
income, a clear indication of mounting concern over job security and the
rising cost of living. Yet there are no alarm bells ringing on Wall Street.
The
US-economy is already sliding into a downward spiral, as long-term
unemployment and the lack of new job creation is curbing consumer spending.
Confidence among US-small companies dropped in June by the most in 2-years,
driven by worries that future sales will continue to deteriorate. Fewer small
employers plan to hire, accounting for the sluggish growth in payrolls. A net
3% of small companies plan to increase staff over the next three months,
according to a survey taken by the National Federation of Independent
Business. Instead, employers are relying on existing workers and temporary
hires to avoid growing their payrolls. A net 5% of small business owners
thought it was a good time to expand.
In Q'2, the
US-economy created just 225,000 new jobs, a third of which were temporary or
part time. That's just a third of the amount of jobs that were created in the
first quarter. Government spending is a net drag on the economy, still
declining over the past two years, while corporations are sitting on a cash
hoard of $1.7-trillion, and refusing to invest or hire new workers, while
banks are sitting on $1.5-trillion in excess reserves, and refuse to lend.
During the
months of April and May, more than $1-trillion was erased from US equity
values as the S&P-500 index fell -10% to the 1,280-level. Yet since June
4th, the S&P-500 index has suddenly surged higher, in a powerful upside
explosive rally to the 1,385-level. The stock market is climbing sharply
higher even in the face of a rapidly deteriorating economic background. The
Russell-2000 index has also tagged along for the ride, but is lagging behind
the large caps. This has led to suspicions that the Fed is concentrating its
firepower in the Dow Industrials futures contract, in order to get the
biggest bang for the buck.
Typically,
the direction of the US-stock market anticipates the trends in the business
cycle by six months in advance. Given the severely weakened state of the
US-economy, one could've expected that the Russell-2000 index would've fallen
into correction territory by now, if the majority of traders truly believed
that the US-economy was sliding into a "double-dip" recession that
could badly crimp earnings. So far, that's not happening. Instead, the expectation
that the Fed could launch a $500-billion QE-3 printing spree is elevating the
stock market, in a gravity defying magic act.
One year ago,
sharp declines in retail sales and anemic jobs growth, combined with an
upward spiral in Italian bond yields above 7-percent, triggered the
"Crash of 2011," that knocked the S&P-500 index for a sudden
and unexpected loss of -20%. The Dow Industrials lost 2,000-points during the
onslaught, and the Russell-2000 index fell into a mini Bear market, losing a
quarter of its value. Fearing a replay, the Fed has intervened aggressively
in the marketplace in recent weeks, and regularly sends signals through the
financial media, about its threats to begin a new round of money printing,
(QE) on a massive scale, that in turn, could be used by speculators to bid-up
commodities and equities. Thanks to the Fed's "serial bubble
blowing," the gulf between a booming stock market and a sinking
US-economy has never been wider.
"Auditing
the Fed" would remove the veil of secrecy that cloaks the central bank
from public view, while it prints trillions of dollars out of thin air,
without accountability or transparency. The Fed's QE monies end-up in the
hands of hedge funds and other big speculators, and it's agents on Wall
Street, that's used to bid-up the prices of key commodities, such as in the
energy and grains markets. If the Fed should decide to print $500-billion of
extra cash in the future, under the guise of QE-3 operation, who would
benefit and who would suffer?
Considering
the fact that the richest 10% of Americans control 81% of the shares in the
US-stock market, - this group would certainly be the biggest winner. However,
half of US-households own no stocks at all, and they would be the biggest
losers, since QE-3 could fuel an upward spiral in the cost of food and
energy. The lowest income earners already spend a third of their budgets on
food and energy. Americans living on fixed incomes and those with stagnant
wages would find that their US-dollars buy less at the grocery store and the
gasoline station. Yet the Fed doesn't even consider the prices for food and
energy in its inflation equation. A fresh blast of QE-3 would only further
widen the gap between rich and poor.
Unleashing
QE-3 is a wrong headed economic policy. QE-3 could
backfire on the Obama re-election campaign, if it manages to spike the price
of gasoline, or jack-up the cost of a loaf of bread. Already, the price of
food staples, such as corn and wheat have surged +50% higher since June 4th,
and soybeans have soared above $17 /bushel, as the worst drought since the
1934 Dust Bowl continues to plague more than half the country. The wholesale
price of unleaded gasoline has climbed 35-cents a gallon higher in recent
weeks, on speculation that the Fed could unleash QE-3. The cost of Ethanol,
used as an additive in gasoline, has increased by 65-cents a gallon over the
past 6-weeks. Mixing the elixir of QE-3 with the Dust Bowl in the Midwest
region would be like dropping a lit match into a tinderbox of explosives that
could ignite powerful rallies in the agricultural and gasoline markets, above
and beyond their already elevated levels, and fueling a whole new round of
inflation.
NY Gold
Tracking Inflation Signals in Commodity markets, Sounding the alarm bells and warning about a whole
new round of inflation, sounds extremist and rings hollow at this point,
following a year long slide in commodity prices, that knocked the Dow Jones
Commodity Index (DJCI) as much as -24% lower in the month of June, compared
with a year earlier. There were deep losses in the soft agricultural markets,
sizeable losses in metals, and shallower losses in the energy markets, for
crude oil and gasoline.
Once the Fed
switched off the QE-2 printing press, at the end of June 2011, the
inflationary pressures that were emanating from the commodity markets began
to quickly unwind. The Euro's year long slide against the US-dollar, falling
-17% in value, also weighed heavily on the global
commodities markets. By of June 2012, the drop in commodity prices had
whittled down the US's producer price index (PPI) to just +0.7% compared with
a year earlier, and sharply below its peak level of +7.1% in Q'2 of 2011.
Gyrations in the broad commodity indexes are reliable indicators of the
future course of inflation rates in many countries.
With the
PPI's rate of inflation tumbling to a razor thin cushion above zero percent,
the Fed could've been justified in taking pre-emptive action against the
threat of deflation, from taking hold in the US-economy, by launching a third
round of QE. At the core of Bernanke's radical thinking is a determination to
avoid deflation at any and all costs, usually by flooding the banking system
with a tsunami of cheap "money," in order to prevent prices from
falling. This strategy is based on the idea that "too much money,
chasing too few goods and services, can at least prevent a fall in the general
price level."
Much of the
Fed's thinking on the extreme importance of fighting deflation is described
in a Fed study, published in 2002. The Fed study - written by 13 economists,
asserts that Japan's experience with deflation shows that the central banks
should go extra lengths to revive a slumping economy well before inflation
dwindles to zero. That's because deflation is more debilitating to economies
- and harder to control - than inflation. Accordingly, as interest and
inflation rates sink closer to zero, policymakers should "take out
sufficient insurance" against the prospect of deflation, the study says.
In today's world, that means QE and ZIRP.
The year long unwinding of inflationary pressures in the
commodity markets, ending in June, has also taken a toll on the Gold market,
which fell by -20% from its all-time high of $1,925 /oz,
reached in August 2011, to as low as $1,550 /oz in
Q'2 of 2012. Gold fell to the threshold of a Bear market, with its -20%
slide, before stronger handed buyers suddenly emerged, jumping into the
yellow metal, at the same time the deflationary trend in commodities was
fizzling out. Buoyed by the drought in the US's Farm Belt, and big bets
wagered on the Fed's dangling promises of QE-3, the Gold market began to
stabilize within a sideways trading range, with support seen at the $1,550 /oz level, and stiff resistance at $1,630 /oz.
On August
1st, the Fed disappointed the Gold Bugs by keeping its QE powder dry, - and
taking no new additional actions to jolt the US-stock market higher. Without
the magic elixir of QE-3, the Gold market fell prey to profit-taking at
$1,630 /oz and soon wilted below $1,600 /oz. It was
one of the few times that Fed chief Ben "Bubbles" Bernanke has
disappointed the Bullish crowd on Wall Street. Risk-On traders have become
programmed to expect the exercising of the "Bernanke Put" and they
were bullying the Fed into launching QE-3 by lifting the Dow Jones
Industrials above the 13,000-level.
However, the
annualized rate of decline in the Dow Jones Commodity Index (DJCI) has
already been cut in half since June 4th, to around -12% today. If the DJCI's
market value can hold steady near today's 145-level by late September, its
year-over-year change would reach zero-percent, and extinguish the threat of
deflation from taking hold in the US-economy. The Fed figures it can wait
until the next scheduled meeting set for Sept 12th, to see if the
deflationary trends in the commodity markets continue to unwind.
Yet the
headwinds blowing against President Obama's re-election campaign are getting
stronger. The US-economy is sinking towards the edge of a
"double-dip" recession. Small business owners, responsible for
2/3's of the hiring in the United States, are clamping down on spending. The
U-6 jobless rate including the under-employed is stuck near 15%. Six of the
17 countries in the Euro-zone are stuck in a recession, saddled with an
average 11.2% jobless rate. Emerging economies in China, Brazil, India,
Korea, and Taiwan are also slowing and exports are contracting. The general
consensus is that QE-3 in the United States or backdoor QE in the Euro-zone
wouldn't ignite a Trans-Atlantic economic recovery.
For the seven
Presidents returned to the White House since World War II, the US's economy's
growth rate averaged +4.7% during the first nine months of their re-election
year. Ronald Reagan's economy expanded at a +6.3% annualized rate during the
first nine months of 1984. Bill Clinton headed toward re-election in 1996,
with the economy growing at a +4.5% clip. Bush was re-elected with growth
averaging a scant +2.8% the first nine months of 2004. However, for Obama,
growth has averaged just +1.7-percent. Yet at the online betting parlor at
Intrade.com, Obama is the odds on favorite to win re-election, by a 57% to
41% spread.
Traders are
Intrade.com are a bit lazy, simply figuring that the direction of the Dow
Jones Industrials between now and Election Day would determine the winner on
Nov 6th. With the Dow hovering closer to the 13,000-level, Obama's odds of
winning re-lection are pegged at 57%. If the Dow suddenly skids towards the
12,000-level, Obama's odds of winning would fall towards 52%, essentially a
dead-even race with the Republican challenger Mitt Romney. If the Dow falls
below 12,000 however, Obama could lose the upcoming election.
Right now,
Bernanke is playing the stock market like a fiddle. Strongly hinting at QE-3
to the media in order to jig the market upwards, - then disappointing market
Bulls after big rallies, by holding pat and keeping his powder dry. Mr Bernanke aims to stay politically neutral ahead of the
Nov 6th elections, and the last window of opportunity to launch QE-3 before
Nov 6th has probably closed. If the Fed unleashed QE-3 before Nov 6th, and if
the Republicans capture the White House, the Fed chief would pay a heavy
political price in January. The "Audit the Fed" bill would become a
reality and so would the dismantling of the Fed's secretive interventionist
schemes in the marketplace. Mr Ron Paul has set the
wheel in motion, - only time will tell if American voters are ready to
restore the slogan, "Free Markets for Free People."
Gary Dorsch
Editor, Global Money Trends
www.sirchartsalot.com
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