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As you are
doubtless aware we are living in a new paradigm – the age of global QE has
arrived. Amongst the major power blocs it started with the US, spread to
Japan, which adopted it with a particular gusto, after suffering from
deflation for decades, and just has been taken up by Europe in a big way,
after waiting for half its young people in many constituent countries to
become unemployed due to the ravages of deflation. Smaller countries will
have to join in or their currencies will soar and they will become
uncompetitive.
It is vital to
understand that, having become a universal policy, QE is here to stay – this
is a genie that can’t be put back into the bottle. The reason is that any
attempt to reverse course and rein it in would quickly lead to soaring
interest rates because of immense debt levels, a global market crash and a
liquidity crisis, in other words a deflationary implosion. Another important
to note is that in this “Golden Age of Fiat” where money does not have to be
backed by anything and where our masters are accountable to no-one, they can
indulge in as much QE as they like.
QE has a
number of huge advantages for the ruling elites. First of all it allows them
to remain in power indefinitely, because credit crises and the social strife
that follows can be avoided by the simple expedient of printing ever more
money – the European elites were slow to grasp this point, but judging from
the magnitude of their just announced QE, they definitely understand this
now. As we know, one of the maxims of the elites is to “privatize profits and
socialize losses” – put crudely and simply, when they make money they keep it
all to themselves, but when they goof up and lose money, they will push the
bill onto the general population, the middle and lower classes – a brazen and
glaring example of this being when the “too big to fail” banks and other big
institutions in the US got society at large to bail them out at the height of
the financial crisis via TARP, the Troubled Asset Relief Program, which of
course was not put to a vote.
QE is just
another enormous scam, a principal objective of which is to socialize bank
and government debt by inflating it onto the masses. They print money (QE),
hand as much of it as they please to their crony pals in banks and other
powerful elite controlled institutions, and then the increase in money supply
reduces the relative magnitude of government debt, since while the debt is
nominally the same, there is much more money in existence to service it or
pay it off. The public then picks up the tab in the form of inflation as the
increased money supply drives up prices.
The reason for
the bizarre mismatch where stockmarkets have been continually rising but commodity
prices have been falling is due to the fact that the elites are awash with
cash to play the markets, while the average poor schmuck on the street is
getting poorer and aggregate demand is diminishing as a result, reducing the
demand for raw materials. One would think that this must eventually impact
stock prices as overall sales fall and profits drop, but in the crazy world
in which we now live, we have to factor in the elites with their huge bags of
free cash that they have to invest in something, which includes the big banks
of course. Their cash mountains resulting from QE could overwhelm old
fashioned considerations like corporate profitability and drive stock prices
higher regardless. This can be a difficult concept for older investors, who grew
up in an age of relative fiscal propriety, to grasp.
A crucial
point to understand is that the world is now actually run by and for the
benefit of the big banks, who are a “de facto” World Government. Governments
and politicians universally do what these banks require of them, or they
suddenly find themselves sidelined or usurped – or worse. The banks have
encouraged everyone and everything to get into as much debt as possible to
maximize profits – they spirit money into existence and then turn round and
lend it out at comparatively vast rates of interest. They are using to QE to
clamp interest rates at 0 (for them), so that they can maximize the
differential with the rates they charge, resulting in, needless to say, huge
profits for doing very little, and, as mentioned above they use the zero
rates to stop their massive debts from compounding and use the QE to inflate
them away at public expense.
The above is
not abstract theorizing – it is necessary that we understand what the game
really is in order that we have a greater chance of being on the right side
of the trade. If we really are in the new age of global QE, then we are
living in a very different investment landscape to what would otherwise be
the case, with the Masters of the System now able to adjust the faucets to
decide how deep recessions will be, and even whether there is a recession or
not – and don’t forget a recession to them is when the value of their
investments falls, not when the guy on the street is broke or unemployed.
This is why we have the situation where big Western stockmarkets like the
FTSE in the UK or the S&P500 in the US are near to all-time highs, while
the average middle class person is struggling.
Comprehending
that we are in a new age of global QE, where they can print up as much money
as they like at any time, changes the way one looks at markets. This gives
the elites the power to manipulate markets on a grand, unprecedented scale.
A dramatic
example of such gargantuan manipulation may be about to play out in the London
stockmarkets. The normal interpretation of the giant pattern forming in the
UK FTSE index which we looked at not long ago, using traditional Technical
Analysis, is that a huge Triple Top is completing, but the government may be
able to avert this outcome by simply doing QE on a sufficient scale to head
this off and force an upside breakout. All they have to do is keep pumping
money at a sufficient rate and make sure it reaches those whose task it is to
keep the market levitated. This is the “new paradigm” that we wrote of near
the start – never before have governments had such power to control markets.
If they succeed in breaking the FTSE out the top of its gigantic Triple Top,
where there is huge resistance, this index will soar. If it starts to descend
from this Triple Top, things could get ugly in a hurry.
 
Click on chart
to popup a larger clearer version.
The markets’
reaction to the Fed yesterday was negative, as we can see on the 6-month
chart for the S&P500 index below…
If the FTSE does break out upside from its Triple Top, then US and other
markets should soar too. The US should remain “leader of the pack” for
various reasons. The obvious one is that its currency, the dollar, is the
global reserve currency. The next is that it is “smelling of roses” right now
because it is not doing QE, while other centers of economic power are,
although the fact is that the Fed still has a huge tub of money from the last
big QE to goose the markets. Still another one is that the US is
geographically homogeneous and distant from world trouble spots, unlike
Europe which is composed of potentially warring tribes. So while there might
be some nasty shakeouts in the US markets over the short to medium-term, as
might be occasioned by a disappointing earnings season, there should be
plenty of cash sloshing about to drive them back up again. All this is a
reason why we are looking at things like airline stocks, which stand to
benefit also from the drop in the oil price.
The other side
of this manipulation coin is that they also have to power to beat down things
they don’t like, such as gold and silver, by endless waves of naked shorting
– but this will only work until the gap between the physical and paper price
becomes untenably large. Given the rampant global QE now underway and the
resulting destruction of currencies, and the fact that most of the available
physical gold in the world has already been bought up by Asian countries,
most notably China, their power to beat down the paper price of gold looks
spent, and it is starting to rise again, after the onslaught of the past 3
years.
The end result
of relentless global QE would be a hyperinflationary depression, where prices
rise strongly because of the endless increase in money but get people get
poorer as wages fail to keep pace. When you mention hyperinflation people
think of it as prices rising by thousands of percent per year, like in the
Weimar Republic in Germany or Zimbabwe at its worst, but it doesn’t have to
be anywhere near that bad to be hyperinflation – if prices only rise by 60%
per year, most citizens would be ruined within 2 years. That could easily happen
if this QE gets out of hand.
When we
consider the outlook for gold and the impact on the gold price of all this
relentless global QE, any fool can see that if you continually increase the
money supply, the cost of something finite like gold is going to rise – and
possibly rocket, especially as a lot of the physical supply of gold has
already been soaked up by more shrewd players like China. This means that the
jokers on the Comex with all their naked shorting are going to be way out on
a limb, when the price gap between paper and physical gold yawns to untenable
and unsustainable levels – it is already big.
So even though
the blizzard of unbacked money created by the ongoing global QE can be
expected to drive the prices of many investments like stocks higher and
higher, gold (and silver) are not going to be left out for much longer. They
are already starting to come to life. Older investors will recall that gold’s
gigantic bullmarket of the 1970’s was punctuated by a big 2-year correction
in the middle of it that corresponds to the big 3-year correction that we
have just witnessed, before it took off higher again into a massive ramp and
a spectacular blowoff top, which is what we should see repeated again, only
this time round, given the unprecedented excesses that now exist, it is
likely to be orders of magnitude larger.
The biggest danger to the system that could yet – and at any time- cause
markets to crash would be a widespread failure of confidence in the banks and
the system. So far investors don’t seem to care about banks and governments
destroying their children’s future with their reckless QE programs, but
should that change and investors “get cold feet” things could get nasty in a
hurry. We are going to need to keep our wits about us.
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