Wednesday, December 18, 2013

The Printing Continues (But just a little less)

The Fed today announced it will reduce its QE of $85 Billion per month to a mere $75 Billion per month beginning next month. The stock market jumped 292 points on the news the printing party would go on. Of course, this news was celebrated as "evidence" the recovery was well under way. But the Fed said no such thing and positioned themselves to either increase or decrease the printing depending on future economic data points,

Michael Pento, pictured above said it well in a KWN interview:
Eric King:  “Michael, as the economy rolls over in Europe and in the United States, how will they (the Fed) keep the taper on without a full blown collapse?”

Pento:  “They won’t be able to.  In fact, a reporter asked Mr. Bernanke what would happen if the economy were to falter in 2014, precisely due to the taper, and he said, ‘The taper could be reversed and asset purchases could be increased.’....

“I think that’s exactly what’s going to occur because there is no way the economy can withstand rising interest rates because the nominal level of debt is much higher than it was at the start of the Great Recession.  We have about $55 trillion in total public and private sector debt, and that is $6 trillion higher than it was at the start of the Great Recession in December of 2007.

So if we have more debt now than we ever had before, and it (the debt) is at the same level as the GDP or output of the economy, then how can it possibly be that rising interest rates brought us into the Great Recession at the end of 2007, but rising interest rates won’t collapse the economy in 2014? 

The answer is it absolutely will.  It will crush real estate, the stock market, and the economy.  And I believe that the tapering will be aborted some time in 2014, and a permanent form of QE will be ushered in -- enough QE in place to keep interest rates negative in real terms, and to keep banks buying stocks and bonds. 

The Fed will never stop its manipulation of money supply and interest rates until they get their desired inflation rate, which is at least 2% to 2.5% as they measure it.  That is why gold and mining shares, which have been decimated in the past year and a half, have no place to go but higher.”

I absolutely agree. This will not mark the beginning of the end of QE. It simply cannot happen because interest rates will begin to rise which would send us into an obvious depression for a number of reasons, including a quadrillion dollars worth of interest rate derivatives.

Also his last point is a good one; both gold and gold mining shares have huge upside from here. Back when we had mostly free markets one could easily predict asset classes that were likely to outperform simply by looking as which asset classes had done the worst over the 2-3 prior years. Gold, and especially mining shares have been absolutely slaughtered the last few years making them a cheap buy. That would be true even without the strategic importance of physical gold in global macro economics and China's longer term plans to create a gold backed currency. With these goals of China, I'm very bullish on the future of physical gold and the mines that can supply future supplies.

And finally a quick look at the "real world" economy. Below are the top 10 of  83 "real world" numbers that illustrate where the economy is now even as stock markets make new all time highs. The complete list of all 83 can be found here.

#1 Most people that hear this statistic do not believe that it is actually true, but right now an all-time record 102 million working age Americans do not have a job.  That number has risen by about 27 million since the year 2000.
#2 Because of the lack of jobs, poverty is spreading like wildfire in the United States.  According to the most recent numbers from the U.S. Census Bureau, an all-time record 49.2 percent of all Americans are receiving benefits from at least one government program each month.
#3 As society breaks down, the government feels a greater need than ever before to watch, monitor and track the population.  For example, every single day the NSA intercepts and permanently stores close to 2 billion emails and phone calls in addition to a whole host of other data.
#4 The Bank for International Settlements says that total public and private debt levels around the globe are now 30 percent higher than they were back during the financial crisis of 2008.
#5 According to a recent World Bank report, private domestic debt in China has grown from 9 trillion dollars in 2008 to 23 trillion dollars today.
#6 In 1985, there were more than 18,000 banks in the United States.  Today, there are only 6,891 left.
#7 The six largest banks in the United States (JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) have collectively gotten 37 percent larger over the past five years.
#8 The U.S. banking system has 14.4 trillion dollars in total assets.  The six largest banks now account for 67 percent of those assets and all of the other banks account for only 33 percent of those assets.
#9 JPMorgan Chase is roughly the size of the entire British economy.
#10 The five largest banks now account for 42 percent of all loans in the United States.

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