The Romney Comments the Press Didn't Tell You

I'm sure you've heard Romney's comments made at a private fundraising event about the 47% of American's who pay no Federal taxes. Its all over in the press. This is not about that. This is about the comments the press didn't bother to tell you about from the same fundraiser.

From Motherjones:

Romney: Yeah, it's interesting…the former head of Goldman Sachs, John Whitehead, was also the former head of the New York Federal Reserve. And I met with him, and he said as soon as the Fed stops buying all the debt that we're issuing—which they've been doing, the Fed's buying like three-quarters of the debt that America issues. He said, once that's over, he said we're going to have a failed Treasury auction, interest rates are going to have to go up. We're living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who's loaning us the trillion? The Chinese aren't loaning us anymore. The Russians aren't loaning it to us anymore. So who's giving us the trillion? And the answer is we're just making it up. The Federal Reserve is just taking it and saying, "Here, we're giving it.' It's just made up money, and this does not augur well for our economic future.

You know, some of these things are complex enough it's not easy for people to understand, but your point of saying, bankruptcy usually concentrates the mind.

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The Gold Debit Card (Patent Pending)

No, not gold status, gold bullion.

For the past few years I've watched the Fed print money to deal with the economic malaise we've experienced since 2008. It became evident that rather than let markets clear, deleverage and reform the rot in our economic system, that we would "extend and pretend". First it was to get us through the initial crisis that saw our financial system on the brink. Then, as time went by I saw that "pretending" had become the new normal. Congress didn't do any substantial reform. Frank-Dodd was passed essentially as an empty bill with no realistic plans towards its implementation. Even today, the CFTC has delayed implementing position limits on gold and silver futures allowing JP Morgan and HSBC to (allegedly) manipulate the prices by creating naked short positions out of thin air. The Fed, once they had dropped interest rates to zero, seemed to have only one policy tool left: PRINTING DOLLARS.

Once I recognized this, it became clear that the US dollar which had already been devalued under President Bush and Fed Chair Alan Greenspan, would be massively further devalued bu President Obama and current Fed Chair Ben Bernanke. At first I looked to other currencies, primarily the Euro, but soon it became apparent that the rot and dysfunction in the financial markets was not a uniquely American problem, it was the entire western world and Japan.The US, Europe, Japan, Great Britain and even Switzerland (!) have all embarked on quantitative easing (printing) to deal with profligate spending, an excess of debt and faltering economies. No currency, it seems, will be a refuge or preserve purchasing power. Only gold seems to be up to the task.

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$3,350 Gold & $190 Crude

The consequences of unlimited quantitative easing are just now being contemplated as "endless easing" becomes official policy rather than a thought experiment. One consequence will be the repricing of assets, including gold and silver, in the ever devalued currency of the USD. For now, the US dollar is still the "petrodollar" that oil is primarily priced, so a devaluation of the dollar means the price of oil must go up as the dollar is devalued.

BofA has their own take on it given that the Fed will increase their balance sheet from $2.2 Trillion to $5 Trillion over the next few years. From Zero Hedge:

n other words, for once we actually were shockingly optimistic on the US economy. Assuming BofA is correct, and it probably is, this is how the Fed's balance sheet will look like for the next 2 years:

Or, in terms of US GDP, the Fed's balance sheet will have "LBOed" just shy of 30% of all US goods and services.

 

It gets worse:
Since the Fed is effectively becoming the marginal player in both the MBS and Treasury markets, a very relevant question is how much private market debt is left to sell. Short answer: not much. According to BofA's calculation, the Fed will own more than 33% of the entire mortgage market by 2014.
 That's half the story.
On the Treasury side, in just over 2 years, "Fed ownership across the 6y-30y portion Treasury curve is likely to reach about 50% by end of 2013 and an average of 65% by end of 2014." You read that right: in just over 2 years, the Federal Reserve will hold two thirds of the entire bond market with a maturity over 5 years (which by then will be part of the Fed's ZIRP commitment, yield 0% and essentially be equivalent to cash).
No wonder that David Rosenberg is worried that the Fed will soon run out of securities to buy (well, there are always equities of course, but the Fed will not monetize those until some time in 2015 when hyperinflation is raging).
And speaking of hyperinflation (and our earlier note that nothing "else is equal") the real question is if indeed the Fed will own $5 trillion in "assets" in 27.5 months, what does that mean for gold and crude? The answer is plotted below:

 



In case it is unclear, the answer is:

• $3350 gold
• $190 oil.

In coming days I'll provide analysis as to why continued QE will not work, except to inflate the price of commodities and (temporarily) the stock market.

To Infinity and Beyond!

 

 I was going to write a long post on the effects of QE3 to infinity announced by the Fed when I came across an extremely well written piece that describes both the plus side and coming negative side of endless printing on different asset classes. It supports the goal of this blog to examine the macro economic environment to preserve and grow wealth. You can read it here. I have also shown it below:

The Dark Side Of QE: The Next Chapter In Our Story

I am about to tell a story with a very happy beginning and a very sad end. Unfortunately, it happens to be the story we are living in today, but because we are still in the happy part of the story most people cannot see what is coming ahead. I will provide that for you here.

The immediate knee jerk reaction to the Fed's announcement today is that the Fed printing $40 billion per month and pumping it into the banking system is fundamentally strong for every type of asset in the world. Those that graduated from college in 2009 and have only been watching the market for a few years would believe this is a fact.

In essence: buy everything and just keep on buying.

Now that we know we are on the path of QE to infinity it is very important to understand how an endless running stream of new money fundamentally impacts assets differently. You'll notice a repetition of the word fundamentally because for long periods of time assets can move in the opposite direction of their fundamentals. Think of the 100% par value of subprime mortgage tranches in early 2006 or the multi-billion dollar valuation of Pets.com in 1999. Over time assets have a tendency, like gravity, to revert back to their fundamental value. This is what causes booms, busts, opportunity, and disaster.

Before we go any further, let's quickly review how QE actually works. The Fed shows up at the doorstep of primary dealer (the largest) banks with a printed bag full of money and asks them if they can come in and buy some mortgage bonds. The banks agree, hand them the bonds, and take the bag full of cash. The banks now have a new lump sum of money to spend or do with what they like. This is also new money that did not exist in the economy before which is how the money supply is increased. In reality, there are no knocking on doors with bags of money, this process takes place electronically with a few key strokes from either side. The outcome, however, is the same.

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More Money Printing- QE3 Has Arrived

The Fed, in a move that is no surprise at all, has announced indefinite monetary stimulus. Though this blog has focused on wealth preservation that has assumed more QE all along, its still disheartening to see our country continue to move down the road to ruin and a weaker dollar. My readers, of course, are well positioned to profit from the latest move but one wonders, what of the rest of America who will now face higher prices in both food and gas as this depression drags out longer?

I'll have more on the Fed's latest move later.

Is Silver About to Explode Upwards?

Bill Murphy on the (possible) end to JP Morgan's silver manipulation.

Pay attention at 17:21. It would seem that Russia too is taking advantage of artificially low prices at the expense of us (Americans).

S&P 500: from 1,400 to 400?

There's a correlation between the  10 year US Treasury and the S&P 500, which represents the 500 largest US companies. Prior to 2008 they moved in tandem when graphed against each other. Take a look at the graph below from 1999 to 2008.

You can see that the orange line tracks the black line very well for much of the last 10 years up until 2008. This was when quantitative easing started. Quantitative easing artificially inflates the price of stocks (along with most everything else) since the stocks are priced to reflect the new, lower valued US dollar.

Since that point the two lines diverge. The question is, when will they re-converge? And will it be because interest rates are rising or because the stock market, represented here by the S&P 500 index, comes down? Its an important question because if rates are held down by the Fed through continued through operation twist, then the index needs to fall from 1,400 to 400!!!

You may recall from my previous post, Three Graphs Explaining When to Dump Gold and Buy Stocks, that I am looking for the Dow/gold ratio to decline to close to 1:1. What these two concepts have in common is that US stocks, whether represented by the broad index of the S&P 500 or the more narrow index of the Dow, will have to decline for these to ration to "revert" back to normal in the case of the US Treasury and to complete an 18 year cycle in the Dow/gold ration.
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