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Considering
how crazy things in the financial world are getting these days, the above
title on that very subject seemed both appropriate, and intriguing. Why
intriguing? As some may have already discerned, the title is intriguing is
because of the revealing parallel that can be drawn between the behavior of
Hal (the too smart for it's own good -- or anybody
else's -- computer in the movie) in Kubrick's classic 2001: a
Space Odyssey; and the Federal Reserve,
which unbeknownst to most these days is submerged it's
own brand of 'crazy behavior'. What kind of crazy behavior? After all, it's
the Fed -- right? What could they be doing wrong? They take care of the money
and economy like Hal was (mistakenly) perceived to take care of Discovery
One, don't they? This is the consensus view of the Fed on one level or
another.
Well, in the
first place, the Fed does not 'take care' of anything except its owners
(like Hal was only interested in taking care of itself), via Fed policy,
which most wrongly assume is for the good of the economy; but in fact, could
not be further from the truth. Why is this the case
when their stated
objectives are to promote full employment, price stability, and to
moderate long-term interest rates? In short, it's because in actuality, and
in addition to feeding power hungry egos of its higher ranks, the Fed is in
the business of doing one thing and one thing only, that being debasing the
currency (dollar[$]) in order to both protect and
further the interests of its owners, which is of course completely at odds
with the best interests of the economy, populace, etc. (i.e. currency debasement is
concealed wealth confiscation.)
And while
long-term interest rates appear to be low (they are in nominal terms), if one
were to factor in the amount of Quantitative Easing
(QE) (high level currency debasement) it requires to keep them subdued,
the picture would be quite different in those 'real terms', meaning nominal
rates would be far higher than if the Fed were not manipulating interest
rates. What's more, the manipulation does not end there. No no no. Most notably, in terms of previously reliable
important macro-indicators, interventions in precious metals market(s) have
also been intensifying in more recent years, where it has been suggested by a
growing consensus of long-time market observers that if it were not for the
suppression of gold and silver they too (like interest rates) would be much
higher. (i.e. increasing currency debasement would
normally lead to higher
interest rates and precious
metals prices.)
Of course the
fact these inflation indicators are being suppressed does not mean they will
not begin rising in earnest eventually (gold has obviously been rising, but
not as much as if the investing public perceived inflation in the proper
context), because at some point, as with Hal, something will go
screwy with our price managing bureaucracy's best
laid plans and all
hell will break loose anyway. That's right. Make no mistake about it.
Eventually all the currency printing will be properly reflected in interest
rates (higher), the $ (lower), and it's counterpart
(currency) gold (higher). This is especially true of gold, where it will rise
in parabolic fashion at some point, likely as 2021 approaches if our previous
time related studies on the subject continue to act as an accurate guide.
(i.e. this being a Fibonacci 21-years from the bulls
starting-point in 2000.)
Although not
making reference to the timing in this regard, Richard Russell makes an
excellent point in terms of sentiment and when the general public can be
expected to participate in the precious metals bull market, where like all
such instances (think tech bubble, etc.), if history is a good guide, it will
be at the end. (i.e. 2021 is the Fibonacci number target from my harmonics
study attached above.) Below are his latest thoughts on the subject, where at
present we are still in the heart of the second phase of the bull, which is
characterized by increasing institutional accumulation. (i.e.
we will include sovereigns
in this group.) Here are those comments, as follows:
"Gold is
in a classic bull market. I think gold is in its second psychological phase.
The second is the longest phase of a bull market. It's the phase where the
public slowly becomes interested in an item.
I believe
that the third sentiment phase for gold lies ahead. In the third phase the
public finally turns bullish, then more bullish, and finally all-out insanely
bullish.
What will be
the signs of the third phase of the gold bull market? First, new inflation
adjusted highs in the price of gold (gold above $6,200). Next, gold will be
the focus of every conversation; it will become THE talk at parties and
wherever people gather together. Next, gold coins and bars will disappear.
The coin dealers will be out of gold and will start touting silver and
platinum (the prices of which will be rocketing higher). Finally, the
naysayers will start warning of a "gold bubble." But their warnings
will be early. The price of gold will shoot up to unbelievable prices."
What will be
the signs of the third phase of the gold bull market? First, new inflation
adjusted highs in the price of gold (gold above $6,200). Next, gold will be
the focus of every conversation; it will become THE talk at parties and
wherever people gather together. Next, gold coins and bars will disappear.
The coin dealers will be out of gold and will start touting silver and
platinum (the prices of which will be rocketing higher). Finally, the
naysayers will start warning of a "gold bubble." But their warnings
will be early. The price of gold will shoot up to unbelievable prices."
I believe
that the third sentiment phase for gold lies ahead. In the third phase the
public finally turns bullish, then more bullish, and finally all-out insanely
bullish."
We include
sovereigns in this group because it's apparent they realize the importance
of gold within the global monetary system, whereas institutions have not
jumped on this bandwagon just yet as they are still too heavily influenced by
the banking cartel. The sovereigns know themselves better than the public and
/ or those working the majority of institutions around the world. Like Dave
in 2001: A Space Odyssey however, eventually realizes Hal is out to get him
and all the other humans on board Discovery One (because Hal realizes he will
be turned off), and why Hal (the Fed) must be turned off. Ron Paul is getting
this message out there;
but again, largely institutions are still not acting on this knowledge. (i.e. denial, etc.). You can rest assured they will at some
point however, where the longer they take in this regard, the more dramatic
the move later on.
Perhaps such
a development would be what is required for both interest rates and gold to
rise, but I would not count on this being the case. No, both gold and
interest rates are more likely to rise as the inflation channel is stuffed
once again, meaning central banks, with Hal leading, accelerate currency
debasement protocols once again. Think this is unlikely given all the talk of
controlling inflation, cutbacks, and austerity today? Think again. Unlike the
2008 banking crisis, this time around entire countries and economic regions
need bailing out, and they are / and will be bailed out at the right time --
make no mistake. (i.e. closer to US Presidential
election time a la Bernanke's
Pickle.) Because the bond
bubble (government finance bubbles) must be funded due to lack of revenue
from failing fiat currency
based economies whose aging debt
burdened populations are deleveraging.
In returning
to the message our title attempts to convey then, make no mistake about it,
while the Fed might be 'crazy' on one level, as in the parallel with Hal, by
no means are Da Boyz about to give up (trigger
deflation) without a fight. So, despite the picture of 'cautious and
insufficient currency debasement' central banks are trying to paint right
now, this will change as the economy and stock market continue to weaken into
summer, eventually spurring an appropriate (monetary inflation will begin
increasing at an increasing rate once again) response from monetary
authorities, just as was the case in 2008.
In this regard, one must always remember currency debasement must continually
increase at an increasing rate in a fiat currency based
economy in order to avoid a deflationary collapse resulting from the post
crack-up boom hangover.
Right now,
and increasingly as long as currency debasement rates remain insufficient to
bring an inflationary tone back into the markets / economy (which are one in
the same now in our mature fiat
currency based economy), the economy
is stalling and blue chip stocks have generated a Dow Theory sell signal,
which may need to be dealt with eventually. Of course what usually happens is
after the equity markets and economy break down, the Fed (Hal) sees this in
its all knowing wisdom (heavy on the sarcasm) and
reacts with an accelerated currency debasement response, which is all they
really do you should realize -- that being debase the currency at an
accelerating rate until all value is exploited. You should also realize Hal
is at the root of our societal
collapse; and that they (and their owners) are pilfering
your wealth at an accelerating rate as part of the larger process of the
clandestine confiscation known as monetary inflation.
As mentioned
above, one of the Fed's primary objectives is to moderate long-term interest
rates, but more recently this has morphed into keeping them highly
accommodative (low in both nominal and real terms), because our mature fiat
currency based economy is now faltering due to exponentially increasing debt
and interest expense. As a result of this, the move in long-term bonds has
become labored, stretched, and overdone to the nth degree, as reflected in
the indicator negative divergences noted in Figure 1, seen below. The Fed has
played it this way in an attempt to stabilize prices (meaning keep
commodities / precious metals lower while boosting stocks / bonds), another
of their primary objectives, which is particularly important this being an
election year. Along these lines, Operation
Twist will end this month (not
so fast), and this will bring the immediate need for something to replace
it (which is why it was extended) or the bond market(s) will crash (given the
diminishing
returns associated with currency debasement / bond market monetization),
especially with the bond market ripe for a correction (or
worse). (See Figure 1)
Figure 1
And again
(because this is important to understand in determining your expectations for
the future), this will likely become a problem sooner rather than later,
where unfortunately for Hal (and the rest of us), it should be stressed we
have reached the point of diminishing
returns in terms of the effect these low interest rates have on the
markets / economy (rates are at all time lows while
stocks are well off their highs a la pushing on a string), where again the
Fed has no choice moving forward except to debase the $ faster. The Fed will
have to do something when push
comes to shove, even if this means commodity prices will go higher,
further undermining both the economy and its efforts. And of course central
banks around the world know this, and the implications on their own monetary
policy (they must print money faster too in the competitive race
to zero), will trigger a global currency debasement contagion the likes
of which man has never
witnessed. Make no mistake about it; we are living in a QE world,
and the rate of currency debasement is accelerating once again. (See Figure
2)
Figure 2
Realizing foreign
currency debasement rates are lower than in the US right now (this won't
last once Hal cranks up the printing presses again), never the less, as you
can see above in the US they are still a healthy 15% measured in True Money
Supply (TMS), poised to take off once again (once the percentage change is
through sine resistance in red above), with the only question being degree of
the move. How can one make the assumption this thinking will become reality?
While it true such thinking is presumptuous, one must be realized the Fed
(Hal) has no other choice except to 'inflate or die', as Richard Russell
would say, meaning it's either continue its inflationary ways or trigger
deflation. Moreover, we know the fiat currency economy(s) the Fed has created
are sputtering,
so like Hal, you can expect it (the Fed) to protect its legacy (as it always
does), meaning printing as much new currency as needed in troubled times. (As
an aside, if it's not the Fed [Hal] that blinks in terms of pressing the
money machine button sooner than later you can count
on China in this regard given the
stakes.)
Further to
this, and in referencing Jim Rickards comments found
here (thanks to John Hathaway), where he himself is referencing
anthropologist Joseph Tainter's work in analyzing
the collapse of 27 separate civilizations (and chaos theory), we find
that apparently no matter what Hal does to protect itself and its fiat
currency economy(s) an end is still to be expected, and that this should
bring back commodity money (with gold and silver at the lead) back into the
forefront. Until then however, they will of course completely debase the $
(and all other fiat currencies) in the process, which can only do one thing
for precious metals - send pricing and buying power considerably higher. And under-owned
precious metals shares would also need to be re-priced given their
relative attractiveness to just about everything that moves out there,
including gold (and silver). (See Figure 3)
Figure 3
What's more,
we may in fact find out very soon that the Fed thinks permanent
/ perpetual currency debasement is necessary, although they would never
admit to this in such terms. Be that as it may, the dye would be cast in this
respect never the less; and again, gold (and silver) would also need to be
re-priced much higher. Along this line of thinking, John Hathaway handily
points out (in the attached above) sentiment conditions regarding QE are such
that any such move would come as a surprise to the larger market, causing the
need for rapid readjustment, as follows:
"With
respect to more QE, we believe the risk/reward posture of the gold market is
asymmetric. By now, it seems that market expectations for additional QE have
been sufficiently dashed; that any new round of monetary easing will come as
a big surprise. The possible absence of QE seems unlikely to inflict
incremental damage to the gold price. On the other hand, a new round of QE
will most likely be triggered by emergency conditions in the financial
markets and be seen as both an act of desperation and a tacit admission by
policy makers that they really have no answers. In such a moment, we would
not be surprised by a leap in the gold price approaching several hundred and
possibly thousands of dollars an ounce in too short a period for significant
capital to enter."
Key in any
such assessment regarding investor sentiment, but not commonly discussed or
understood is the pivotal role speculators play in determining market
direction, as we have pointed out previously as a key factor in body of our
work. Here, if familiar with this work, you will remember our observations
regarding speculator betting practices, as reflected in key EFT open interest
put / call ratios, has brought us to the conclusion that because this
sentiment indicator is not widely followed it still has predictive
capabilities, and that this measure(s) has served us well. In this regard
then, you may be interested to know that although the ratios for the metal
ETF's GLD
and SLV
are still extremely low, meaning speculator bullishness has yet to wane,
those for the all important precious metals stock
indexes, GDX
and XAU,
have in fact experienced marked increases post options expiry last Friday,
which is undoubtedly why (or at least contributed to why) the shares have
behaving better of late. (i.e. they are
out-performing.)
On this basis
then, one should expect the bid in precious metals shares to return quite
soon, especially when coupled with the knowledge that Hal is printing again.
(See Figure 2 above) Operation Twist was extended yesterday and with this the
implication we have QE to infinity, the only question being when debasement
rates will accelerate. Considering the Fed's thinking is fundamentally
flawed and that the global economic slowdown is accelerating,
this should be sooner rather than later or something
scary will come our way this fall, just in time for the election. (i.e. that would be as bad as commodity prices taking off
as per the explanation in Bernanke's
Pickle.)
So, to the
question, 'has Hal gone crazy', the answer is obviously no. While their
thinking might be fundamentally flawed, and personal egos might play into
policy inappropriately, in the end the Fed knows it must print or all over
for them. That is to say the illusion of prosperity they create by debasing
the currency will end sooner (deflation now) rather than later (think a taste
of hyperinflation, then deflationary collapse), along with the need for their
fraudulent services. (i.e. they intend to postpone
this for as long as possible which is why currency debasement rates are
measured as closely as possible.) This makes them liars then (because they
are printing but downplay it with the help of the media), not fools, or
something along this line of thinking.
Get long gold
bugs. Good times are coming soon to a theatre near you.
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