Zoom!! There Goes Gold!
The price of gold responded wildly yesterday to Federal Reserve Chairman Ben Bernanke’s announcement that in response to the ongoing Obummer of an economic recovery the Fed would purchase $40 billion per month of mortgage backed securities until the unemployment rate dropped.
Basically what he’s trying to do is drive interest rates so low the only way investors (i.e., banks) can make money is to lend (versus saving). The thinking is that forcing banks to lend, borrowers will in turn spend that money, spurring the economy, helping to reduce unemployment. Meanwhile, more people than at any point in over thirty to forty years are unemployed, underemployed, or have just flat out given up and left the workforce altogether in the face of Bernanke admittedly crushing whatever savings they might have left while driving food and energy prices even higher.
In other words, we’re out of ideas so we are now going to ‘print’ money INDEFINITELY.
If this isn’t a flat-out, open admission of absolute failure by the Fed and the US government since 2008, I don’t know what is. Bernanke, who once said if he had to he could drop dollars out of helicopters to help the economy, could not have made it more clear yesterday: We are on the road to ruin, we know it, and there’s nothing we can do about it. Make no mistake, Ben Bernanke, in an outright politically charged (independence of the Fed be damned) statement, declared war on the US dollar yesterday.
And gold responded as only true money can do.
Bernanke also announced that interest rates will be held effectively at zero percent until mid 2015. This is a full year longer than the 2014 date we got just months ago from the Chairsatan himself. Along with the continuation of the Fed’s ‘Operation Twist’, this new QE to Infinity will make the stock market look good for Obummer’s election campaign, but one heck of an inflationary period and/or high interest rates – or both – will have follow. That is, if we don’t see a complete collapse into a deflationary depression first.
I fully expect no more than a 1.5% bump in housing prices out of this on a 25bp drop in rates (at most), which is nothing in the grand scheme, while Main Street will likely see an increase in food and energy prices paid of 10% of more by this time next year. As many of you know, I have predicted since 2007 that the US would see no better than 1.5% – 2.0% YOY nominal GDP for the next decade (with real negative growth when discounting the Fed) based solely on the deleveraging that began in that year. Despite the massive intervention by the Fed, I have been right year after year. The future is easy to predict when you follow the math. The only unknown is the timeframe; however, the deflationary depression that I believe is on the horizon is plain to see (despite Bernanke’s efforts), and personally I would take it sooner rather than later. The pain of this is less than the hyperinflationary depression that some believe will come first, though that gets us into a discussion of monetary versus political events that is beyond the scope of this email (for those who care, deflation (default) is a monetary event, whereas hyperinflation is a political event).
The one remaining aspect of all this, and perhaps the most important, is what I alluded to above. The malinvestment that will (continue to) occur in the real economy as investors are driven to risk in search of yield, while savers (and capital) are (and continue to be) destroyed. This will be muted somewhat in this latest incarnation as each additional injection (just as drugs do) requires more liquidity while achieving a lesser result. However, understanding investor reaction (muted or not) to such manipulation/intervention is key to understanding the boondoggle in the larger sense. In short, however, there is no place to hide in an environment of HFT algorithm-driven markets responding to mainline injections. One’s best choice is to exit the markets completely. Tangibles, PMs, and assets outside of the USD are a good choice but even they are at risk.
I don’t really care who wins the election – the math will trump politics in the end, so grab a bowl of popcorn and pray for higher interest rates sooner rather than later.
(Tip o’ the hat to John F for help on this piece)
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