Almost a month ago I posted a blog about the sorry state of the Market’s management team. Towards the end of that blog which was titled, An Illness Called MDD, I say this:
“Of course, Bernanke knows what is all too plain to see: the moment he stops feeding the beast [with QE] it will turn on him. In a matter of seconds Wall Street will begin acting like a bunch of spoiled brats looking for more candy.”
You saw a glimpse of that behavior this week.
Last week investment markets started to rattle from the moment Federal Reserve chairman Ben Bernanke mentioned his approach to terminating the quantitative easing (QE) program. The media portrayed the market as “confused” by the Fed’s statements. I’m not sure how that could be; Bernanke’s statements couldn’t have been clearer.
In my opinion, there’s only one thing to be confused about – and that’s the value of gold. In fact, gold best symbolizes the dysfunction in “the market.” Currency is weak, debt is ballooning, and central governance continues to demonstrate corruption and incompetence. These conditions are ripe for gold – yet it continues to sell-off, dropping another 6.5% last week. But other than this anomaly, everything else is doing exactly what logic dictates.
On Wednesday of last week Bernanke once again reiterated his intention to begin tapering QE activity in just a few months time. In two days of trading, Wednesday and Thursday, the Dow dropped 560 points. It ended the week down 2.5%.
Stock market strength also suffered a setback, the 15-51 Indicator lost 4% in the trading week. Bond values also continued to fall, with yields making the most of the Fed’s statement and spiking 18% in the week. Below is a chart of this year’s activity.
Why would yields (market interest rates) rise so dramatically upon news that QE will be ending?
As mentioned in last week’s blog, half of the $85 billion that the Fed prints every month via QE is used to purchase U.S. Treasuries. And as we know, foreign investors have recently sold a record amount of U.S. debt. Together they produce much less demand for U.S. government debt, a condition that causes values to fall and yields to rise.
Less Demand + Increasing Supply = Falling Bond Values (rising rates)
There’s absolutely no reason to be confused here – unless, of course, you are part of the Wall Street profit machine. They like chaos. It creates volatility and uncertainty – and they make money from it big time.
I caution you not to get caught up in their aim to gain.
In this high stakes monetary shell game, it is apparent that Ben Bernanke now sees the asset bubble being created in the stock market – and on his balance sheet. He seems now to know that the QE program has outlived its usefulness and is becoming a dangerous tactic leading to a dead end. He now sees what has been evident to outsiders for a long time.
Nevertheless, there was great debate on CNBC following this week’s Fed comments with so many “experts” confused about the Fed stance, and actually arguing that a tapering of QE does not tighten the money supply. These people argue that any level of QE above a zero amount (even if it is less than the $85 billion of new money Wall Street currently gets) still adds to the money supply, and therefore, not a “tightening” event.
That’s just silly. Those who argue that position have absolutely no concept of a household budget – something, by the way, not taught in college classrooms.
Think of it this way: If your household income dropped 10% in one month – an equivalent to a QE move from $85 billion to $75 billion – would money be tighter in your household? I mean, I just can’t buy into the opposing stance that money isn’t tighter because you’re still earning money. It doesn’t make sense to me – or the markets.
Yields are rising because demand for bonds is weakening, and according to the Fed, money will get tighter from here on out (also a condition for rising rates.) There should be no confusion why bond values are falling.
Ditto for the stock market. Stocks fell at decent clip this week for all the right reasons: stock prices are over-valued and can’t possibly be sustained without the current level of QE. Any drop-off in it will cause some level of correction – so stock values fell.
Monetary manipulation aside, the stock market drives off of Market growth. The economy, while somewhat stable, is not producing the growth needed to sustain legitimate recovery and lofty stock market values. Without such growth, escalating stock values are baseless. That’s what makes impending correction so obvious.
Indeed, this week’s stock market activity could certainly be the beginning of a lengthy correction process. Second quarter earnings’ season is right around the corner, and based on the general consensus among large corporations after first quarter earnings were released, market activity for the second half of 2013 is expected to be considerably less than the first half.
Slowing growth rates and profits, along with less money supply via QE, will continue to pressure stock prices down further.
Gold, like stocks, is mis-valued; and both are due for major reversals. To get a better gauge on the value of gold, below is chart from the previous market top, October 2007, until now. See below.
Gold is approaching its average trading value since October 2007, the last market top before major correction. It rightfully had a major run-up during this period because the money market crashed – the perfect condition for gold. Like the 15-51 Indicator, gold has been experiencing a correction that started in earnest late last year.
People always ask me, Is it time to abandon gold?
Answer: No.
Long term investors fully understand the Market condition, its horizon, and fundamental dynamic. The global condition for currency and debt are abysmal and on a course to get worse. Corrections are part of the game – and they go both ways. As such, a gold resurgence should be expected as things worsen in the stock market.
That’s the way it goes.–But we’re not there yet.
My recommendation to you: put yourself in the investment cycle. Convince yourself that you have made money all the way up, in both stocks and gold. Position yourself, right now, for maximum opportunity when things go haywire – when stocks correct significantly to the downside, interest rates spike higher, and gold reverses course.
In these conditions cash is king, bonds are a future opportunity, and gold is as good as gold.
Stay tuned…