So the word on the Street is “clear”: stocks are surging because the economy is getting stronger, the falling unemployment rate is further proof, and QE is being tapered because of it; and all of this is causing yields to rise. These things, they say, are indicative of a stronger dollar and a strengthening market economy
Believe that and I have a bridge to sell you.
Bernanke’s move to reduce monthly QE was simply a symbolic gesture. Now that he’s ready to retire Gentle Ben appears to now know that it’s time to end his failed monetary program. Bernanke, who ends his Fed term in just a few weeks, took the cowardly action of passing the buck to his successor, Janet Yellen, to bail the U.S. out of the gross misconception that QE is.
Unwinding this monetary abuse is not going to be easy – or painless.
The 10 Year yield was up 72% in 2013. And yes, I hear you: the 10 Year yield started the year at 1.72% and ended the period at just 3.03%. The seventy-two percent increase doesn’t seem like much when talking about these historically low interest rates – but the move is relative nonetheless.
Remember, QE was employed to keep yields low. Way back in September 2012 (a data point not shown in the chart below) the Federal Reserve launched its controversial third QE initiative, called QE3. Yields were just 1.56% when it began. They are twice that today. Clearly the program did not achieve its desired outcome, as yields went up. See below.
So why print more QE money when yields were already so low?
Because stock market values continued to climb. The Dow Average was up 26% in 2013; and in a late year surge, stock market strength ended with a 13% gain; gold ended down 28%. This dynamic makes it appear like the economy is getting stronger — that QE is working.
Remember, QE is not intended to raise stock market values. It’s supposed to keep yields low (something QE3 didn’t do) which decreases the value of the dollar and increases the value of gold. But this hasn’t happened in this dysfunctional market.
Instead, QE3 has fueled a new stock market bubble while low yields have enabled sovereign debts to escalate to unsustainable levels – which is so reminiscent of the subprime mortgage crisis. This is the reason Bernanke made the symbolic gesture to taper QE in December 2013. The program is producing the wrong results, and doing more harm than good.
And it is only because stock market values have risen to new all-time highs that QE remains a “viable” monetary program. It portrays an image of economic health and recovery, making politicians and monetary governors look smarter than they actually are.
This is a major market misnomer. (See: Smoke and Mirrors for more information.)
At the present time higher yields have nothing to do with a stronger dollar or market economy. Instead, the move is driven by an excess supply of U.S. of Treasury securities. This will drive a dovish Federal Reserve to quickly reverse course in ’14 and increase the amount of QE — to keep the stock market bubble inflating, and to keep hope of a low yield environment alive.
Back in July 2013 the trend lines of stock market strength and gold met (see below). Since then stocks have risen and gold has continued to move down. As mentioned in The Gold Prediction, gold has been a leading market indicator since the money boom began, and many times has indicted stock market movements many months prior. See below.
The Dow Jones Industrial Average has recently reached its objective: Nominal GDP; stock market strength has rebounded since its 2012 correction, and gold continues to build a lower base since peaking in September 2011. This suggests a major stock market correction is on the horizon.
If there is one market fundamental to consider in 2014 it is that of yields. Rising yields, and/or inflation, will throw a kink into the global monetary ponzi scheme and send markets reeling. This will pressure central banks, world currencies and the debts of sovereign states, and the activity of their according global economies.
Needless to say these conditions will greatly affect stock market values to the downside.
One recommendation for 2014: cash is king more so than any other recent year. Markets are extremely manipulated and corrupted – and that includes gold, which is poised to reverse course once stock market values correct.
Stay tuned – and let me know if you need help…