Benson's Economic &
Market Trends
Complacency and the Rain
Dance for Money
Richard Benson
Archives
September 17, 2004
One has to appreciate, in theory and in practice, Alan Greenspan's
genius, at least in the Machiavellian sense, and how it has been
used in the financial markets to drive the real economy. Indeed,
many notable economists, financial market participants and the
press, are now acknowledging how the Fed has used asset bubbles
in stocks, bonds, and housing to facilitate the continued household
spending of borrowed money. This has created a false sense of
wealth and has kept the economy rolling with no savings.
What is becoming crystal clear is that if the United States'
bond and stock markets suddenly "re-priced to fair value",
the world would witness a crash in stocks, bonds, housing prices
and the dollar. This inevitable re-pricing, caused by unsustainable
Treasury and Trade deficits, will be fiercely and politically
delayed, at all costs, until after the November election. Also,
the extent to which the Treasury and Fed can use legal but undisclosed
Exchange Stabilization Policies is not widely understood by the
financial markets.
More importantly, while the magnitude of aid - amounting to $1.3
Trillion - given to America's financial markets by foreign central
banks has been disclosed, it is not appreciated that these holdings
will most likely keep US Treasury rates 3% lower than they would
be if the Treasury needed to fund its deficits within the US.
Evidence of the government's "active hands" in the
markets continues to grow. First, there is the manipulation of
the gold market that has been solidly documented
but not widely disseminated in the press. Beginning under the
Clinton Administration, the dollar has been made to look strong
by holding down the price of gold. This
legal and logical market manipulation has been accomplished by
central bank gold sales and by lending gold to bullion banks that could, in turn, sell the
gold to earn carry trade profits. You might
wonder why our government is so actively involved in keeping
the price of gold down. Well, a logical reason would
be that when the price of gold takes
off, even the investment masses will focus attention on the real
problems of massive trade and federal deficits and world-wide
money creation. For investors with a long-term view, the price
of gold is being subsidized and held well
below market. If you like government subsidies, you can get one
by buying gold.
Second, evidence also appears in the stock market's strange but
predictable behavior. Whenever the markets look like they are
about to crash, major buying suddenly appears at the regular
scheduled times during the day to keep the stock indexes from
breaking down below major psychological barriers. It always looks
like a major player has stepped in with an unlimited checkbook.
In reality, the checkbook is a printing press owned by the Fed
that can flood the market with REPO funds, and allocate a few
billion to have market agents buy stock futures to smooth the
market out.
We do know that Greenspan understands and uses psychology to
try and create a self-fulfilling prophecy when it comes to the
markets. He understands that if he is telling the world one day
that the economic recovery has "traction" and the next
day the stock market goes south, any economic recovery would
suddenly be history. So, what must the Fed hope for and encourage?
From their perspective, the best thing would be for a massive
stock market rally to occur in anticipation of a Bush re-election.
However, with rising interest rates and a slowing economy - the
peak having already passed in the corporate earnings cycle -
a stock market rally is unlikely with stock and bond prices currently
at record levels. So, the best outcome is boredom and complacency
in the bond, stock, and currency markets. The key to engendering
complacency is engineering low volatility - the Fed's gift to
the White House. With low volatility and high complacency, the
stock market looks just as safe as an insured FDIC bank CD.
Keeping volatility low is neither difficult nor expensive. Now
that there is no clear market trend, it will pay for major funds
and banks to "sell volatility". These institutions
sell puts and calls, take in premiums, and hope that the options
will expire "out of the money". For experienced traders,
it is no surprise that close to or on key expiration dates for
options, market prices of the index the option is based on are
temporarily brought into line so that as many options as possible
expire worthless. Just like Las Vegas where small speculators
take option bets, the markets spin and, surprise, they lose!
(When it comes to "efficient market theory", all that
can be said is that the large financial institutions and commercial
market players are very efficient at "skinning the small
speculators.)
Finally, you might wonder where the really big market manipulation
is. Simply look at the Federal Reserve's Foreign Custodial Account.
Since 2001, it has risen by $700 billion to $1.3 Trillion today.
This is a record! All this money has been printed up out of thin
air by foreign central banks to buy United States' Treasury debt
and support the dollar at a far higher level, and hold US longer
term interest rates at a lower level than they would be without
this direct and unprecedented market manipulation. (When it comes
to central banks, the polite word for manipulation is intervention).
This intervention, which holds the value of the dollar up and
interest rates down, also makes bond and stock prices artificially
high. In turn, artificially high asset prices encourage consumers
to spend and not save. Indeed, with over $1,300 Billion of reported
central bank intervention currency what does it matter if a few
billion dollars spill over into the stock market?
From the perspective of a prudent investor who is interested
in the preservation of capital, two choices seem obvious. The
first choice is to use the foreign central bank intervention
as a window to get out of US stocks, bonds and the dollar. The
second choice is to study with Navajo Indians to learn the secrets
of their "rain dance for money" and perform
it for the foreign central banks. Hopefully, they will then keep
printing up money to buy $300 - $400 billion of dollar assets
forever. Perhaps complacency, as a long-term investment policy,
is becoming over-rated.
September 16, 2004
Richard Benson
Archives
President
Specialty
Finance Group, LLC
Member NASD/SIPC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480
1 800-860-2907
eMail: rbenson@sfgroup.org
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321gold
Inc
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