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If Romney Wins, Expect the End of Quantitative EasingGary Dorsch It’s been nearly eight years, since Fed chief Ben Bernanke told the Senate Banking Committee at his confirmation hearing, that “with respect to monetary policy, I will make continuity with the policies and policy strategies of the Greenspan Fed a top priority.” The former Princeton University professor who served as a Fed governor from August 2002 to June 2005 before accepting the post as President George W. Bush’s top economic adviser, also pledged, “I will be strictly independent of all political influences,” Bernanke said. History will show that Bernanke did follow in the footsteps of his mentor for the first 3-½ years of his tenure. The infamous “Greenspan Put,” or the knee-jerk reaction by the Fed to rescue the stock market whenever risky bets went sour, - through massive injections of liquidity and reductions in interest rates, - was seamlessly replaced by the “Bernanke Put.” Since Bernanke gained control over the money spigots, the Fed continued to expand the MZM money supply by +65% to a record $11.3-trillion today. That’s an increase of about +9.4% per year, on average. The yellow metal never traded a nickel lower since Mr Bush tapped Bernanke to become the next Fed chief in Nov 2005, when the price of Gold was $468 /oz. Today, Gold is hovering around $1,735 /oz, up +370% for an annualized gain of +57%, - highlighting the most devastating blow to the purchasing power of the US-dollar of all-time. Following the stock market crash of 2008, Bernanke decided to take US-monetary policy down a very dangerous path that his predecessor had never explored. Bernanke experimented with the nuclear options of central banking, - unleashing powerful weapons for the first time in the US, such as “Quantitative Easing,” (QE), the Zero Interest Rate Policy (ZIRP), and “Operation Twist.” These weapons were forcefully deployed in order to artificially re-inflate the value of the US-stock market, and in turn, help to boost President Barack Obama’s chances at winning re-election. Bernanke borrowed the blueprints of the Bank of Japan, - the original pioneer in QE and ZIRP, dating back to March of 2001. The Fed was able to engineer a doubling of the S&P-500’s market value in just three-years, for a gain of $7-trillion, from the bottom of the brutal Bear market that came to a merciful end in March of 2009.
However, the Fed chief broke his promise to stay above the political fray, when on Sept 13th, Bernanke and his band of super doves, decided to unleash “Infinity QE-3” or the unlimited printing of money, at an initial rate of $40-billion per month, with less than eight weeks left in the race for the White House. The Fed crossed the line by brazenly supporting the President in his bid for re-election. By jolting the stock market higher, Fed aimed to conjure-up the illusion among the general public of an economic recovery looming on the horizon that would in the short-term, boost consumer confidence, and the opinion polls for Barack Obama. One-year ago, the Conference Board’s consumer confidence index, had sunk to as low as 40.9, following a sudden crash in the Dow Jones Industrials. Shortly afterwards, Mr Obama’s approval rating plunged to the lowest of his presidency, at 42%. However, the Fed engineered a quick recovery of the market’s losses, by utilizing ZIRP and Operation Twist, combined with covert intervention in the stock index futures markets. As the Fed guided the Dow Industrials higher, above the 13,250-level, Obama’s approval rating also rebounded to 49%. Hedge fund trader Jim Rogers cried foul in an interview with CNBC on Sept 12th, “The +30% gains since last October have been largely driven by one catalyst, - the Fed. It’s pumping huge amounts of money into the market. This is a Fed rally. The money has to go somewhere and it’s going into the stock market and the commodity market. Those who timed the market right will do well, but most won’t. It’s going to end terribly,” Rogers said. However, with the Dow climbing to a five-year high, - traders at Intrade.com also lifted the odds of Obama winning a second term to as high as 78% on Sept 29th. “Strip out monetary support and the Dow Jones Industrials would likely fall more than 4,000 points, if corporate and economic fundamentals truly reflected share prices,” said billionaire real-estate magnate Sam Zell on October 2nd. Monetizing government debt and pegging interest rates at near zero-percent for several years are experiments in market socialism, and not “free market” capitalism. The longer the Fed fails to let market forces determine interest rates, the more the Fed creates inflationary pressures. Oil prices go up, food prices go up and the average American doesn’t see wage increases. That means there is less disposable income for consumers and will eventually it would lead to another economic recession. The Fed’s Fraudulent “Trickle Down” Policy The Fed’s QE policy revolves around the “trickle down” theory, - or the idea that “higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. In turn, increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.” However, it hasn’t quite workout that way. US-listed companies are sitting on $2-trillion in cash and would rather spend most of the hoard on stock buybacks, higher dividend payouts, mergers and acquisitions of competitors, and the like, all of which creates no jobs whatsoever and, in many cases, will leads to fewer jobs. Furthermore, there isn’t an equitable distribution of wealth in the stock market, where 82% of the outstanding shares are owned by just 10% of the richest Americans. Bernanke has publicly committed the Fed to a zero-interest rate policy through the end of 2015. Traders in the US-markets have been under the spell of the Fed’s radical monetary schemes for so long, that they believe the “Bernanke Put” can endlessly keep equity prices afloat, even if the US-economy that’s sliding into a recession. Banks can borrow from the Fed at less than 0.25% - essentially free money, and lend the funds to speculators like hedge funds, private equity firms, and others. The speculators then channel the money into the US-equity markets, but also into crude oil futures and precious metals.
The hallucinogenic world of QE, and ZIRP, and Operation Twist has become the “New Normal” in the markets. Nobody knows how long the Fed’s latest scheme – “Infinity QE-3” will last, but already some analysts are predicting the Fed might end-up increasing the MZM money supply by at least $1-trillion in the next few years. This premise is built upon the assumption that President Obama would win a second term, and therefore, allow the addicted money printers at the Bernanke Fed to continue with their radical schemes. Under this scenario, - many investors have turned to the precious metals, Gold and Silver as a hedge that can protect their purchasing power, while the Fed is whittling away at the US-dollar. Most analysts agree that the long-term trend for Gold is Bullish, and that it’s only a matter of time until the yellow metal will eclipse its record high of $1,925 /oz, reached in August of 2011. The price of Gold is ultimately buoyed by the expansion of the world’s money supply. Since the Fed began its efforts to pump-up the stock market from its lows of July and August 2011, the size of the MZM money supply has increased by $1.3-trillion. Meanwhile, the price of Gold has been gyrating sideways, between support at $1,550 and resistance at $1,800 /oz. Currency War, Fed versus the Bank of Japan – friendly fire Flooding the world’s money markets with an endless stream of greenbacks is also designed to weaken the value of the US-dollar against other major foreign currencies. However, other central banks are fighting back, especially the Bank of Japan (BoJ), which does not want to see the US-dollar fall below ¥75 in the currency markets. Japan’s “Lost Decade” of economic growth has stretched into a “Lost Generation,” amid tougher competition for Japan Inc in foreign markets from the likes of Apple and Samsung Electronics, an aging and spend-thrift population at home, and most of all, exporters are suffering from a super strong yen with the rest of the world. Growth in Japan throughout the 1990’s averaged +1.5% that was slower than growth in other major developed economies, giving rise to the term “Lost Decade.” During the 20-years thru 2011, Japan's average quarterly GDP Growth was even slower, expanding at an anemic +0.50% clip, giving rise to the term “Lost Generation.”
Starting in November 2011, Tokyo secretly began to manage a “dirty float” for the dollar/yen exchange rate. The BoJ dumped ¥10-trillion yen into the currency market, and bought $133-billion, as it tried desperately to stem the US-dollar’s slide at ¥75. The US Treasury was happy to give the green light for Japan’s massive intervention in the currency markets, since the US-dollars that are acquired in the operation are usually recycled into US Treasury notes, helping to keep US-bond yields low. Japan is now the third largest holder of US T-notes, with $1.1-trillion, up from $983-billion a year ago. However, intervention alone in the currency markets is not sufficient enough for the BoJ to defend the US-dollar at ¥75, when the Fed is churning out a tsunami of dollars with Infinity QE-3. As such, the BoJ boosted its own QE-scheme, by adding an extra ¥10-trillion ($127-billion) to its bazooka, with the increase earmarked for purchases of government bonds and treasury discount bills. Equipped with ¥80-trillion yen, ($1-trillion), the total amount allotted for QE is now equivalent to nearly a fifth of Japan’s economic output. In other words, the Fed and the Bank of Japan are involved in a currency war, with each side printing local currency, and purchasing domestic bonds. Otherwise known as “financial repression,” the central banks exert totalitarian control over credit and can finance the Treasury at ultra-low rates in spite of a mushrooming national debt. To counter the increase in the Fed’s MZM money supply, the BoJ has increased Japan’s monetary base, which hit a record high of ¥124-trillion last month. Benefitting from the friendly fire between the world’s two most powerful central banks is the Tokyo Gold market, which is priced at just under ¥140,000 /oz, and double its market value versus six years ago. For Japanese investors, - Tokyo Gold has been one of the few stellar areas in a dismal local market. To read the rest of this article, please click on the hyperlink below: http://www.sirchartsalot.com/article.php?id=169 ### Oct 16, 2012 321gold Ltd |
