Will the Fed crash equities next to support the dollar and bonds?
Posted on 09 May 2011 with 7 comments from readers
Since the global financial crash over two years ago markets have been characterized by unprecedented levels of government intervention at every level. That is why the past has been no good as a guide to predicting the future.
Second-guessing the Fed is what it is all about. Eventually the Fed might have to throw in its hand. But until it does it will not pay to fight the Fed. So what is going on now?
Dollar to rally?
Does the Fed not read these and other columns warning that its money printing is a path to hyperinflation and the destruction of the US dollar and bond markets? Of course, its many PhD officials do that and frame their strategy accordingly.
What people now think is going to happen is that the Fed will produce QE3 in a timely manner to save the financial markets. If they do not do this then the threat of higher interest rates will cause commodity and equity markets to crash, and the dollar and bonds to rise.
Commodities and stocks have been going up but not because there is an economic recovery. There is none, or nothing worth the name. They have been going up because of the money being pumped into the financial system by the Fed, ECB and Japan.
One way to flush this excess liquity back out of the system is to crash commodities and stocks, and then produce QE3 after all to save Wall Street and its derivative mountains. Then you keep interest rates lower for longer, support the dollar and neutralize the excess cash. It’s not a great outlook but not hyperinflation.
Next rally
The the stocks and commodities party can then get going again, with the insiders profiting hugely while some of the excess liquidity of QE1 and QE2 is liquidated. At least this is the theory now propounded by respected analysts like Clive Maund and Karl Denninger.
That would make last week’s action in the commodities space a sign of things to come. Silver plunged 30 per cent in a week, its biggest fall in 31 years, a crash completely orchestrated by Comex with its four margin changes. Oil dropped by 10 per cent, a massive down shift for the most important industrial commodity.
Goldman Sachs called this commodities sell-off a week earlier, so perhaps we should standby for a similar warning on stocks. The real summer shake-out may have only just begun with the Fed once again calling the shots.
7 Comments posted by readers:
i do not think one of the FED’s primary objectives is supporting the dollar or bonds.
pumping equities is the only thing it can do, hoping for a ‘wealth effect’ to increase employment (fails)
in a ‘fiat’ currency system,printing is all anyone can do as long as we have zombie banks like japan has had since their ‘89 crash….
the US should have took the ’swedish model’ (what a visual i get typing that) and deconstructed the big banks……it was rough for them, but after a few years they were(and are) fine….and thats hard for someone who is to the right of attilla the hun to admit…..hell, the banks are fine now in sweden n you don’t even have to go to work on mondays n fridays if you don’t want……..imagine what we could do here!
fiat currency–>credit crisis –> print to bailout banks–>sovereign crisis –> fiat currency crisis
it’s just human nature.
just as night followed polonius’ day
Goldman just lowered their projected USA GDP growth projection for the rest of 2011, and for 2012, to between 3 and 3.5 %. That is down .5% from their last forecast.
47% of Germans now say ‘no’ to more bail out money for Greece and all the rest of the tax dodgers.
27% of all USA mortgages are now under water. Housing prices are now not expected to bottom until late 2012, or early 2013.
French & German banks have an estimated e350,000,000,000 exposure to the PIIGS. I can’t believe Spain isn’t a terminal problem, but I guess 21% unemployment isn’t much of a big financial problem over there. They must save a lot, like the Japanese and Chinese.
Hedge funds lost a fortune on the instant drop in the oil price last week. Poor things. Note how fast oil went back up to near $100. The cheap oil is disappearing at a rate of 6% a year (IEA estimate). Oil produces roughly 34% of ALL energy now used. You think when oil output starts to decrease, that it might cause a little problem?
Whenever we think about PhDs running things so well, keep in mind Long Term Capital Management. That brilliant bunch did accomplish one thing. They taught the Wall Street puppet masters that if they went broke, the Fed would organize a bail out. The era of moral hazard was thus born. And we all know how that worked out a mere 10 years later. Get ready for a replay before the end of this decade. Phil Angelides, the former head of the financial crisis inquiry commission, just said that he is VERY worried about the efforts to weaken financial regulation legislation by Wall Street.
Some expert on CNBC just said that someone just projected a 20% yearly labor rate of wage inflation in China for the next 10 years ! The one child policy will drastically reduce the number of workers in the 20-30 year old age group during that time. Factories are already moving from China to Vietnam (and some Vietnamese military officers are now being trained in the USA) and Bangladesh for cheaper labor. He said many Chinese companies keep 2 sets of books for tax cheating purposes.
I bet the farmers in Northern China would like some of the water heading down the Mississippi River right now. They are opening the Bonnet Carre spillway today. If you are wondering what a spillway is, it is a concrete structure built along the side of a river. If the water gets too high and threatens to over top the levees, they pull out thousands of large timbers and allow water to divert through a former swamp into Lake Pontchartrain, which connects to the Gulf of Mexico through 2 huge passes. The Lake is near sea level so the water flows from the higher River into the Lake. Another spillway, the Morganza, further up river from New Orleans near Baton Rouge, can also be opened to divert water to the Atchafalaya River which is in the large Atchafalaya Swamp. The wide swamp is connected to the Gulf of Mexico. The amazing thing is that opening the spillways only lowers the water in the Mississippi by a few feet. That is because the River is nearly 180 feet (55 meters) deep, and nearly a kilometer wide, where it passes through New Orleans. That is a LOT of fresh water. Texas has a plan to pipe some to them. (It already has the fertilizer in it.) Like the North American Water and Power Alliance, it won’t happen, although only for political reasons. That NAWPA plan is something! That engineer was a genius to come up with that idea. Building that would put the entire world to work. I like the flooding of the Rocky Mountain trench part.
Finally, the Mississippi River has been trying to divert down the Atchafalaya River since the Great Flood of 1927 because it is a shorter distance to the Gulf. Only the dam – like structure built by the Corps of Engineers prevents it from doing so. (See Google Earth.)The control structure came very close to failing in the last big flood, about 25 years ago. Should that happen, it would be a national emergency because the Mississippi would silt – up, preventing ocean going shipping, and New Orleans might lose its’ drinking water supply. Remember the ships that backed up after hurricane Katrina? A LOT of foreigners would miss the massive cheap grain exports. It makes me glad I have clean well water over here in Slidell. I get the first 5,000 gallons (19 cubic meters) for $33 which includes the sewer treatment fee. It rains a LOT here.
And S&P just cut Greece’s credit rating again, from BB- to B. You may want to stay away from big bank stocks.
Is that McDonald’s a cash machine or what! I’m 1.1 miles from one. It takes 10 minutes to get there & back. And I get to watch the Norfork Southern trains fly by pulling a lot of chemical cars, most decorated with colorful graffiti while waiting in the drive-through. If I try to watch the whole train, I get dizzy.
Egypt isn’t looking good. I wouldn’t want to be living in Israel in a few more years.
I’m not even sure what the fed is supposed to do anymore. All its ever done is pump money…
bill—per your girl diana yesterday…..home loans underwater: 55% in atlanta…..48% in minneapolis.
is there any doubt the fed will inflate till they are not underwater?…not helping my retired but w/no mortgage.
in this ponzi credit expansion since ‘71, all fixed debt has been reduced by inflation on the backs of savers and lately, retired, with COLA for SocSec maxed at i believe 2.5%.
while the realestate heavy CPI might be less, retired buy food, fuel mostly….not in the CPI.
*** reads commentary, then reads remarks ***
*** reads Bill’s interesting anecdotes . . . all 23 of them ***
*** ponders Peter’s dilemma for a moment ***
One way to flush this excess liquity back out of the system is to crash commodities and stocks, and then produce QE3…”
While I have great respect for Karl Denninger and Clive, I strongly doubt that the FED would seriously consider that move to flush excess liquidity from the financial system, primarily because of the considerable “uncertainty” related to the consequences of that action.
In other words, there’s a high likelihood of “unintended consequences” and the Power Elite simply can’t afford that. Additionally, such a move could easily jeopardize Obama’s re-election . . .
The only good thing that has come from Obama’s Presidency has been the manipulated propping up of the stock market (by the FED, of course).
After tracking developments for a decade now, I fully expect
Ben bin Bernank to follow form and pull PPT support causing a
mini-crash in the equities market. The exiting funds will rush
into the bond market, already under duress from contagion of
events in Europe and Asia. The U$D will rise and commodities
and PMs will fall. I’m in agreement with the title of this article.
How about a motto for the FRBS,
“Q-E to Infinity . . . and Beyond”?
(with apologies to Buckaroo Banzai)
ben hopes he can crash gold/silv without crashing equities….summer break in qe will scare metalbugs off
what does crashing the DOW get him but a midnite call in a muffled voice from obozo?
he is going to see if china/japan come back to pick up the slack.
the US is not funded by bonds or taxes….bond market HERE is a relique left over from the gold standard days…RIGHT NOW ben just walks in at the end of the auction n buys anything left them HIMSELF—that is a fact……ben pushes buttons n prints the world’s reserve money.
while the end of QE2 means not EXPANDING the balance sheet, all maturing bonds will automatically be re-bought by ben.
that is how we got in this mess, and it will get worse.
taxes, to us, just make dollars valuable because we have to have them to pay govmint with.
6 depressions in 1800’s to 1929 gold standard had flaws…..i’m not sure it would work at all today……but this isn’t working either.
sudden expansion of credit never ends well.
signed, fellow goldbug