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Fed minutes casts doubt on long-term QE and financial markets sell-off after a peak in buy orders marks the top

Posted on 04 January 2013 with 7 comments from readers

The euphoria of the New Year rally came to an end yesterday with the release of Fed minutes reporting that members are divided on the need to further expand its balance sheet with more quantitive easing or electronic money printing.

As a presumption of unlimited QE for as long as it takes to get unemployment down to 6.5 per cent is the foundation for the recent rally in financial markets both stocks and commodities sold off sharply, giving back most of the previous day’s gains.

Buy orders

On New Year’s Day some 90 per cent of broker orders were buy orders, a spectacular skew to the positive that normally indicates a moment prior to a market reversal. The point of maximum optimism is by its nature a market peak that is unsustainable.

Still you needed to be an extremely brave contrarian to short the market at that point. Perhaps not now that the market has most likely reversed direction, unless the Federal Reserve issues a statement that contradicts its minutes and that is unlikely.

Could this be the start of the 20 per cent or more sell-off that contrarians like Dr. Marc Faber have been calling? We thought heretically for a brief moment on New Year’s Day and wondered if the king of the Barron’s Roundtable was wrong this year. It would seem not.

Contrarians believe that following the crowd in investment is almost always a mistake and that herds of investors are usually wrong. The writer Gustave LeBon pointed out that a crowd of people has the intellect of a blockhead.

Will the same people who evinced such optimism about the future on New Year’s Day now all rush for the exit at the same time? Dr. Faber will probably have the last laugh on this one.

Bad fiscal cliff patch

As ArabianMoney sagely noted at the time, though nobody paid any notice, the deal on the US fiscal cliff is a patch and many issues are still unresolved. However, we had not thought that included the Fed’s policy of unlimited QE.

That said if the sell-off in financial markets is now brutal enough in response to the Fed minutes we would still see no alternative policy available. The Fed is boxed into a corner by its previous actions. Besides what happens to all the money it has already created?

This liquidity will have to go somewhere and if not into the bond market – because rising interest rates are coming that depress bond prices – then gold and silver?

Posted on 04 January 2013 Categories: Banking & Finance, Bond Markets, Global Economics, Gold & Silver, US Dollar, US Stocks

7 Comments posted by readers:

Comment by James M - 04 January 2013

Dear Ed., its for others to call you a sage. You also called silver to go well beyond $50, to $62 in a euphoric moment as it was rising into $49.

This situation has everyone questioning. As Jim Rogers said, stay in cash, unless you know what you are doing.

Comment by Bob - 04 January 2013

Is this a repeat of 1994 when the Fed tightens dramatically over 2 months? Unlikely IMPO. If they stop printing the US economy will tank.If they raise IRs the US economy will tank.

The problem now is that what the Fed says cannot be trusted – do as I do andnot what I say?

The markets appear completely rigged in favour of the banks and those in the know. You need to be very very brave right now if in anything other cash.

Comment by James M - 05 January 2013

@Bob

I relate to those comments. I’ve been checking with my friends whom i regard to be in the know. They are saying no one knows what to think. South of my border the jury is out as regards a prediction. The Repubs report the dems are finally realizing the party is over. But they are all scared. My one friend talks about America rediscovering manufacturing as the next inevitable turn of events. I think there is merit in his argument. We both agree that RE is still in a downturn. Its about jobs. Yet there is the new normal to consider. I’ve heard this phrase repeated 12 times in the last several days. Yet no one knows what it means…

Comment by Bernard M.A.Doff - 05 January 2013

The topics of contrarian thinking and crowd psychology are rather more complex than are described here.

Trying to go against the market when every Central Bank is pushing it up is like putting your hand in the fire; contrarian yes but reckless also.

Every commentator that I read predicts that the market will go down, while to their chagrin the market resolutely pushes the other way. One wonders what actually is the “contrarian” view in the market?

The “madness of crowds” has been the conventional thinking for over a century. For the contrarian view (!), read Malcolm Gladwell’s brilliant book “The Wisdom of Crowds”.

Note that Gustave Le Bon was consistent in his theory of crowd stupidity: he criticised democracy and even court juries. His theories were an inspiration to Adolf Hitler. He also proposed a hierarchy of racial superiority. As always one should read critically and take everything with a pinch of salt.

Comment by Andy - 05 January 2013

The FED did also say that their will be QE4 so this report is quite conflicting as Ben Bernanke said the FED would continue to support the market as long as the market needed it.

Comment by Doug - 06 January 2013

The fed is using BS rhetoric in desperation to entice confidence in US finance, just as the ECB has done. It (fed) bought over 75% of treasuries last year, and cannot walk away without interest rates rising, and bond, stock and housing markets tanking, banks going insolvent, etc. It knows this and is down to LYING to keep the ponzi scheme going as long as possible, hoping credit rating agencies won’t be so quick to downgrade, China and Japan not so quick to sell treasuries, etc.

Comment by James M - 06 January 2013

Eric Sprott: “.. But with all of the data that is available to them, with some simple analysis of where we are, I mean we are in the biggest Ponzi scheme of all-time. We are just printing money and people have to realize it’s not a winning proposition.”

This is the prime question in my mind, and no way of shirking the responsibility to answer it. The new normal is a giant con, and we the people are the buyers. If you agree with this proposition, then you must own gold.

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