Fed Orchestrated Money Printing Lifts Stock Market Higher
Stock-Markets / Financial Markets 2010 Mar 21, 2010 - 06:04 PM GMTBy: Steve_Betts
Technology is usually a wonderful thing. Advances in production allow us to manufacture and ship countless items, to every corner of the world, on a daily bases. Improvements in communication allow an individual to call the other side of the world in seconds whereas four decades ago you would wait hours, sometimes a day, for an international operator to place your call. You can now surf a thousand channels on your TV instead of the three channels that existed when I was a kid, and world events are brought into your living room as they happen.
Advances in medicine cure diseases that would have killed you twenty years ago. All of that’s the bright side, but as with everything in life we have a dark side to technology. We need the life saving changes to compensate for the effects of pollution, chemical preservatives in our food, and genetically altered meat, poultry, and seed. The one thousand channels I mentioned also bring a level of sex and violence into our homes that would have been unthinkable thirty years ago. With mass production quality seems to suffer, and I would maintain that creativity suffers as well. Just walk into any Wal-Mart and look at how many useless items are stocked on the shelves.
I can’t and won’t argue that technology allows us to live a longer and more comfortable life, but I have to wonder at what cost. Quality seems to be the first casualty, at least in America. The internet has such wonderful possibilities and yet the best they can do is send me fifty e-mails a day for Viagra! Is that all there is? Oh yes, and the government has discovered that the internet is a wonderful tool to use to spy on its citizens. Americans have yet to discover that the world-wide-web is putting a serious dent in their civil liberties. Technology should be used and appreciated for what it is meant to be, a tool to improve the human condition. It should also be recognized for what it is not, i.e. a replacement for the human brain. We have allowed our educational system to deteriorate, and slick ad men have replaced learning with the X-box. Most people now go through life without ever having an original thought, and that was not how it was intended to be.
There have been other periods in history of technological explosion. In the 1920’s the US experienced a real economic, social and moral explosion do to the introduction of the radio, the car, and airplane. Man went from a solitary rural life, traveling on horseback, to flying through the air and listening to the Yankees live while sitting in his living room a thousand miles from the stadium, and he did it in just twenty years. Unfortunately, society often behaves like a kid who just got his driver’s license, and dad gives him the keys to a really fast car. A little too much foot on the gas, at just the wrong time, and tragedy strikes! That happened in 1930 and it took a world war and almost twenty years to recover, all because of too many excesses. A smart man would look at that and say we should find a way to prevent excesses. An even smarter man would say you can’t prevent excesses any more than you can have a one-sided coin. A pendulum must be allowed to swing both ways. Then he would go on to say that we already have a way to deal with excesses, and it’s called a “free market”.
The free market, and a gold standard, guided the US economy from the War of 1812 until 1913, allowing the country to become the wealthiest creditor nation in the world. Things changed in 1913 when a very small group of men decided that a central bank was needed in order to protect the interest of the people. What they were really trying to protect was the interest of Wall Street that suffered considerable devastation after the 1907 crash. Quietly they decided to use the Fed to skim the cream off of the economy, at the expense of the strong middle class, and always working in silence behind closed doors. Then along came Keynes in the 1930’s and gave the central bankers justification to spend excessively during times of economic strain, assuming of course they would cut back and save during times of plenty. Also, gold and silver coins were replaced by gold and silver paper certificates based on physical gold stored in some vault some place. Since the government was honest, there was never a need to audit the gold.
This lasted until the early 70’s when Nixon violated the US Constitution and closed the gold window altogether. It’s also when the United States government began to spend well beyond their means on a regular bases. They had the world’s reserve currency and they actually believed they were too big to fail! Several years after Nixon shut the door, the US became a debtor nation, and the debt has been growing ever since. There were some moments of sanity with Volker, but all caution was thrown to the wind when Greenspan took over the Chairmanship. They started adding extra shifts in the printing room and then they bought more printing presses. Through good times and bad Greenspan threw more coal into the boilers that fed the printing presses. He had the philosophy that if a lot was good, then even more had to be better. Then along comes Bernanke who announced that he had a print press and helicopters, and he knew how to use them both. Never before had a USA central banker been so outrageously and stunningly full of bullshit!!
Every problem from Mexico, to Russia, to 9/11, and then to the credit crisis was met with the same panacea, i.e., a healthy dose of fiat currency. One size fits all! The only problem with the remedy is that it has the same genetic make-up as the ailment. By that I mean that all fiat currency is a promise, or obligation to pay, and another way to express that is to call it “debt”. The Fed is solving a debt crisis by generating more debt, and even the mentally challenged must begin to realize right about now that there’s a flaw in the Fed’s logic. It’s gone to such an extreme that the February deficit was a staggering US $229 billion, and it has not gone unnoticed. The latest Treasury International Capital numbers (TIC) demonstrate that our bankers are losing patience with the Fed’s propensity to print. They have tried to compensate by doing some printing on their own, but they can’t keep pace.
That’s pretty much where we stand today, more and more Fed orchestrated printing going as a result of less and less third party interest in US debt. The Fed talks about draining liquidity, but the reality is that there’s a whole lot of printing left to do in our future. How do I know that? The stock market says so, that’s how I know! This week we experience a major buy signal when the Dow finally confirmed the new closing highs in the Transports. The Transports made six consecutive new closing highs before the Dow finally confirmed on the seventh attempt. The Dow confirmed even though it is extremely overvalued, rising on weak volume and poor breath, and running against the primary trend which is bearish.
Right now both the Dow and Transports are extremely overbought (blue circles) at this point in time and are due for a correction. That reaction may have started on Friday, but it’s still too early to tell. Should we see a reaction, I suspect it could last four days and one of those days should involve a triple digit decline. Good support is down at 10,514 and then at 10,443.
I want to make it quite clear that the only thing supporting the Dow right now is a river of fiat currency, and this river will grow as time passes. There are only two things that can happen when you increase the flow of a river, it can expand beyond its borders or it can run deeper if you dredge out the silt that has accumulated over time. Today’s river definitely runs deeper in the sense that all this liquidity will not filter out through to the general public. The same few that have received benefits from previous bailouts will continue to be the same few that will receive benefits in the future. This will make economic expansion difficult since money invested in financial markets is generally not around for a long period of time.
How long can this river of money influence stock prices? In all honesty, the influence is greater, and has lasted longer, than even I anticipated. My guess is that the Dow will go to a minimum of 11,245 and could run as high as 12,399. It’s anybody’s guess, but given the strength of the buy signal we received this week, the Dow will run higher.
The instrument of liquidity is the US dollar and the speedometer for the US dollar is the velocity with which it moves through the US economy.
The speed has been declining since 1996 and only recently appears to have put in a meaningful bottom, and the question is whether or not the improvement is temporary. If velocity continues to increase then the Fed can rest comfortably knowing that deflation is receding. You see the Fed determined years ago that the only way to deal with the massive US debt is to inflate it away. That’s why the increases in the money supply have been close to exponential as you can see below:
The reasons for the increase are twofold: to support Wall Street and to inflate debt away. You the individual do not figure in the equation, and that’s why we haven’t seen any real pick-up in economic activity, or employment, and you won’t either unless it’s an accident.
In spite of the increase in supply, the dollar has enjoyed a decent reaction of late. Recently we saw two tests of major resistance at 81.32, topping out at 80.93 on February 23rd. Since the top the dollar has traded eighteen sessions, tested good support at 79.62, looked like it was about to break down, and then came storming back on Thursday and Friday to close the week out at 80.75. As you can see in the chart below, that took the dollar back up above the lower band of the recent ascending trend:
Also we can see that RSI, MACD, and the histogram all turned back up late last week and look set to go higher from here. I don’t know if we’ll see another test of 81.32 but I would expect so. I also believe that the third test will either be successful, or the greenback will turn down for good. Given the fact the dollar is eighteen sessions off of the high, too long for a first or second degree reaction, the odds favor a turn down. Over the long run it is the Fed’s karma to keep printing fiat currency at an ever increasing rate, and that will adversely affect the dollar driving it much lower over time. That’s the penalty we pay for higher stock prices right now.
For months now people have been talking about the coming inflation, and now with the Dow breaking out, it appears they’ll finally get their day in the sun. Unfortunately oil prices have yet to reflect this as you can see below:
They’ve gone nowhere for six months and may have just failed in their third attempt to get through strong resistance at 81.32. This in itself isn’t necessarily bad as you may recall that oil took six attempts to break through 80.00 when the bull market was in full force two and a half years ago. The question I ask is whether or not we are still in a bull market. This chart is less than convincing and charts of the grains are absolutely horrible! You can see that both the RSI and MACD have turned down, the histogram is now in negative territory, and none of them confirmed the January high. On the other hand, with the stock market headed higher, this should be bullish for oil. Only time will tell.
Gold is one of the few markets I am optimistic about, and still it’s been rough sledding. As you can see in the following chart, spot gold sold off sharply on Friday after four straight days of gains:
In spite of the Friday sell-off, the April gold futures contract still managed to close up 2.20 for the week at 1,107.60, and it did hold above good support at 1,107.10 so little if any damage was done. The key was and continues to be gold’s ability, or should I say inability, to close above strong resistance at 1,136.20 which was tested again earlier this week. The gold price continues to compress into a tighter range that now has a floor at 1,090.10, and as long as that holds, gold is in good shape.
SUPPORT RESISTANCE
APRIL GOLD 1,105.6 1,117.1
1,091.5 1,136.2
1,080.8 1,052.3
Gold is the only constant in an ever changing and severely distorted world. These distortions are no accident and that’s what drives more and more investors toward gold. It has risen every year for nine years and yet almost no one knows anything about it. The financial news networks’ usually avoid talking about the yellow metal, unless of course the price is declining. Governments’ insist that it is a barbarous relic. Recently supply of gold held by all central banks reached a record level, and yet no one heard anything about it. Why are the same institutions that print so much fiat currency accumulating gold? Simply put, they know how things will wash out in the end. The IMF puts up large quantities of gold for sale and it is snapped up immediately because a few people know the intrinsic value of an ounce of the yellow metal. Gold is the only way to protect your wealth in real terms. That’s why both the primary as well as the secondary trends are headed higher. If gold breaks out above 1,136.20 the tertiary trend will be headed higher as well. If it breaks below 1,090.10 it will turn lower. In any event, the tertiary trend is not relevant. What’s relevant is that gold is headed higher, and it is the only vehicle that offers long term protection.
So there you have it, the Fed has apparently seized the day but the war is far from over. The question remains whether or not an institution can change the primary trend from bearish to bullish, and we still don’t have an answer. The Dow Theory confirmation was a stay of execution but settled nothing. Could the market still turn down here in spite of the confirmation? Anything is possible but the one thing I do know is that you have to pay a price for your excesses. Anyone who lived in Germany in the 1920’s, or Italy in the 1940’s, or just about anywhere in Latin America in the 1960’s and 1970’s can tell you that. Americans have been sheltered from reality for more than three generations by a benevolent Federal Reserve. Fly now, pay later is the mantra, but you still have to pay. You always have to pay, no matter how hard you try to avoid it. That will be the lesson of this decade, and it will be a painful one.
By Steve Betts
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