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QE Taper Begins -- But for How Long?

Dan Calandro - Sunday, December 22, 2013

The U.S. Bureau of Economic Analysis revised third quarter GDP growth up to 4.1%; the previous estimate had market activity increasing 3.6% for the period.

GDP estimates helped distract “the market” from other news and sent the Dow Jones Industrial Average surging up 3%, to 16,221; gold dropped another 3% on the same reports, and yields inched up. The 15-51 strength Indicator was essentially flat. See below.

12-20-13

In what was Ben Bernanke’s last FOMC meeting before his January 2014 retirement, he instructed the Fed to begin slowly unwinding their controversial quantitative easing (QE) program. Beginning in January ‘14, Wall Street banks will receive $10 billion less per month, or $75 billion, of freshly new printed money every month. In the announcement Bernanke cited stronger economic numbers (GDP and unemployment) as reasons to lower the amount of monetary stimulus. However, Bernanke also stated that the Fed intends to keep interest rates low well into the future – far beyond 2015 – even if the unemployment rate falls below their key level of 6.5%.

So if the economy is indeed stronger, the recovery more solid and stable, then why must interest rates be kept so low for so long?—And why can’t QE be unwound faster and more definitive? 

Truth be told, world central bankers are scared to death of higher interest rates. A rise in yields will force many European states into submission. They can’t afford their debt now, and higher interest rates will only push more of them into bankruptcy. Only blind-men can’t see this.

This is corroborated by the vast number of Wall Street and media pundits that prove to be confused about QE movements – what they mean and how they impact currency and market activity. Call me a cynic, but the “experts” don’t know what the real deal is then they have an excuse for not seeing the next correction coming. They’re famous for that.  

The purpose of QE is to keep interest rates low in hopes that the lower interest rates will spur economic growth. It clearly hasn’t worked. Rates have been low for a long time and banks are still tight and the economy is still fragile. The reason for this is simple: banks see inflation (a.k.a. the cost of money, a.k.a. yields) rising in the near future, and as a result, they see little possibility of lending profitably at these low interest rate levels. So they don’t.

QE has succeeded in keeping interest rates low but it has come as a market hindrance – not an economic benefit. Profit is the main motivator of market activity. If its opportunity is farfetched lending doesn’t happen. And that’s what we’re seeing.

There is little doubt that Bernanke’s replacement, Janet Yellen, will quickly reverse the tapering course and increase QE the moment yields begin to rise in ’14. The economy is still fragile and unemployment is stubbornly high. Inflation is low, indeed, but that’s because QE money is not getting down to the Market level – to consumers, business, and enterprise. Instead, QE money has only found its way to the coffers of wealthy Wall Street bankers. 

Indeed, a 4% GDP growth rate is much improved than what the American Market has been experiencing lately. However, that level was achieved in just one quarter of the three so far this year. Growth for calendar year 2013 is expected to be just 2%, a feeble pace to say the least. That’s why unemployment hasn’t recovered – and why the Fed is so adamant about keeping rates low in the foreseeable future.

That’s also why this QE taper is just a gesture.

Bernanke wants to end it. He really does. But he just doesn’t know how best to do it with little monetary or inflationary impact. Think about it. At some point the Fed will have to unwind QE (the act of selling U.S. Treasury and mortgage backed securities for cash) to therefore remove the new cash it printed during easing. Remember, QE was instituted to keep yields low; to reverse it will invariably send yields higher – and that will cause world havoc.  

History has a tendency of repeating itself – especially when world governors make the same stupid mistakes. 

The Federal Reserve is re-inflating a balloon destined to burst like all previous ones. There is no economic reason for stocks to be trading this high. None. It’s a QE boom. And it too shall bust.

Don’t get caught off guard. Markets remain extremely manipulated – and that includes gold.

Stay tuned…

Shield

The road to financial independence.™

The Gold Prediction

Dan Calandro - Sunday, December 08, 2013

After falling fractionally for five consecutive sessions the Dow Jones Industrial Average got almost all of it back on the last trading day of the week. It closed Friday up 199 points to 16,020 (a 22% gain for the year) on a stronger than expected jobs report and an upward revision to third quarter GDP, from 2.8% to 3.6%. 

But perhaps the most amazing angle to this stock market resurgence is the story of strength, which after being negative for most of the year, has made a major move to the upside. The 15-51 strength Indicator is now up 11% for the year. See below.

12-6-13a

Today’s good news is tomorrow’s bad news.

For instance, the GDP growth rate sounds good. The move has prompted some "experts" to say some really stupid things, like: "The world and its mother are optimistic about the future."  In other words, broker-types are using these two economic releases to sell the pipedream that the storm has passed and that it’s a perfect time to go long and deep on stocks. 

However, much of the GDP growth came from a build-up in business inventories, perhaps for the holiday season. Consumer spending, the long-term driver of economic prosperity, grew at just 1.4% in third quarter ’13 – the weakest gain since the recession supposedly ended a few years ago. And as of right now, all indications are pointing towards a weak holiday shopping season.  

If consumer demand doesn’t rise significantly in the current quarter it will completely wipe out the third quarter’s gain, as inventories (supply) won’t need replenishment or further build-up. In short, take third quarter GDP numbers with a grain of salt.  

Same is true with the unemployment rate which dropped to 7%, shaving .3% from its previous mark. But here again, the move has more to do with negatives than it does positives. For instance, most of the rate drop came from people leaving the workforce – those who have stopped receiving unemployment benefits or quit trying to find work. You see, once people are out of the government system they no longer count. 

This can be corroborated by the labor participation rate, which is at a historic low (63%); and the long-term unemployment rate, which remains way too high (37%). These are twice the ’08 levels. 

The drop in the unemployment rate doesn’t feel real because it isn’t real.  

Nevertheless, we know that improving economic conditions will bring about an end to quantitative easing (QE). QE is a Federal Reserve policy implemented to keep interest rates low. It does so by printing new money to fill the free-market demand gap for U.S. Treasuries. They try to keep yields low to make it easier for borrowing, and to hypothetically expand individual and business net worth. In essence, the Fed tries to boost the housing market and business expansion by keeping interest rates low with QE.

However, the Fed has said on numerous occasions that QE will be tapered when unemployment lowers and economic (GDP) growth stabilizes. That’s bad news for the Wall Street establishment, as recent economic data forces the Fed’s hand to end QE. 

As mentioned on many previous occasions, a QE taper will automatically bring about an increase in yields (a.k.a. market interest rates.)  Such a condition will stop the housing market cold, tighten consumer credit, and ultimately slower the growth in business expansion and broad-based inventories. And stocks will correct to the downside.

Speaking of corrections, gold has done just that – and for some time. It peaked in September 2011, and in July of 2013 its trend-line met the 15-51 Indicator’s. This is a significant move. 

It is important to note that gold has been leading "the market" since the money crisis first presented itself. Since then every time gold has made a significant move stocks have followed suit several months in arrears. See below. 

12-13-13a

Gold bottomed out in November ’08; and then four months later stocks did. Gold jumped in value in December ’09; and then stocks made a similar leap five months later in May ’10. Then gold spiked to its highest level in September ’11, and once again stocks followed several months later, in April ’12.  

In the modern market gold bottoms and peaks faster and more robust than stocks for the simple reason that market activity is being driven by monetary policy and currency devaluation more than anything else. 

That’s not what We want. 

What we want is for stock valuations to be driven by economic expansion that is primarily driven by consumer demand – not governmental efforts to print new money and manipulate markets.  

In the current Market condition consumer spending is light, QE and government spending is heavy, unemployment is way too high and wage growth is weak. These are major Market hindrances – this at a time when stocks are at all-time highs.

Indeed gold has been in correction mode for a long time, down some 35% since reaching its all-time high. But markets correct all the time, and in environments this manipulated they correct more extremely and for longer periods of time. That’s the gold condition. 

That is also the condition of stocks, which have largely regained their previous high positions: the Dow has almost reached its objective* (Nominal GDP), and the 15-51i strength indicator is just 6% away from its all-time high (reached in September ‘12).  

That’s way too strong for the current economic condition. Stocks have corrected to the upside because of easy money and QE, not Market strength.  

If we listen to gold it tells us that stock market strength is due for another major correction some time in the near future. The Dow Average, this time, should follow. 

Stay tuned…

ShieldThe road to financial independence.™

* Based on new GDP numbers recently released the Dow will reach its objective at 16,419. I would expect it to reach this level before correction. There’s simply too much new money being added to the system not to get there. But be careful. This is a slippery slope. 


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