PM End of Week Market Commentary – 5/23/2014

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  • Tue, May 27, 2014 - 10:40pm



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    Someone, writing decades ago,

Someone, writing decades ago, whose name escapes me, had another name for Epsilon Theory.  Conventional Wisdom of the Dominant Group – more affectionately known as COWDONG!

  • Wed, May 28, 2014 - 12:58pm



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    Answer to Trend Manipulation


I apologize.  You are correct that in my previous post on this thread I did not answer your fair question.  I really did intend to, but ran out of time, electronic ink and honestly forgot.

The best description for the Fed's (and central banks in general) approach to gold in the run up to 2008 that I know of is "managed ascent".   I can't take credit for coining that phrase, and apologies, I can't give proper attribution, but Jim Rickards or James Turk possibly.

During pre-2008 "normal" times, there was movement connection of asset prices to generic inflation, and debt-fueled global growth.  Everything went up.  Whether is was Oil, roughly 430%

Copper, roughly 700%

Sugar, roughly 700%

or Housing, roughly 250%

In summary, during this period, A) the Fed had few choices but to allow a Managed Ascent because all asset classes were rising rapidly, and B) (more importantly) the Fed did not need to do much because the global economy was perceived as sound, gold insurance was not highly sought, and dollar collapse was not on anyone's radar screen.  Happy days were here again.  The Fed needed to only 'tap on the brakes' of gold price periodically (again, several intelligent investors could see the liquidity-fueled asset inflation and were bidding gold higher).

The Fed policy agents are now seen standing on the brakes.

Let me know if you want a post of a Nanex chart of what "standing on the brakes" looks like.

You can read my previous post re "Confidence" if you want to have background on the "Why".

So all of these asset classes were rising, driven by Fed easy money policies, and fair enough, secondarily, overall global demand.   The Fed only needed a moderated overall economic policy that included allowed gold to rise in parallel to other asset classes.  Just not too much and not out of alignment with other assets.

Recall that these were the halcyon days of free money, housing prices rising into infinity, the always growing home equity credit card.  So simply, people and investors were happy and not worried.  

Of course, as we learned in retrospect, there were very troubling goings on in the background of these happy days by reckless financial institutions levering up on their MBS to the sky, but virtually no one noticed that, nor did anyone care.

It goes without saying, but I'll say it, everything changed after the credit crisis.  Besides deflationary collapses in, well, just about everything, we all know what the Fed did to the money supply.  QE to infinity is fact not fiction.  ZIRP as far as the eye can see.  We only learned recently how many trillions of dollar swaps the Fed made available to Europe.  The Fed truly "saved" the world with the magic liquidity button.

Fast forward past 2009, to today, after credit markets and asset prices stabilized in the short term.

Anyone with two neurons knows that we have not solved our debt issues, that what has happened in the past 5 years was a Fed fire hose rescue operation that (temporarily) arrested prematurely a pre-ordained deflationary collapse.  Now 7 billion of us are whistling past the graveyard, betting our futures on a handful of flawed humans with dubious economic models and suspect allegiances and motives.

To coin another phrase, good luck with all of that.

And as I and others have said seemingly thousands of times, in the face of oceans of increasing money and credit-money, smart folks should be buying every ounce of gold they can get with whatever non-essential cash is available.  The price of gold should be multiples higher to appropriately reflect inflation risk and investment demand.

But thanks to an endless stream of "optics control" by the Fed, by the MSM, by the conventional investment community, we have a lot fewer smart, at least educated, folks than there ought to be regarding financial risk and risk mitigation.

That's the entire point about how important the optics of price of gold reflected in the gold charts, and derivative analytics i.e. TA world of trends, 100 DMA, stochastics, etc, etc, etc, etc.

The blatant and obvious price smashes in the middle of the night, the hiding of 10's of trillions of dollar swaps, the lies about the meaning and utility of precious metals by Fed officials.  These are obvious signs (to me and a few others, at least) of the current level of desperation.  But, as any student of human psychology knows, desperate and stressful situations create symmetrically desperate and stressful responses.  I predict some big mistakes are coming.

To answer your bond price question, I have never said that the Fed agents were the only market participants.  The global economy is continuously fragile at present and has had a string of national economic scares, for example Cyprus and EU bank collapses, Argentinian and Turkish central bank balance sheet destruction, and now Chinese credit market concerns with some major financial institutional bankruptcies.  The dollar i.e. UST always benefits in these serial crises from a flood to safety via the "cleanest dirty shirt in the laundry" phenomenon.  The Fed steps in when there are outflows i.e. risk-on trade periods to pick up any slack as bonds roll over / new issuance.  The mission is always to keep bond prices at historic lows.  Because the big commercial banks and most importantly the U.S. government simply cannot afford historic bond yields of 4, 5, 6% 10 year UST.  They simply cannot.  It will immediately double the national deficit.  And set off a vicious cycle of yield increases.  The Fed of course knows this.  So those rates will not materialize.  I answered your question, now please answer one of mine.  If the economy is "normal" and "recovered" and "growing", why aren't bond yields at historically normal levels of at least 4% and higher?

So I think you would agree from the Fed perspective, "mission accomplished" on the bond front.

Just like the Tacoma bridge disaster, we can watch with fascination, intuitively knowing that it cannot go on forever, and likely not much longer, but unable to predict with perfect precision when it breaks.

But soon enough, my friend.  May God bless you and other people of good will as they prepare spiritually, physically and financially for that period of time when things break.

  • Thu, May 29, 2014 - 01:42am



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    managed ascents


We both see what happened, but place an entirely different interpretations on it.  (Big surprise!)  But it is good to see that we agree on what actually happened, if not about why.

First let me knock an easy one.  Your "Nanex Chart" isn't proof of successful trend manipulation or "standing on the brakes."  It is however proof of Barclay-style manipulations, good for a quick boost to the bonus and a lose for the customer.  Likely that sort of operation has been going on since the LBMA opened its doors.  My sense is, it has been getting more explicit and frequent.

But again, that's not trend manipulation.  Its a short term no-risk skimming operation to transfer money from customer's pockets to the trader's quarterly bonus and the bank's P&L.

To prove effective & successful long term trend manipulation, you need to come up with evidence (evidence!!) that gold's price has suffered to a greater degree than other things over the long haul.

What you can't do is simply say that gold "should have" done better and use that as evidence.  That's just your opinion.  Why should I accept your opinion as to what the fair and proper price of gold should be?  Are you trying to be a central banker or something?

See, we know the Fed has tried to manipulate the trend of the bond market.  It is explicit Fed policy, and they have spent trillions giving it their best shot.  And in response, sometimes the bond market has cooperated, and sometimes it hasn't.  Available evidence (evidence!!) suggests that trend manipulation is not only hard, works only sporadically, but is expensive too.

My only point in all this is about trend manipulation.  Its very hard to do, especially long term, and it is usually quite costly to even attempt.  And we have evidence (evidence!!) that even when the Fed really wants rates lower, and they are spending trillions to make it happen, half the time the market just doesn't cooperate and rates rise instead.

So why should we imagine that the Fed can control the trend in gold market, when there is no evidence of such attempts at control, and in fact there is evidence that their overt and expensive efforts to control the bond market have met with only spotty success?

All markets have cycles.  Gold is a market.  It too has a cycle.  There are up-cycles and down-cycles.  While I know everyone wants to use the Fed as Scapegoat of the Century (and indeed, it deserves that title in many areas), just because gold rose at the same rate as sugar and copper and the other commodities is not evidence of Fed successful trend manipulation!  In fact, it is just evidence that gold tends to act like other commodities!

I know, the next response would be "ah yes, and that's exactly what they want us to think!"  Circular logic at its finest, but not evidence-based reasoning.

I found this last point of yours really interesting:

And as I and others have said seemingly thousands of times, in the face of oceans of increasing money and credit-money, smart folks should be buying every ounce of gold they can get with whatever non-essential cash is available.  The price of gold should be multiples higher to appropriately reflect inflation risk and investment demand.

This site, and the fact we are generally pretty lonely here, is a full and complete explanation of why gold's price isn't higher.  Most people don't agree with us!   How many times have you seen "the look" whenever you talk about the stuff we know to be true?  It happens all the time.  It is reflected in Chris's perpetual complaints about how our national leadership (and the vast horde of technocrats that support them – and the public in general) are ignoring some really important issues that will bite us all in the ass in the not-too-distant future.

So since we know the vast majority of people are blissfully (wilfully) ignorant, why then would that ignorance not be reflected in the price of gold too?  Why must we find a "gold trend manipulator scapegoat" crutch to explain this instead?

Ultimately, the answer is a simple one.  Gold is not higher because the vast majority of people (with money) don't agree with us.  And in a market, "agreement" translates directly into price.

As for your question:

If the economy is "normal" and "recovered" and "growing", why aren't bond yields at historically normal levels of at least 4% and higher?

My goodness.  I never said anything about "normal" "recovered" and "growing."  Our economy is bifurcated; for the top 10%, it is recovered and growing.  For the rest – stagnation and contraction, depending on where and who you are.


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