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The Fed is Engineering Obama’s Re-Election Campaign

Mitt Romney has just rolled up back to back victories in the Nevada and Florida primaries, and his path to the Republican nomination looks to be inevitable. Republicans are mostly basing their voting decisions upon opinion polls showing Romney has the best chance of defeating President Barack Obama in the Nov 6th presidential election. According to the latest Gallup poll, both Obama and Romney have equal support of 48% of the US-electorate, and if correct, more than a billion dollars worth of campaign and PAC ads will swamp the media outlets, in order to try an influence the decisions of less than 5% of undecided voters.

In his standard stump speech, Romney charges Obama with peddling for votes by spending taxpayer dollars in order to support his re-election. “Over the past three years Barack Obama has been replacing our merit-based society with an entitlement society,” Romney tells his supporters. Indeed, direct government payments to individuals shot up by almost $600-billion, a +32% increase, since the start of the Obama administration in 2009.

A record 49% of Americans live in a household where someone receives at least one type of government subsidy, such as Medicare, food stamps, hosing subsidies, unemployment insurance, school lunch, veterans’ benefits, etc. And 63% of all federal spending this year will consist of checks written to individuals for which the government receives nothing in return, the White House estimates. That’s up from 46% in 1975 and 18% in 1940. At the same time, about half of Americans pay no federal income tax at all. While the Republicans rail against the burgeoning welfare society, they also support corporate welfare for the oil industry, and tens of billions in subsidies for America’s Agricultural farm factories.

Americans are facing tough times. Millions are still out of work. Wages remain stagnant, while health care costs, tuition, and other household cost continue to rise. Many homeowners owe more for their houses than they are worth. Yet the income of the wealthiest 1% of Americans has risen dramatically over the last decade, and now equal 25% of the entire national income. Still, the federal government lavishes the top-1% with billions of dollars in giveaways and tax breaks. Meanwhile 50% of US-workers earned less than $26,364 last year, reflecting a growing income gap between America’s rich and poor.

Undoubtedly, there will be plenty of mudslinging fired from both sides, with political spin artists trying to brainwash the public’s view of the state of the economy. “This president’s misguided policies have made these tough times last longer,” Romney said to his Nevada supporters on Feb 5th. “If elected president, my priority will be worrying about your job, not saving my own,” he added. For his part, Obama told thе Democratic Caucus on January 27th that their votes for the $787-billion economic stimulus package prevented a second Great Depression, and enabled the progress made ѕіnсе the financial crisis of 2008 and 2009. “Over thе last 22-months we’ve seen 3-million jobs сrеаtеd, - and more new factory jobs ѕіnсе thе 1990′s. A lot οf thаt is because of tough decisions уου took,” said Obama.


Mitt Romney is now starting to aim most of his fire on President Obama, instead of attacking his Republican rivals. However, Romney’s Road to the White House faces a very big roadblock, - the Federal Reserve. The highly secretive central bank is working around the clock in order to help Mr Obama get re-elected, and the fruits of its labor are just beginning to sprout in the political arena. The Fed has engineered an improbable recovery rally in the stock market that has lifted the Dow Jones Industrials to its highest closing level since May 2008, - back to the time before Lehman Brothers collapsed. The Nasdaq, dominated by technology stocks, has rebounded to the 2905-level, its highest close in 11-years, led by juggernaut Apple Inc.

Despite all of the turmoil in the stock markets over the past five-years, when retail investors withdrew $465-billion of their savings out of stock mutual funds, Fed chief Ben “Bubbles” Bernanke proved that the Fed could rig the stock market, - and engineer an economic recovery by printing vast quantities of money, and keeping interest rates locked at historically low levels. Behind the scenes, the Fed funneled trillions in loans to Wall Street bankers, arranged currency swaps with other central banks, and through in agents, intervened directly in the futures markets, in order to keep the stock market’s recovery rally intact.

One of the Fed’s favorite tools used to pump-up the stock market is “open mouth” operations, in order to influence trader behavior and market psychology. The Fed broadcasts a constant barrage of hints to the financial media, that it could unleash another tsunami of “quantitative easing” (QE), at a moments’ notice. By flooding the markets with ultra-cheap liquidity, the Fed whets the appetite of risk takers, and starts an orgy of speculation in the markets and creates asset bubbles. In turn, a steadily rising stock market is boosting the odds of Obama’s winning a second term. Mirroring the steady climb of the Dow Jones Industrials, online bettors at Inntrade.com, now give Obama a 57% chance of getting re-elected.

That’s up from 46.5% odds of winning on October 4th, when the Dow was plunging in a downward spiral to the 10,500-level. Thanks to massive intervention in the futures market, the Fed put a brutal squeeze on short sellers, and engineered a stunning +375-point rally in the Dow Industrials in the final 45-minutes of trading on October 4th. The Fed turned back the threat of a Bear market, and in hindsight, ignited the third leg up for the Bull market that began in March 2009. The Fed has proved its ability to manhandle the Treasury bond and stock markets, and few traders are willing to fight the Bernanke Fed these days.

Incumbent presidents are always hard to beat. The powers of the presidency go a long way. Not since 1971 and early in the 1972 election year, when Nixon pressured Arthur Burns, then the Fed chairman, to expand the money supply with the aim of reducing unemployment, and boosting the economy in order to insure Nixon’s re-election, have traders seen such massive political pressure on the Fed to intervene in the markets in order to help a president to get re-elected. In order to constrain an outbreak of inflation, Nixon imposed wage and price controls, and won the election in a landslide.

Underneath the surface, the Fed was steadily increasing the high octane MZM Money supply, throughout the turbulent days of 2011. The size of the MZM Money supply has increased by $1-trillion from a year ago, to a record $10.75-trillion today. At the same time, Bernanke has gone far beyond the markets wildest imaginations, by pledging to keep borrowing costs for banks and hedge funds locked at zero-percent for the next three years. The Fed said that it aims to continue with its ultra-easy money policy until the US-jobless rate falls towards 6-percent from 8.3% today, and is willing to tolerate a higher inflation rate.

Only one US-president since World War II -- Ronald Reagan -- has been re-elected with a jobless rate above 6-percent. Reagan won a second term in 1984 with an unemployment rate of 7.2% on Election Day. Reagan won in a landslide since the jobless rate had fallen almost 3% in the previous 18-months, and a sizeable majority of US-voters thought the economy was moving in the right direction. By contrast, under Mr Obama the unemployment rate has dropped by 1.7% in the last 26 months – from a high of 10% in 2009. The Fed aims to keep the ultra-easy conditions in place that would enable the jobless rate to tumble to 7% by Election Day, even at the expense of faster inflation, to help Obama win a second term.

It’s starting to look as if the US-economy is on a steady, if unspectacular, upward trend. Considering how beaten down the economy has been, - it’s possible that Obama might find himself in the sweet spot of a virtuous cycle of a business recovery, in the months ahead. Republicans will claim that Obama’s policies deserve none of the credit. “Mr. President, we welcome any good news on the jobs front,” Romney said. “But it is thanks to the innovation of the America people and the private sector and not to you, Mr. President,” he added.

However, presidents tend to get the blame for everything bad that happens on their watch and receive credit for everything good. Obama’s chances for re-election are starting to look much better, after Labor department apparatchiks reported that US-employers added 243,000 workers to their payrolls in January, the biggest gain in nine months. The US-economy has created about a half-million jobs in the past two months, government bureaucrats says, and the unemployment rate dropped to 8.3% in January from 8.5% in December. Already, 2012 is looking like a winner for automakers -- just one month into the year.

Another hopeful sign for the US-economy’s future, - sales of new cars and trucks rose +11% to in January to 913,287, thanks to low borrowing costs and better loan availability. The sales pace accelerated to its highest level since the Cash for Clunkers program in August 2009. Chrysler had its best January in four years. If sales stay at January’s pace, they would reach 14.2-million, up from 12.8-million in 2011. While that’s below the 2000 peak of 17.3-million, it’s better than the 10.4-million trough hit in 2009. One reason car sales are improving is that buyers need to replace aging vehicles. The average age of a vehicle in the US is a record 10.8-years, nearly two years older than a decade ago. The bad news is that US-motorists are paying an average $31,300 for a new car, compared with $28,000 five years ago.

Historical observation reveals that the direction of the stock market has a notable influence over consumer confidence and spending levels. In particular, the top-20% of wealthiest Americans account for 40% of the spending in the US-economy, so the Fed hopes that by inflating the value of the stock market, wealthier Americans would decide to spend more. It’s the Fed’s version of “trickle down” economics, otherwise known as the “wealth effect.”

Yet when measured in “hard money” terms, or in comparison to the price of Gold, it becomes clear that much of the Dow’s “miracle rally” during the Obama administration was nothing more than a “monetary illusion,” inflated by the Fed’s hallucinogenic QE scheme. When seen thru the prism of Gold, 1-share of the Dow Industrials can only buy 7.4-ounces of Gold today. That’s slightly less than the exchange rate that prevailed at the bottom of the stock market’s slide in March 2009. Compared to the price of Gold, the Dow Jones Industrials is currently trading at its lowest level since 1992, - a 20-year low. In other words, without the Fed’s massive money printing operations, the stock market would be in a shambles today, and Obama’s chances at re-election would’ve been worse than Jimmy Carter’s in late 1980.

Just as the Dow’s historic rally is a mirage in hard money terms, the decline in the jobless rate to 8.3% is also deceptive. The fall in the headline unemployment rate has tumbled because the size of America’s workforce is shrinking – 4.8-million workers have simply given-up looking for a job over the past 31-months, and are no longer counted as unemployed. If these workers were counted as unemployed, the jobless rate would be at 11%. Nearly 24-million Americans remain unemployed, underemployed, or have just stopped looking for work. Long-term unemployment remains at record levels. If all these segments of the labor force are considered, the so-called U-6 jobless rate is at 15.1%, or equal to 1-in-6 American workers.

There’s also the issue of the purchasing power of US-wages. The average hourly earnings for private-sector US-employees for the past 12 months rose by a scant +1.9-percent. That’s well below the +3% rise in the consumer price index, resulting in a further lowering of workers’ real wages. There’s also been a widening disparity between corporate profits and worker’s wages. In Q’3 of 2011, US workers received just 44-cents in wages of every dollar of income earned in the US, the smallest share since 1947. In other words, whatever economic growth that’s been achieved over the past few years has also come at the expense of a sharply higher cost of living for many commodities and services. In contrast, US-corporations received more than 10-cents, up from 7.3-cents per dollar of income five years ago when the recession officially began, an increase of +37%, benefitting the top-10% of the wealthiest Americans that control 80% of the listed shares on Nasdaq and the NYSE. 

Still, the Fed figures that if it continues to pump-up the value of the stock market, eventually good tidings for the US’s asset based economy would follow. On Sept 21st, 2011, the Fed devised a brand new scheme to inflate the stock market’s value. The Fed said it would switch $400-billion of its portfolio into long-term Treasury bonds, in order to lock down long-term interest rates at historic low levels. The Fed telegraphed the move to Wall Street for weeks, dubbed “Operation Twist.” Since then, the Fed has locked the 10-year Treasury note yield below 2%, which is less than the 2.05% dividend yield that’s offered by the S&P-500 Index, and making the stock market look more attractive.

The Fed has been able to lock long-term bond yields at historic lows, even at a time, when the CBO reports that annual spending over the Obama era has climbed to a projected $3.6-trillion this fiscal year from $3-trillion in fiscal 2008, up more than 20%. The government’s share of spending in the US-economy has increased to 24%, up from an average of about 20% of GDP. This doesn’t include the $2-trillion tab for Obama Care. Under the Obama administration, the federal debt has mushroomed by about $5-trillion in a mere four years.

Since the Fed unveiled “Operation Twist,” the Dow Jones Industrials has soared +1,700-points higher, yet long-term Treasury yields remain “repressed” by the central bank. Typically, in a free and open marketplace, Treasury bond yields would’ve climbed sharply higher, alongside a booming stock market. Instead, the Fed has kept Treasury yields locked at artificially low levels. The massive degree of heavy handed intervention in the marketplace, and the manipulation of interest rates, the stock market, and currency exchange rates, is reminiscent of the Japanese capital and currency markets, and has also become the hallmark of the Bernanke Fed and the Obama administration.

However, according to the latest Gallup poll, the Fed’s intervention tactics are boosting Mr Obama’s ratings in the opinion polls. Gallup says 46% of American voters now approve of Mr. Obama’s performance in the White House. That’s up from 38% on October 4th, when the Fed rescued the stock market from the claws of the grizzly Bear. Historically, the best predictor of a president’s re-election chances is the approval rating. Since World War II, every president with an approval rating of at least 50% has won re-election. Every president with a rating clearly below 47% has lost. The most important driver of voter sentiment is the health of the labor market, and the number of net new jobs that are created.

But the Fed still has substantial work to do in order to insure Obama’s re-election: among the all-important independent voters likely to determine the outcome of the upcoming election, 47% approve of the way Obama is handling his job, and 50% disapprove. Many traders figure that if Obama is running neck and neck with Romney in the polls, the Fed could decide to take the politically risky gambit of unleashing QE-3, - printing anywhere from $600-billion to $1-trillion, and in turn, inflate the Dow Industrials to record highs above the 14,000-level.

If correct, there could be serious side-effects that could derail Obama’s re-election campaign. For instance, unleashing QE-3 could lift the price of North Sea Brent crude oil towards $150 per barrel, and jolt retail gasoline prices toward $5 /gallon. QE-3 could also lift the price of Gold above $2,000 /oz and trigger a broad based binge of speculation in the commodities markets, for grains, livestock, and base metals. That could usher in a whole new wave of consumer price inflation that would erode the purchasing power of US-wage earners.

Japan’s finance chief, Jun Azumi, said on Feb 2nd, that if the Fed unleashes QE-3, he would exert maximum pressure on the Bank of Japan (BoJ) to consider easing policy further, in order to prevent the US-dollar from falling below 75-yen, and to protect its export-reliant economy. “Yen buying has strengthened, led by short-term and speculative moves on the back of expectations for low interest rates in the US until 2014. I would like the BoJ to take account of economic conditions and various factors in deciding policy, including quantitative easing,” Azumi declared. Thus, if the Fed unleashes QE-3, the BoJ could provide traders with a double bonus, - QE-4 in Tokyo, and a whole new wave of yen carry trade speculation.  

Saudi Arabia, the central banker of crude oil, is doing its part to counter the effects of QE in the Western world and Japan, by lifting its oil output to about 9.8-million barrels per day, up about 1.5-million bpd from a year ago. Riyadh is keeping the oil flowing at near record levels, even while Libya’s output of 1.5-million of high-grade light crude is gradually re-entering the marketplace. Still, the crude oil market is bubbly these days, with North Sea Brent trading above $115 /barrel, and gaining some upward momentum. Expectations of further rounds of QE in England, Japan, the US, and “Backdoor” QE in the Euro-zone are buoying the crude oil and Gold markets at historically high prices.

Suddenly, the financial media is swamped with speculation about a possible Israeli airstrike on Iran’s nuclear facilities in the months ahead, which if correct, could lift crude oil prices towards $200 per barrel, and wreck the fragile recovery in the US-economy. But it appears as though Israel’s public statements about a possible military strike against Iran's nuclear sites are a bluff designed to spur Europe and the US into adopting tougher economic sanctions on Iran in the months ahead. After all, if Israel was actually preparing to launch a military strike against Iran, it would not be broadcasting such an operation so openly. Israel’s attacks on nuclear sites in Iraq in 1981 and Syria in 2007 were launched in utmost secrecy.

Thus, traders in the Dow Jones Industrials reckon that the odds of an Israeli airstrike are very low. Instead, the US is expected to placate the Israelis by ratcheting up economic sanctions on Iran’s central bank, its oil industry, and oil shipping companies, in order to bring about a hasty collapse of the Iranian economy. The key question is whether Iran would deliver the first strike against Israel or US-bases in the Persian Gulf, if it thought its economy was crumbling and tough sanctions were threatening to topple the Ayatollah’s regime. In any event, the tension in the Middle East is a convenient excuse for oil traders to keep the price of North Sea Brent pegged near record highs, and in turn, helps to buoy the price of Gold.

Whatever the hurdles, traders have the utmost degree of confidence that the Bernanke Fed will always devise a new rescue scheme, and place a safety net under the stock market, if necessary, when risky bets go sour. Traders also believe the US-stock market is entering the sweet spot of the presidential election cycle, and it’s very hard to bet against it. There is a strong historical tendency for the market to trend higher over the course of the second half of the presidential cycle. Thus, with the Fed working round the clock for team Obama, and the size of the entitlement society reaching majority proportions, Mr Romney is seen as the long-shot candidate to win the presidency in November.

Romney’s Road to the White House seems like a episode of Mission Impossible, - his mission is to enable a majority of the American electorate to see through the Fed’s smoke screens, and the Labor department’s fuzzy math. If Romney beats the heavy odds that are poised against him, it would signal the end of Bernanke’s tenure at the Fed, and the end of his experiments with Bubble-mania and market manipulation.
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The Fed Resumes Printing

The Federal Reserve recently announced important policy changes after its Federal Open Market Committee (FOMC) meeting. Here are the three most important takeaways, in its own words:
  1. The Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.
  2. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. In the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent.
  3. The Fed released FOMC participants' target federal funds rate for the next few years.
Immediate Reactions
The first item is the most important as it was not expected – and it had an immediate effect on markets. As seen in the chart below, gold spiked higher on the surprise news of extending the zero-rate policy through 2014.
The news prompted a similar jump in silver services:
Keeping rates low requires the Fed to print new money to buy Treasuries, so the dollar weakened against the euro, although the reaction wasn't as big as in those in the gold and silver markets. This is partially due to the fact that the ECB is on its own campaign of printing money.
The promise to keep short-term rates low for a longer period also caused longer-term rates to fall slightly, as seen in the 10-year Treasury rate chart below, which fell from about 2.05% to 1.95 %, a relatively modest decline.
What Does This Say about the Fed's Policy?
The most important action of the three was to extend the zero Fed funds rate to the end of 2014. This is a form of easing that could affect more rates than just short-term rates. Furthermore, there is a debate as to whether the action was the result of the Fed's concern about the economy slipping back into recession. Or, this could also be a bullish sign for the economy and stock market, as the guaranteed low rates could increase investment to improve our economy. Zero rates drive investors to take on risks – such as buying stocks – to gain higher returns. As a result, this induces more investment toward riskier parts of the market, which might otherwise be underfunded. Though the Fed aims to stimulate the economy, we're more likely to see a slip back into recession rather than see an effective Fed stimulus improving the economy.
The press conference suggested that quantitative easing (QE) remains on the table. As a result, new targeted asset purchases by the Fed are likely in our future. These additional purchases with newly printed money could become inflationary. That is why gold shot higher and the dollar weakened in the short term.
Both the Fed and the ECB have decidedly less-hawkish members and leadership than just last year. Both have now moved toward more money printing to keep rates low. The chart of central bank balance sheet as a ratio to GDP shows that the central banks of the world are clearly "printing":
Longer-Term Implications
The problem with printing money and promising to do so for years ahead of time is that the negative consequences of inflation only happen after a delay. As a result, it's difficult to know if a policy has gone too far until years down the road at times. Unfortunately, if confidence in the dollar is lost, the consequences cannot be easily reversed. One problem for the Fed itself is that it holds long-term securities that will lose value if rates rise. The federal government faces an even more serious problem when interest rates rise, as higher rates on its debt mean greater interest payments to service. Due to this federal-government debt burden, the Fed has an incentive to keep rates low, even if the long-term result is higher inflation. However, for now the Fed's statement suggests it sees inflation as "subdued," so it's putting those concerns aside for now.
Along with the promise of low rates, the Fed for the first time gave an inflation target of 2%, as measured by Personal Consumption Expenditures. The actual and target inflation show that the Fed is currently not under major pressure from missing its target… not yet.
The Fed has not even tried to set a target for the unemployment rate, which is only expected to edge below 8% by 2013. The Fed says that that the longer-run unemployment range is 5% to 6%. The big difference from the current level of 8.5% indicates that the Fed faces a greater challenge with unemployment than inflation now.
My conclusion from the Fed's actions is that it doesn't care as much about its inflation target as it does about improving the unemployment rate. Thus, it will err on the side of letting inflation rise, if it would improve unemployment. But holding rates too low too long fueled the housing bubble. Repeating the same game will have consequences of malinvestment in the form of new bubbles in the economy. The Fed hopes to restore employment before the negative consequences of loose monetary policy show up.
The Fed provided the accompanying chart of the Fed funds rates expected by the seventeen members of the FOMC. Each dot indicates the value (rounded to the nearest quarter-percent) of an individual participant's judgment of the appropriate level of the target Federal funds rate at the end of the specified calendar year. Over the long run, the Fed expects the funds rate to rise to around 4.25%. Eleven of the members indicate that the rate will rise before 2015. Only six expect the rate to stay close to zero through 2014.
The above chart should not be taken very seriously, as Fed predictions have been notoriously inaccurate. Furthermore, it's likely that rates will rise before 2014 as a result of market forces pushing them upward due to mistrust of the currency – measured by rising gold and commodity prices.
The Federal Reserve balance sheet expanded dramatically as the credit crisis became acute in 2008. The Policy Tools (shown below in black) grew by $2 trillion with the QE1 purchase of mortgage-backed securities and the QE2 purchase of long-term Treasuries. This was an unprecedented effort to support those markets, provide liquidity, and drive rates down to zero. A simple extrapolation of similar expansion policies to the end of 2014 suggests that the Fed may require an additional $2 trillion to extend its goals. The problem is that such action would surely weaken the dollar and drive gold much higher. If confidence is lost, rates could rise even as the Fed continues to print and buy securities. The Fed says that it will change its policy if conditions warrant. I think they will be forced to stop this policy well before 2014 is over. Nonetheless, in the meantime, they will plant the seeds of rising prices with ultralow rates.
The gold price is driven by Fed policies and its bias toward printing money rather than defending the dollar's purchasing power. This Fed bias was again reconfirmed by this announcement. With all the Fed's renewed vigor toward keeping rates low longer, we can once again reconfirm the ongoing downward slide for the dollar. As a result, gold remains the best investment against the damaging government deficits and central bank policies around the world.
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Gold & Silver Market Morning

New York closed at $1,745 as the euro rose in the belief that the Greek debt crisis has been solved. The euro jumped 1% at the same time to €1: $1.3265. Both Asia and London held it there. London then Fixed it at $1,743.00. In the euro it was Fixed at €1,315.174. The euro held at that level throughout the morning. Ahead of New York’s opening the gold price was rising again at $1,746.30 with the euro at €1: $1.3280 leaving the euro price of gold at €1,314.99 in the euro.

Silver continued to show considerable robustness and opened at $34.35 in London. Ahead of New York it stood at $34.33.

Gold (very short-term)

Gold should continue to show a stronger bias in New York today.

Silver (very short-term)

Silver price continue to show a stronger bias in New York today.

Price Drivers
In the belief that the leaders of Greece have resolved their differences the euro started to rise, taking gold with it. Yes, it is only the first step in a long process, but it was the most intractable, so the market thinks. The next step is to persuade private holders, to accept a voluntary write-off of 70%, of that debt. Nevertheless markets across the world were ready for some good news, which is why they all took off, including those of precious metals.

As we said yesterday, Asia’s gold markets don’t react to developed news on a day-to-day basis. That’s why the gold price barely moved there. London showed a certain pragmatism taking a wait-and-see line, waiting for definite news.

Meanwhile, one of the worries gold investors have is the state of the dollar. The Federal Reserve's latest weekly money supply report from last Thursday shows seasonally adjusted M1 rose $13.2 billion to $2.233 trillion, while M2 rose $4.5 billion to $9.768 trillion. And it will continue to rise every week. At what point will faith in the dollar sag? There are so many structural problems in the financial system that major growth and a strong government determined to reform the system is needed before the reasons gold price rise can be driven away. Is this just a pipe dream?


Julian D.W. Phillips for the Gold & Silver Forecasters

Global Gold Price (1 ounce)

1 day ago

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Led by Banks, Stocks Are Inches from Key Targets

The stock market hasn’t been much fun to trade in a while, but that could change today as the broad averages approach some potentially important rally targets of ours. Want to know exactly where these targets lie but don’t subscribe?  Click here for a free trial subscription that will give you access to our proprietary numbers. One of them foresaw a 600-point rally in the Dow that is nearly complete. The other is a bullish target for the E-Mini S&Ps that smacked us in the eye yesterday with its clarity.  There are also two bank stocks whose deft handlers appear to be setting up suckers for the kill. These financial biggies are household names, but because they are in the thick of Europe’s bailout hoax, they are destined to go down with the ship. Under the circumstances, the hysterical, short-squeeze rallies that have driven their shares steeply higher may be ready to seven-out.
We’ve been itching for months to find a good place to short this market. As many of you who trade will already know, except for a delightful, breath-of-spring plunge in late October/early November, it’s been a tiresome, uphill slog for patient bears. Now, although we can’t guarantee that the Hidden Pivot targets about to be hit are going to stop the bull dead in its tracks, we’re optimistic that they will provide an exceptional opportunity to get short. There are umpteen ways to do this, but we’ll probably concentrate on index futures and put options on certain equity trading vehicles. If you’re not familiar with the “camouflage” technique we use to help alleviate the stress of initiating a trade, you may be surprised at how easy it is.


This won’t be the first time we’ve laid out shorts in a market that was steaming relentlessly higher. Although the odds will always be against trying to catch the Mother of All Tops exactly, Rick’s Picks subscribers know that it’s possible to at least attempt it without getting maimed. Or even dinged.  However, because we are wary of the watched-pot phenomenon, we will not divulge our specific rally targets in this commentary. We also don’t want to jinx the numbers by drum-rolling them too loudly.  But if you’re interested in seeing how close we actually get to calling a/the top, simply click on the link above for a no-risk trial to Rick’s Picks. You’ll have access to all of our services and features, including a 24/7 chat room that draws traders from around the world.

Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indication of future results, so let the buyer beware. There is a substantial risk of loss in futures and option trading, and even experts can, and sometimes do, lose their proverbial shirts.  Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2011, Rick Ackerman. All Rights Reserved.www.rickackerman.com
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Why Our Currency Will Fail

The idea that the very same economic forces that are currently plaguing Greece, et al., are somehow not relevant to the United States' circumstances does not hold water. As goes the rest of the world, so goes the US.
When we back up far enough, it is clear that money and debt are there to reflect and be in service to the production of real things by real people, not the other way around. With too much debt relative to production, it is the debt that will suffer. The same is true of money. Neither are magical substances; they are merely markers for real things. When they get out of balance with reality, they lose value, and sometimes even their entire meaning.
This report lays out the case that the US is irretrievably down the rabbit hole of deficits and debt, and that, even if there were endless natural resources of increasing quality available at this point, servicing the debt loads and liabilities of the nation will require both austerity and a pretty serious fall in living standards for most people.
Of course, the age of cheap oil is over. And as Jim Puplava says, the oil price is the new Fed funds rate, meaning that it is now the price of oil that sets the pace of economic movement, not interest rates established by the Fed.
However, of all the challenges that catch my eye right now, the one most worrisome is the shredding of our national narrative to the point that it no longer makes any sense whatsoever. I'm a big believer that our actions are guided by the stories we tell ourselves. To progress as a society, having a grand vision that aligns and inspires is essential.
But when words emphasize one set of priorities and actions support another, any narrative falls apart. At a personal level, if someone touts their punctuality but chronically shows up hours late, the narrative that says "this person is reliable" begins to fall apart.
Likewise, if a company boasts about being green but its track record belies them as a major polluter, the "green" narrative fizzles.
And at the national level, if we say we are a nation of laws, but the Justice Department selectively prosecutes only the weak and relatively powerless while leaving the well-connected and moneyed entirely alone, then the narrative that says "we are a nation of blind justice and equal laws" falls apart.
I wish this was just some idle rumination, but I see more and more examples validating the importance of alignment of narrative and behavior. Because when there is a disconnect between words and actions, anxiety and fear take root.
Unfortunately, there is quite a lot to fear and be anxious about in the most recent State of the Union address and GOP response.
State of the Union
The recent State of the Union speech by Obama, and its Republican response, are both remarkable for what they say as well as what they don't say. The summary is this: The status quo will be preserved at all costs.
Here are a few examples of the sorts of disconnects between rhetoric and reality that are absolutely toxic to the morale of all who are paying the slightest bit of attention.
Let's never forget: Millions of Americans who work hard and play by the rules every day deserve a government and a financial system that do the same. It's time to apply the same rules from top to bottom. No bailouts, no handouts, and no copouts. An America built to last insists on responsibility from everybody.
We've all paid the price for lenders who sold mortgages to people who couldn't afford them, and buyers who knew they couldn't afford them. That's why we need smart regulations to prevent irresponsible behavior.
It's time to apply the same rules from top to bottom? Is Obama aware of what Erik Holder is up to over there in the Justice Department? The robo-signing scandal alone has thousands and thousands of open and shut cases of felony forgery that can and should be applied to as many individuals as were directly involved, from top to bottom in every organization that was engaged in the practice.
Here's the reality. Under Obama, criminal prosecution of financial fraud fell to multi-decade lows during what is and remains one of the most target-rich environments in living memory.
And I will not go back to the days when Wall Street was allowed to play by its own set of rules.
So if you are a big bank or financial institution, you're no longer allowed to make risky bets with your customers' deposits. You're required to write out a "living will" that details exactly how you'll pay the bills if you fail -- because the rest of us are not bailing you out ever again.
Has Obama checked with the Federal Reserve to assure they are on board with the new 'no bail out' policy? Because last I checked, they were the ones mainly involved in bailing out the big banks and providing swap lines and free credit to anyone and everyone that needed help, US or foreign.
To be fair, Obama can make no statement or claim about what the Federal Reserve can or can't or will or won't do. It is not under executive nor even legislative control. If, or I should say when, the Federal Reserve bails out the next bank or country or whomever, it's "the rest of us" who will be paying the bill -- in the form of eventual inflation.
[W]orking with our military leaders, I've proposed a new defense strategy that ensures we maintain the finest military in the world, while saving nearly half a trillion dollars in our budget.
Let's review the proposals for military spending then. The language above is nearly impossible to decode. What is really being said is that proposed defense increases have been scaled back, and that this is what is being called savings.
In 2000, Defense spending was $312 billion dollars. In 2012, the proposed budget calls for $703 billion, a 125% increase in 12 years.
What the plan he mentions really calls for is spending increases in 5 out of the next 6 years. The lone holdout is 2013, when the plan calls for cutting spending by a whopping $6 billion less than the amount already approved for 2012.
Somehow that all translates into rhetoric that implies cuts of "nearly half a trillion dollars."
As Lily Tomlin used to say, "As cynical as I am, I find it hard to keep up."
GOP Response
“The routes back to an America of promise, and to a solvent America that can pay its bills and protect its vulnerable, start in the same place. The only way up for those suffering tonight, and the only way out of the dead end of debt into which we have driven, is a private economy that begins to grow and create jobs, real jobs, at a much faster rate than today."
This platitude-laden set of ideas is blissfully blind to the role of energy in the story, the amount of debt in the system, and the fact that both parties have contributed equally over the years to the predicament at hand.
How exactly is it that the private economy is supposed to flourish here, with the Federal government borrowing more than a trillion dollars a year and oil at $100 per barrel? The simple truth is that the US government needs to begin borrowing at a rate lower than the previous year's economic growth. If GDP grows at 2%, then the total debt pile must not grow by anything more than 2%. That is the only way that the official debts can shrink relative to the economy.
GOP Response
“We will advance our positive suggestions with confidence, because we know that Americans are still a people born to liberty. There is nothing wrong with the state of our Union that the American people, addressed as free-born, mature citizens, cannot set right."
Last I checked, the original vote tally in the Senate on the National Defense Authorization Act, which empowered the armed forces to engage in civilian law enforcement activities and selectively suspended the habeas corpus and due process rights (as guaranteed by the 5th and 6th amendments to the Constitution), passed by a voice vote of 93 to 7 in the Senate.
It's kind of hard to swallow the idea that the GOP stands with Americans as "a people born to liberty" when their members are in perfect lock-step with the Democrats, chipping away at the most basic and cherished freedoms. There's no difference between the parties when both seem intent on limiting individual freedom and increasing the power of the government to reach into and examine our daily lives.
When Words Hurt
The above examples are not meant to pick on any one person or party or set of ideas, but to illuminate the profound gap that exists between what we are telling ourselves at the national level and the actions we are undertaking.
Again, it is the gap between what we tell ourselves and what we do that creates a sense of unease, anxiety, and oftentimes fear. When we hear words "X" but see actions "Y" over and over again, it is hard not to come to the conclusion that the words are meaningless; empty rhetoric designed with polls and focus groups in mind, but little else.
It is the blind obedience to the status quo that worries me the most, as it raises the likelihood that nothing of any substance will be done until forced by circumstances, at which point, like Greece, we will discover that the remaining menu of options ranges from bad to worse.
Left Unsaid - Our Missing Narrative
In neither Obama's address nor the GOP response do we hear anything about Peak Oil, a stock market that has gone nowhere in ten years, or the fact that with two wars winding down there ought to be massive savings from defense cuts that we can capture. There's lip service to the idea of using more natural gas to begin weaning us off our imported oil dependence, but no commensurate trillion-dollar program offered to rapidly build out the infrastructure necessary to utilize that gas in a meaningful way.
A more honest set of messages would note that mistakes were made, opportunities squandered, and priorities misplaced. It would note that the US is on an unsustainable course with respect to spending, debts, and liabilities. There would be an explicit admission that having your central bank print trillions in "thin air" money in order to enable runaway deficit spending is a dangerous and foolish thing to entertain.
Most obviously missing is a national narrative that is coherent and comports with the facts. Both parties basically imply that if we elect a few more of their type, do a little of this and then tweak a little of that, then we will get our nation back on track.
There is no call to a shared sacrifice for something greater. There is nothing to rally around except a laundry list of disconnected programs; a little something for everyone. There is no overarching theme under which everything else can be hung, such as a space race, a civil rights movement, or a massive upgrading of our national infrastructure.
A good narrative is one that inspires people and is based in reality but also asks something larger of us that we can share in. What is our vision for this country? Where do we want to be in ten years? How about twenty? How will we get there, and what will be required? What should we stop doing, what should we start doing, and what should we continue doing?
None of these things are on display, and all are badly needed if we are going to make the most of the next twenty years.
The Troubling Facts
Of all the facts that got skimmed over or avoided in the State of the Union extravaganza, the fiscal nightmare in DC was probably the most glaring. Yes, both parties have decided to talk about the deficit, but neither is giving the appropriate context.
For FY 2012, the federal government is projected to run a $1.1 trillion deficit. Let's compare that number to the projected revenues:
The $1.1 trillion deficit is 42% of total revenues and 73% of all income taxes. That is, in order to spend what the US currently spends without going further into debt (i.e., to have no deficit), income taxes must immediately increase by 73%(!).
This is the sort of territory that, were the US any other country, would have already landed its debt markets -- and likely its currency, too -- in very hot water.
Historically, countries that have run deficits 40% greater than revenue for more than two years have experienced profound financial and political crises. The US is now in its fourth year of inhabiting this rare territory.
How can it keep doing this when every other country that has tried has gotten into trouble? Simple. The Federal Reserve has enabled such egregious deficit spending by buying up mind-boggling amounts of government debt. This has both kept rates low and created a lot of additional buying demand for Treasuries.
Exactly how much US debt is the Fed buying? Under Operation Twist, the Fed has bought anywhere from 51% to 91% of all gross issuance of bonds dated six years or longer in maturity.
It is quite obvious that the Fed has been a major participant in the bond markets and a major reason why Treasurys are priced so high and offer so low a yield.
It seems that it is well past time to speak directly to the enormous fiscal deficits in a credible way, not merely bemoaning them being too high. And we're also overdue for an adult national conversation that it's unwise and unsustainable for a country to lean on its central bank to print up the difference between receipts and outlays.
Oil and Recoveries
There is a clear relationship between high oil prices and recessions, confirming the idea that the price of oil has the same impact on the economy as higher interest rates (perhaps even more so nowadays). Both are a source of friction. With higher interest rates, less lending and less consuming happens. With a higher price of oil, more money gets spent on energy, much of it sent to foreign producers of oil, and thus less money is available for other consumption.
Both higher oil prices and higher interest rates cause people to think a bit more before pulling the trigger on either ordinary spending or a big capital project.
Note that all of the six prior recessions were preceded by a spike in oil prices. In the case of the double-dip 1980's twin recessions, oil remained elevated after the first recession was (allegedly) over. Don't be fooled by the logarithmic nature of the chart below -- note that the typical decline in oil prices between the recession-inducing peak (blue lines) and the recovery-enabling trough (green lines) was a substantial 30%-50%:
Also note in the most recent data that oil prices happen to be at roughly the same level that triggered the first recession in 2008 (the purple dotted line).
If we needed one simple chart to help us understand why trillions of dollars of stimulus and handouts are not causing the economy to soar, this is the chart that explains the most. High oil prices and recessions are highly correlated, and it's not too much of a stretch to postulate that economic recoveries and high oil prices are inversely correlated.
Note also that the above chart is not inflation-adjusted. If it were, it would show that there have been exactly zero recoveries when oil prices are near or over $100 per barrel.
For those counting on an economic recovery here to lift all boats and assist the bailout efforts, the burden of history is upon them to explain why this time we should ignore the price of oil.
I say we cannot. Policy planners and citizens alike should be ready for disappointing market and economic activity in response to the usual bag of printing, borrowing and delaying tricks.
Dead Ahead: A Currency Crisis
The State of the Union speech and GOP response neither accurately portray the true fiscal condition of the US, nor present a compelling narrative that speaks either to the realities of today or a future we might like to head towards.
The US is simply on a fiscally ruinous path, and neither party seems up to the task of laying out the story in a way that is mature, clear, and direct.
No recovery has ever been possible from oil prices this high, nor with debt levels this extreme, and it is quite improbable to think that both conditions could be overcome with anything less than a completely clear-eyed view of the true nature of the predicament faced.
Decades ago, Ludwig Von Mises captured everything discussed here elegantly:
There is no means of avoiding the final collapse of a boom brought about by credit expansion.
The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Our current dire fiscal condition, our leaders' dysfunctional unwillingness to address the flawed behavior that caused it, plus many other recent events both in the US and in Europe, point to the idea that a voluntary abandonment of further credit expansion is just not on the menu.
That leaves us with some final and total catastrophe of the involved currency system(s) as the inevitable outcome.
In Part II: Surviving a Currency Crisis, we explain what a currency is, what happens when a currency collapses, and, most importantly, how to position yourself prudently in advance.
At this point, time to prepare is your greatest asset. But as we can see from the precarious global economic situation described above, time is running out. Use what remains wisely.
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