"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Tuesday, June 7, 2011

A potential signal for further monetary stimulus, aka, Quantitative Easing

Ever since talk began surfacing of the ending of QE2 this month, the stock market has rolled over on the technical price charts. The more convinced that the markets have become that the Fed was going to take away the fun and games, the further the equity markets have dropped. It has now reached a point where the stock market is threatening to take out a critical support level. Should it do so, consumer confidence, already reeling from high foreclosure rates, falling property values, soaring gasoline, food and other energy prices, and a lackluster jobs situation, would immediately plummet.

The one thing that has helped to keep some of the population from becoming completely depressed has been the fact that they could look at their 401K programs and still see that those were in the plus column for the year. In other words, while the rest of the world was seemingly going to economic hell, at least they were making a bit of money on their retirement accounts.

Take away this last refuge of happiness, and the mood of the public will grow foul and fester, not to mention that of Wall Street and the many brokerage houses which do not generally make money during bear markets in equities.

Look at the weekly chart of the S&P (note - I use the emini S&P for charting purposes) and you will see the rising 50 week moving average along with a critical horizontal support level that comes in near the 1250 level. That is also the level near which the S&P began the new year of 2011. If it falls below that level, all gains from the year are gone and losses begin to then mount. That is when the general public will lose its last refuge of consolation.

I mentioned last week that if 1300 were to give way on the weekly chart, it would bode ill for the broad equity markets going forward. That level is still a key level but as of now the S&P is trading below it and cannot seem to recapture its footing above it. The momentum is growing to the downside on the charts and if we continue to get economic data that disappoints and reinforces the growing perception that the economy is in serious danger of rolling over, a very strong possibility exists for a move lower in the S&P to the 1250 level.

If this level gives way allowing the market to fall down towards the 50 week moving average which currently comes in near the 1225 level, expect a chorus of voices clamoring, nay, demanding further stimulus from the Fed. Those voices will firstly come from the Democrats whose election fortunes next year are directly linked to the welfare (or lack thereof) of the US economy. It will also come from the doves on the FOMC. Lastly it will come from many in the financial community who are more willing to take their chances on a falling Dollar than a falling stock market.

If the Fed hearkens to those voices, and I have no reason to doubt at this time that they will not, expect the US Dollar to not only take out critical chart support near 73 - 72.50, but to continue sinking lower. The result will be to push gold sharply higher and into new all time highs.


  1. Dan,
    IF you are right, about QE3 -and based on what happened since 2007/2008 with both the bankers and the politicians, I think you are- what do you expect will happen with the CCI ? I was negative on the CCI -seems to be the right call so far- and wonder if investors will panick when/if QE3 is announced -showing that despite the previous QE1 and 2 the economy is still in a very, very bad shape- or if the hedgies will try to play the commodities and push the whole market up?
    Thank you for your thoughts.

  2. Dan,

    Dont you think that commodity prices will have to come down before it is political feasible for Bernanke to start QE3? These high commodity prices have already created lots of inflation worries and public outcry (gas prices, food prices etc.)

  3. GDX/GLD ratio closed at yet another record low for 2011.

    So far, the "Ratio Traders" have been dead right. And today, they were high fiving their unbelievable luck after Bernanke announced "no QE3"

  4. What is the signal? Did I miss it? All I read is an opinion.

  5. Haha Dan,
    Do you suppose those idiots in washington can join the dots between money printing err... sorry, Stimulus and inflation?
    I some how doubt it. And as for your nation's public? I think they are too busy watching Idols or trying to make ends meet, to getting any serious thinking done. Well not quite yet anyways.
    So hell Ben, get those presses a rollin' cause no ones gonna notice til it way on too late

  6. I am actually starting to believe that what Bernanke is attempting to engineer is a pullback in energy price inputs, sufficient to maintain fuel prices at or below current. They could actually get away with it since the administration does have the power to play the expanded drilling card. Should that happen, oil prices will stabilize in the near term. For all the reasons you mention above, it is hard to see a deep sell-off in equities serve any purpose other than to (a) destabilize the current political order, (b) push states & municipalities deeper in the red and (c) negatively impact credit markets. The bottom line is we know a cheaper USD is a pre-requisite for employment growth. How we get there is the big guess but negatively correlated assets, like PMs, will benefit. I would add finally, though, some of the softening in silver miners appears to be a result of lower global GDP and implied reduction in industrial demand for the metal.

  7. We should never forget that the Fed is privately owned. It is not a government institution. It does not exist for the good of this nation. Its primary objective is to maximize the profits and wealth of its shareholders. Keeping inflation tame and maximizing employment are only a secondary mandate that acts as a smoke screen. If the Money Masters who truly own the Fed do not see any benefit in extending the US debt through QE3, they will not hesitate to push the economy into a double dip recession. In the end, they are the ones that will benefit the most from such recession. They have limitless powers for printing money out of thin air and they love to buy things at a fraction of their cost. History shows that they have not hesitated to do so several times before. In fact, they have done much worse than that.

    By the way there is a great video called “The Money Masters” that explains the history behind the current world recession, the creation of the Federal Reserve in the hands of a few private investors and the bankers’ goal of world economic control by a very small coterie of private bankers, above all governments. A “must watch series” of truly informative videos.


  8. Eric,
    are you suggesting that the US Government DOES do what is good for the nation? This whole private conspiracy thing is just odd. Obviously when there is power and violent enforcement to be bought, those with money will try and buy it, always remember however that actors in the market have no real violent enforcement power of their own. The real problem is that we have a political system with a huge monopoly on arbitrary force with no restraints on selling this power. If you focus on the shadowy puppet masters and ignore the rigged political system you have no prayer of fixing any of this. Money will flow to those who are selling something, neuter the violent state and reign it back to a primarily local, constitutionally restrained system and the wealthy power buyer problem will melt away.

  9. stallheim,

    The shadowy puppet masters have an infinite money printing power. And they have been very effective at using it to corrupt the entire political system for their own benefit.

    By the way, why should the power of printing money be in the hands of private bangsters instead of the treasury? If the treasury can issue bonds why can't it issue dollar bills too? Why do we need a private bank to do this??? Those who control the creation of money control just about every thing.

    The whole system was corrupt since the creation of the Fed in 1913. That was the single biggest mistake ever done in the history of the United States.


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