"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, July 31, 2012

Caution ahead of the Fed

With all the hype preceding this week's Fed meeting, not to mention the usual circus atmosphere surrounding some potential action from the ECB, my advice to both gold and silver traders is to be EXTREMELY CAUTIOUS. The market has worked itself into a tizzy in my view as it salivates at the further prospect of additional liquidity measures being undertaken by both Central Banks.

When markets are in this state of mind, you will end up either being a HERO or a ZERO. In other words, you are now in the precarious position of having your fate determined by the roll of the dice. If you get it right, and the Central Banks act when you expect them to, you will be a hero. If you get it wrong, and the Central Banks disappoint, you are dead meat. Frankly, that is not the way to be a long term survivor in these markets. Yes, you may hit it big and congratulate yourself but what happens if you miss???

Personally I do not believe Bernanke has the appetite to go with another round of QE at this time. Maybe in September but not now. Why? Simple - look at the current yield on the Ten Year:

Do you really think that the problem with the economy is that longer term yields are not low enough to stimulate borrowing? How much lower do you think that the Fed might be able to drive this yield by launching another round of bond buying? Perversely enough, if the Fed were to actually pull the trigger, the market will probably do the exact opposite with Yields moving HIGHER instead. After all, yields are moving lower or stuck near historic lows because the market fears the fallout from excessive amounts of debt in the system which is weighing on global and domestic growth. If the psychology were to somehow shift to fears of inflation, yields on this Ten Year will start moving higher. That would actually short circuit any attempt by the Fed to push yields lower so as to stimulate new borrowing.

My own view is why mess with bond buying programs if the market is already doing the work for you on its own?

Then there is the level of the S&P 500. Does this look remotely like a market that is serious trouble??? While we technicians can pour over our indicators and study the internals of this market like the soothsayers of old studied the entrails of slaughtered sheep, the average Joe looks at his stock portfolio and basically yawns. Now, if the S&P 500 were flirting with the 1000 level, this would be a different story; however, as with the yields on Treasuries, why mess with things if the market is doing what you want it to do without taking any additional steps such as another round of bond buying?

Keep in mind that Central Bankers will ALWAYS RESORT TO VERBAL INTERVENTION first to see if that can accomplish their intentions without having to resort to the actual intervention. The latter will proceed only if the market calls their bluff on the former. At that point, in order to preserve their credibility, the CB's will then act.

Think about what the Fed has managed to do thus far (and we might add the ECB which is now getting into the game). They have driven yields down to historic lows and the stock market to not far from its all time high without having to engage in another round of politically toxic Quantitative Easing. Why should they proceed this month with plans to start another round forthwith?

My view is that they will do nothing except more of the same - namely - tell the markets that they are monitoring the economy closely and stand ready to act should the conditions warrant. That is what is so perverse about this stock market rally - the disconnect from stocks and the actual economic conditions is becoming more and more strained with the passing of each week.

As the economy continues to slow the stock market has continued to shrug off each new release of economic data confirming the slowdown. The entire rally has been predicated on the supposition that the rotten economic data will surely force the hand of the Fed to act. But put yourself in Bernanke's place and try to see it through his eyes.

WHo is calling the shots here - the market or the Fed? If the Fed is seen as nothing else but an errand boy of the markets, acquiescing to its demands come hell or high water, then what good is the Fed? After all, if the market determines Central Bank responses, then why have a Central Bank at all? Why not merely take a poll among the investor/hedge fund camp and see what they want and just have it implemented by the Fed? Basically we end up with the situation where the markets say "JUMP" and the Fed responds by saying "HOW HIGH?" Personally I do not think Bernanke is going to allow this to happen.

Now, if the market were to suddenly collapse and a selling rout occur across all asset classes, then the Fed would act.

Of course, the Fed could surprise everyone and announce this week another round of QE which would have serious implications as far as food prices would go. With grains being devastated by the drought and reaching historic highs, a new round of bond buying would send more hot money flows into the commodity sector in an even larger way and would drive prices even higher for a short time. I suspect that it would also shut off demand but for the very short term, it would send shock waves through the food supply chain.

I have said all this to merely emphasize the point, gold traders and silver traders for that matter, be careful out there. It is not the time to play reckless. The market will always be there tomorrow should you miss a move today. Remember that.


  1. One of your very best essays! It's always a pleasure to read your analyses, but especially so today!

  2. "The market will always be there tomorrow should you miss a move today. Remember that."

    Sometimes I forget this with everything that is going on. Thank you for reminding me.

  3. Great stuff Dan! I and I'm sure many others really appreciate your insights. I'm sure TPTB aren't ready for the metals to break out yet and are looking for an excuse to knock them down since they are so close to breaking out. I wish I had bought some puts today.,. If the usual happens, it will be another opportunity to purchase the metals at a great discount ( especially silver). Thanks again Dan for taking the time to write this great commentary and for your contributions to KWN.

  4. Sorry but I do not agree with you Dan.
    What I mean is that the FED has been on the sideline for sometime now. The extension of the bond buying has been a shot to the moon , the FED knowing that it will not help the real economy. The news in the last 2-3 months have been bad and whatever the FED has done so far has been with no benefit for the real economy (One could say that without it it could have been even worse...but I won't go there).

    Every US President has been using the FED for his own political benefit. The fact that Romney is now slighty ahead of Obama AND the fact that a majority of American are saying that Obama has not done a good job on the economy -and they do not buy the argument that all of this mess is due to Bush...because this was 4 years ago and Obama could have been able to do something since 01/2012- is not good news for Obama's reelection.

    The main question to ask is how -and when- Bernanke can change the perception of the American voter. My answer is: act quickly and put money in the real economy -NOT in the banks- like infrastructure and help Obama to blame the banks for not doing their jobs... My bet -without putting any more money in the stock market- is Bernanke is going to move and sooner than anyone expectation. The general idea is to say -like you- that he is not going to move anytime soon. As a contrarian -and based on the above- I am expecting the opposite and it is going a huge firework.

  5. Right now, there is little velocity of money because there is little lending, and that is why the inflation rate, real and reported, are so low in the face of the trillions that have been printed. One way to paint a face on the economy, that it appears to be improving, a perception that is required to satisfy the political needs of the next 3 months, is to stop paying interest on reserves that the commercial banks keep at the Fed. Or, even more, charge them interest for any monies kept at the Fed, at the same time, tacitly provide a hiatus on the constraints of Dodd-Frank, and voila, the genie, i mean genius of the current administration will be there for all to behold and vote on in three months. GM has already embarked on making available to the market place loans to sub prime borrowers, and they are doing that on an enhanced basis. It is not that GM learned no lesson from the sub prime fiasco a few years ago, it is more that they are coached by their partner, the government, to make loans that will never be repaid so that the manufacturing sector will appear to be improving. If the Fed were to change the interest rate paid on those reserves kept at the Fed by commercial banks, most probably, it would be with a nudge that they better start churning out loans, at least in the short term, to satisfy the diktat of the political imperative. For any fed action to produce a statistically reportable effect on the economy before November,time is getting awfully short, which would force the Fed to act now rather than later. On the other hand, perhaps Mr. B. is a mole and may take no action at all, because he is our own home grown 'Ben of Arc', working against the re-election of the man who would be king.

  6. Thank you kindly for sharing that with us. I would expect to see the Fed act quickly should one of the TBTFs (aka the financial system) suddenly require an infusion of liquidity in order to live another week or month. Aside from that, jawboning seems to be getting the job done for now. Pretty amazing stuff going on at this point in Western financial history, thanks as always for sharing your analysis and commentary.

  7. Mr. Norcini has it right to be careful here at this point in time and September does look like a better play for Bernie and the Fed since in that fantasy world there is room to add more credits when looking at the rosy gov inflation charts.

    Grain pricing hits in earnest later on and even 0% loans still leaves you with an underwater mortgage to unload.

    For now debt continues soaking up any added printing with little or no growth in the real economy, the beginning of the lost decades while everything bottom bounces except seasonal movements and any tax packages looming big for the future of markets.

    25% chance the bottom falls out of the price of gold, 25% chance it breaks out above the all time high, 50% chance we go sideways in this large range for at least a year more.


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