Jim’s Mailbox

Posted at 10:39 AM (CST) by & filed under Jim's Mailbox.

Jim,

We are living in a fool’s paradise. Heads I win, tails you lose. The public is being baffled, hoodwinked and misled at every turn.

I remember my first visit to a dentist as child. He had to drill a cavity in my mouth. I distinctly remember him saying that it wouldn’t hurt, but rather, it would make me laugh. "Try not to laugh too hard", he said. All I recall is that it DID hurt. I felt as if I was lied to and never trusted those people in "whites" again. The fact that this remains in my memory to this day, says it all. Today, I feel the same is happening again.

The Fed announced it is tapering modestly, by $10 billion a month, from $85 billion to $75 billion. A few things catch my eye, beyond the MSM’s blabber about "tapering does NOT mean tightening". If tapering is not tightening, then where is the liquidity coming from?

First of all, think about the amounts we are toying with… BILLIONS, per month! A staggering amount by anyone’s definition. Perhaps we’ve been immunized by the use of TRILLIONS when speaking of yearly accumulated debt. Remember President Carter’s defeat in 1980? I do. One of the main reasons for his defeat was his accumulated deficit in the hundreds of millions. I read about it every day, in every newspaper. That publicity cost him the election (Mind you, by the time President Reagan left office, the term billions were being used to describe our deficit). What’s good for the goose should be good for the gander.

Secondly, the Fed tempered this move with the statement that they will keep interest rates "exceptionally low" until joblessness falls "well below" the new and lower 6.5% threshold set today. Doesn’t this lower threshold practically guaranty increased liquidity? With the $10 billion tapering announced today, I wonder where and how the Fed will supply the liquidity needed to keep rates low? The way they’ve managed to keep rates low, heretofore, is with asset purchases. Perhaps those purchases will be replaced with "helicopter" droppings finally? If so, I’m certain they will be confined to the banking venues of Manhattan. This is definitely a case of double talk.

Which brings to mind today’s 5 year Treasury auction. A disaster! It carried a massive 2.2 tail with a plunge in Directs (read Foreign Central Banks) from 50% to only 25%. How in heaven’s name can the Fed keep bond rates from soaring, without stepping in to pick up the shortfall in demand? They must.

Third, as expected, stocks initially dropped… then suddenly soared almost 300 points on the Dow. Either the market believes the liquidity will continue to flow or the Fed had stepped in to purchase equity securities (a new asset purchase program?). Gold, ironically, moved higher initially, on continued liquidity expectations before falling significantly as the Dow moved higher! If continued liquidity injections are what prompted the rise in equities, then Gold would rise along with stocks. The fact that they diverged on the same premise, can only lead me to believe that intervention in both markets is the culprit (Fed purchasing stocks and simultaneously selling gold futures). Higher gold prices would signal inflationary tendencies.

Let’s recap today……

Gold lower – indicating tightening moves
Dollar higher – indicating tightening moves
Stocks higher – indicating looser policy

Go figure! If it weren’t for one simple thought that permeates every fiber of my soul, I’d be a lost and confused as John Q. Public.

That thought is this: With central banks reducing their exposure to US debt and any subsequent rise in interest rates that would send our Budget into orbit (with higher interest expense on the bonds), there can be no doubt that liquidity will continue to flow in increasing amounts as the Fed must fill the gap in demand for our bonds (born buyer of last resort while pumping money into the banking system in doing so). Hence higher gold, (and not Fools Gold, as you would find in a Fool’s Paradise), higher stocks (until inflation really rears its head), and a massive decline the dollar. All three items being dictated by the laws of nature….not the laws of the MSM.

CIGA Wolfgang