When it comes to the economy, what matters most is the availability of money and not the purported interest rate stance of the Fed. For example, in order to maintain a given interest rate target in the midst of a strong economy, the Fed is forced to push more and more money into the system to prevent the Fed funds rate from rising above its targeted rate. This in turn causes long term rates to fall. The opposite will happen should the economy go through a period of weakness. Since they are always behind the curve, they end up exacerbating the problem rather than dampening the fluctuations. Since June 2004, despite raising the Fed-funds rate from 1% to 5 ¼%, the Fed has actually hiked the pace of pumping money into the system, creating a negative yield curve. In short, the Fed has been talking tough while acting like a very loose $5 street walker.
TIME LAGS: Nobody seems to realize that there are always time lags whenever there are any changes in FED or Government policy, whether they be Taxes, Money Supply or even High Oil prices or ??? . It takes time for the Free Market to send its signals through to every participant and it then takes time for every participant to react. The estimated average time lag between changes in the Fed Funds policies and the growth momentum of industrial production is on average 12 to 36 months. Hence, at the same time as the FED’S attempted tighter stance (beginning June 2004), the effect of the previous and continuing loose money stance was still in force and continuing its influence for the following 30 months. So in spite of their regular ¼ % increases, the yearly rate of growth of industrial production stayed strong into 2007. However the strong economic activity made possible by its loose money policy, had made the FED Funds rate targets unsustainable—so the Fed had to continue to increase the money supply to prevent the Fed Funds rate from overshooting their stated targets. This monetary pumping has thus far prevented the growth momentum of the economy from slowing, also preventing any meaningful rise in long-term interest rates.
INFLATION: According to Milton Friedman, inflation is at all times a monetary phenomenon. If you keep printing money (beginning in 1994) at a rate that is 10% a year above the economy’s real rate of growth, inflation must eventually ensue and it has. It first showed up in the stock market, then found its way into the Bond market and eventually into Real Estate. Now that the world economy is awash in Fiat cash, it’s finally finding its way into commodities, takeovers and corporate buyouts. Now with nothing much left to inflate, the money is finally finding its way into the CPI. Witness the price explosion of Gold and Silver: Even though the government has thus far managed to convince everyone (through their ingenious manipulation of the CPI) that there was and is no inflation, Nevertheless, inflation has already begun to rear its ugly face and it won’t be much longer before we see just how high inflation really is. Bernanke, to his credit, is now looking to the future while the rest of our esteemed talking heads are still focusing on their rear view mirror.
THE RIGHT MAN IN THE
In my opinion, Bernanke is possibly the only man at the Fed who realizes that he has no other choice but to push interest rates even higher than most would now even dream of in order to try and head off an explosion in inflation: Even if it’s in the face of the economy’s growth momentum starting to trend down. Like it or not and despite what Wall Street and the politicians want, he knows that the economy cannot continue growing above trend for any more sizeable length of time without going into rampant inflation. He realizes that both the USA’s and the world’s economies are now more out of balance and are in the biggest bubble mode than in 1929 or any other time in world history. He realizes (at least I hope he does) that our only HOPE is to engineer a recession, hopefully it will only be a mild one, so as to avoid a combined Stock, Bond, Real Estate and Take-over CRASH, which would lead to a world wide depression.
He and only a few other people in the world realize that cutting interest rates now, especially in the face of tightening lending standards, would not only do nothing to save the real estate market, but would actually bring on the depression by causing the US Dollar to tank. A crashing dollar would set the world’s financial system on it ear; the results of which would be devastating. He knows full well the lag effect of the last 18 months of interest rate policies will eventually end up setting in motion a depressing effect on economic activity which will begin to take effect, more than likely, within the next 1 to 3 months if it has not already done so. Let us hope that the FED, because of the lag effect will NOT, as they always have in the past, doesn’t overshoot their targets and exacerbate the problem that they themselves have created.
In the meantime, the lag effect of the higher interest rate policies since June 2004 will eventually finding its way into rising long term rates, undermining the stock, bond and real estate markets that sprang up on the back of Greenspan’s FED ultra loose monetary policy, setting in motion a much needed controlled economic slowdown instead of a Bust, giving the economy a chance to self correct its huge imbalances.
realized full well that the bigger the boom the bigger the inevitable bust: His
main objective was to push the time of the inevitable crash into the next
Chairman’s term and thus preserve his legacy. To give him his due, he was also
trying to raise interest rates high enough before Bernanke finally took over so
that the FED would then have some ammunition to hopefully slow down the crash
and keep it in only a Recession mode.: However “IT” will be, when “IT” comes, at
first similar to 2001, too little and too late.
In 2001, we were sitting on projected massive budget surpluses and unified
government so Bush was able to get massive tax cuts passed and succeeded in
stopping the recession in its tracts; but this time around the
Let us pray that I’m right and Bernanke is not only smart but lucky as well, he is our only chance to prevent a major financial catastrophe.
GOLD and SILVER
The Gold and Silver Bugs, after serving a 25 year prison sentence mired in a Bear Market, have been finally let loose: But they are still talking about fundamentals: They have been always right about the shortages of new supply vs. demand, but that didn’t stop the Bear Market. For the past few years, the supply demand imbalances have become so acute that we are now in a world wide Bull Market for all commodities not just for Gold and Silver. But that is not from where an exploding Bull Market in Gold and Silver comes from. In order to get a 1978-1980 type explosion in Gold and Silver (and their stocks) prices, you require the combined emotions of both GREED & FEAR. So far we have been only experiencing the beginnings of the Greed phase. I know this because even the biggest and best of the Gold Bugs keep calling for periodic corrections. When Greed really takes over, there is no longer talk of correction as prices begin to jump 5% to 10% in one day and people line up to buy bullion as signs pop up everywhere “WE buy and sell gold”. That final stage only begins as the FEAR of a collapsing currency embroils men’s guts. Once both fear and greed take over the market and the short squeezes begin in earnest, there is no way of predicting how high the high. $2200 Gold and $200 Silver seems to me to be the barest minimum targets, maybe $5000 or even $10,000 could be in the cards, Your guess is as good as mine. I realize that the great majority of you may think I’m crazy, but when you yourself start thinking that these numbers might actually be too low, then and only then, will we be firmly in the clutches of the blind Greed and Fear phase that will mark the final top.
Who are these people that will end up buying at the top? Why they are the same ones that got in near the lows but sold out for what turned out to be relatively small profits and were waiting for that one more pull back that never came (it came, it was 36% but it only lasted two weeks) to get back in. Be careful and make sure that I am not describing YOU. Remember a Bull Market will always do whatever it has to do to make the majority of the people wrong.
WOULDA SHOULDA COULDA
We are now in or close to the end of that correction in Gold and Silver that everyone was dreaming of. In my opinion not only is that correction over, but we are about to complete Wave 2 of the explosive Wave 3. So now that its here, how many of you are actually buying and or fully invested? Not very many since most of you have now lost your nerve. You are about to learn what a real Bull Market in Gold looks like when this market, which is about to enter Wave 3 of 3, finally explodes and starts to go up so fast you won’t have a chance to get back in.
Just in case you haven’t noticed, the resumption of the Bear Market in the overall stock market that I have been warning you about since October 06 is right on schedule to completing its top. Perhaps it will take one more breakout to a new high to set that final and biggest BULL TRAP in history.
What To DO Now?
Liquidate all your short term Debt. Build up your cash position by selling most of your stock and long term bonds into any further rally. Buy Gold and Silver NOW. Use your buying power if you have no cash to increase your gold and silver stock positions. But whatever you do, get back in now or you will be sucked back in right near the eventual top.
GOOD LUCK AND GOD BLESS
AUBIE BALTIN CFA. CTA. CFP. PhD.
The above information has been gleaned from information that I believe to be reliable but is not guaranteed by me. The information provided is strictly for educational purposes only and is not meant to be used as investment advice or recommendations.