Like the title of last Thursday’s article, I find myself starting each day asking “where do I start?” The entire world is in turmoil, care of the inflation exported by Western banks over the past five years in an attempt to mask the devastating impact of a generational financial collapse they created; and in the process, kicking the can as far as possible – before the ultimate, inevitable “reset” occurs.
Ironically, the 1998 emerging markets debacle started the same way – i.e., with a modest Fed tightening; which ultimately, nearly destroyed countless nations’ currencies. Of course, those were “high times” compared to what the world faces today; as back then, the global economy was strong, debt loads manageable and Central banks seemingly all-powerful. Conversely, emerging markets are nothing but low men on a terminally cancerous totem pole, of which this disease is rapidly consuming. In other words, this time around the Western Central banks have not only destroyed emerging markets with money printing, but themselves. And by the way, as we wrote last month, the Fed monetizes a lot more than it says – whether it says it’s “tapering” or otherwise.
Late last year, the Fed penned itself into a corner with relentless “recovery” propaganda aimed at goosing stocks to maximize year-end Wall Street bonuses. Consequently, it announced a modest QE “tapering” in mid-December; while simultaneously, extending ZIRP to ‘infinity’ for all intents and purposes. As we forecast in our year-end predictions, such “tapering” would be catastrophic for emerging market currencies – such as those of the “fragile five” nations, where a quarter of the world’s population resides; and eventually, “first world” currencies like the dollar itself.
Since the December 18th “taper” announcement, U.S. economic data has been utterly abysmal; from the December NFP report, to durable goods orders, new home sales and new jobless claims. Not to mention, this was indisputably the worst holiday shopping season since the 2008 financial crisis; yielding 20-year lows in electronics orders, a 17% plunge in video game sales and mass store closings as far as the eye can see.
All along, the Fed has vehemently insisted its policy decisions were “data dependent”; and thus, why they would even consider further tapering announcements is beyond me. Let alone, as the “sum of all financial fears” emerged right before yesterday’s FOMC meeting; i.e., an all-out collapse in global currency markets, yielding all-time low foreign exchange rates across a broad swath of heavily populated nations’ currencies, including the Russian Ruble, South African Rand, Indonesian Rupiah, Argentine Peso and Brazilian Real – with several other major population centers on the verge of the same; particularly, the Indian Rupee.
Obviously, the politics of Helicopter Ben leaving office with an unparalleled legacy of money printing, inflation generation and debt accumulation played a part in the Fed’s decision to “taper” another $10 billion per month. However, irrespective of what they actually do behind the scenes, such a suicidal policy statement boggles the mind. Not only did the stock market plunge – and T-bonds rise (clearly assuming further QE); but the dollar barely budged against major currencies, whilst emerging market currencies continued to plunge. Twelve hours after the announcement, most currencies hit new lows for the move; although since then, most have (very modestly) rebounded, as Central bank jawboning regarding the potential for further “intervention” pollutes the airwaves.
Asian stocks plunged, with the Nikkei, of course, closing at 15,007 – as for the second time in a week, the Bank of Japan clearly “PPT’d” it above this key psychological level. European stocks fell as well; and as for U.S. equities, even I have never seen such a concerted effort to support the “Dow Jones Propaganda Average,” following yesterday’s 189-point loss. No less than five times did Dow Futures approach attempt to go negative this morning; when suddenly, a “magic hand” lifted them each time. In fact, this morning has featured one of the longest, most devastating lists of economic “misses” on record,” including the following…
1. Chinese PMI contracts to a recessionary reading of 49.5
2. The Baltic Dry Index, which measures global shipping activity, plunged 50% from its December highs
3. U.S. jobless claims rose from last week’s 326,000 to a whopping 348,000 – compared to the 327,000 estimate
4. 4Q U.S. “GDP” came in +3.2%, compared to the 3.4% estimate. More importantly, it was only this high due to the BLS dropping the inflation deflator from 2.0% last quarter to 1.3%; not to mention, collapsing imports, validating a miserly 1.1% increase in personal consumption expenditures
5. The Bloomberg Consumer Comfort survey declined from -31.0 to -31.8. Yes, those are minuses before the figures.
6. Last but not least, how about this doozy of a collapse in the pending home sales index? Given that such carnage was caused by a miniscule increase in the benchmark 10-year Treasury yield – from 1.5% to 3.0%, compared to the 50-year average of 6.5%; just think how psychotic the Fed would be to actually slow down Treasury monetization; particularly given record foreign T-bill sales in December, and the November PBOC announcement that accumulating foreign currency reserves is “no longer in China’s favor.”
Consequently, the TPTB will doing everything in their power to convince markets the Fed’s decision is immaterial; including, potentially, the enactment of additional “executive orders” – as America’s formerly democratic, capitalistic society morphs into totalitarian communism.
However, the sad fact remains that the ENTIRE increase in stock and bond indices over the past five years has been due to expanding Central bank liquidity; which, by the way, may well increase in Europe next week, when the ECB may drop its benchmark interest rate from 0.25% to the zero bound level – and potentially, hint at commencing its own, overt QE program. Which is why yesterday’s Fed decision is so baffling, in so many ways.
Frankly, the best way of putting it is in terms of a “Hobson’s Choice”; i.e., either do nothing and risk a near-term dollar collapse – or announce an additional QE “taper”; and thus, risk an emerging markets implosion. Either way, the financial cancer will ultimately destroy both; but in taking the tack they chose yesterday, they clearly opted for the latter. Fortunately for Bennie, it looks like said collapse will not occur “on his watch” – as his term as Fed Chairman ends tomorrow. But unfortunately, the global fiat currency regime is a Ponzi scheme; and thus, must grow larger to sustain itself. Thus, in this analysts’ opinion, they chose poorly; as frankly, it is difficult to conceive how all the “hot money” flowing out of emerging markets into the “safety” of stronger currencies can be staunched in such an environment.
Of course, things aren’t always as complex as they seem; as frankly, the looming PHYSICAL gold default is clearly a major factor in such decision-making. It’s no longer a secret that gold prices have been suppressed to maintain the illusion of a “strong dollar”; and with global inventories plunging to unprecedented lows, whilst demand achieves unprecedented highs – the Fed knew full well that reneging on market “expectations” of a taper could have caused a run on the remaining physical inventory. Why such expectations came about in the first place is beyond me – given the horrific global economic and financial market situation discussed above. But irrespective, if the Fed had “paused” its taper yesterday, PMs would no doubt have exploded higher.
That said, I believe the Cartel was shocked when gold and silver closed significantly higher yesterday, whilst the Dow plunged 189 points (thus, violating “PPT Rule #1); as no doubt, they hoped the massive naked shorts they employed simultaneous with the 2:00 PM EST FOMC announcement would cause an avalanche of Paper PM selling. Heck, gold closed significantly above its two-month “line in the sand” at the key round number of $1,250/oz.; although silver was still capped at its now seven-month “line in the sand” at the very, very key round number of $20/oz.
Remember, the COMEX is already in ‘technical default’ for the 125,000 ounces still standing for delivery of the December options contract; and after tomorrow’s close of the January contract, another 15,000 ounces. Moreover, “first notice day” for the February contract is tomorrow; and as of yesterday afternoon, open interest representing 4.6 million ounces of gold was still on the board.
We have long written of how “option expiration day” is immaterial compared to “first delivery day,” as regards the Cartel’s priorities; as in the case of the latter, the majority of open interest is settled with cash – while regarding the former, a significant portion is settled with actual metal. This is why, for years, we have seen countless instances of gold and silver “hanging tough” through options expiration day, only to plunge in the ensuing three days – i.e., before “first delivery day.” Even after first delivery day, contracts can still be “secretly” settled in cash. However, many of those holding contracts this long do so with the intention of taking delivery; and thus, with just 375,000 ounces of registered COMEX gold inventory (with the aforementioned 140,000 already spoken for), the Cartel is clearly terrified that it won’t make it through February without defaulting.
And thus, amidst a market environment where Asian and European equities were significantly lower; most emerging market currencies were sitting at or near their lows; global economic data was abysmal; and yesterday’s markets clearly signaled the Fed’s decision to be PM-bullish, we saw the 19th “2:15 AM” attack in this year’s 20 trading days; as well as the 163rd such raid in the past 180.
Clearly, the Cartel has actually intensified its attacks this year; as not only has the percentage of 2:15 AM raids increased from an already ridiculous 90% last year to 95% since the turn of the calendar, but the percentage of days in which silver experiences a 2%+ intraday decline has risen from 54% last year to an incredible 67% this year. Yes, silver, which is not only a monetary metal, but the world’s second most widely used commodity (after crude oil) – has declined by 2% at some point nearly every day for the past 13 months. No, no manipulation here! And by the way, those waterfall declines you see below occurred the second the COMEX opened; with not a single other market budging.
To conclude, for some reason we may never know, the Fed uncharacteristically opted for a policy decision that will likely exacerbate what is shaping up to be an historic currency crisis. Whether it’s directly related to last-ditch “can kicking” related to the looming physical gold default is difficult to gauge; but either way, the Fed will continue monetizing indefinitely and likely, will be forced to return to maximum (and beyond) printing levels when the unfolding crisis spins out of control, forcing its hand.
Under any circumstance, global demand for physical gold and silver will continue to surge in 2014; as the only place Fed decisions are “PM-negative” is in the propaganda utilized to maintain a dying status quo. This is the only legacy Ben Bernanke will be remembered for; and god help us all, as when uber-dover Janet Yellen finishes the job, billions worldwide will be fighting for their financial survival.The end game was long ago set in stone; and if this week’s desperate actions – from the President, the Fed and the gold Cartel – doesn’t convince you to PROTECT yourself with real money, we don’t know what will.