Just One False Move
The following is commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, February 16th, 2010.
Just one false move on the part of our price managing bureaucracy and it's all over - all over but the crying. Of course according to the Governor of New York it's already over, where by the looks of things beneficiaries of the bureaucracy will be crying soon enough. But if its not now, it would most assuredly not be long after anyway, as for example, on a national level, even the bureaucracy's own statisticians calculate that within 10 years commitments will consume some 80 percent of the federal budget all things remaining the same, meaning something must give, either increase taxes or cut services and entitlements. And although no cuts have been enacted as of yet, with officials possibly thinking jawboning would work here too, sooner or later the bond market will need to begin discounting this reality, meaning rates will need to rise in order to attract the money necessary to pay for our still bloated standard of living.
It's either that or actually start cutting services, which of course would be suicide for an increasingly bureaucracy based economy hooked on cheap credit and increasing taxation. So you see, the feds are damned if they do and damned if they don't. At least the choice is easy on a state level given they do not have a printing press to fall back on. If they did not the decision would be easy too. Unfortunately the feds have one however, and they have been using it well for a very long time. More recently they have decided to attempt buying some credibility by slowing the pace of national currency debasement, this, along with the Fed jabbering something to the effect they wish to shrink their balance sheet, which means Quantitative Easing (QE) would be reversed. This is of course jaw boning too, as all that needs to be done is change the monetization mix. (i.e. mortgages will be monetized by Fannie Mae and Freddie Mac now, as discussed last week.)
Be that as it may, at the same time just the slowing of currency debasement rates and alphabet soup policies from bailout proportions is causing money supply growth measures to come in, where even the vaunted True Money Supply (TMS) growth rate has turned negative. (See Figure 1)
And as you know from our discussion last Friday, it's not just the Fed that has decided to take its foot off the gas pedal, with Chinese central authorities going one step further in tweaking reserve ratios, which is a bold move considering the boom / bust configuration of not just the global economy, but their own as well by association. (i.e. all mature and well inflated fiat currency economies are unstable by nature.)
So, in my opinion, the scuttlebutt of all this is expect some nasty surprises in equities moving forward, where in their desire to cool-off growth and interest rate pressures (which is a bubble popper in its own right, and why central authorities are taking this risk with economies still fragile), they take the risk of killing the cat. Of course cats have nine lives (although you would think they had all been spent long ago concerning the economy), where the idea here is - so what if the global economy falls off its apple cart again - the feds will just print more money. And that's the consensus of just about everything you read on the subject, including those who think the Chinese will be able to prop up the entire global economy. (Shame on you Doug.)
And you know what, if with all their efforts, which as you know from past commentaries includes monetization of the cash markets now, stocks don't take out recent lows this week, with options expired and having no effect next week (remember - with open interest put / call ratios falling this is a drag on stocks going into expiry now), don't be surprised if surprising strength shows up in equities again. Here, a test of January's highs in most indices is possible, but perhaps not the S&P 500 (SPX) since it's related put / call ratios have been falling precipitously. Of course gold could make up for this with the almost 100,000 contract drop in long open interest on Comex, where room now exists for hair-brained paper market speculators to come back in and drive prices back up considerably. At least this is the expectation of many despite the money supply growth rate picture discussed above.
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Good investing all.