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Thursday, March 10, 2011

Bernanke's Special Sauce

The stock market is toast. Unemployment claims shot up another 21k to nearly 400k and last week's figure, as always, was revised up.  Everything is being taken out to the woodshed today. Wall Street has a big time problem.

I call it the land of unintended consequences. Quite simply, the world is in debt up to it's eyeballs. While the vast amount of Main St. Americans don't have a clue just how bad of financial shape we are in, Wall Street does. So do I and a few others.

The number one absolute mandate of the FED is to avoid DEFLATION at all costs. Deflation is supposed to be what happens when debtors get in over their heads. They are supposed to get their asses kicked and lose the assets they can't afford and very likely- had never paid for anyway. When deflation occurs, people living within their means and savers benefit. Because too few dollars are chasing giant debt piles. Money becomes more valuable. People with money can buy things cheap.

Enter the FED. It's member banks are swimming in debt. They are the biggest debtors on the planet. The Fed's only course of action is to counterfeit currency and inflate away those existing debt piles. That has been the course of action since 2008. It is about to come to a head. This is what happens when idiots are allowed to manipulate the QUANTITY of currency. If you live under your means and save like me, you get hosed.

So for two years we have witnessed a stock market rise as the FED's policies have ruined every asset class except equities. Bonds have barely hung in there only because the FED is buying Treasury debt. This is an insane check kiting scheme where one branch of government borrows from another branch of government. This is like loaning money to yourself or writing checks on one checking account and depositing them in another.

The Mexican standoff is coming. Nobody on Wall Street wants to get caught holding the bag when the FED's 600 billion (which is actually 800 billion) permanent open market operations come to a close in June. POMO or QE2 as it's known, is the FED's scheme for money printing. At that point in time, there will be no more free money, no equity buyers, and the first one to panic- panic bests. This is precisely why the FED's intervention cannot stop. Because if it does, I believe, the deflation that should have happened in 2008 will start in earnest. Deflation is bad for commodities. Prices will ratchet down. 

My bets in gold and silver are bets that the FED will begin another contrivance like QE3. The reason I am so confident is two fold. The whole financial world will get it's ass kicked like it should have in 2008. The FED simply refuses to stop printing and if they do, treasury rates will back up and the mounting interest will implode. But here's my number ONE reason why the FED will continue counterfeiting. The 2012 presidential election. If the FED quits printing now, and the financial world implodes, the transparent one will get throttled. Obama knows this. There is no way he can win re-election in a deflationary scenario that starts in June. It is the perfect storm.

Today gold and silver are getting marked down. I am going to go buy some more- that's how supremely confident I am. You'll want to have some gold and silver about the time the FED says some bullshit like, "the economy is simply too unstable to run on it's own, therefore we are going to stimulate the economy with Bernanke's special sauce number 3.0." Coming to a TV screen near you- very soon.


Anonymous said...

If the Middle-East boils over and oil prices go out of sight, it will be a different ball game. Cna you hear the war drums in the distance?

Brian said...

I can hear the war drums...they always sound the same.

rawmuse said...

Drums must never stop. When drums stop, bass solo...

Anonymous said...


Just curious-Canada?


And When???

Brian said...

Vancouver looks nice. Belize and Ecuador. Not that I've been looking...Ha!