Tuesday, August 9, 2011

Market Update

Last Thursday at 11:00AM we posted a page from the playbook being used to run this market.
This was posted before the DOW began plunging to previously unexpected levels.  The playbook is simple.  If objectivity is sought the big picture becomes completely clear.

As previously discussed, the bond buying programs put in place by the privately owned Federal Reserve benefit the shareholders of that institution.  The shareholders are the primary dealers.  The primary dealers are required to bid in treasury auctions creating stability for the government's bond issuance.  What has been happening for the past 2 years is slightly different in that the primary dealers buy the bonds, mark them up a few clicks and sell them back to the Federal Reserve.  The Fed uses newly created cash to buy these and the spread on sale results in billions of dollars of profit for the member banks.  Some of this free money is used to purchase equity index futures in order to manage public opinion and distract the people from this outright theft.  If you still think this is a conspiracy theory consider the chart below.  Recognize that it begins with Bernanke's Jackson Hole speech last August and ends in June of this year when the bond buying program expired.  This happened while the average American was struggling to get by, unemployment was 20%, credit was completely unavailable and commerce had ground to a halt everywhere but Washington.

Why did the primary dealers meet at the New York Fed two weeks ago?  The last bond buying program ended in June of this year.  An arbitrary date of August 2nd was chosen as a rally point for public concern.  The debt ceiling was officially lifted at the end of July.  The press said that the dealers met to discuss options if the debt ceiling was not raised.  This is not the case.  The purpose of the meeting was to agree on how to manage public opinion into agreeing that another bond purchase program was needed.  Since that meeting the market has been allowed to plunge.  It is unsupported by the futures purchases of the primary dealers.  The DOW has fallen 1,400 points in 10 days.

So, what happens now?  There are only two possible outcomes we will explain the one we feel is most likely first.  Few sites go on record with these predictions.  It is also worth mentioning that in March of this year we predicted that gold would pass $2,000/oz in the 3rd quarter but close the year in the $1,800/oz area.
Possible Outcome 1:
The Fed begins meeting today.  For readers that still might be utilizing the Wall Street Journal as their primary source for information we must inform you that the Fed does not meet the way you think.  The meeting is the huddle where they figure out how to spin what they have been told to do.  You do not have to believe us but we know what we are talking about.  The meeting is designed to make sure the spin they need to apply to the decision is ready for market scrutiny.  The primary dealers have succeeded in scaring the public.  You must ask yourself what has changed in the economy in the past month, quarter or year?  Nothing has changed, conditions are the same but the perception of the people has been manipulated.  This article appeared in the FT last night:
What?  They are forced to consider it?  Why?  Nothing has changed but now they are forced to consider it. There are stories about a double dip recession, trouble in the economy and unemployment.  We have been writing about these conditions in the face of criticism for being negative, pessimistic and hoping for failure.

So here is the prediction.  The new bond buying program is announced to save the economy.  The market begins to rally as there will be another $500-700 billion in fresh cash pumped into the system.  This is in addition to principal and interest reinvestment of the $2.6 trillion in Fed holdings.  So really, closer to $800billion is the correct number.  Gold has effectively reached our short term target of $1,800 as $1,782.50 was achieved overnight.  Once the rally begins gold will take a hard hit of $100-150/oz.  This will also include at least one margin hike on the yellow metal.  Currently it is 4 times easier to trade gold futures than silver futures.  That will change.

With this move the remainder of the year will include more of the same to include surging commodities, weakening dollars and a perceived rise in the stock market.  Future posts will provide more detail as conditions change.  It is a good time to point out that the Dow is flat over 11 years and the price of gold is up over 600%.  Here is a 5 year chart.
Possible Outcome 2:
This is not likely considering the oversight of the Fed is tantamount to a dog on a self-feeding system.  There is tremendous moral hazard at work when they can initiate a policy that gift-wraps profits.  We still must at least say that there is a small chance no program will be announced.

If this happens we suggest you move to the strongest part of your home and close your eyes.  The Dow will reach a level that you are not ready for.  We don't want to frighten you this early in the morning but the long predicted 1:1 Dow:Gold ratio will be more believable.

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