"Fed's Hyper Liquidity Endgame" on a desperate Fed endgame
gold-eagle.com
got some really nice graphics hand-made
took much time during a rainy day watching sports on TV
/ jim
an excerpt:
Instead, it is my contention that the Fed has no end game, and is thus coerced into keeping alive the bond game or face economic death. The bond bubbles must NOT be ventilated and released, since the only source of dynamism in wealth production comes from the financial sector. Real wealth production through building, growing, mining in a true production sense is minimal with our once great but now crippled economy. It is my contention that the US Economy will back into an interest rate trap, by focusing on the weakness of the real economy, while allowing continued extravagance with monetary expansion in outright subsidies to the financial sector. The Fed might interrupt any semblance of economic growth by capping interest rates, and impose more commodity inflation via USDollar debasement. The scale involved for money growth has not been witnessed since the Weimar Republic in the 1920 decade. The process has already begun.
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It is my contention that the USDollar will be fully sacrificed in order to keep a cap on long-term interest rates. As evidence continues to arrive on multiple fronts of price inflation, we are sure to see greater bond market volatility, but perhaps not sharply higher long-term yields. The Fed will be doing brisk business of printing phony money to purchase 10-yr Trez Notes in open market actions, along with mortgage debt from the Fanny Mae failure. Vigilantes will be relentless, as always, to force up the 10-yr TNote yield in lockstep with the erosion to capital which price inflation entails. However, real economy deterioration will keep the vigilantes at bay, as rates periodically react downward. The Fed can and will monetize the TENS, keep a lid on mortgage rates, and prevent leakage of damage from the financial sector to the tangible reality of households, to housing prices. Their strategy to protect from rising interest rates will force the USDollar below critical support, again and again, starting with the important DXY=85 line, which corresponds to the Japanese yen at 95-96, and the euro at 128-129.
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The Fed will take the road with less immediate risk. They will attempt to avoid higher rates. Liquidity will accelerate, as it has in the initial months of this year. That trend should continue, quietly at first, then to a greater extent as the markets catch on to their strategy, which is to SACRIFICE THE DOLLAR, and to SALVAGE BONDS. Traders will jump on dollar carry trades to hurt the US$ decline. The Federal Reserve and Dept of Treasury will transfer risk from interest rates to the currency. In doing so, the Fed will offer a giant assist to the financial sector, to whom the Fed is deeply beholden. They will amplify the risk put to the real economy, which must deal with higher commodity prices, energy prices, food prices, scrap prices, and intermediate goods prices like steel. For the last two years, the financial sector has thrived, but at the direct expense of the real economy. THE ONLY CONCESSION HAS BEEN TO HOUSEHOLDS, in the form of higher property values. However, equity extraction is a trap and evidence of liquidation. Expect this trend phenomenon to worsen, badly worsen, like with reverse mortgages.
Rather than revive the real economy, the consequent inflationary effect of the falling USDollar will further stress the real economy. The financial sector will be supported, since it resides closer to the power center of the nation. The only way for the stock indexes not to break down, and the bond market not to break down, is for staggering monetary expansion, debt monetization, and interference with the free markets. The strategy will succeed until foreigners have had enough of bond losses, made worse by currency translations which override any minor gains. The Federal Reserve no longer has the Bank of Japan and the People's Bank of China to do their dirty work and overnight bidding. The Fed will be forced to go it alone, to enable a grand USDollar decline, with a directive NOT to crush the bond market with higher interest rates. A weaker US Economy than reported will expose the plan as pure folly. The real economy slowdown might be much worse than anyone anticipates. For 30 years we have exported inflation, and now it returns home, directly or indirectly.
The best indicator on the health of the real economy is the yield curve. As the Fed grudgingly hikes rates, watch to see whether long-term rates rise in step. If LT rates do rise, danger exists for unwound carry trades to take them unexpectedly high from a convex response built from speculation. If LT rates do not rise, it could be from Fed backroom actions which put the US Economy at even greater risk down the road, from a USDollar crisis. In the absence of product pricing power, and absence of wage growth, rising oil prices tied to terrorist actions are most likely to slow the US Economy. In the past, higher oil prices have been inflationary. In this current distorted and dislocated environment, higher oil prices might be economically deflationary. The fate of gold and bonds is uncertain. |
