“The Big One Cometh” we wrote last week, and indeed IT, at least two Legs of IT, Did.
First, The ECB announced a program of “Unlimited Bond Buying,” “Q.E. to Infinity” as Jim Sinclair put it months ago and we concurred.
And now, The Fed has announced it will buy $40 Billion of Mortgages per Month for an unlimited time period.
But The Fed already has $2.8 Trillion on its Balance Sheet, and the ECB over $3 Trillion. The Powers-that-be claim this is not inflationary, but recent real Food and Energy Price Inflation show this to be untrue. And there is no mention of the problems of buying Impaired Collateral.
Therefore, now let us be the first to coin a term for what is also likely to come, and, indeed has already begun.
“Disinformation to Infinity,” a multi-faceted Deception, which if not recognized as such, could be extremely injurious to investors’ Profit Generation and Wealth wherever in the world they reside. The most recent example of Disinformation from the ECB (and there are several prior ones) is Draghi’s claim that the Unlimited Bond Buying can somehow be “Sterilized” so that it will not be Inflationary.
Bill Fleckenstein presents one excellent explanation of why “Sterilization” to immunize against Inflation is not realistically possible.
“…we now know that Bernanke has heavily telegraphed QE3, and (thanks to today’s ECB announcement) that Draghi has committed to unlimited bond purchases. Of course – wink, wink – he is claiming those purchases will be sterilized, but that is an impossibility. Just Call Him “Mr. Clean” For those who don’t know, sterilization means that for every euro’s worth of bonds the ECB buys, it will sell an offsetting amount. Usually that is done by buying a maturity of one length and selling one whose maturity is similar (or shorter). Thus, there is no net change in the amount of money created (in theory), but a maturity (or credit) that is unpopular gets a little help on the demand side while a more popular one gets more supply. (Bernanke used to talk, in essence, about a theoretical form of sterilization when he discussed the Fed’s “exit strategy,” although that approach to sterilization is one that is more “legged into,” i.e., buy now, sell in the future.)
“At this point, however, the Fed makes no pretense about an exit strategy. …What’s more, the Fed would have you believe that it will have no problems executing its exit, which of course is silly. No single entity (nor any group) has enough capital to buy all the bonds they won’t be buying when QE ends, on top of all the bonds they would need to sell.
“…Draghi claims he going to sterilize his purchases. Well, if you’re buying debt of Spain, Italy, and potentially France (not to mention Portugal or Greece), there is a lot more problem debt to buy than there is debt you would be able to sell, such as Germany or Sweden or some other more fiscally prudent country. (Because you obviously can’t be selling the same government debt you are buying and expect to provide any relief.) That means it simply can’t happen. Obviously, when you contemplate the thought of unlimited purchase, it is literally impossible for you to sell an unlimited quantity. It doesn’t even work in theory, and in practice it really won’t work.
“But the fact remains, the only way to protect oneself is to own something that can’t be debased like gold, silver, or other rare assets.”
“ECB Sterilization = Fed ‘Exit Strategy’,” Bill Fleckenstein,
“Daily Rap”, 9/6/2012
So, the consequence is that we are looking at both QE to Infinity and also a likely ‘Disinformation to Infinity’ or at least until Economic Realities overwhelm the Deceptions. (And, yes, Deepcaster has several Recommendations for Gold and Silver in our Portfolio.)
And as those who suffered through the Weimar Republic know (or, more recently, the Argentine and Zimbabwean versions) Monetary Inflation which exceeds increases in the production of Goods and Services leads inevitably to Price Inflation. Period.
Indeed, it already has, around the world. The Eurozone’s Main Crude Oil Supply is Brent, whose price has bounced up well over $100 for months.
And the “Arab Spring” was touched off by riots over Food Price Increases and there is credible evidence of Food Price Riots in China as well. And these Food Price Increases came before the Drought in the U.S. and Elsewhere.
And the Continuing Commodities Index (CCI) has increased by over 15% per year for the past 10 years – a Reflection of Inflation in The Real Economy.
But the best hard evidence of accelerating Price Inflation comes from the USA which is already Threshold Hyperinflationary at 9% per year. This is the Real Number (as opposed to the Official Ones) provided by shadowstats.com (see Note 1).
Note that the Official Numbers are Bogus (i.e., more Disinformation) and serve to disguise the Inflationary impact of repeated QE.
Just in case one Thinks Truth Suppression is limited to the U.S. or Eurozone, consider the following example from China where a Canadian Citizen Financial Researcher was jailed for writing an Unfavorable Report about Silvercorp, a Silver Miner working in China.
“But one of the most-daming thigs I’ve come across on China hit my desk over the weekend. I seldom link other articles in full, but his one is worth a read when you get a chance:
“In China, Silvercorp Critic Caught in Campaign by Police”
It is the story of a researcher in China who police arrested – and detained – because he works for a fund manager who writes negative reports on Chinese companies. (The researcher is a Canadian citizen, by the way, yet sits in a Chinese jail on flimsy evidence and no due process whatsoever. I can’t believe the Canadian government lets it stand.
Chinese companies have had lots of fraud issues, as you may know. Investors have uncovered discrepancies and outright frauds in U.S.-listed Chinese companies. This sent the stock of many such companies tumbling.
“This, is turn, hurt these companies’ ability to tap Western markets for more money, which hurts their ability to pay local taxes. And that hurts the local governments who labor under a pile of debt. It’s all any ugly, corrupt circle.
“Take-away: If you are in China, you have to write positive reports or you get arrested. That’s the message here.
“Gloom spreads in China despite the best efforts of officials”
Chris Mayer, Mayer’s Special Situation, 9/10/2012
In sum, short-term, Central Banker and Government Actions will not only be a Major Determinant of Market Performance but also of the “Stories” (i.e., the Disinformation) that are told to describe Performance and Prospects. But in the mid and long term, Fundamentals will prevail.
Speaking of the “Stories”, The Fed and other Central Bankers would still like us to believe that their QE and related Action are net-beneficial to the Economy. This is false, of course, because they are net-beneficial Mainly to the Mega-Banks, and not to Taxpayers.
Dr. Robert McHugh provides a good analysis of the effect of Fed QE, which by the way could be applied as well to the ECB Action.
“The impact of QE3 should be higher prices for both precious metals markets and stock markets, for at least the short-run (for the Stock Markets – Ed.). But, not for the long run because the program will not work to stimulate the economy or generate jobs. That is because the money does not go to the general public, does not go to Main Street, but goes to Wall Street. Unfortunately, Wall Street is not an efficient money distributor or job creator. The money goes into markets from Wall Street, not to households or small businesses, merely elevating stock and commodity prices. Unless households or small businesses own stocks and metals, they do not benefit. The process is simple. The Fed prints money, then buys fixed income notes and bonds from Wall Street. Wall Street ends up with lots of freshly printed cash. Billions of cash, maybe trillions if the QE program is large. Wall Street has to do something with the cash, so they buy stocks and commodities, driving up prices with demand, while speculating prices will rise in the future when they can make a profit by selling positions, that selling initiating a collapse in markets and the disintegration of the QE3 money printed by the Fed in the first place. QE becomes an exercise in temporary stimulation of markets, not sustained stimulation of the economy. For an effective QE3 program, printed money would need to be given to small businesses and households in the form of an income tax rebate from the U.S. Treasury where economic demand can increase and jobs can be created. Consumer spending (households on Main Street) is the key driving force for economic growth, and that spending can fuel improved revenues for small businesses, which are the key engine for jobs creation. For QE3 to work, the Fed should fund a tax rebate by buying new Treasury issues.”
“The Fed and QE3: What This Means for Markets”
Robert McHugh, safehaven.com, 9/8/2012
And there are other Financial Realities which are hidden by Disinformation or Outright News Blackouts. One such Reality is tht certain Asset classes deemed to be safe, are not really.
Jim Willie provides an Excellent overview of Asset classes which a variety of sources claim are safe. But this claim appears to be Disinformation in light of Willie’s analysis. [Specific strategies and Investments aimed at Profitability and Protecting from Disinformation are contained in our recent Letter and Alerts and referred to in Notes 2 and 3 below.]
◄$$$ AN ATTACK ON THE $2.7 TRILLION IN MONEY MARKET FUNDS HAS COME, THE TRADITIONAL STATIC STABLE SHELF. OBSERVE THE STEALTH ACTION TOWARD CAPITAL CONTROLS. NEW RULES COULD FORCE A MAINTENANCE OF A MINIMUM AMOUNT IN EACH ACCOUNT. THE MONEY MARKET FUNDS SERVE AS SCARCE CAPITAL, A LIQUIDITY SOURCE THAT HOLDS TOGETHER THE INSOLVENT BANKING SYSTEM. $$$
Back in January 2010, it became apparent that money market funds were in danger. They are typically very safe, the safest, like cash funds. No longer. They have been abused to sustain the corrupted system. Depositors (investors) gradually have been losing their right to redeem money market accounts, in fallout from the extreme distress extended from mortgage bond holes followed by sovereign bond growing holes followed by more hidden derivative gaping holes. The USGovt is implicitly placing capital controls on the primary forms of cash aggregation available, such as $2.7 trillion in US money market funds. The regulators are leaning on proposed Money Market Rule 2a-7, which grants money market fund managers the option to "suspend redemptions to allow for the orderly liquidation of fund assets." The rule is obviously designed to prevent money market runs, thus bank runs, in veiled domestic capital controls. (Emphasis added.)
◄$$$ A STUNNING PROGRESSION IS UNDERWAY, THE EROSION IF NOT RUIN OF ASSETS IN A SEQUENCE. NOTICE THAT SUPPOSEDLY SAFE PAPER ASSETS ARE AT GREAT RISK. THE EXTER PYRAMID IS AT WORK. THE END GAME IS TO HOLD GOLD, THE LAST ASSET STANDING, THE ONLY SURVIVOR. $$$
In recent years like in 2006 through 2009, investment in mortgage bonds proved unsafe. They used to be the stable staple among paper merchants, located with their real estate brethren of assets in the red group (highest risk). More recently, sovereign bonds have been shown to be unsafe, the supposedly sacrosanct bonds backed by governments. Finally, cash set aside in money market accounts is not safe. The progression of risk is palpably clear in the systemic breakdown. The present focus of interest is the orange group that includes government bonds. Money market funds lie in the yellow group since the ultimate in short-term paper, in my opinion. Next will be attack focused upon the short-term government bills. The winner and final survivor will be gold, the last asset standing to look over the charred ruin landscape. It is inevitable. It is written by the annals of history.
Yes, indeed, Physical Gold has a Tangible Reality which can not be Distorted by Disinformation.
September 13, 2012