Saturday, November 1, 2014

Central Banks Distort World Financial Markets

Unbelievable!  In a mere 12 business days, the S&P along with other major markets skyrocketed back to the highs without even taking a breath.

Those who have been following it know that the recent move down to 1820 quickly reversed when a Fed Governor suggested that QE 3 should not be terminated, but extended.  That was in light of the fact that much of the economic news had been played up in a positive light.  None-the-less, that was the signal to go all-in.  I for one couldn't believe it even though my own system hinted that the downside momentum was shifting.

The rally continued to surge, despite the Federal Reserve Bank ending QE 3.  Many thought that the end of the QE would result in market weakness as it has each other time the Fed stopped a stimulus program.  But Nope.  The market kept going up and up and up.

Finally, on Friday, we awoke with the news that Japan's Central Bank is going "all in" on stimulating their economy by buying huge sums of their own government bonds.  Also, they will be buying Exchange Traded funds not only in the Japanese market but also in foreign markets.

Truly, how can anyone believe that stocks have any true value when they are propped up with money that is created liberally, without limits.  For us, money has a cost and the cost is high.  For banks and other financial institutions, the cost of money is virtually free.  They can borrow limitless sums of money and buy stocks, continually pushing up the prices.  Central banks as well can literally create money and buy limitless amounts of stocks. 


It's not only the Central Banks and their army of investment banks that are roiling the markets, we also have to look at what is happening with the computerized High Frequency Trading and other Computer Algo trading.  On Thursday, some Japanese headline (an old one at that) hit the wires and the computers grabbed it with huge buy orders.

Notice the craziness of trading that occurred after 1 pm on Thursday.  A huge e mini S&P futures trade of over 15,000 contracts hit the market in just one second causing the market order system to literally break down.  The markets continued trading even though bid/ask information was not accurate.  No doubt, someone made billions on this SNAFU.  My quote system was down and I was unable to do any trades.  It's a bit scary if you ask me.

We similarly had a "Flash Crash" in May of 2010 when the Dow fell 1,000 points in just a few minutes.  It was at that point that I personally got out of advising people as for sure, this is not a market for us mere mortals.  When it breaks, those who are smiling as the markets continue to soar, will be outraged as their life savings will disappear.

Even for me, I am solidly positioned in the Bearish camp convinced that the risk of a market meltdown are high.  But I have seen time and time again, that those who position themselves right often don't benefit from being right.  Should the market collapse, it would probably close and instead of letting prices fall, no trading would occur and my puts, that could possibly have made me fabulously rich, will probably not be allowed to be closed out profitably, most likely because some banks that did not have actual collateral to sell these instruments to me could not back up their losses. 

It's happened before and it will happen again.  It's hard to see anyone getting out of this intact.  The Bulls will get destroyed but so will the Bears.  How does one protect themselves?  My long term though has always been buy buying physical gold and silver.  You would think that with the continued amounts of fiat currency being created around the globe, that gold and silver would catch a bid.  After all, in India, China, Russia and all across the world, common folks (and rich ones too) are buying massive quantities of gold and silver.  Even here in the US, record numbers of US Gold and Silver Eagle 1 ounce coins have been sold again this year.  The demand is incredible but the price continues to plummet.

It broke though key support levels and is dropping like a rock.  For me, it's a buy.  Many are calling for it to fall even down to the $600 levels but I still recommend buying it on a regular basis.  Silver is even a better value.

In the good old days, the Silver/Gold ratio used to be something around 15 ounces of silver equal 1 ounce of gold.  This is the approximate ratio of silver that is produced for each ounce of gold in the mining process.  But now, the silver gold ratio is 72 ounces of silver to 1 ounce of gold.  And what's more, silver is an important metal in the manufacturing sector.  One would think if the economy was really doing well, silver would be strong along with other industrial metals.  But nope.  Not happening.

If this chart is any indication of the strength of our manufacturing economy, then we are surely in trouble.

Conversely, what is strong is the US Dollar.

This strength is expected to continue for a long time to come, which is good for me, as I spend a lot of time in Mexico where my dollar will be buying more pesos.  Similarly, it will be buying more silver and gold coins and perhaps real estate as well.  It's important to diversify into hard assets if you haven't already done so.


To me it's all quite clear what the eventual outcome will be.  All the Central Banks in the world have been printing massive amounts of money in an attempt to stimulate their economies so that they can have inflation.  Unfortunately, the world may be in a cyclical phenomenon that even the Central Banks can't eliminate.  Here in the US, many are carrying too much debt or into the 2008 cycle carried too much debt, wound up losing their jobs and now either have no credit available to them or no longer chose to use credit.  Many have the luxuries they desire and don't need to frivolous things anymore.  How many large screen tvs can one own?  The only thing that seems to fly off the shelves are the new Smart Phones. 

The younger generation now is coming out of college already saddled with a huge debt burden with limited job opportunities.  The Fed longs for wage growth to signal inflation but corporations continue to consolidate and lay off.   It's hard to see how this is all going to turn around.

Yet the market continues to soar.  The wealthy continue to get wealthier while the middle class gets extinguished.  It is a very scary scenario.

The last thing the economy needs is a stock market melt down and the Federal Reserve will do all that it can to prevent it.  Chances are, they will have to once again do another stimulus program and continue to print more money.  This will go on until the game is over and the true value of the dollar is revealed.  The true value of the dollar of course is derived from the taxing ability of the US Government.  Ummmm, elections on Tuesday?  How will that play out in the markets?

Stay tuned.  Chances are the markets will hold up through Tuesday, election day.  But then what?  If Republicans rule the day, will the markets be spooked?  Will the Fed ever get audited?  So many questions to be answered. 

So while it is not the correct and timely call to make, I myself continue to purchase puts along with gold and silver coins.  Well, I'm always early but I have my convictions and understandings of the current situation.  The great thing about buying the gold and silver is that I never look at my treasure chest and say, um, gold is at $X,XXX today and I have $XXXXX.  No, it's I have X ounces of this, X ounces of that, X of this, etc.  It is a store of wealth, not a productive asset, a store of wealth.

Good luck on your trading and investing.

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