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The Short Lady Has Not Sung Ep.135

  • As I said in my last podcast, when the the Federal Reserve issued its press release yesterday at 2:00pm, Janet Yellen did not give the markets they were hoping for; in a way, it was almost as if she threw them an anchor instead, because the Dow Jones ended up falling about 200 points as a result of the disappointing statement
  • The statement was dovish, but it wasn’t dovish enough, and even though the Dow recovered about half those gains, I think the market is still on the defensive, given the fact that Janet Yellen still did not veer from the projected rate hike path, even though the Fed went out of its way to say that the tightening would be very gradual and that rates would still be low for a long time
  • And the Fed will continue reinvesting all all the maturing bonds, so the balance sheet will not shrink at all
  • They will continue to reinvest interest and principal payments, meaning the balance sheet will continue to grow, so it’s still QE, just a slimmed down version
  • But I do expect full-blown QE4 to come before the November election
  • I do believe that this is the first step in a reversal of policy because Janet Yellen did acknowledge that economic growth slowed last year
  • In fact, it slowed more at the end of the year, as we will see when we get the first look at the Q4 GDP tomorrow; I think the economic slow-down is continuing in 2016
  • The Fed also said that they were monitoring the financial and global markets and will take in consideration the effects that these might have on economic growth, inflation and employment
  • Obviously, the effects on economic growth are going to be negative – it’s the reverse wealth effect
  • The Fed puts a lot of stock in the wealth effect, but it’s a two-edge sword
  • The Fed statement also mentioned that they are still targeting 2% inflation but that they’re not quite there, and expressed concern that they might not meet that goal
  • To me, acknowledging the economy is slowing, going out of their way to mention that they are monitoring the global economy is an easing from their rhetoric
  • The Fed is going to have to do a lot more than that subtle suggestion
  • I think it is enough to turn the dollar; it has been weakening across the board today
  • Oil prices have moved up a bit
  • Gold stocks have actually done a little bit better than gold – gold and silver were both hit today: gold was down about $10/11, silver was down about .30
  • There was a huge sell order that came in early in the morning and just knocked the markets down in about a minute, which has been typical
  • It looked like the metal was poised to continue to move higher
  • We’ll see what happens tomorrow when we get the GDP
  • But one of the reasons it looked like today should have been a big day for gold was the economic news that came out early this morning on December Durable Goods
  • They were looking for a +.2 increase, following a 0% gain in November
  • Instead, first they revised the November’s number to -.5 and then, instead of improving, we dropped 5.1 – Huge decline!
  • You have to go back to the ’08 financial crisis to find a Durable Goods that bad
  • It gets worse when you look at the details
  • Strip out transportation: they were looking for zero, instead we got -1.2
  • On top of that, they took last month’s -.1 and made it -.5
  • The worst one is Core Capital Goods: last month was down .4 and we got -4.3
  • Year-over-year Capital Goods is down 7.5%
  • So, given this number and the Fed’s statement yesterday, I expected gold to build on its momentum, but for that big sell order that happened early in the morning
  • The gold stocks held up today, despite the big drop in gold
  • I expect a rally tomorrow if we get a weak GDP number, and now a lot of people are looking for a weak number; the consensus is now down to about 1%
  • Whatever number we get, it will be revised even lower and after the final revision I would expect Q4 to be a negative number and the the beginning of a recession
  • The Fed is probably disappointed in the market’s reaction to their statement; they clearly were worried about the markets
  • They are trying to walk the fine line, trying not to lose their credibility, and they don’t want to seem to be making decisions based on the stock market
  • They need weak GDP numbers or unemployment numbers so they can claim to change their policy based on the economy, not on the markets
  • The only their policy had was on the markets; the real economy has been a disaster the whole time
  • I wanted to discuss a Bloomberg article I posted on my Facebook page about an “inflation problem” in Australia and how it’s been solved
  • Normally if you read an article about inflation you would think it is how they managed to bring inflation down – it’s actually the opposite
  • The inflation problem in the article is that there wasn’t enough of it – inflation was too low
  • The problem’s been solved, because not it is higher, blaming it on the big drop in the Australian dollar, making imported goods more expensive
  • The article described this as a lucky break for the Reserve Bank of Australia, because no monetary policy on their part was needed to create more inflation
  • The cost of living is rising more rapidly, and this is good news!
  • When my father wrote his book, “The Biggest Con”, and I know many of you ordered that book – they are now sold out –
  • We still have “The Federal Mafia” and “The Kingdom of Moltz” available on schiffbooks.com
  • In “The Biggest Con” he said Keynesian economists worship Inflation as if it is a god, the answer to every problem, but they don’t actually never speak that name
  • They use other ways to describe inflation, for example, “stimulate the economy”, “ease credit”, “expand the money supply”, “prime the pump”, “increase deficits”
  • All these things boil down to printing money, which is inflation
  • My father had a word for it, he called it a “Zig”, which meant inflation was being couched in semantics
  • Economists in the 60’s and 70’s would not admit to creating inflation because the public knew that inflation was bad, and would know that they were trying to solve a problem by creating a bigger problem
  • Gerald Ford ran on the slogan,”Whip Inflation Now!”
  • When Nixon imposed price controls, inflation was 4% – just half of the Fed’s current goal
  • Now the public has been educated by the government to accept inflation as an economic solution
  • The government has managed to convince us that inflation is good! Now we have to whip up inflation – we have to whip up deflation
  • From the point of view of the debtor, inflation is always good: if you have a lot of debt, you want to inflate it away
  • Now the government has much more debt than in the 1970’s; now they are desperate for inflation and have dumbed-down the public to accept inflation as a good thing
  • The Fed pretends that if inflation ever gets too high, that they will do something about it, but that’s part of the bluff
  • They can’t do anything about it – what would the Federal Reserve do?
  • If inflation, as the government measures it spiked up to 4%, would they jack up interest rates to 6-8%? Of course not! They can’t do anything!
  • The only thing they can do is to put out bogus inflation statistics, because if they ever showed that inflation was above their target, and they didn’t do anything to bring it back down because it would prick the bubble,
  • What would happen to the housing market, corporate debt and the government itself if they had to pay a higher rate of interest on their debt
  • In fact, budget deficits have just take a big turn higher and that trend is going to continue and I think already President Obama may have doubled the national debt since he was sworn in
  • That means we added a total of as much debt as every president from Washington to George W. Bush accumulated combined
  • If this continues it will continue to double
  • There has to be a crisis somewhere along the way, but we are continuing on this trajectory in order to keep everything from imploding
  • The bigger the debt, the bigger the economy based on debt, the more debt we need to sustain growth
  • The only hope the government has inflation.  They want the numbers to go up, so the debt comes down relative to the inflated economy
  • It’s not real economic growth, but they’ve got to convinced the public that inflation is a good thing
  • The dollar crisis is going to come when the Federal Reserve has to allow inflation well above their 2% target and they do nothing to reign it in
  • That’s when the markets will perceive that there is a problem
  • When the Fed is forced to back up their words with action and they fail, that’s when you have a run on the dollar
  • Before that happens, the dollar has a long way to drop to push the CPI to a level that will finally show the extent to which prices are rising
  • So far, governments are pretty capable of disguising inflation through statistical methodology
  • Reporting prices is so flawed now that you really have to have a dramatic increase before any amount of inflation shows up in an official measure
  • But all of it shows up in the lives of everyday people
  • When the government was reporting no inflation, voters were citing it as their biggest concern
  • One of the most interesting things I saw recently was an interview with former President and CEO of the Federal Reserve Bank of Dallas who is now a contributor for CNBC
  • He has been saying that the Fed is a weapon that is out of ammunition, that we front-loaded the bull market
  • In this CNBC interview, he admitted that they knew the market would go down at least 20% when they raised rates, because the Fed knew they had pumped up the market with cheap money
  • But the most important part of this interview, is when he talked about QE and zero percent rates, because here, he says exactly what I have been saying, except when he says it, he is treated respectfully and when I say it they make fun of me
  • Here’s what he said: We (the Fed) have no idea whether or not Quantitative Easing actually worked. He said Ben Bernanke wrote a good book, but the final chapter has not been written
  • He said we don’t know if it worked until we successfully end the program by normalizing rates and reducing the balance sheet, while keeping the economy on an even keel
  • I said it is like a pilot who is taking credit for a successful flight, but has not landed yet.  The hard part is landing and he doesn’t know how to do it
  • Dick Fisher recognizes this
  • I disagree with Fisher on one point:  He says they don’t know if it worked or not. I know it didn’t work.
  • I know that printing money and creating bubbles in the financial markets never works
  • I wonder if Dick Fisher can point to any time in history when this has worked
  • I think he has to know it can’t work – he opposed some of it
  • All it does is make the problems bigger, setting up a bigger crash
  • Why do you think the Fed left interest rates at zero for 7 years?  Why didn’t they raise them 2 or 3 years ago? Because they are scared to death of doing it!
  • Why do you think Janet Yellen is saying she will move rates up very slowly, and they will be low for a long time? Even though she talked about reducing the balance sheet, it is still growing, because they are reinvesting all the principal and interest
  • It is impossible to get out of it
  • I said from the very beginning, “This is a monetary roach motel.  There is no way out of a roach motel.  Ask a roach!