HE MARKETS AND THE ENDING QUANTITATIVE EASING (QE2) IN JUNE

by Bert Dohmen, June 25,-2011

Indeed, as a voting member of the FOMC this year, I have made clear within the meeting room and in public speeches that, barring some frightful development, I will vote against any program that might

seek to extend or enlarge the substantial monetary accommodation we already have provided, just as I argued against the $600 billion extension the voters on the Committee approved last November....”

Fisher is an astute individual. He is worth listening to, especially because he doesn’t have the urge to “go along to get along.”

Economist David Rosenberg wrote about the QE experience in 2001 in Japan. He noted that:  the Bank of Japan launched the program on March 19, 2001, the Nikkei surged 7.5%, from 12,190 to 13,103. It went on to make a fresh high on May 7, at 14,529 (just under two months after the announcement) — rallying another 11%. Three-quarters of the post-QE rally to the May highs occurred in the first four days.

However, three months later, it became clear that the economy was not responding. Six months after the start of QE, just before 9/11, the Nikkei was at 10,500, down 27% from the post QE announcement high, and 14% lower than on the day of the announcement.

The Japanese experience may be a good guidepost, although, the U.S. is not Japan, and the Fed is not the Bank of Japan. However, the above supports what von Hayek wrote in his classic economic book, THE ROAD TO SERFDOM decades ago, namely that after a credit bubble bursts, the government throwing artificially produced money into the markets doesn’t work and just makes things worse over the long term. In other words, you can’t solve “over-indebtedness by creating SUBSCRIBE

PREDICTING THE FUTURE: by Bert Dohmen, June 22,-2011

3. COMMODITIES:  The commodity rally became another very “crowded trade.” It was based on a declining dollar. Inflation fears were whipped up, but these were based on rising food and energy prices. Now the foundation for that rally is crumbling. There will be significant dishoarding of the commodities. But it will be very volatile. Because of the floods in the Mississippi basin, there will be fears of agricultural shortages. However, it’s a big world, and they grow these crops in other places.

The fears of continued inflation will now be replaced by renewed fears of DEFLATION. Whereas the rise in commodity prices produced hoarding, a bear market in these will cause dishoarding. Shortages will turn to surpluses. That’s bearish for the commodity currencies, i.e. Canadian and Australian dollars.

The powers behind the scenes are also at work. Big increases in margin requirements on the futures exchanges are squeezing out the speculators. The silver margin just one year ago was slightly above $4000 and today (Monday) will go to over $21,000 per contract. When speculators can’t come up with the money they have to sell. To us, this looks like a well-organized “bear raid,” the type organized by Joe Kennedy in 1929-1930 in the stock market.

4. OIL:  Crude oil prices soared as if the world were running out of oil. It has always been our minority view that the globe has at least 200 years of known oil reserves. Any shortages are artificial. If the natural gas resources were deployed more efficiently, such as running trucks of all sizes, we might have 500 years of such energy. The energy crisis is contrived. Last week, for the first time, we heard an analyst on financial TV talk about the huge glut of oil everywhere. Isn’t it amazing! On that day oil had one of the largest daily plunges in years, down $11 per bbl.

The cost of hiring a super-tanker (VLCC) is now only $585 per day. That’s a plunge of 99% from recent peak rates. It costs you more to rent a 32 ft. motorboat on Lake Tahoe. Part of the reason is a surplus of tankers. Another reason is a glut of inventories. Yet, the major firms continue to warn of oil shortages.

Washington politicians have sabotaged every effort to develop the huge energy deposits in the U.S., on or off-shore. They say “drilling is not the solution because it would take 10 years to produce the oil.” Well, President Clinton said that when he vetoed the Republican bill to drill in the ANWAR. That was 13 years ago. Just follow the money! The industry is dominated by five major oil companies. They benefit from their oil in the ground (reserves) rising in value. The rest of the industry wants to be able to drill in order to grow their firms. But they are blocked at every turn.

5. T-BONDS:  Selling and shorting T-bonds has been another “crowded trade.” Everyone, including PIMCO, the largest bond manager in the world, became bearish on T-bonds. We wrote in the WELLINGTON LETTER last month not to be short this market and that we expected a good bond rally, based on a reversal from inflation to deflation psychology. Now we see more technical evidence of this (see the CHARTIST section). T-bonds should be a good investment for the next six months or longer.

CONCLUSION:  Inflation cannot be sustained when people can’t get jobs and housing prices continue to decline. That’s what gives you the 20 years of oscillation between slight economic growth and recessions in Japan. The recent inflation trade was overdone and now the bears get the chance to overdo the deflation trade. It will be volatile, but the trends should confirm disinflation or deflation until late this year.

We will see much weaker economic numbers for the next six months or longer. The two large locomotives of the globe, U.S., Germany and China, are now seeing surprising weakness in their economic numbers. The weakness will go global. And if you adjust for the vastly deficient inflation adjustment in GDP and other statistics, the U.S. and perhaps China are already in a recession at this time.

The ending of QE2, although widely expected and certainly partially discounted, will have an adverse effect for the bulls. There are currently two dominant views: those who want to squeeze the last little gain out of this rally, thinking they can be the first one out the exit when the markets tumble, and those who don’t believe the market will react negatively because the end of QE2 “is already in the market.” I think both will be wrong. The decline has already started. SUBSCRIBE

SIGNS OF A MARKET TOP :   by Bert Dohmen, May-16-2011

Another historic event occurred since our last issue:  the first ever press conference held by a Fed chairman since the Fed was founded in 1913. He made history.

It’s great that the Fed, after 97 years, wants to create the appearance of more openness. They want to convince us that are our friends and do what they do to assist the economy, even if it means destroying the value of the U.S. dollar. 

Referring to sharply rising food and energy prices, Bernanke said that the “committee” believes these price rises are “transitory.” For the next six months he will probably be right. Question: is he the dog, or the tail that wags the dog?

At the last FOMC meeting, the Fed left interest rates unchanged as expected. The statement said that they would continue to pursue an accommodative policy because of weak economic conditions. That was a green light for all the precious metals to move higher. In the hours after the meeting, there was a spirited rally. Silver gained $2.70 per ounce, and gold made a new all-time high, gaining more than $25.

This is a paradox. The knee-jerk reaction would be to think that a weak economy would reduce inflation pressures, thus bearish for the precious metals. The second reaction however is that this would produce even higher budget deficits and therefore a continuing need for the Fed to print money to finance the unsustainable Federal deficits.

The rest of the stock market also responded bullishly. A 0.25% yield in money market funds is not competitive with speculation in stocks. However, our work suggests that this is probably the last gasp of the bulls. They are fully invested, have no more cash but an abundance of optimism, and the only way for them to react to any unexpected problems is to sell. That’s what makes market tops.

One market signal is giving us great concern: the yield on 6-month T-bills continues to decline and is now at a record low, just above 0%, even below the December 2008 crisis low. Why would anyone lend their money at no yield to the government if there is no apparent crisis? In 2008, Treasuries became the only island of safety. Are these low yields saying that money is now going to safety again? One

could say that banks can’t find credit-worthy borrowers and therefore stuff the massive liquidity provided by the Fed into safe, short-term T-bills. That by itself tells you that deflation, not inflation, is the bigger problem. But is that the only explanation or is there a serious problem brewing? We don’t know at this time. SUBSCRIBE

THE MOST DESTRUCTIVE TAX:  INFLATION: by Bert Dohmen, April 28,-2011

That’s an amazing statement. So, she admits we have rising demand and diminishing supply. What is causing the rising demand? Is it possibly excessive money growth from the major central banks of the world? Read the following.

A friend sent us this info. The Mormons (LDS) are required to have 1 years supply of food on hand at all times...they have a good handle on prices...They have a food cooperative which I assume knows how to get the best prices. The Mormon canneries show food inflation up 11%-49% just over the past 3 months.

According to the new price list from April 4th, many food staples have increased by more than 20% since the last price list came out just 3 months ago on January 3rd.

Beans. Black 13.69%                                      Oats, Quick 48.90%
Oats, Regular 49.19%                                     Beans, Pinto 12.13%
Onions 21.60%                                              Milk, Non Fat Dry 25.00%
Rice 38.99%                                                 Wheat, Red/White 44.54%
Apple Slices 24.53%                                       Carrots 21.31%
Macaroni 40.25%                                           Spaghetti 38.99%
Potato Flakes 33.33%                                     Sugar 33.81%
Beans, Refried 27.72%                                    Cocoa Mix 40.69%
Flour 29.70%

That’s alarming. In China, there is similar inflation, which is will eventually cause great social unrest.

The Fed’s policy is to produce inflation in order to remove the chance of painful deflation. They assume inflation is easier to resolve. But the Fed has never known when to stop such a policy.

Inflation hurts poor people the most. It also causes dislocations of resources because it breeds speculation. And eventually, it creates bubbles which must implode. Isn’t that what we have now, serious speculative bubbles? It just doesn’t feel like it because home prices are still weak and most people are not participating. But no one can deny that there isn’t big speculation.

Amazingly, most of the members of the Fed’s FOMC are not concerned about future inflation. They should spend a little more time studying charts and going grocery shopping. The Fed is the source of all inflation. If the Fed didn’t create lots of artificial money, then things like rising oil prices just cause a shift of consumer spending, such as from going out to restaurants to filling up the gas tank.

Currently, there is a very close correlation between the Fed’s purchases of government bonds (also referred to as the Fed’s balance sheet) and commodity prices. When the balance sheet doesn’t grow, commodity prices stop rising. The Fed’s QE2 is scheduled to stop in June. But the Fed has already made comments suggesting that it may continue to “reinvest” the proceeds from mortgage bonds and thus prevent a shock.  

After the latest revelations from the files of the Fed, forced by a court order, Americans found out that a huge part of the $3.3 trillion of the Fed’s money creation went to foreign banks, including a bank controlled by Libya. No wonder that people are urging an “End to the Fed.” And no wonder that the Fed didn’t want to disclose it voluntarily. As a taxpayer, don’t you feel better now about the people who are going to drive the country over the cliff? Shipping trillions of dollars abroad possibly is a new form of “foreign aid.”

We should never believe that inflation comes from natural disasters, or is a freak of nature. Inflation is created by the central banks creating lots of artificial money. And now we have Europe, China, and the U.S. creating trillions of money out of thin air. Never in thousands of years of history has this failed to produce a significant cheapening of the currency and very unpleasant inflation. That’s why gold and silver are now the best investment.

As smart investors, we should not accept the manipulated inflation statistics of the governments. The government tells us that currently, the CPI in the U.S. is 2.7%. If you calculate it the same way it was done 30 years ago, before several presidents introduced the fudge factors, then inflation now is 10% (www.shadowstats.com). And that means that all the other statistics which use the government’s inflation numbers, such as GDP growth, are very, very wrong.

This would be a good time to plan for the next financial crisis. We still have time. But when it happens, it will unravel quickly. Read my new book (to be released in early May) FINANCIAL APOCALYPSE, (www.BertDohmen.com), which shows how to interpret the signs of an approaching crisis even while all the analyst in the media still talk about “boom, bull market, undervalued stocks, and a great economy.” The book has plenty of charts which demonstrate the tell tale clues and how to pinpoint market tops, not just the stock market, often within one or two days. This book is great collectors item. SUBSCRIBE

BUBBLES! by Bert Dohmen, April 12,-2011

........What has fueled the new bubbles? The Fed!  The real reason for the stock market up move this year is that the Fed is stepping on the accelerator as never before. Look at the fantastic money growth in “Adjusted Reserves,” which is the fuel for future loan growth, if banks ever start lending again. It is directly controlled by the Fed. In the two months ending March 23, it’s growing at a 388% annualized rate! We have never seen such growth before. Astonishing!

That money has to go somewhere. It’s not going to fuel economic growth. So, it goes into speculation as it always does. Many analysts appearing in the media have voiced the puzzlement about the stock market’s ability to shake off all the bad news. It’s money!

But is there a more important question? Why is the Fed doing this? Did they see some ominous signs of economic deterioration and are trying to prevent the “double-dip?” Are they getting desperate in their attempt to cause an economic rebound? Or are they preparing the financial system for June when the Fed’s QE2 program stops?

We are not privy to that info. But when something unprecedented like this happens, you better pay attention and ask questions. If and when the economy starts to grow at a stronger rate, all this stimulus has to be taken back. And that will be painful.

You have to ask, if things are so great in the economy, why are they talking about the Fed coming out with QE3? And that was before the nuclear crisis in Japan. Currently, all our sentiment readings are at levels normally only seen at important market tops. Unless you have a crystal ball, successful investing is a matter of going with the probabilities. And those say that cash will be a good investment class for awhile. SUBSCRIBE

BUYING OPPORTUNITY or a RALLY TOP?

by Bert Dohmen, Wellington Letter March-14-2011

.........Since late February, we have given warning signals. As you can see, it was worthwhile to heed those. We are now in the phase where all the pundits in the media tell you to go “bargain hunting.” They say, “Buy the dips.” Well, we heard all that in 2008 before the meltdown. It turned out to have been disastrous advice. We prefer to go with the evidence.  

Our view is that over the past two weeks we have seen the change of the tide. The bears are starting to take charge, which means that more and more money managers will now shift from looking for stocks to buy, to looking for positions they can trim from their portfolios to raise cash. In other words, the demand/supply equation has changed.

This is no longer your father’s stock market. This is the age of HFT trading where computers can enter 10,000-20,000 orders (not shares) in one second. But chart analysis still works. In our SMARTE TRADER, we caught the top nicely and got into a number of short positions just at the right time.  

You hear the analysts appearing in the media talk about corporate earnings, sales growth, and all the wonderful things. But aren’t these already discounted by the market? After all, we have had a big rally since October of last year.

The bulls always talk about future earnings. Are earnings really a good predictor for the future of the stock market? One of our favorite economists, David Rosenberg, reminds investors that in 2008 the consensus forecast for S&P earnings was $102.67. The actual earnings at year end were $65.47, a huge forecasting error. What is the forecast for 2011? It’s $97 (EPS), 15% higher than 2010, and the highest forecast since 2008. And we know how that one turned out. SUBSCRIBE