Dow Jones Industrial Average Rhythm Section

Bands have a rhythm section that holds the music together. The rhythm section is generally the percussion and bass instruments. They play in harmony to drive the music and set the tempo to make the melody sound better. Stock indices today are like music. There is a band playing so our charge is to identify the rhythm section. That way, we will know the tempo of the music which will allow us to enjoy the melody.

As we all know, the Federal Reserve Bank is the rhythm section of today’s stock casino. They supply the flow of money that continues to buy stocks higher. They increase the flow of money when they want a faster tempo or whenever they feel the pace dragging. Their melody is sweet and it is in the key of C Major. There are no flats or sharps. The blues will not be allowed by this rhythm section. 

This week, the Fed met to announce that they would keep interest rates at zero from now until the end of time. Well, actually they said they would keep rates at zero until at least 2014 but I think we all get the message. When a nation goes $15 trillion in debt, passes a Congressional vote to add another $1.2 trillion in debt, and ignores tens of trillions in obligations, there is no way that interest rates on that debt can ever rise. Period. Even Greece, who cannot pay back a penny of their debt even with Zimbabwean dollars, is pressing for loans at no more than 3.5%. Surely a nation with an addiction to a monetary printing press like the US can print money like a drunken Zimbabwean to pay debt while demanding that interest rates stay at zero. Ben Bernanke has granted this request and will continue to pour ink into the printing press. At this current meeting, the Fed also said that some form of further easing was still on the table.

Duh. In a nation run by liars, thieves, and conmen, of course the debt has to expand. That’s the way the empire crumbles leaving the elite with the spoils. In the meantime, the elites have to keep the con going in that the US is still sovereign, solvent, and strong economically. It is neither sovereign nor solvent. Her economic strength is an illusion as she is strung out on stimulus pumped into her veins by the central bank who now sits in her saddle. The oat sack of feed that the bank hoists over her ears at night is full of debt poison. She is too ignorant to resist, too hungry for nourishment to refuse, and too weak to seek sobriety from debt. The US is simply Greece ten years ago with an exponentially greater impact to the rest of the world.

But, that’s not important, is it? All we want is an oat sack draped over our ears and we won’t resist the tug of reins in the morning. Give us a rally in stocks and we are  more than happy to be saddled by a big fat man with sharp spurs. Do we not even recognize the pattern of control? Do we not understand the rhythm? Can we not tap our foot to the beat? Do we not even care that capitalism is no more and stock futures are completely controlled by a force that will ultimately destroy us all? Tap once for ‘No’ and twice for ‘Yes’. I think I know the answer to each response. 

Yes, there are still two trading days to January of 2012 and the Dow is up some 3.5% year-to-date. Wonderful! Look closely at the following chart. It is a chart of the Dow in the month of January, 2011.

Chart 1. DJIA - Daily 01/03/2011 thru 01/31/2011

Chart courtesy StockCharts.com

Now look closely at the next chart (Chart 2). See any similarities? 

Chart 2. DJIA - Daily 01/03/2012 thru 01/27/2012

Chart courtesy StockCharts.com

It almost looks like the same chart. Bernanke’s Fed is still playing the same song at the same tempo. Yes, last year we were in the midst of QE2 and this year we are in the midst of Operation Twist. Both operations are performed by the Fed and both are intended to keep interest rates down. At this writing, the 10-year US Treasury yield is now 1.9% and the 5-year US Treasury yield is hitting record lows. Yet, the Q4 GDP came in at a rather pedestrian 2.8%. Nothing to see here, folks. Go about your business. The Fed has it under control. Everything is fine. 

So what should we expect now? Well February of last year packed on another 1.5% to the Dow and the Fed is still in all-out stimulus mode. Yes, even with interest rates at zero and and economy supposedly growing, the Fed is stimulating. With all the talk of Greece debt troubles, Euro-land debt woes, recession in Europe, China slowing, the US limping along, and political disfunction, the Fed holds the trump card. It is stimulus. POMO activity will not cease. PPT activity will not cease. The Fed will keep pumping up stocks and bonds so as to lay down the smokescreen for elitism pilfering. As long as the tempo and rhythm and tempo are steady, investors will keep dancing. QE2 gains repeated QE1 gains. Operation Twist will no doubt repeat QE2 gains. Stocks will again sag when the Fed’s latest program ends in June. They will follow with QE3 and so on. Will the Fed let February fizzle? I doubt it.  

Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.

The GDP Deception

As 2012 begins, investors need to know the true health of the US economy. A major barometer is the Gross Domestic Product figure. The US economy generates nearly $14.5 trillion dollars annually in Gross Domestic Product or GDP. This is a measure of economic output. When GDP is expanding, we feel good about the economy, our jobs, and our investments. When GDP is contracting, we feel bad about the economy, our jobs, and our investments. Therefore, it is imperative for central bankers and political regimes to foster ever expanding GDP numbers. A happy populace is less likely to revolt and demand new leadership. In our modern information age, everyone knows about the current GDP number. Expansion is good and the economy is growing. Contraction is bad and the economy is in a recession. Thank goodness the GDP number can be rather malleable. And, like everything else in the new era, it can be faked. 

Let’s look at GDP in Chart 1.

Chart 1

US Real GDP

Chart courtesy St. Louis Fed

Looks fine, right? Since 1980, it looks like the US has experienced 5 separate recessions with minor GDP contractions. In all, economic growth is healthy. Currently, the economy is growing. So, the populace is spending more money, buying more stuff, and putting more demand on the supply chain of goods. That’s what we get from Chart 1. Don’t get too excited just yet. Japan’s GDP would show a very similar expansion over the same period. Yet, Japan has supposedly endured decades of malaise that are known as the ‘lost decades’. So, what is GDP and how do we actually measure it?

Let’s define GDP. GDP is basically derived from multiplying money velocity times money supply. Money velocity is measured as the number of times one dollar is used to purchase final goods and services relative to GDP. Therefore, this figure is expressed as a ratio derived from the number of times a dollar changes hands to produce the GDP. Money supply is derived from the so-called ‘M2’ data which is basically the sum of all money deposited in banks.  Let’s look at money velocity in Chart 2.

Chart 2

Velocity of M2 Money Stock

Chart courtesy St. Louis Fed

To borrow a phrase from Rick Perry, ‘Ooops!’ The chart showing the velocity of money turnover is declining. That means we are using a dollar less frequently to purchase final products and services. That means the economy should be contracting and activity should be slowing. Economic activity as measured in dollar turnover is declining. In fact, the money velocity rate of turnover is the slowest it has been in over 30 years! Seemingly the US should be in a brutal recession since money velocity should be acting as a drag on GDP. But it is not. Why? Because the other factor in the equation is the money supply. Money velocity times money supply equals GDP.

If we need a positive GDP, and the money velocity is slowing down, we need to have a corresponding increase in the money supply to make this happen. The Fed of course controls to a degree the supply of money with their printing press and their buying or selling of Treasury notes. So, to produce a positive GDP in an period of slowing money velocity, the Fed must increase the money supply. Let’s look at money supply in Chart 3.

Chart 3

M2 money supply minus small time deposits

Chart courtesy St. Louis Fed

To borrow a phrase from Kurt Cobain upon emergence from a suicidal drug overdose coma, ‘Ta-da!’ See, economic activity is not faltering. Really. It is robust. Sure, money is not changing hands very frequently but just look at that rise in the creation of dollars. That’s the secret to positive GDP. Ta-da! Printed and created by thin air. Unfortunately, the money supply increase has been procreated by massive debt. But let’s just stick with GDP for right now. We can confirm that a money velocity rate of 1.6 times a money supply number of $9 trillion gives us a GDP of about $14.5 trillion. We must also understand that the three variables in our formula, money supply, money velocity, and GDP, are just that. They are variables. Money supply can generally be counted and so too can GDP. Money velocity may remain as the unknown and it is therefore solved for by dividing GDP by money supply. Regardless, money velocity may give us a truer indication of economic health than the other two variables.  

Now let’s play with the numbers like we are Federal Reserve members high on ink.

• Had the Fed not increased the money supply from the 2008 level of about $6.5 trillion to the current $9 trillion, a money velocity rate at the current 1.6 ratio would produce a GDP of about $10.4 trillion. That’s a 30% smaller GDP than the current pretense. Is it safe to say that our current $14.5 trillion GDP is due to the addition of $4 trillion in extra debt since 2008? Either debt is good or GDP is phoney!

• For perspective, in the mid-1990’s, money velocity was about 2 and money supply was about $3 trillion giving us a $6 trillion dollar GDP. By the end of 2011, GDP has gone up by a factor of 2.5 (thanks to a massive increase in money supply) and money velocity has declined by 25%. Is the economy stronger now than 15 years ago? We can answer that question by acknowledging that unemployment is 2 to 3 times higher today and real incomes are in decline. Suffice to say that national debt has exploded over this time span.

• A 30% drop in GDP would surely signal a depression. Perhaps the present double digit unemployment numbers coupled with the 58% worker participation rate reflects this reality rather than the illusion of wealth perpetrated by GDP figures. 

• Pumping up the money supply only to give it to bankers does no good if the money never gets into the hands of the consumers. If the bankers hoard the money, the velocity of turnover is zero. Zero times any number is zero and a GDP at zero does no one any good.

• Poor or negative economic growth tends to make those who possess money opt to keep their money in their pockets. They don’t spend it and they don’t invest it. Therefore, the money velocity gravitates to zero.

• Today’s rate of interest on deposits of money is close to zero. The Fed has now kept the Fed Funds rate at zero for four years. As I have written and spoken over the years, the rate will never go up. It will stay at zero forever. Logically, zero interest rate coupons should serve to force holders of money to spend and invest that money thus creating a higher rate of money velocity. But we are not in Kansas anymore. Perhaps we should see the economy for what it truly is - a ruin in testament to the extinction of capitalism. 

• The central banks have stupidly painted us into a corner. Interest rates can never rise. Imagine a scenario in which the Fed began to raise interest rates by raising the Fed Funds rate and selling Treasury holdings. Rising rates would most likely serve to attract more capital in a quest to take advantage of a higher rates relative to stock equity risk. Money velocity would fall further as rising rates would contract the money supply. GDP would nose dive.

• Massive levels of debt, such as the soon to be $16 trillion the US owes, serves to drain the money supply. Someone has to buy all that debt and that is $16 trillion turning over at a velocity of zero. At this point, rising sovereign debt loads necessarily contract the money supply. Central bankers have to work overtime to carry on the illusion of prosperity. 

• Massive debt is highly unproductive as it chokes the money supply. A choked money supply constricts an economy and in turn, the money velocity slows down even more. There are only three outcomes. One, the money supply has to be pumped up exponentially Zimbabwe style. Two, the money supply has to be routed to the consumers’ hands who will increase the money velocity. Three, sovereign nations must eliminate debt to free up the money supply. The first two scenarios foster inflation. The last scenario fosters depression in the short term. But, once the shackles of debt are unlocked, capitalism will spur an increase in the velocity of money and the supply can simply be maintained. GDP would then be on a true growth trend. A money velocity at a ratio of 2 with a money supply at $5 trillion yields a GDP of $10 trillion. A money velocity at a ratio of 1 with a money supply of $10 trillion yields a GDP of $10 trillion. The former is far healthier than the latter. 

Perhaps the moral to the story is that money velocity is much more important than money supply. Perhaps another moral to the story is that GDP can be faked and manipulated by the central bank. 

Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.

2012 Begins - Let The Deception Continue

A new year has begun! 2011 is behind us and a fresh new year awaits. But alas, the new year has started off as the previous year ended. The Dow Jones Industrial Average lost some 110 points in the first week of January for a half-percent decline. But wait, I have deceived you. So too has the stock casino. So too has the media. Everyone is a liar and the US of A is in a race to become the lyingest nation ever conceived. Hey, don’t get pissed off at me. I’m only the explorer of truth in a nation of absolute deceit. Strap on your hip wadders and hold your nose. We are about to venture in to the cesspool of lying.

First of all, I lied about the Dow being down in the first week in January. Well, sort of. The thing is, if we don’t count the first thirty minutes of trading on the first trading day of the month (Monday was the holiday for New Year’s Day), the Dow was down. From 10 AM Monday morning, the Dow lost 110 points on the week. However, the Dow gapped higher as soon as the trading began and jumped 200 points higher in the first five minutes. Two more five minute trading periods and the Dow was up 250 points at 10 AM. From there, the index lost ground for the rest of the week. Of course, the same powers that pushed the Dow higher out of the gate also made sure not to let the index go negative for the week. So the Dow finished the week up .8%. Is that a ‘weekly rally’? The media is going to report it as such. 

Of course, readers come to this blog for truth and reality. The truth is that in a four day trading week, there are 1,560 minutes of trading on the NYSE. So basically, 30 minutes were up and 1,530 minutes were down. The 30 minutes up tallied about 250 Dow points and the 1,530 minutes down tallied about 110 Dow points. The positive 140 points came in 15 minutes of trading. This is the new stock casino. Gains come in microbursts and the microbursts are sold as ‘rallies’. Here is what we need to learn.

To take advantage of the ‘weekly rally’, investors had to position themselves in the Dow stocks on December 31, 2011. Otherwise, they had no chance to catch the rally at the open as the indices gapped higher right at the 9:30 AM open. 

Investors looking to join the rally after 10 AM on Tuesday were fed to the sharks and suffered a .5% loss for the week. 

The culprit of the rally and the culprit of the casino demise were one in the same. The US dollar weakened early on Tuesday morning only to experience an appreciation throughout the rest of the week. Dollar up, Dow down. Dollar down, Down up. The rules of the casino are simple. The winner in Blackjack holds the hand closest to 21 without going over and the winner at roulette places their chips on the corresponding number in which the ball lands.

The winner is predetermined.

As witnessed from the first five minutes of trading on Tuesday morning, a lot of volume hit the Dow. Someone wanted the Dow higher at any cost. Let’s just call the someone the Federal Reserve. They now completely own the stock casino and are solely responsible for its trend.

99% of what the babbling idiots on the financial networks babble about all during the day is just noise. It means nothing. 

The vast majority of investors have absolutely no clue that the horse they are riding is a mechanical horse outside a grocery store. They think by a snap or a tug on the reins the horse will speed up or slow down. Listen up. The horse will stop when the time on the quarter runs out! Get off. The ride is over. It’s not a real horse!!!

When the idiots in the media talk about ‘weekly’ rallies, they are really referring to five minute pops orchestrated by the Fed. Reporters are simply repeaters. None of them know anything and the truth would make their heads explode!

The Dow closed Friday with a loss even after the gobberment said unemployment came down to 8.5% as the economy added 200,000 jobs. Yeah, yeah, yeah. Of course it did. Would you like to know what he job picture looks like next month? Sure, it will add another 250.000 or so and unemployment will be 8.4%. How do I know? I have seen the movie before where all the citizens were rounded up and put on box cars. Yeah, yeah, yeah. Lunch will be served on the trip and a movie will be shown. Disneyworld? Yeah, that’s right - we’re all going to Disneyworld!

Behold, the chart does not lie. Below is the chart of the Dow for the first week of January, 2012 in five-minute bars. Notice the 200-point spike in the first five minutes of trading with the heaviest volume of the entire week. When Ben wants a rally, he gets one. The trick for investors is to have their money sitting in stocks waiting for the next five minutes of Federal Reserve rally. Good luck. The roulette wheel is already spinning. Ben will put his finger on the wheel when he is ready to declare a winner! Some people call this a rally. A more honest assessment is that the deception will continue five minutes at a time. Does this chart really look like a rally? 

DJIA - 01/03/12 thru 01/06/12 intraday five-minute bars

Chart courtesy StockCharts.com

Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.