Sunday, August 25, 2013

The Fed 'Put'

August 5, 2013 - One of America’s great comedians spoke in Portland, Oregon. His address concerned the Fed ‘put’ that has been in place now for better than a decade. For the uninformed, the Fed ‘put’ is the implicit guarantee that the Fed will step in at a moments notice to arrest any declines in the Dow Jones Industrial average and then work to lead a rally. This is especially humorous in that the Fed is the Plunge Protection Team. They are the trampoline. They are the sugar in the Kool-Aid. They are the caffeine in the coffee. They are the cocaine in the crack. They are..., well, you get the idea. Anyway, Daffy Duck or Elmer Fudd, or, whatever the Dallas Fed head calls himself, Richard Fisher I believe, said the following:

“Financial markets may have become too accustomed to what some have depicted as a Fed ‘put,’ or the idea that the central bank will loosen credit after a market decline. Some have come to expect the Fed to keep the markets levitating indefinitely. This distorts the pricing of financial assets and can lead to serious misallocation of capital.”

I know, I know. Like me, readers need a few moments to compose themselves after a hearty tear-inducing belly laugh. But really, let’s break it down. First, Elmer, or Mr. Fisher, says that ‘some’ market participants are accustomed to a Fed ‘put’. Please, sir, put the drugs down for a minute. Let’s change that to ‘all’. Then he says, ‘idea’ concerning the Fed ‘put’. Please, this is no ‘idea’. It is fact. The Dow drops. The Fed acts. Show us an single instance in the previous two decades in which this has not been the case. Then, this guy admits that the Fed has been ‘levitating’ the stock indices. This means there is nothing but air underneath stock prices. This is called a ‘bubble’. Of course, we would all agree that the Fed’s activities do indeed ‘distort’ asset prices. But this is what the Fed does. Why? Because it’s good for banks!

Now, Mr. Fisher thinks that the Fed should begin to curtail bond purchases this fall. If this guy thinks for one second that the Fed can do this without a Dow plummet, he is out of his mind! If he thinks the Fed will not respond to such a plummet by yet another intervention program, then he is deranged. 

Let the Fed announce some degree of ‘tapering’ of bond purchases. Watch the Dow plummet a few thousand points. I would suggest that Mr. Fisher have a large shovel handy because he will need it to clean a substance from his underpants of which he is full of. The Fed has continuously demonstrated that the stock indices will not be allowed to contract substantially. Should they, and the game is over. Then even the dopes will realize the sham perpetrated by the central bankers. It is indeed the public speeches by members of this cartoonish body that should alert us as to the disaster that awaits us somewhere at the end of the tunnel.

I believe the Fed will write the economic news that is necessary to warrant tapering sometime this fall. The Dow will then plummet like it was 2008 all over again. Then the Fed will clean our their pants and announce an increase to bond purchasing thus driving interest rates to new all-time lows and the stock indices to new all-time highs. Like Elmer, the Fed might go wabbit hunting but they ain’t gonna shoot no wabbit!

Just one more thing. Copper has long been thought of as an economic barometer. What is it telling us now? Below is a chart of copper, the Dow, and the US dollar represented by the USD. This is an eleven-year, weekly chart with the price of copper in orange, the Dow in blue, and the USD in green. Very simply, we can see that the price of copper has for the most part tracked the Dow. And, we can see that copper and the dollar have been mostly inverse in their movement. So, we can now see that really since the beginning of 2011, copper has been declining and the Dow has been ascending. This year, this has become even more apparent. Most likely, copper falling and the Dow rising cannot continue. One must join the other. For copper to rise, and thus affirm a Dow rally, the dollar must fall. Home construction and the like would have to increase to drive copper higher but I think we all know that to be fantasy. That will simply not happen with higher interest rates. Besides, copper is drawing a bearish head-and-shoulders and a long-term double top. Stock investors are always the last to catch on mainly because they want to believe all the lies of the regime.  

But what if the Fed tapers? The dollar would likely rally, copper would fall, and the Dow would then have to make a decision. The recent Dow sell-off would tend to support the argument that the Dow will follow copper lower. I believe it would join copper in a descent until the Fed reverses course and once again, increases bond purchases. Do I hear an even $100 billion a month? Regardless, ignore copper at your own risk! 

Chart courtesy
11 years, weekly - Copper in orange, Dow in blue, USD in green

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.