The Timing Is Curious

We just finished a wildly volatile week in most all markets across the entire world.  Stocks were dumped early and then pumped at the end of the week, interest rates were dumped until the end of the week and oil simply crashed and actually “sniffed” at a “7″ handle.  Greece came completely apart at the seams with their stock market and bond markets collapsing.

An obvious question would be “why.”  Why did all of this happen this week?  An obvious answer which surely would be a contributor is the spread (or fear) of the Ebola virus.  But this is truly a strange duck and one I’m not really sure what to make of.  By now I am sure you saw the picture of the Ebola patient wrapped up in a Hazmat suit surrounded by three others in Hazmat suits and … a guy with a clipboard?  The “clipboard guy” apparently even flew with the patient as there were pictures of him again after the flight …what’s up with this?  Even more strange is President Obama kissed the nurses who were caring for an Ebola patient?  Is there an antidote?  Is it a manmade virus?  Is it real?  Is it a “bio weapon” gone bad or “escaped” by “accident on purpose?”

There are all sorts of questions to this which we really don’t have the answers to but suffice it to say, an Ebola pandemic (real or just perceived) would be enough to shut this country (and the financial world) down.  It could be used as a scapegoat for crashing markets, financial closures, martial law and mass quarantining of population segments.  If it is real, what a tragedy. If it is not, yet is used for “cover” and a “reason” for societal and financial collapse, what a travesty.  As for Ebola arising just now, I say the “timing is curious” to say the least… especially since there are reports this is a manmade virus.

Another area of “timing” was the emergence of Fed Governor Bullard on Friday morning.  If you recall, he was boisterous on October 9th when he said, “We should be willing to remove some accommodation.”  Friday morning he flip flopped and said, “A logical response at this point is to delay the end of QE.”  It is important to understand why he has said what he said and in particular “when.”  The markets and the dollar were rising and crushing emerging currencies and markets by Oct. 9th, Mr. Bullard stepped in and tried to jawbone some of the building froth from our markets.  It only took a week later and some 1,500 Dow points for him to step out and reverse his words.

There are several problems here as I see it.  First, the Fed is darned if they do and darned if they don’t.  The stock markets threw a taper tantrum and dropped nearly 10% in six or seven trading days.  In order to placate the equity markets, QE cannot be shut down.  On the other hand, the Fed cannot continue QE or begin another round because there simply are not enough Treasuries outstanding for them to purchase.  Let me rephrase this, there are enough but whatever the Fed buys …they are taking out of the collateral pool which then can no longer be lent against.  This in effect actually lowers the amount of credit outstanding which “de”flates rather than “re”flates.

Another problem is the leverage that the Fed itself is taking on.  Their capital is now levered at nearly 80 to 1.  The big banks were levered nearly 30-35 to one back in 2008 and we all know how well that worked out.  What will the Fed do?  Lever themselves over 100 to 1 and blow their balance sheet up another trillion dollar?  I suppose they could try this but the markets at some point are going to call their bluff.  The Fed has no margin for error now, a bigger balance sheet and higher leverage will only make the collapse when it comes that much more horrific.  Do you believe there are any odds whatsoever that the Fed can ever even hint at the reality of higher rates?  No matter who would like to deny this truth, “tapering is in fact tightening” and no amount of words can change this.  Make no mistake, this is ultimately, and will also be seen as a “solvency” problem for the Fed itself.  Going one step further, the Fed acted as a white knight back in 2008 and ’09, they have now put themselves in a very poor position because they are now the ones in need of a white knight.  Not only will they NOT be seen as the white knight, they very well could become the problem itself?

We also got news at the end of the week, India imported 100 tons of gold for the month of September …this was about half of all gold mined for the month.  There was also a report from Shanghai, they imported over 68 tons for the WEEK!  If China were to import at this run rate, they would import 3,500 tons over the course of a year.  This is an impossibility over the long run as the rest of the world only produces 2,200 tons.  I bring this up because again, we have more evidence of demand completely dwarfing supply while price remains weak.  “Apologize” however much or in whatever manner you’d like, physical demand is blowing out the actual supply while the price is being suppressed.  I believe there is also a “timing issue” here, something behind the scenes is in a precarious state, the “alarm bell” must be silenced.

Last weekend in Washington, the G-20 held a finance minister and central banker meeting.  Do you find it at all odd that immediately following this meeting the markets have become unstuck?  What was discussed or decided behind these closed doors?  The annual G-20 meeting will be held next month in Brisbane Australia, has or is something being decided?  Is something “being” decided “for” the U.S. and her dollar?  Curious timing?

One other area which received little to no press were events in France and also Italy.  French bond yields diverged higher from the rest of the core Euro states and they basically have thumbed their noses at the deficit spending targets they were given.  Italy did a currency swap earlier this year and an 8 billion euro trade deal with China this past week.  Again, the timing is curious because Italy is one of the European weak sisters in need of assistance.  Germany has her hands tied trying to support Greece from collapse …so in comes China to help a struggling Italy.  The fracturing of the Eurozone may be a result of the coming reset?  Again, timing?

I bring this last paragraph forth because China has to this point only “courted” western business as opposed to going head to head with the U.S.  I received a note the other day which stated “China could make gasoline $100 per gallon any time of their choosing.”  I initially scratched my head on this one but after 10 seconds I “got it.”  China can pull the plug on the dollar any time they choose.  Once this is done, hyperinflation will be set our nation and $100 per gallon may become a conservative number.  The upcoming G-20 meeting will be of particular interest to me because I believe there will be (maybe already are?) decisions made “for” the U.S. as opposed to the traditional “by” the U.S.  I believe the problem is now seen globally to be the Federal Reserve, I also believe the world is working to “fix” the problem.  More on this tomorrow.Similar Posts:

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