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You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.
George Bernard Shaw
Very volatile day in the markets, with gold leading the way higher and silver lagging a bit here in the short term.
Gold appears to be rising strongly, but not so much parabolic as some might imagine. It is certainly short term extended to the upside, calling for some type of correction or consolidation. But the fundamentals remain compelling.
These are dangerous markets, especially the equity markets. Please be very careful with your trading.
Stocks are now trading like commodities, largely on the technicals, and with High Frequency Trading still dominating the trade, they are only loosely associated with reality. This is what has been driving people to look for something solid, reliable.
Alas, it is hard to find. Even in gold, the paper trade has distorted markets for years as a result of the failure of the CFTC and SEC to maintain honest and efficient markets. So the rest of the world starts to create its own markets, and the decline of the American Empire begins to accelerate.
Any excuse will serve a tyrant.
Aesop
The Fed threw the market a bone, stating that they would maintain easing through the upcoming Presidential election if the economic conditions called for it.
And so a powerful relief rally ensued. Whether it will be maintained is another question and answer, heavily influenced by the upcoming economic reports, especially with regard to employment, median wage, and spending. And of course the sovereign debt situations and wobbly governments around the world.
About what one might have expected.
No specific action at this time, but reassurances that the Fed recognizes the downturn in the economy, with fresh evidence of this since their last meeting in June, and higher risks to recovery through lack of confidence in financial assets, and slack employment and spending by consumers.
In a very real sense the Fed is attempting to bridge the gap between fiscal and monetary policy, given the inadequate response from the federal government to the financial crisis.
The Fed changed the wording from 'extended period' to 'through 2013.' I had expected them to say 2012 but since this is not a binding limit it is of little consequence, except to signal that the upcoming presidential election will not deter them from taking what they believe to be the necessary steps to maintain the financial system. Default may be all right with some, but the Fed apparently does not concur.
There were three dissenting votes, from Plosser (Phila), Kocherlakota (Minn), and Fisher (Dallas), based according to reports primarily on this statement regarding longer term easing based on economic conditions.
"...are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."
I tend to think that their dissent, if based solely on this, represented some sort of intellectual stand, as the statement clearly represents no firm commitment to rate policy, but is intended to put some meat in the reassurance. There is recent precedent for this approach in other central banks. It is intended to convey intent to reassure the longer term horizon of business decision, but is clearly not a commitment.
And if the dissent was based on a desire to RAISE rates, which I highly doubt, I would think that those governors might be operating in some alternate universe with different relationships and conditions. I am open to contrary arguments, but it is most likely that a desire to raise rates would be based on some ideological persuasion or first principle rather than on sound economic theory.
The dissenting votes may feed into the 'no confidence' in the governance of the country based on ideological differences and zombie economic theories that continue to hinder real recovery.
But at the end of the day it is official acknowledgement of the weakness of the economy, and easy money as needed through 2013. The markets will most likely recover from these extreme short term trends, barring new difficulties, especially from Europe. How robust that recovery will be is another matter. The inability to reform is a significant impediment to growth and a return to normalcy.
Whether any sort of a sustained rally of more than a few days ensues is another matter. The system appears to be broken, corrupt, and dysfunctional. The solution may not appear until the suffering becomes more widespread, shaking the fortunate out of their comfortable complacency.
I should add here that if the equity market does not respond sufficiently on the announcement, we may see the entry of the Exchange Stabilization Fund and its house banks, either into the close or tomorrow. They tend to do this to reinforce some Fed action if the market does not respond on its own. This is view as benign, similar to jawboning, the 'management of perception.'
Federal Open Market Committee
Release Date: August 9, 2011
Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.
Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.
"And remember, where you have a concentration of power in a few hands, all too frequently men with the mentality of gangsters get control."
Lord Acton
Investors do not need a ratings agency to tell them what to think about the US sovereign debt status. The Treasury market is broad and deep, and the facts about the US financial situation are reasonably available, although sometimes hard to retrieve through the fog of rhetoric and deception.
Specialist agencies like S&P are needed to rate more obscure financial instruments and entities without a wide following or deep and liquid markets. And the US ratings agencies have shown themselves perfectly willing to produce 'ratings on demand for pay' over the last ten years for their large financial customers. And nothing appears to have changed.
So today we saw Treasuries rally sharply even on the longer end of the curve where the downgrade occurred. How about that! But it was perfectly understandable.
Why? Because the message was not about the quality of the Treasuries, which the market already knows much better than the bureaucratic paper pushers at S&P. Rather, the implications were about the outlook for the US economy. And that outlook is becoming increasingly dire. So Treasuries and gold were bought for safe haven status, and stocks and assets dependent on economic growth were sold off sharply in search of liquidity.
The reasons for this weakening economy should be obvious by now, and it is not because of the long term debt situation. Here is a review of some of the changes in the past twelve years that have taken the US from surplus to disaster.
We saw a remarkable flight to the safety of gold, but much less in the more industrially popular silver, and a serious sell off in the commodities. That was the clear sign that this market action was a comment on the economy, with its slack demand and stagnant wages, the dire condition of the average American family, and the dysfunctional nature of the economy.
And for the first time in a while, there was a feeling that the US government has lost its bearings and its ability to respond effectively even in the face of a common cause and emergency, and it was expressed dramatically.
Obama came on television to speak. And after he said his piece, the losses in the equity markets doubled. Why is this?
Because the President may be many good things, and have many good qualities, but he is most surely not a leader, and does not seem to possess an overweening moral principle or vision which he can communicate and achieve, even in the face of opposition and adversity. What does he stand for, and who or what does he really support with any passion, not because it is convenient, not as a means to some other end, but because it is the right thing to do? The best way to be thrown under the bus is to be one of his supporters and constituents, who is not a major lobbyist and campaign contributor. He is hardly a radical and he is certainly no reformer; he is a chameleon, who goes along to get along.
He is the very profile of a modern corporate manager, heavily laced with the moral timidity of a professional bureaucrat. He could not carry Franklin Roosevelt's leg braces. I would not hold him to this higher standard if he had not chosen to pursue the leadership of the Presidency in times of crisis. But he did. And he sold out faster than a hooker when the fleet comes in. He pandered to the monied interests with his key appointments and choices of advisors from the very first days of his administration.
The President's response to this latest crisis is familiar, to have the Congress choose yet another bipartisan commission, similar to the ones that have failed to reach any practical consensus so far, and delegate the problem to them, hoping for the best.
And what makes this situation even worse is that as bad as this President may be, his opposition are largely created from the same mold, the same lobbyist infested cesspool, and are unprincipled servants to power, beholden to creeps, crooks, and sociopaths who pay them and reward them with power, to the detriment of the American republic.
There are wide expectations that the Fed will 'do something' tomorrow. I doubt they will do anything, but they may say something. This is what Wall Street wants. If they do not get it, and the markets begin to move downward with some momentum, look for yet another hastily tossed together crisis response to come out later in the week. Hostage-taking pays in this unprincipled environment.
The downgrade was a vote of no confidence in the leadership of the US, across the board: Democrats and Republicans, the Banks and Wall Street, the Regulators and the Fed, and their partners in the corporations, the mainstream media, the economists, and big business. The power elite, the best and the brightest, the fortunate sons, whatever one wishes to call the governance of the country, have utterly lost their moral bearings. Confidence in the government is at shocking lows, with some polls showing confidence in the Congress is down to 18%. Why Are Banks Getting Off Scot Free? - Greenwald.
In a parliamentary government, the leadership of the US would have fallen this week. This is what the market is saying.
And governments are beginning to fall around the world, as the tide of history advances. The pampered princes and princesses of privilege are blind to what is happening.
The pity will be if the Fed does announce QE3, and the market rallies, and it is quickly forgotten, business as usual. For then it is just a reckoning delayed.
The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery.
