Net Asset Value of Certain Precious Metal Trusts and Funds

Adjusted Monetary Base Less Excess Bank Reserves

Thanks to my friend Gary at NowandFutures.com for this chart.

I like to think of the expansion of the monetary base as it has been implemented this time, versus 1933 , as a large animal passing through the body of a python.

Who knows what might come out after the banks are done digesting it.

In the second version of the chart below I have merely added a simple trendline.

Absent lending and a velocity of money the added liquidity at cheap rates, is perhaps little more than a subsidy and crutch to the zombie Wall Street banks.

More simply, the expansion is an artifact of the bank rescue and the assumption of bad debts and others financial obligations at above market prices, and not a program targeting the real economy. It is a variation on the efficient market and trickle down theory. Give the banks plenty of liquidity and they will lend it. No, they will take the Fed's riskless interest for the most of it, and gamble with the rest, demanding more guarantees, subsidies and benefits every step of the way.

Yes, the Fed has a 'blunt instrument,' but it is not as blunt and clumsy as Greenspan put forward, for example. The Fed has been primarily concerned with the banking system and its prosperity, both as monetary policy center and in its key role as regulator, and repeatedly allowed and even led the financially naive into trouble.

And they too often have responded to legitimate criticisms and questions from the Congress and the people with appeals to secrecy and snarky misdirection, abuse of their jargon, and the other things that serve to hide their actions.

So with the Fed inflating selectively on the banking side, without exercising vigorous oversight on the financial system, and the median wage languishing in the real economy, a forecast of stagflation, which is always and everywhere the outcome of policy error or exogenous shock, appears probable.

"Significant changes in the growth rate of money supply, even small ones, impact the financial markets first. Then, they impact changes in the real economy, usually in six to nine months, but in a range of three to 18 months. Usually in about two years in the US, they correlate with changes in the rate of inflation or deflation.

The leads are long and variable, though the more inflation a society has experienced, history shows, the shorter the time lead will be between a change in money supply growth and the subsequent change in inflation."

Milton Friedman

This is much more than a liquidity trap. The financial system is broken. It is corrupted and distorted, and it is acting like a weight on the real economy.  And the banking system has been broken since 1990's.  Perhaps broken is not quite the right word since it implies some accident and not a willful campaign of intent.

You can pour monetary stimulus into this corrupted system as the Fed did in the first decade of this century, and the results will be the same: financial asset bubbles, corruption, fraud, increased public debt, and a widening gap between the wealthy few running the system and the public who are paying for it.  The only thing good about stimulus is that it is better than austerity, if both are intended to sustain the unsustainable. 

Stimulus without reform is a waste, but austerity without reform is insane cruelty.

The message of OccupyWallStreet is fairly clear, but the status quo cannot hear the message: 'The Emperor has no clothes.' And today on Bloomberg the response was, 'They hate us for our prosperity.' What the protesters are saying is that the system is broken, we have lost confidence in it, and we want the change and reform that we voted for in 2008 and were never given.

To paraphrase Tacitus on the status quo of empire, "To ravage, to slaughter, to usurp under false titles, they call freedom; and where they create a desert, they call it prosperity."

Gold Daily and Silver Weekly Charts - La Douleur du Monde - Dec Gold Futures

Silver and especially gold had nice rallies today as it was 'risk on' with Sarkozy and Merkel crooning a lullaby to the equity markets. The dollar retreated sharply from its zenith. It has not yet broken uptrend.

I wonder if the metals liquidation is over, and if the hands that remain are strong and relatively unleveraged. We will not know until the stock market corrects again and we see if the metals follow.

Earnings season is coming up for stocks. I am not impressed with the stock rally today and put a small short position back on since we have reached my 'bounce' targets. Now we see if we rally on or not.

I am long gold bullion. We have not yet broken out and may be coming to a similar situation that we have had a bounce, but it must move higher than 1680 and 1700 and stick a couple days close to say the trend is higher again in the short term.

So I have a little hedge back on. If the metals break out and stocks keep rallying then the miners look a little more interesting.

I have included the December Gold futures chart to make some of the levels of resistance and their meaning easier to see.

SP 500 and NDX Futures Daily Charts

A big rally on Wall Street today as the bond market was closed for Columbus Day. In other words the adults stayed home. So stocks had their way on hopes that Merkel and Sarkozy would come up with a feasible plan to take the French and German bank debts on to the public balance sheets, or at least whichever part is not served up as a haircut to bondholders and bank shareholders.

The US is keenly interested in this because despite assurance otherwise the contagion and counterparty risk with Wall Street is significant.

Volumes were very low so the rally was not as impressive as one might imagine. But the shorts were there and they were squeezably soft and overexposed.

This will likely continue to be an event driven market and when the events subside, then the gimmicks and technicals of the traders take over.