It's All about Easing

When I say easing, that means to market participants, money entering the economy/market which is what has driven risk assets higher since 2009 with the F_E_D's extraordinary measures which were clearly telegraphed by smart money, they understood very quickly that the F_E_D was putting money in the market which these banks with huge loan losses could then make up money rather than the F_E_D having to deal with a Bear or Lehman every month, essentially give them a fool proof way to make money so the F_E_D wouldn't have to give it to them.

In Congressional testimony Bernie defended QE1 & 2 as helping the average stiff by way of the "Wealth effect" (not the same at all as trickle down economics), he argued that the Russell 2000 specifically was up significantly which made average Americans richer by the way of their investments. The problem is, around that time the "U6" under-employment rate was hovering near 19% (25% during the Great Depression), I doubt there were too many average Americans watching their portfolios grow.

Through this process of QE-lets just call it what it is, printing money or dollar debasement, guess who was hurt the most? The most responsible of Americans, the savers as the value of their savings were and are still debased. Guess who else? All of those patriotic Americans that use to believe in buying treasuries and putting them away for retirement. In this manner the Treasury will almost certainly NEVER default, they will pay back debt, just at a fraction of what they sold it for, again through dollar debasement and inflation.

While Bernie was right about the R2K, what few Congressmen would ask (except Ron Paul every chance he had) was what was the downside? The reason they don't want to ask about the downside is the answer would point squarely at their out of control spending. China went from the primary holder of US debt to a secondary holder as the F_E_D absorbed what China was no longer willing to pick up at auctions; the F_E_D who is barred from participating in primary auctions found a simple way around the law, have the Primary Dealers like Goldman Sachs and roughly 45 others including John Corzine's  now defunct MF Global (Remember that? If you had an account with MF Global and lost all of your holdings through re-hypothecation, you remember... *Read your broker agreement, I can almost guarantee you have signed a document allowing your broker to do the exact same thing). The process was called Permanent Open Market Operations or POMO in which the PD's picked up whatever wasn't sold and in many cases they held the Treasuries for a week or two and then flipped them to the F_E_D through the secondary market and made billions on each POMO day which was risk free/free money that went in to the market to bid up any and all risk assets.

The downside (other than what has already been mentioned)?

All risk assets were bid up like commodities in green or the R2K in red; the scam is easy, as a PD like GS you buy Treasuries at auction, hold them for a short period with no risk and then flip them to the F_E_D at insane profits and the same day put those profits in to a self-fullfilling prophecy/market, just inflation started to hurt average Americans and companies as well as Emerging Markets (remember how they were supposed to be the next big thing until Bernie flooded them with inflation as the US's primary export?). You may also remember some of the big Wall Street firms had quarters in which they didn't have a single losing trading day.

So why end the party?
Commodity inflation entered the manufacturing base and every other corner of the economy and input costs sky-rocketed while profit margins were squeezed.

In the red box you can see what has happened since no QE3 followed up the end of QE2, commodities have sunk while the market has remained hopeful that at the next meeting (not literally as in next week, but every next meeting since QE2 ended) the F_E_D would announce QE3 and it's simply wash, rinse, repeat-second verse same as the first.

Gold is the reflection of those hopes as gold is the single biggest beneficiary of Quantitative Easing (When fiat currency depreciates, people move assets in to gold).

Higher gold prices as you can see are not new to the QE cycle, but if yo apply a Rate of Change indicator, you can see the only time the ROC for gold was stable and growing was during the F_E_D's easing, as soon as QE2 ended look at the ROC for gold.

Now gold reflects the hopes for more QE, HOPES! Gold has essentially become a sentiment indicator for the probability of more easing, case in point was VERY obvious today on the leaked NFP number out at 8:30 a.m. today.

 It turns out 3C works pretty well with gold futures, you can see here, to the right is accumulation on a leaked NFP number before the report.

 The NFP came in horrible, for those looking for QE, this is GREAT news and it was reflected in gold as it jumped immediately at 8:30 on the lousy NFP report, but all may not be what it seems as the day wore on. For larger players, they probably understand the gold/macro economic relationship, they probably also understand QE this year is highly unlikely, but there's no reason they can't still ride the gravy train as it appears they did today.

Gold Futures on a longer, more important 3C timeframe, accumulation on a leaked NFP (something the BLS has already admitted is a problem) and distribution in to the move up; note where the first negative 3C divergence is...RIGHT AT THE HIGHS.

As for GLD...

At the blue arrow we had a huge trade in GLD, you can read a bit about it from back then in this post from June 1. This was a 4% 1 day move and about 6% overall, but many of you used calls and made over 100%.

This 4 hour chart shows where the positive divergence was that led us in to the trade, although it showed up in 2 days on an hourly chart. I figured GLD would pullback to the $150 area and then head significantly higher, but since thinking that first Draghi jawboned the market higher with promises of not letting the Euro fail, the next week was an ECB meeting in which he did a lot of talking, but punted, then Jackson Hole in which everyone hoped for a 2010 repeat, but Bernie punted to Congress and this week the ECB bond buying program that is inherently and purposefully flawed so it will seee very little light of day, but the head line was enough to send the market higher yesterday with Gold, yet no follow through in the market today. This 4 hour chart is also (along with the gold futures) showing distribution in GLD, why?

The F_O_M_C is coming up next week, but why I believe with conviction that there will be no QE3 (other than Bernie's less than inspiring Jackson Hole comments), this simple chart...

16 countries that have reported Manufacturing PMI including the US, the Euro-zone, China, Japan, etc have ALL come in below 50, which means contraction in manufacturing; that's 100% of the countries that have reported over the last week or so (many in contraction for multiple months). Of all of the countries we have data on in the world, 80% are in contraction below 50.

When US Manufacturing ISM was released this week, other than being in contraction, one of the key take aways was even with commodities much cheaper now, their input costs are rising. For the average American, food and gas are rising, as a matter of fact, I believe gas hit a new historical high mid-week.

So if you ask what would keep the F_O_M_C from QE3, there it is.

Smart money seems to have this figured out and I'm pretty certain that by the time the F_O_M_C passes or even before, gold is going to be lower.

When we consider the only thing that has propped up the markets, the hopes for more QE, then we also have a problem there. It seems smart money knows this and has known it for some time, at least that's what the charts would indicate, so why not sell at the best prices possible before September and then January redemptions come in on the 89% of hedge funds under-performing the SPX?

Have a great weekend, obviously I have some other thoughts, particularly on the ECB and market charts.