International Forecaster Weekly

The Short Term

It is a sad day when you know a market should be lower, but they 'rig' it to go where they want it. But it does not in any way affect the long term. Every dollar that the Fed digitizes into existence lowers the value of the ones in circulation.

Bob Rinear | January 11, 2014

Last week we talked about the long term and what we feel is coming. But since what we talked about is pretty big scale stuff that could easily take years to develop, what about the near term? In other words, if our guess is that in 5 – 10 years we’re going to see a global currency reset, and a host of interesting developments surrounding that….what happens before we get there?




That is the 64 million dollar question. Why? Because as we’ve seen for the past 6 years, they can indeed “make” the markets go where they want. They can “support” the economy enough to keep it functioning. They can invent enough bogus economic reports to keep people from being afraid. They can push the idea of “consumption” to the point of being vulgar in the hopes that mindless consumers spend their savings on the latest greatest gadgets.

Not long ago Ben Bernanke announced they were removing 10 billion dollars from their supposed 85 billion dollars a month in asset purchases. This is commonly known as the “tapering”. They are tapering off the amount of their injections. Or, are they? As we discussed, because they were also investing all of the paper that was becoming due, those extra interest payments amounted to about an additional 10 billion a month. So, in essence Bernanke didn’t cut anything. They started at 85 billion a month, added the interest payments to make it almost 95 billion a month, and are cutting back to 85 billion a month. Sleight of hand at its best.

But therein lies the problem and the question. We only know about what we’re told folks. For some ungodly reason, people think that the numbers the Fed’s tell us are absolute. Well they’re not. We had to sue the Fed to find out that they had actually printed up 16 trillion and sent it to Europe during the height of the financial crisis. Well, what if it wasn’t only 16 trillion? What if it wasn’t only Europe and they also printed money for Brazil, or Japan, or India?? How would you know? How would anyone know??? So problem one is that they could be printing money and dishing it out via channels that no one suspects and no one would ever know.

But, let us just suppose that the junk they feed us is real. Okay. Now we know for a fact that a large percentage of the reason we’re at DOW 16K is that a large portion of the money they print is being pushed via the banks into the risk market of stocks. Common wisdom would suggest that if they were to really curtail their printing, then stocks would necessarily have to fade off. I whole heartedly agree with that assumption.

TV, Pundits of all shapes and sizes, and talking heads from every corner will tell you that the economy is accelerating, and that the Fed can cut out ALL their printing by September or October if this year and all will be fine. Well, frankly those folks must be smoking drano. There are NO economic activity increases that are going to replace 1.1 TRILLION dollars worth of free money handed out by Uncle Benny and his Inkjets. Sorry.

So that leaves us in a quandary doesn’t it? It does. While there’s no doubt that after all these years we’re seeing pockets of economic strength here and there, there’s no where near the level and quality of economic advancement that would be needed to keep our markets where they are without the Fed money. Now granted, the stock market is NOT the economy and it isn’t even reflective of it, but just go with the flow here for a bit.

Last week what did we hear from Fedex? Oh, just that they were going to sell a ton of debt and then go buy back a couple billion more dollars worth of their own stock. We’ve seen record levels of this happening all throughout 2013. Companies are selling debt notes on the open secondary market and then using the proceeds to buy back their stock float and push their stock prices higher. How does that work? That works in two ways. By removing “float” or in other words the amount of stock available to buy, it reduces the supply. So, if investors want it, they have to pay more to get it.

The second thing, and the much more important issue that buy backs do is… it artificially boosts their quarterly earnings per share. Think about that a minute folks. If you’re a CEO and you know your earnings are going to stink like five day fish, how can you get more “EPS” (earnings per share) if your sales aren’t making it? Well, if you reduce the amount of shares outstanding, then any profits you make are sliced up by a smaller pool of shares. So, if you reduce the float by say 10%, you just increased your earnings per share by 10% on the shares remaining. That’s accounting gimmickry folks.

Okay, so what… you ask? Well consider this…. Bernanke’s money has had a few intended targets. The most important one was to keep interest rates low. Will rates remain low if he really does some actual cutting of the purchases, instead of that shell game he announced last month?? Nope.

If Bernanke wasn’t in the market buying up notes no one else wants, and keeping mortgages low, we would NOT be looking at 2.9% ten year money. We would NOT be looking at 4.2% mortgages. We’d be looking at 4.5% ten years and 6.4% mortgages. We would NOT be seeing corporations enjoying the extra interest payments they’d have to make. We would NOT see Uncle Sam loving the idea of paying increased interest on their trillions of debts.

In other words, talk is cheap folks. They can say they’re going to stop printing and they can go through all manner of twists and gyrations. But if the Fed money stops, interest rates rise and the economy and the market stalls out. So, it is quite conceivable that they will NOT actually decrease the amount of their printing this year at all. As Yellen takes over the helm at the Fed, she’s not going to want to greet her first year in office with a crashing stock market. So I’m fairly confident that she’ll keep the monetary spigot wide open.

There unfortunately is the second of many problems we face. We know stocks are expensive now. We know that analysts have lowered the bar for earnings because there was more pre-warnings last quarter than we’d seen in 10 years. Expensive markets at a time when companies are struggling to beat already lowered estimates means that they cannot bluff their way higher if the Fed’s money supply dries up. Yet if the supply does not dry up, which I suspect, then they can go ahead and make more goofy excuses for why stocks should continue higher…. And they will.

How sad is that? Very. Yet that is exactly where we are right now. I am not going to do a laundry list of the disgusting facts that we know to be true, but lets just say that a nation seeing record folks on disability, record folks on food stamps, record folks on Government assistance, record number of part time workers, generally doesn’t equate to rainbows and unicorns.

Thus, the stock market and the economy in general, are tied directly to the stimulus provided by the Feds. If they keep the spigot open, there is no reason why we don’t see the market at 18K if not 19K. Of course that’s nuts, but again…if the banks are going to take in Free money, and not lend it out, they’ll certainly plow loads of it into stocks just as they’ve done for years now.

So, in the “short term” while they are hell bent on destroying every last cent of value the dollar might have had, we can see stocks move higher. It doesn’t matter if China doesn’t want our Treasuries, Yellen will buy them. It doesn’t matter that because of ObamaCare, thousands of companies are cutting staff or limiting hours. As long as the Fed prints, insanity can reign. We have the last 6 years as proof.

Obviously, all this makes my job frustrating. It is a sad day when you know a market should be lower, but they “rig” it to go where they want it. But it does not in any way affect the long term. Every dollar that the Fed digitizes into existence lowers the value of the ones in circulation. Every drop in buying power is felt by the nations that have been forced to hold our junk dollars. That will change. In fact the changes are already in the works, it will just take a long time for them to finalize.

While we feel confident that our longer term predictions of some really rocky road ahead is solid, that’s years ahead of us. In fact, we actually believe that it could all be avoided if we as a collective nation got our respective heads out of our butts and did the right things. But, are we really going to elect officials with the backbone to do the tough things necessary to save the ship? My confidence on that is below low. All it would take is a huge push to open the oil fields, build 10 refineries, cut the EPA red tape, lower the barriers to small business and we could right this fine ship. Who’s going to do that? NO one. Thus, we have to stick with the long term outline as we’ve described.

If the Fed’s keep their foot firmly on the stimulus pedal, we might see a couple decent pull backs along the way, but we could also see the market gain another 10 - 15% this year. They’ve got most of the public buffaloed into thinking that things must be fine if the stock market keeps making highs and they’re itching to get in. Isn’t it just like normal? In the past couple months we’ve seen some big time selling from the likes of Warren Buffet and some other big name billionaires, and Insiders are selling more of their own stock at the fastest pace since 2007, while Johnny Public is thinking he best jump aboard or miss the train. Well John, the train left in 2009. You’re getting on the caboose at the end of the ride.

Bernanke made it quite clear during his “taper” talk that he was going to keep rates exceptionally low for a long long time. As long as Yellen keeps that tradition alive, and I think she will…we will probably see a higher market again this year. Just understand that each new dollar printed, brings us closer to the day the world rejects them. And reject them… they will.

On Friday, we got the Governments take on how many jobs we produced in December. The number came out at an incredibly lousy +74K. But, the sick part is that because 347K people gave up looking for work, the unemployment rate actually fell to 6.7%. We are now at a point where 91.8 MILLION people are not in the labor force. That’s a participation rate not seen since 1978. Isn’t it amazing to you that we have about 320 million folks in this Country and a third of them….have no job? And here we are seeing a stock market flirt with all-time highs? Nothing wrong with that picture eh?

The Fed’s will keep their stimulus flowing and the idiot market will probably continue to go up because of it. Just understand that the market “bubble” is inflating, and when it does find its pin, the pop will be heard round the world.

Next week, I want to focus on Gold and Silver. I am sure there are more than a handful of you wondering if they have had their day in the sun and it is time for them to go into a two decade slumber. While I don’t know the future, I’m willing to toss my opinion on the table for what it is worth. So, stay tuned and we’ll chat about that starting Wednesday.