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THE POLITICS OF FINANCIAL MARKETS

Markets this morning are still working to digest the statement from the Federal Reserve after they raised the Fed Funds rate to 4.75% yesterday afternoon. The overall tone of the statement was more hawkish toward the future course of interest rates than most traders were expecting. Prior to the announcement, stocks were higher, bonds were relatively flat and the dollar was lower. Once traders heard, “Some further policy firming may be needed,” the dollar reversed course and moved higher, bonds sold off to reflect higher yields and the Dow Industrials sold off more than a hundred points with the broader S&P 500 down 12 points. Two hours into today’s session the dollar is flat, bonds are modestly lower and stocks are struggling to remain in positive territory with the Dow Industrials higher by ten points at 11,164 and the S&P 500 three points higher at 1,296.

To paraphrase CNBC’s man on the floor of the New York Stock Exchange, Bob Pisani, he says, “The Fed continues to raise interest rates, but the stock market is resilient; it simply doesn’t go down. Each month we keep making new highs, and it’s making the bears go crazy.” To be blunt, it would not be politically expedient to see a meltdown in stock prices, even though the Fed marches-on with higher interest rates and hawkish rhetoric toward the future of interest rate increases. Yesterday, Alan Binder, a former Fed Governor said he believes the Fed will stop rate hikes between 4.75% and 5.25%. Robert McTeer, another former Fed Governor said the statement invites the same policy for the next meeting, and 5% is now inevitable. Bill Gross offered more detail by commenting that employment data will be the key indicator moving forward. Higher unemployment claims should signal a pause by the Fed, but with strong employment data rates will continue higher.

Political Markets

Back on January 18th, I wrote my Market Wrap-Up titled, “THE TRUTH…a Rare Commodity These Days.” At the time of writing I aired-out my frustrations due to the lies from the government, the distorted statistics and the lack of accurate reporting by the mainstream media. Today I am more focused on what is actually happening and why it is happening. In past years I have centered my financial analysis on three basic criteria in the following order of importance: market fundamentals, technical analysis of price charts, and geopolitical developments. I had it all backwards. I believe the markets these days are primarily driven by politics, followed by fundamentals and technicals. We are living (and investing) in a wartime economy and financial markets. The biggest problem of all is a global monetary system pumped on steroids and running amuck.

All paper currencies around the globe are pure fiat; they are money because the governments say they are money. They are backed by nothing except confidence in the system and military might. We have witnessed a boom in commodity prices because the continuous creation of money causes more demand for physical goods, but it is impossible to electronically print more oil, gold, silver, lumber, and copper. The financial markets have been driven by excess liquidity from the creation of more and more money by central banks all around the globe.

In these politically driven financial markets, our leaders have decided it is imperative the U.S. dollar remains as the single reserve currency for the entire world to use in global trade. On March 23rd Jim Sinclair wrote, “It is impossible to examine the future price of gold without an examination of the geopolitical scene. Geopolitics impacts everything from the U.S. Federal Budget deficit to the price of energy, and therefore becomes a major ingredient in the price fluctuations of metals.”

I believe our leaders have the desire to maintain the status quo of America as the one-world superpower. They must control the financial markets by maintaining the status of the U.S. dollar and by maintaining the supremacy of our military might. When I look at the big picture for the direction of the financial markets, I see things in “lock-down” mode. Let’s take a quick look at stock prices, bond prices and the strength of the U.S. dollar for the last few years:

When looking at the charts please make note of the “paper” asset prices of stocks, bonds (interest rates) and the U.S. dollar. They have gone mostly sideways since the beginning of 2004. In our “liquidity-driven” markets, paper assets have been propped-up by excess money creation and artificially low interest rates. The government and the Federal Reserve have had to distort inflation figures in order to keep inflation expectations at a minimum. We keep hearing that inflation is well contained, but most analysts agree the numbers have been massaged by way of all sorts of statistical gimmickry.

How to Maintain the Status Quo

I came across a good editorial by DeepCasterLLC in the Financial Sense University called “Juiced Numbers – How the Government Gets the Statistics It ‘Wants,’ Markets Get Manipulated, and Citizens Get Deluded, and Worse.” Here is a brief excerpt from the article:

Direct Manipulation

One is direct through daily injections of repos (repurchase agreements) into the market by the Federal Reserve. Repurchase agreements are loans (at Fed Fund rates) issued daily by the Federal Reserve to primary dealers, the proceeds of which are used to buy, for example, Dow index futures, if the Fed seeks to boost the Dow.

So, the several primary dealers (e.g. Goldman Sachs, J.P. Morgan) who apparently work under the Fed's direction are able to use these loaned funds to buy or sell various securities and futures to affect the markets. [Note: One species of Repos, POMOS, never has to be repaid, but explaining the significance of that (beyond the obvious) is beyond the scope of this article.] the fact that the loaned funds can be used to purchase derivatives, as well as plain equities, gives the manipulators the tremendous leverage which derivatives afford.

Those who doubt whether the government has the capacity to manipulate the markets (and especially the larger markets like the multi-trillion dollar currency and bond markets) are invited to inform themselves about the $32 trillion interest rate derivatives colossus at J.P. Morgan Chase, or the $1.5 trillion derivatives position at the Bank for International Settlements (the Central Bankers' Bank). And that $32 trillion derivative position at Morgan is the position at just one of the Fed’s several “primary dealer” firms.

Indirect Manipulation

The other major form of government market manipulation can most accurately be called indirect. It consists of "massaging" various statistical measures and data to come up with results that suit the manipulator's (usually, whatever Presidential Administration has power at a given time) preferences, insofar as its' political, economic, or financial or market goals are concerned. It is the United States government's generation of "creative statistics" on which we focus here.

Since the stock bubble popped a few years back, interest rates were driven to multi-decade lows so paper asset prices could be re-inflated. Looking at the gold chart, you can see that real money didn’t get fooled at all. It’s not only the officials in the U.S. that have been working the fiat money pumps around the clock; it’s happening with central banks around the globe.

The Fed will always lean toward the side of “easy money” because that is the only way they can keep this ponzi-fiat-monetary-system alive. The Fed has embarked on walking a serious tight rope. They now have a number of problems of their own making. I liken the situation to someone trying to put out a fire by smothering it with gasoline. Bill Buckler of the Privateer Newsletter out of Australia on March 17th pointed out two serious problems the Fed has on their hands, and I will add a third problem to the mix:

The Fed has two problems. The first is that in any REAL terms, the Fed Funds rate and the entire Treasury yield curve are still in NEGATIVE territory by a substantial margin. The official CPI and PPI numbers are a farce. REAL price increases in the US are advancing at somewhere between 8-11% annually. 

The second problem facing the Fed, which we covered in the Early March Issue (#547) of The Privateer, is that the rest of the world is only now STARTING to raise their interest rates. The global foundation of the carry trade, Japan with their long standing "zero rate" policy, has not yet started. Foreign Central Bankers are just as alarmed at the borrowing going on in their nations as the Fed is, but they have not been able to afford to raise their own rates for fear of pushing the US over the brink of recession and facing the certainty that such a recession would rebound in their own economies.

It is only now, after the Fed has been steadily raising rates (albeit in baby 0.25% steps) for nearly two years that the rest of the world has BEGUN to take steps to try to bring their own credit expansions under some kind of control. When the Japanese join in, and they are threatening to do so with increasing regularity, we will be seeing the BEGINNING of global rate rises, not the end that Wall Street is hoping for.

The third BIG problem the Fed must juggle is the disconnect between the financial markets on Wall Street and the real economy down on Main Street. A great portion of consumer spending over the last two years has come from the big boom in real estate prices due to the extremely low interest rates. When new homes are purchased people buy refrigerators, furniture, decorations and all kinds of knick-knacks. Cash-out refinancing has also been a huge stimulus for consumer spending. Now we have interest rates moving higher right along with higher energy costs. It will be no surprise to see $3.00 gasoline at the pumps again this summer. (Note: Today Platts forecast a drawdown of 1.5 million barrels of gasoline, but the draw was MUCH bigger than expected at 5.4 million barrels.) With higher mortgage rates and higher interest rates on credit cards, along with higher energy and consumer prices it shouldn’t be too long before the consumer is tapped-out!

John Mauldin, wrote in “Outside the Box” on March 17^th says, “Households’ cash outlays for goods, services and non-financial assets (e.g. houses, SUVs) were approximately $662 billion more than their cash inflows in 2005 – a record in dollar terms and a record 7.3% of disposable income.” To continue spending at the current rates money must come from increased income, out of savings, or from an increase in debt obligations. The savings rate in the U.S. has turned negative, so we need to see wage increases or hope for an emergency rate cut from the Fed.

Money Pump Going into High Gear

(Original article from HalTurnerShow.com has been retracted)

As I said earlier, to maintain global dominance the U.S. must control both the financial markets and maintain military dominance around the globe. When I flip through the channels on TV and talk to friends it seems nobody is paying attention to the geopolitical developments that are taking place. We have been lulled into a state of complacency. I see people fixated on reality TV shows, American Idol, Desperate Housewives, the World Poker Tour and March Madness with the college basketball tournament.

The real “madness” is happening in our financial markets as we wage war on global terror. The scene in Iraq appears to be getting worse, for now Iran has postponed selling oil for euros, our Congressmen have backed-off China to impose trade tariffs and revalue the yuan, Japan says they are near the end of their zero-interest rate policy, and the Fed guns the money supply while raising interest rates to prop-up the dollar. America has been put to sleep with countless “distracters,” but President Bush knows he must be tuned-in to the financial markets based on the recent change in his cabinet. Chief of Staff, Andrew Card will be replaced with a big-time insider to the financial markets. My final “cut and paste” for this Wrap-Up comes from Bill Murphy’s posting last night on LeMetropoleCafe:

A heads-up from Rob Kirby:

Bill;
What a "tell" - Andrew Card gone and hello Josh Bolton. How do you spell p-a-n-i-c? I wonder if it's a coincidence that Dubya's new chief of staff just happens to be a former Goldman Sachs director. Seems the most pressing issues facing this Administration might not be exactly as advertised - seems to me it's all about the Broken Monetary System and what to do next. This is why they need to bring a Goldman insider on board - the web of deceit is obviously too complex to bring anyone else up the curve.

Amazing.

Bolten’s recent background:

Currently, OMB [office of management and budget] Director Goldman Sachs Executive Director, Legal & Government Affairs 1994-99 Council on Foreign Relations member 

Well folks, there you have it. I’m not so much frustrated with the strange directions and imbalances in the financial markets. As a country, we are at war. Leaders go to extremes to maintain existing power structures. Overseas leaders also go to extremes in their attempt to dislodge existing power structures. If you want to check out an incredibly sobering article posted in the Financial Sense University, please see J.R. Nyquist’s most recent contribution titled, “More Tricks.” His first two sentences go like this, “The strategic alliance of Russia and China continues to develop, embracing an ever-widening circle of junior partners in the Western Hemisphere (including Cuba, Venezuela, Brazil, Bolivia, and even Mexico). China and Mexico have congratulated themselves on a strategic partnership to the bafflement of those who are clueless about national resentments and historical grudges.” The plot thickens.

Some Closing Numbers

After spending more time than I expected on the political nature of our financial markets, I will touch on a few of the highlights in today’s trading. There wasn’t much in the way of economic news today as the Treasury was busy auctioning $14 billion of five-year notes. The auction sold on weak demand with a yield of 4.785%. The demand was weak because it is widely expected the Fed will continue to raise rates. In fact, those who bought today’s auction have already seen bond prices decline slightly. At last reading the two-year note is yielding 4.81%, five-year at 4.80% and the ten-year at 4.81%. The yield curve is flat as a pancake and expected to move higher across the board. Ben Bernanke insists on the new paradigm that a flat or inverted curve does not portend economic weakness ahead…we shall see.

The Mortgage Bankers Association said its application index rose 1.2% with the purchase index higher by 2.7% and the re-finance index down by 1.0%. Note the purchase index is down 15.2% year over year and the re-fi index is down 16.1% from a year ago. The 30-year fixed rate rose five basis points to 6.36% and the average one-year ARM rose 14 basis points to 5.83%. Let’s hope the long-rates remain low to keep some of the housing stimulus in the markets.

Gold and silver continued their march higher with silver leading the way. Spot gold closed $6.50 an ounce higher at $573.10 and silver added 23 cents to break through the psychological $11 barrier at $11.07 an ounce. The metals are clearly sniffing-out the excess money creation and relentless borrowing of the Federal Government. Owning bullion is a great way to protect yourselves from the electronic printing presses!

The energy complex closed higher across the board with crude adding 38 cents to $66.45 a barrel even though inventories came in higher than expected. Unleaded gasoline closed two cents higher at $1.90 a gallon. Platts forecast a draw of 1.5 million barrels, but the draw was much bigger than expected at 5.4 million barrels. Heating oil added two cents to close at $1.85/gal and natural gas moved six cents higher to $7.45/mbtu’s.

The stock market bears were once again frustrated, as there was no follow-through selling in today’s session. Yesterday’s declines were the largest drop in three weeks…but have no fear! In fact, the big spin on the Street according to Bloomberg says, “U.S. stocks headed for the broadest advance this year in a show of confidence that companies will sustain profit growth as interest rates rise.” The Dow Jones Industrial Index moved 61 points higher to 11,215 and technology shares led the way to move the NASDAQ Composite higher by 33 points closing at 2,337. If they continue to create excess cash, it has to go somewhere!! Assets prices across the board, with the exception of bonds continue higher! Let’s hear it for “Helicopter Ben” as he keeps the party going!!!

Have a Great Evening!!

Mike Hartman

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