Obsession With Central Bank Action is Unhealthy, But Typical

By Gary Tanashian

June 18, 2012

The great question revolving around Greece is now answered.  It remained unanswered when the opening segment of NFTRH192 was written.  Here is how one writer was trying to deal with these and other questions over the weekend:

Obsession With Central Bank Action is Unhealthy, But Typical

"We’re seeing some positive sentiment return on account of a few things: the prospect of coordinated intervention in the event of a sloppy Greek election, or outright victory of an anti austerity party," such as Syriza, said Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. –MarketWatch

NFTRH has been managing what I believe could be a pivot to a coming intermediate bullish phase in the broad markets. For several weeks now my response to the Ticker Sense sentiment Poll has been 'Bullish'. This has been largely due to markets’ [previous] proximity to important support, pervasively bearish sentiment, an over bought/over owned US dollar and the ‘Sitting Democrat’ election year cycle.

A potential 'QE' component is part of the analysis because as I have taken pains to illustrate, a deflationary environment has reset the entire casino from its former 'inflation expectations' stance of a year ago to one that is on pins and needles about Greece, Spain and Europe in general, as the US economy continues to steadily grind out signs of economic deceleration and China’s growth has slowed from unsustainable hyper levels.

There was going to be no overt Central Bank action amid a rising prices/costs backdrop and 'off with their (the inflators') heads!' sentiment among the public. Against the current backdrop, there could be. But again, a watched QE pot may not boil on demand.

So let’s try to break down the scenarios that could be in play as markets open on Monday, after the Greek election has come and gone.

Scenario 1: Pro-Austerity, Pro-Euro Forces Win, Order Maintained

Is it possible that markets could react negatively to this news? Have they really been rallying on the prospect of an asymmetrical disaster and inflationary response? It is likely that policy makers, especially in the US, would stand down in the very short-term on this news and the market would be left on its own.

Rather than the thrills and spills of cataclysm and official response, we would be left with an economy that is grinding and decelerating (Empire Manufacturing was the headline disappointment last week), but all would appear 'normal' (whatever that word means in levered up modern markets) at least.

The Fed meets on June 19-20 and I think it would be foolish for a writer to try to pick apart all the different moving parts that are in play and come up with some kind of a forecast. But if Scenario 1 carries the day we are back to the normal plan, which sees the inflators being ‘drawn out’ of hiding by economic events that steadily continue toward our ‘economic contraction’ scenario that comes against a backdrop of inflation fears being little more than a distant memory.

This is the favored scenario for the ongoing analysis that sees general gold mining fundamentals marching higher in the form of rising gold-commodities ratios (‘real’ price of gold or RPG) as the economy continues to contract. If the gold mining sector gets hit as QE cultists abandon ship, this could present another buying opportunity for one of the few sectors that benefit fundamentally from the counter cycle.

Scenario 2: Anti-Austerity Forces Win, Greece to [Renege] on Obligations and Leave the European Union

Asymmetry would immediately come to the fore, with emotions running high and all eyes on Spain, Italy and any other ‘next dominoes’ that could tumble. Words like contagion and crisis would go global and go into hyper drive. All of this would be against a backdrop of already slowing economic activity. Policy makers would be compelled to act.

There is no telling what could happen to gold in this scenario. Gold is simply a much hyped, much obsessed upon anchor to monetary sense; to simplicity, as opposed to the violently thrashing thing that Keynesian geniuses have created for us over the many fiat decades of credit and debt creation.

Would Ben Bernanke be fiddling around with yield curve manipulation (Operation Twist) in this scenario or would he go full steroidal with massive purchases of long-term Treasury bonds without the sneaky window dressing of selling short-term ones? If the mission is ‘increase money supply in a compelling manner for all the world to see’, he will be a man and tell the world “I am Ben Bernanke and I am here to inflate, as has been my Raison d'être since I first made headlines in my speech entitled Deflation: Making Sure "It" Doesn’t Happen Here ."

The US Fed would also have the cover of being ‘coordinated’ with other global inflators and acting for the good of all against the contagion in Europe.

What’s It All Mean? 

If I knew, I would not be writing you today because my riches and power would be beyond imagination. Instead, we are stuck in a failing system, you and I. The system is broken and is run by people who make it more broken with every policy response.

Inflation has been the problem since gold was finally and completely sent to the wilderness in the early 70’s. It is just that the degrading process takes longer to play out than the 70’s gold bugs (and possibly even the current era’s newly minted gold bugs) might have ever dreamed possible.

In short, whether the world blows up on Monday or order is maintained, the system is suffering from the leverage of credit/debt-based policy that came before. Personally, I vote for stability and maintenance of the illusion for now. I vote for Greek Austerity and continued market management along the current course.

So the balance of #192 is going to proceed as if some sort of order will be maintained since I think it would be foolish to try to quantify the tiger by the tail that would be the alternative. That wildcard must be considered an asterisk (emphasis on the last 4 letters of that word) on the analysis this week.  Sign up for the free - and spam free - eLetter.


4 thoughts on “Obsession With Central Bank Action is Unhealthy, But Typical

  1. Clinton, Dodd & Frank were the most corrupt individuals to ever make it to thier high positions of power. It's call Cronie Capitalism. This is when Gov't officials who are crrupted brake a perfictly fine sector of the free market all to buy votes to stay in power. CRA on steroids. Next up Healthcare with Obamacare! Everything the Democrats touch they ruin in the free market. The natural outcome of socialist and communist agenda. "Liberalism always creates the exact opposite of it's original intent" JQ

  2. Back in the late 80's and early 90's it was the S&L scandal. Clinton was a good president in that he went after them. 1300 were arrested and 300 saw bars. Since then they prepared by putting key people into the SEC and other regulatory agencies so when they did it again and promoting a man for president they could own. So is anyone suprised when no one goes to jail after 08?
    I ought to know as I have read 13 books on the subject researching for a Wall Street thriller novel where a bunch of unemployed people become vigilantes and take out 10 of the bankers.

  3. We should go back and enact the Glass Steagle Act and let the dag gum banks alone. Repeal all the Gov't regulations under the Dodd Frank Bill. Dam Democrats in charge in 2006 sent this country into a tail spin that they will never be able to get us out of. Gov't stay the ____ out of the Free Markets way. I laugh my ___ off everytime I hear the current administration or liberal talking heads blame Bush. they are the ones who created the mess in 1993 by repealing the Glass Steagle Act then Dodd Frank bill bails out the banks in 2008. Unbeleavable!!! The banks should have been allowed to file BK and reorganize. They are big boyz. The car companies have yet to pay us tax payers back and the Lib's who protect the unions lie to us and play games with the numbers claiming they have paid off the tax payer bail out money. LOL yes they did and too bad it was with tax payer money they paid us back with. Only in America.

  4. Banks have exceeded their depositors trust by speculating on the stock market. The Volker rules are very necessary to control them. If they wish to speculate in the market, it should be via a separate company, so that should they lose Billions of dollars as JP Morgan has recently, the loss will NOT affect their clients, or damage the bank, which should be built on a solid foundation, in any way.

Comments are closed.