Japan, and Bill Gross, and QE-3 – Oh My!
The height of the Mayan empire was about 400 AD. They predicted a lot of mind-boggling events – but their calendar (created by Pacal Votan) ends on Dec 21, 2012. On that exact date at 11:11 am, the earth will have finished a 26,000-year journey around the galaxy and end up in the "dead center" of it. Pacal Votan did not say that this date would bring the end of the world; he said it would bring an end to an "age." An age where people have gotten so into material things, and so far away from the natural instincts they once had, that all sorts of distortions were going to happen as we approach that time. Seeing those Japanese tidal surges pick up houses, roads, trains, and just carry them along like Tonka toys certainly looked like something out of those ‘end of an age’ movies. Unfortunately the events in Japan are all too real, and my heart goes out to everyone affected. Japan's going to need steel, copper, oil, natural gas, lumber, and the list continues. Granted they don't have the money to purchase it, but like all fiat currencies and Governments, they will print it and make it happen.
I look at the US, where Democrats, Unions, and Republicans are almost coming to blows over necessary "change." I look at the U.S debt structure that we have created, and for the first time it is mathematically impossible to "fix." And then there was the news this week that Pimco’s Bill Gross, arguably one of the most elite investors and connectors in the world, has liquidated all his Treasuries and is in cash. Why would he do that? The first thing that comes to mind is that he feels there will be no Quantitative Easing (QE-3) and therefore rates will soar higher, causing bonds to fall. But I think there are many ways this could play out. One scenario is triggered because The President isn’t doing so well in the polls, with deficits, with inflation, etc. The Republicans are moving up in the polls by talking about spending cuts, and deficit reduction. What if this is just a political maneuver? What if Bill Gross knows that when QE-2 ends in June, The Ben Bernanke is not going to institute QE-3 right away? What if Obama has said: "The Republicans are blaming all of this on us. They don’t want any more stimulus. Let's give it to them and see what happens?" Now we all know – without QE-3 the economy stops, and at that point Treasuries won't be worth much. I’ll bet that’s the point where Bill Gross starts buying them again. Why - because soon Obama will come back and say: "See, the Republicans said I was doing everything wrong, so we took their approach and the economy is now rolling backwards into a recession. Now, do you see why you need me in the White house?" Immediately yields would crash, bonds would soar and Bill Gross will be a genius.
Let’s dig a little deeper and put some details around their implementation of this. The Ben Bernanke has just 3 more meetings of the FED before the official end of QE-2. Now China, Russia and others have been screaming that they are not happy about what we're doing to the value of the dollar – and if The Ben Bernanke comes out and suggests he's going to keep the QE program in place, they are going to step up their retaliations. It's my guess that Ben will start leaking to us that QE-2 will indeed end – but he’ll change his voice to: "We have various ways to continue a stimulating environment." Remember – Ben didn’t invent Quantitative Easing – he simply took it to a whole new level. When Greenspan took rates so low back in ’02, ’03, and ’04 – that was a form of Quantitative Easing. But now the plot thickens. Remember when I posted the news that the FED was going to change the way they account for their holdings? Up until Dec 24th, if the FED was holding toxic assets it could have gone bankrupt, but, by allowing toxic assets to be offset with "income" from good holdings, they can keep the books steady in "perpetuity." You see, the Fed now has so many mortgage backed securities and notes – that as they mature, and as "some" amount of people continue to pay their mortgages – the Fed is taking in massive amounts of money on a monthly basis. In other words, the Fed can announce that they are not going to expand their balance sheets any further and end QE-2 (sounding marvelous to other countries), but because they’ve changed the accounting rules – sit on the toxic assets, taking in what payments they get, and use those payments to continue to buy 2 and 10-year notes. How much are those payments – you ask? Approximately $600B – which is just about the level of QE-2!
Now that puts a question out there, how will the market react when they announce the end of QE-2? Well – again, the devil’s in the details. The next FED meeting is the 15th. I'm pretty sure they will nod to each other that QE-2 must end in June. That "should" be the pill that pulls the market down, and commodities, materials, and stocks should come down on those announcements. But big time bankers know what The Ben Bernanke is going to do – which is to use the interest/payment income to do QE-3 just without announcing it. So, it’s my prediction that the big time bankers would be loading up on market shorts via the dark pool programs, and then do a major market rug pull. The ‘rug pull’ would be easy to justify, and they would tell everyone that due to the end of QE-2, and no subsequent plans for QE-3, we have to be much more cautious. All of the people bidding up commodities and materials may flee too – thinking that inflation will be subdued because of the end of QE-2 (this includes gold and silver.) And being a good banker – once everything pulled down substantially, I'd be actively buying the very commodities, materials and stocks (and gold and silver) that I just sold. Why? Because it would be easy to come out and say "Hey, The Ben Bernanke is still doing just as much as he did during QE-2, but he just didn’t announce it!" Instantly the market would soar and everything that had pulled back would soar along with it. We will know if this is the plan, if we hear everyone talking about the end of QE-2 ‘being official’ with no concrete plans to do QE-3. If my guess is correct - this could be more like a 20% correction, and then sometime in the fall, after buying up everything that fell – The Ben Bernanke comes out with a statement about how they're actually doing QE-3 Lite and we get our final hurrah run up into year end.
The market’s actions lately coincide very well with my theory. After setting that high back on February 18th, the market has done a lot of nothing but chop sideways and down, literally making lower lows and lower highs. We've seen gigantic mood swings as they've dropped us 228 points, rallied us 150 points, etc. – but those types of incredible moves are normally indicative of the market being close to making a big move, or a direction change. Yes – on Friday – the Government’s PPT (Plunge Patrol Team) stepped in to save the day and get us back up over 12K and the 50 day moving average, but where did we end – 12,044. Until we break under DOW 12,000 or over DOW 12,400 we’re still in a “danger zone.” I think we're going to get that correction we've been missing and I think it's getting awfully close. Or they don’t announce anything and continue to push us sideways.
Our long holds looking like: SLV, NG, AAU, DNN, AVL, and USSIF. Even with the one day gold and silver raid last week – we held through it.
In our short-term holds we have:
N, SLW, FRG, QSURD, NGD, PAL, AUGT, EXK, SVM, and AGRO.
We haven’t done much other than small day trades over the past several weeks – mostly due to market chop. We mentioned some shale drillers last week - Approach Resources (AREX), GeoResources (GEOI), and Gulfport Energy (GPOR) – however, did not purchase as of yet – and all are between 10 and 15% cheaper now than a week ago!
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Until next week – be safe.