The FOMC’s Garbage Grinder

The fact to take away from this is the higher the Federal Reserve’s holding of US Treasury Debt becomes (Blue Plot below), the larger the “injection of liquidity” into the financial system (chart above) is required to counter deflationary trends in the markets.  This growth in the Federal Reserve’s balance sheet is why a dollar of QE in 2020 doesn’t have the same economic impact as it did in 2009.

The “policy makers” understand this perfectly, as explained by Doctor Bernanke; the Father of Quantitative Easing, in November 2002.

“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.  Of course, the U.S. government is not going to print money and distribute it willy-nilly……..”

- Ben S. Bernanke, Federal Reserve Board Governor, November 21, 2002.

How long before this massive loss of purchasing power for the dollar be translated into consumer goods prices, gold and silver bullion, as well as share prices for their miners?

Sometime in 2021 to 2024 (the next presidential term), expect a weekly “injection of liquidity” of over a trillion dollars in an effort to prevent a meltdown in the stock and bond markets, and one trillion dollars may prove to be insufficient.

"A billion dollars isn’t what it used to be."

- Bunker Hunt; Congressional Testimony on the Hunt Brothers’ 1970s silver market manipulation.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 687\Chart #4   Fed Bal Sheet.gif

Stepping aside any reference the FOMC has to the stock and bond markets; just looking at the Federal Reserve’s balance sheet above is alarming for what its impact on the US dollar’s purchasing power is going to be in the not too distant future.

The Dow Jones in daily bars below is looking good.  It’s been crawling upward since early November; however I don’t think that will continue for long.  Whether that implies the Dow Jones is about to make a big break out to the upside or begin deflating down to lower levels I don’t care to guess.  But if the Dow Jones began 2021 with a big break out, that would be fine with me.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 687\Chart #5   DJIA OHLC.gif

The Dow Jones 200 count (Red Plot below / number of days of extreme volatility in a 200 day running sample) is finally coming down.  It peaked at 51, but closed the week at 43, and will soon collapse to much lower levels as the Dow Jones 2% days from last winter’s market meltdown are removed from the 200 day sample in the next two months.

Bull markets on Wall Street are always low volatility affairs.  Seeing daily volatility so low now in the market, where a 1% move in the Dow Jones from one day to the next is a big move, is a very positive indication that for the foreseeable future the stock market is going to be going up.  

Maybe we won’t have any big problems in the stock and bond markets until once again the Dow Jones begins seeing those dreaded days-of-extreme volatility, days the Dow Jones moves +/-2% or more from a previous day’s closing price.

C:\Users\Owner\Documents\Financial Data Excel\Bear Market Race\Long Term Market Trends\Wk 687\Chart #6   Dow Jones & 200 Count.gif

Increases in volatility are never good for the stock market, but can be for gold and silver.  So, rising volatility in the stock market signals the market is being deflated, while rising volatility for gold and silver signals these markets are making big moves that could be either up or down.

Below I’ve plotted the volume of days of extreme volatility for gold by year going back to 1970, or days where gold moved more than +/-3 from a previous day’s closing price.  One fact that stands out is how market volatility for gold was much greater before the mid-1980s.  Why would that be?  Market manipulation in the gold (and silver) market has increased greatly since 1980; looking at annual volatility below strongly suggests that.

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Disclosure: None.

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