The Perpetual Motion Scam
Tuesday, December 22nd, 2009By Adam Lass, Senior Editor, WaveStrength Options Weekly
Précis: The Fed’s Trillion-Dollar Bomb is guaranteed to push up this asset 95% over the next few months.
Does this whole Federal Reserve/Treasury note debacle have you a tad confused? Don’t feel too bad about it. Because you’ve got some 10 million fellow investors banging their heads on their desks right along with you.
Most every financial editor and cable news talking head has spent the past few days “explaining” what just happened, and most folks are more confused than ever. Cross-eyed. Hornswoggled!
The evidence? As I sit to write, the markets are actually lower than before Bernanke leaned out the window of his ivory tower on Constitution Ave. and pronounced that he would invent a trillion new dollars from thin air.
Washington’s Idea of a Joke
There are several interesting ideas to be gleaned from all this.
First off, it is mightily amusing that the Marriner S. Eccles Federal Reserve Board Building is located on Constitution Ave., seeing as how that particular document makes no mention whatsoever of that particular institution.
Okay, perhaps “amusing” is not the right word. How about “bitterly ironic?”
The Road to Ruin
Second, regardless of whether it was just, safe or even sensible, the Federal Reserve has been a major force on the markets for the better part of the past few decades. When I was a mere pup, perhaps six or seven people outside of Washington, D.C., even knew the name of the Fed Chairman. And they all worked for the Financial Times and The Wall Street Journal.
I think it’s fair to say that Paul Volcker was our first central banker to even begin to intrude into the public consciousness. But it was Alan Greenspan who became the FOMC’s first celebrity chairman.
Problem is, Greenspan’s very public nature may very well have poisoned the U.S. stock market. That’s right, it might not even be what he did so much as the fact that he did it so loudly that has brought us to ruin.
The Worst Reasons in the World
Under his regime, no investing fact could be accepted at face value. Let’s say for a moment that Wall Street announces tremendous profits across the board. Everyone is making money hand over fist. Prior to Greenspan, that would be considered a great reason to buy stocks.
Sounds rational enough, doesn’t it? American companies are making money, so you should kinda want to own them?
But after the arrival of our very own Rock-God Banker, announcements like that would trigger sell-offs – because now the Fed would raise its short-term bank rate. On the flip side, a slew of quarterly losses were a great reason to buy stocks because every taxi driver and sewer worker from here to Paducah just knew for a fact that now “rates” would go down.
Rewarding Incompetence
This change was no accident. Rather it was the deliberate policy of Alan Greenspan’s Federal Reserve to act as a break against any sizable market movement in either direction.
It also introduced an illogical toxin into America’s bloodstream. Post Greenspan, failure became the only reason to buy while the only sane reaction to success was to sell immediately.
Quality and value automatically represented their exact opposites. Is it any shock then, that we now find ourselves giving million-dollar bonuses to the riskiest players on the block? (Heck, we even keep giving them bonuses after the damage is done.)
More Dollars = Less Wealth
But now, suddenly, things are different. Now we have Alan Greenspan’s successor at the helm of our semi-independent central bank, a gray man who can’t seem to affect the market no matter what he does or says.
I’ve occasionally wondered if perhaps Ben Bernanke’s goal was to rescue the country from this poison by returning the Fed to obscurity. Seriously, the FOMC just announced that it would leave rates at zero for the foreseeable future, and also dump a trillion brand new dollars on us… and the market went down.
Or maybe, just maybe, folks have finally caught on to the whole scam. Could it be that most every investor out there finally understands that that banks – regardless of delusions of grandeur – simply cannot create wealth simply by printing money?
Perpetual Fraud
It’s like the old 17th century dream of perpetual motion, wherein water falls on a wheel, which in turn both powers a mill and pumps the same water back to the top of the machine so as to perform the whole cycle again and again, ad infinitum.
And just as the laws of physics prevent these machines from actually working, the laws of economics state that we can’t bring trillions in genuine new wealth into the system by buying trillions of dollars’ worth of our own bonds.
In the end, more dollars without more GDP simply means weaker dollars, each one capable of doing less. And not only the ones they are printing, mind you, but all of them, including the ones you are holding too.
The Return of an Old Arch Enemy – and a New Opportunity
It’s called inflation, folks, and we are already seeing it reappear in the nooks and crannies of the system. Producer prices are starting to climb again, as are consumer prices. And as in the beginning of most every inflationary cycle in recent memory, energy is leading the charge.
Which brings us to the third and final idea for today’s column. Crude futures set a double bottom last December and this February. Now the move through $50 has confirmed the breach of the 12-month falling trend. The next marker in the new upside trend will be a return to the previous “normative” of $95/barrel by next December.
This 95% price increase offers traders numerous opportunities to offset the penalties the diminishing dollar will enforce on all. One could simply buy shares of the S&P energy SPDR ETF (XLE:AMEX), and capture most all of this action.
Or you could select your own basket of well-positioned energy companies, and deploy call options against the same, looking to leverage your gains 10-to-1 against the sector as a whole. This is the path I will be recommending to readers in tomorrow’s WaveStrength Option Weekly issue.
Regardless of whether you go long oil, or gold, as has been mentioned repeatedly by Justice and me over the past few weeks, or simply short the dollar via such funds as the Powershares Short Dollar ETN (UDN:NYSE), you simply must act soonest to guard against the Fed’s depredations.
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