Commodities and Resource

The Monarchs of Money: Central Bank Control

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In this week’s letter, Ivan Lo talks about the recent market events, global yield levels, NYSE margin debt levels, what to expect in May trading, how gold physical is up while paper prices are down, how gold is now being considered for legal tender in yet another state, and why he believes certain silver companies are due for a run. Featured Video: The world’s central banks have printed unimaginable amounts of money in recent years. Neil Macdonald explores what this means for the global economy and for your financial well-being.

[youtube height=”326″ width=”580″]http://www.youtube.com/watch?v=7T_VxdLJdDU[/youtube]

Dear Readers,

On Friday, both the Dow and the S&P soared to new highs.

The S&P soared past 1615 thanks to a major short squeeze, before being brought back down just under 1600 by the algo-softwares. The Dow climbed passed 15000 for the first time.

Even the transports were strong.

There’s been a lot of strange activity in the stock market over the past few weeks, with much of the climb fuelled by euphoria more than fundamentals.

The price action of the N. American exchanges has been very confusing, but characterized by a broadening formation. Take a look at the S&P:

broadeningformation

Just when it looks like the market is turning downward, something immediately turns it around — crushing shorts and causing a massive short squeeze in the process and sending the market to new highs.

Conventional technical analysis says that once you take out a significant low, it means you go lower. But in broadening formations, seen in the above chart, what happens is that you make lower lows, but also higher highs.

Worldwide Euphoria

US stocks aren’t the only ones making new highs. Europe has finally moved to new highs, while Japan’s easily predicted run continues.

Back on March, I said:

A lot of economists say the risks for investing in the Japanese markets are too grand given the nature of Japan’s economy. But I am going to say the same thing I said about the US markets last year: The Japanese markets will continue to make new highs — despite the recent run up.

The Nikkei is at a four-and-a-half-year high, while the yen is at a three-and-a-half-year low. The correlation speaks for itself.

Never make short-term bets against an entity that can print unlimited amounts of money. Unless you’re short the currency, that is…

After many inquiries on strategies how to play Japan properly, I suggested:

If you’re looking at Japan ETFs, I prefer ones that hedge against the yen while providing exposure to Japanese equity markets, such as WisdomTree’s Japan Hedged Equity Index (DXJ) or the MSCI Japan US Dollar Hedged Index (DBJP). These two ETFs provide great exposure to Japanese equities but also benefit from a declining yen; it’s like a double whammy of betting on Japanese equities while shorting the yen against the dollar.

Since both of those letters, the Nikkei has climbed and the yen has fallen.

Stocks are making new highs everywhere around the world.

The culmination of low interest rates and money printing has forced global yields to practically nothing, forcing safe haven investors to look towards equities for better returns.

As I tweeted last week, Global yields on $20 trillion worth of government securities is now less than 1 percent:

Those looking for safe income investing are no longer able to find safe income investments.

I talked about this many times over the past few years:

… In short, interest rate drops when money is printed. This leads to lower bond-yields, which in turn should alter how investors value equities relative to the fixed-income market. When long-term bond yields can’t keep up with inflation, and thus is losing value, fixed-income investors have to eventually rebalance their asset mix towards equities in order to maintain their current allocation.

By incentivizing fund flows into the equity market, stocks rise. This boosts wealth and should make consumers, who now feel richer, spend more.

2013 is already shaping up to be a record-breaking year. Both the DOW and the S&P have made new all-time highs.

But they’re not alone. Guess what else is breaking records?

Central bank money creation.

2013 will mark the biggest year for global central bank printing.

Self Destruction

Yes, the U.S. is destroying itself with the amount of money they’re printing, and you may hear a lot of white noise about a potential bond bubble. But I can assure you it’s not just the US fighting to prevent that from ever happening.

The world is intertwined with the dollar.

As I mentioned in a previous letter, the world’s four biggest developed-market monetary authorities — the Fed, the European Central Bank, the Bank of England, and the Bank of Japan — are now all aligned in their money printing/inflation-inducing policies.

2013 will see the biggest money injection the world has ever known, and its all being done with the lowest worldwide interest rates anyone has ever seen.

Those that cannot afford to print have had to cut rates just to keep up. India just cut rates. Australia just cut rates. Everyone is cutting rates.

If the world’s financial system were to collapse at the heels of the dollar, countries heavy in resources and energy will become a ruling power. Russia, anyone?

The only way out of this mess is to gradually increase inflation without spooking the dreaded hyperinflation.

You may ask yourself, “With the amount of money already printed, why isn’t inflation higher?”

As I mentioned last year in the Dramatic Drop, CPI inflation can only occur when money is being spent; right now, it is not:

Because while the Fed can print as many dollars as they want, they cannot control how the dollars are used once it enters the system. Inflation can only occur when money is being spent. We call this the velocity of money.

…The velocity of money measures the rate at which money flows through an economy, in other words, how much money changes hands; it has to do with the amount of economic activity associated with a given money supply. It’s also is a key input in the determination of an economy’s inflation calculation.

…the velocity of the MZM money stock is now at its lowest level since the currency crisis of the 1960s that led to the end of Bretton Woods System in 1971. The last time we witnessed such dramatic drops in money velocity? The Great Depression.

In theory, when the economy finally heads towards the path of growth, that’s when the velocity of money will finally begin to turn.

In reality, there is simply too much money in our system now to ever return to a strong money velocity ratio without spurring massive inflation in the process. There is simply too much money in the system…

If there is so much money in the system, why are American citizens and others around the world so broke and jobless?

Where is the money?

The Monarchs of Money: Central Bank Control

In a fiat system, money is controlled by the central banks. These central banks have printed unimaginable amounts of money in recent years, making the wealthy, wealthier and the poor, poorer.

While basic consumer spending show minimal growth, high-end luxury items, such as million-dollar paintings and exotic sports cars, are rising dramatically.

Sales in the U.S. for Porsche cars have never been higher, with Porsche selling more in 2012 than ever before, and nearly doubling its sales since 2009.

This is all as a result of the central bankers who control your lives.

Take a look at the brief documentary below on the reality behind the world’s most powerful (and real) cabal:

click to play Monarchs of Money
click to play

Sell in May?

Historically, May has been a horrible month for US stocks – especially over the last three years, where May has lost on average around 5%.

Generally, we see a massive spike in the VIX in first week of May, but we haven’t seen it this year. Even when the market appeared to turn downward earlier in the week, that downward momentum was immediately shifted up and we shot past 1615 on the S&P.

Normally I would make a call on which way the market is headed in May, but not this time – not just yet. While we should be taking a step back after breaking new highs, I have to consider that worldwide central banks are continuing to cut rates while record money sits on the sidelines.

Furthermore, as rates continue to get cut worldwide and remain at record lows, income/bond investors will need to put their money in places that are showing real returns.

I think bonds in the short term still make sense (not so much a few years from now), while risk assets such as stocks don’t look as promising anymore.

Punish the savers and reward the spenders. The central banks are doing their job.

However, despite the euphoria created by the Banksters, we have to take note of one disturbing fact: The NYSE margin debt level is now nearing record-high territory .

NYSE Margin Debt Levels Near High

Margin debt amounted to $379.5 billion in the month of March. The highest margin debt amount previously was $381.4 billion back in July 2007. That means the amount of money people are borrowing to buy stocks are now back at pre-2008 levels.

I would say that we still have some time before we reach a dramatic turn to the downside — as more investors turn their deposits into risk money — but I would caution diving in too deep.

NYSE Margin Debt Nears Record
click to play

We’re now in a situation where shorts will likely pile up, as a result of the market being at such a high. Shorts could use May as a way to bring out the short term bears. However, if the bulls take over, shorts will be scrambling to cover, sending the market even higher. This is a dangerous time to be making big bets.

If I had to make a call, I would say May ends even.

Paper Gold Down, Physical Gold Up

While gold holdings in exchange-traded products plunged 174 metric tons last month — the biggest drop ever –physical gold demand continues its surge worldwide.

The Perth Mint, which refines almost all of the nation’s bullion, said that demand jumped to the highest in five years in recent weeks and that they had to keep their factory open through the weekend to meet orders.

According to Jason Toussaint, the managing director of investments at the London-based World Gold Council, buyers in Australia were waiting in lines of half a kilometer long just to get minted coins.

The U.S. mint said April 23 it suspended sales of coins weighing a 10th of an ounce after demand more than doubled from a year earlier.

Demand for the physical metals have now also pushed physical premiums in the Middle East region to levels not seen in years.

The World Gold Council estimates that central banks are expected to surpass last year’s purchases of 534.6 tons last year (which already is the most since 1964), by buying more than 550 tons this year.

While central banks continue to print record amounts of money, they also continue to buy record amounts of gold; trading their printed money for gold. Think about that…

More Legal Tender

I have wrote many times before that numerous US states are trying to pass into law to allow gold and silver as legal tender. Arizona has now become the second state to do this.

This Tuesday, the Arizona Senate approved a measure to make gold and silver legal currency in the state.

From Yahoo:

…The bill calls for Arizona to make gold and silver coins and bullion legal tender beginning in mid-2014, joining existing U.S. currency issued by the federal government.

If signed into law, Arizona would become the second state in the nation to establish these precious metals as legal tender. Utah approved such legislation in 2011.

More than a dozen states have considered similar legislation in recent years, according to the National Conference of State Legislatures.

…The push to establish gold and silver as currency has become increasingly popular in the United States in recent years among some hardline fiscal conservatives, with the backing of groups including the Tea Party movement, American Principles Project and the Gold Standard Institute.

Keith Weiner, president of the Gold Standard Institute advocacy group and a supporter of the bill, said the legislation was needed to counter what he sees as insolvency in the global monetary system.

“The dollar system and all of the other derivative currencies, including the euro, are a recipe for worldwide bankruptcy,” Weiner told lawmakers at an earlier hearing, adding that a “sound and honest money system such as gold and silver” was needed to bring stability.

The Silver Spoon

Between gold and silver, silver is the one with the greatest risk/reward proposition. The chances of silver climbing 25% are a lot higher than the chances of gold climbing the same amount.

There are a lot less publicly traded silver miners in the world than there are gold. With one of the greatest panics in precious metals in the last 30 years having just occurred, but now showing strong support, I think that silver stocks – ones in production – may soon see a strong reversal.

I have been looking at many silver stocks over the last few months waiting for that time to strike. That is why I have yet to add any company this year to the Equedia Select Portfolio — despite nearly half the year having gone by.

However, I think it may soon be time and I am beginning to finalize my research on a silver company I believe to have major upside given its corporate outlook.

In the history of the Equedia Letter, I have never presented a silver company that didn’t show my readers the opportunity for great gains. As far as silver companies go, I am batting 1000%.

Stay tuned next week for my report.

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Until next week,

Ivan Lo

Equedia Weekly

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Comments (8)
  1. Michael H says:

    Keep up the great work…fantastic newsletter

  2. Mark lee says:

    The only thing real about Fort Knox is the building. There’s nothing inside those vaults.

  3. harry wilmott says:

    Keep up the excellent work very fascinating report, thank you

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