Just when you thought it was safe to go back into the Fed waters, behold Federal Reserve Bank of Philadelphia President Charles Plosser's almost idiotic statements today. He firmly said that the Fed should begin tapering its $85 billion monthly bond-buying in September and end the "unorthodox" stimulus by year's end. His reasons are invisible to sensible people.
He said risks to the Fed's so-called quantitative easing are growing with the size of its balance sheet, currently at $3.5 trillion. What these "risks" are, he doesn't say. We surely know one is not inflation. It will be "difficult" for the Fed to change course on policy, he said. Why? He didn't say. (Well, getting to the moon was difficult but we did so in 1969.)
The crumb of detail Plosser provided borders on the absurd: "We don't want to create another housing boom," he said, and "we have to be careful of the unintended consequences of our policies."
Let's zero in on this phantom housing boom.
Mike Fratantoni, the Mortgage Bankers Association's (MBA) vice president of research and economics, said that last week refinancing applications reached their lowest level in two years and that the rate remains unchanged. This is due to the uncertainty over continuation of the Fed mortgage and bond-buying program.
According to economists at Contingent Macro Advisors, mortgage activity fell 43.6% over the past two months. (Note that gold fell from just below 1450 to roughly 1200 during this same period on the same Fed miscommunication. Of course, it has recovered somewhat in the last week.)
"Mortgage applications had been on a rising trend over the past 18 months, although there has been substantial week-to-week volatility, but the trend now appears to have topped out and begun a steady retreat," said the broader statement from Contingent Macro Advisors.
The average U.S. rate for a 30-year fixed mortgage rose this week to 4.51%, a two-year high, on rising expectations that the Federal Reserve will slow its bond purchases this year.
Mortgage buyer Freddie Mac stated Thursday that the average on their 30-year loans, a certain segment of the market, jumped almost half a point from 4.29% the previous week. Just two months ago, it was 3.35% - a whisker above the record low of 3.31%.
Mortgage applications shrank for the fourth straight week as interest rates continued to inch up inexorably.
According to the MBA, mortgage applications tumbled 4% last week after plummeting 11.7% the week before. The Market Composite Index, a measure of mortgage loan application volume, decreased 4.0% on a seasonally adjusted basis from one week earlier. Mortgage applications are now about a third below their level from a year ago.
Do these Fed hawks not read the news? We do and resoundingly resent their mischaracterization of conditions, which lead to volatility and make trading of gold, silver and just about everything else very difficult.
Since the last FOMC meeting just three weeks ago, market sentiment has turned - spun is more like it - at least four times.
First, the precious markets turned bearish when Federal Reserve Chairman Bernanke introduced the notion of bond purchasing reductions later this year. They then turned bullish days later when several Federal Reserve members came out to say that stimulus is still viable.
Then the market flipped to bearish again last Friday when solid jobs numbers strengthened the case for stimulus tapering. Finally, markets flopped to bullish yet again this week when the FOMC June minutes were released along with further elaboration from Chairman Bernanke, who stressed stimulus is not going away.
One of Bernanke's statements on Wednesday afternoon caught people off-guard. "If financial conditions were to tighten to the extent that they jeopardized the achievement of our inflation and employment objectives, then we would have to push back against that." Oh, gee whiz. Which is it?
Pushing down rates is exactly what QE3 has been all about from its inauguration.
The FOMC press release, immediately following the itemization of the monthly bond purchases, said clear as a bell, "These actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative."
Here is the most fundamental notion of all fundamentals. When there is not enough money available in the system, growth cannot occur. Recovery cannot be defined as such with 7.6% unemployment and 1.1 to 1.7% inflation. But the Friedman adherents wish that just wasn't so. So they ignore facts and distort normal discourse.
Yesterday, China's Minister of Finance critiqued the idea of the end of QE3. Head of the European Central Bank, Mario Draghi, said an end to QE3 could tip Europe back into recession. However, Europe is being prevented by Germany from creating a mirror of the Federal Reserve, a true co-ordinating central bank whose decisions would be felt by all EU countries and the world.
China has said it will not inject more liquidity into its economy even though it is faltering. Germany, even though its manufacturing sector - chief driver of its economy - is barely on the growth side of major indexes. Great Britain seems to be doing better because it is hitching its wagon to the U.S. star once again. The rest of Europe, especially the marginal economies, are mired in unemployment and stagnation or regression. Japan has stepped up to the plate with stimulus programs.
It is no longer reasonable for China and Germany not to coordinate with the United States. (Thanks for the critique, you guys, but either get in the game or keep quiet.)
No one likes volatility, especially if it is rooted in a poor grasp of fundamental facts and, absent that, rooted in misinterpretations so wrong-headed that a first-year college Econ student can do better.
Meanwhile, not one of the industrial democracies has worked on a real fiscal policy, created a grand strategy for revitalization for the next two decades, or addressed chronic unemployment caused by stagnation. So Keynes is winning the monetary battle but Friedman is winning the fiscal battle.
On Thursday a record was set. The U.S. government posted a huge budget surplus for June - in fact the largest for that month on record at $117 billion. The right wing in the U.S. House of Representatives meanwhile is trying to cut back on food aid to the poor. $6 billion per year. Weigh it for yourself.
What a world. Better re-read "Jaws" while you're on vacation. It may be the sleeper business and economic treatise of the year.
Wishing you as always good trading,
Gary S. Wagner
The best traders and market analysts maintain as much objectivity as possible in order to have the highest level of clarity during the analysis process. However as human beings emotional content can easily cloud even the most objective technical traders. I mention this because our current trade required hard-core empirical evidence and then some before we actually issued a buy signal in gold and silver yesterday. First and foremost we had to see the market not only find a bottom, bounce off that bottom, but have the price point of the low as a significant support level either based upon Fibonacci retracement or straightforward trend analysis.
We receive that information when the market traded to an intraday low of 1185. That was exactly a 61% retracement as gold moved from 700 to over $1900 per ounce. However we needed a second critical piece of information before I could feel comfortable issuing any kind of a buy signal. That was that the market would have to break above a significant resistance level, that being just over 1270 per ounce. This week’s release of the most recent federal reserve FOMC minutes provided the fuel for such an upside market breakout. Today’s video will detail not only the thought process behind yesterday’s buy signal but all of the background and necessary evidence which had to be in place before any call would be made.
Proper Action: Maintain Long gold @ 1285 and stop below 1244 to 1266
Maintain Long Silver @ 20.10 and stop below 1960
Click on chart below to view gallery