Dollar Printing to Follow Renewed Stock and Oil Market SellOff
Wealth Cycles

It is obvious today, after years of first-hand evidence, that money supply and expectations for changes in the money supply--in other words, dollar printing--impact asset prices and investing more than any other factor.

On March 19th we penned End of Covert Dollar Printing Expected to Result in Stock SellOff, making the claim, in the midst of a field of green shoots and sprouts, that sentiment would begin to reflect reality as doubts over further printing became more prominent.

We will look at where we stand today, and the criteria for further printing at this point.

Tyler Durden, our anonymous friend, provides the chart below. We note that the bottom pane (the blue bars) illustrate average trade size. What we can observe (bottom green circle) is that those with the capability of larger trades sizes, executed at the highs. We alerted our readers of the erroneous excess in sentiment, and therefore an opportunity to reposition from stocks at the highs, into savings, rather than an investing-mode as the storm approaches. A stance we maintain.

We have made the argument that this year, as in the prior two years, price is determined by incremental central bank easing rather than normal market forces. Without new printing, the future outlook for businesses reverts to the dis-utopian truth of depression, with price fixing and distortion slowing any natural reorganization of labor and raw materials, thwarting the normal healing that would take place in a free market.

Barclays used the popular chart below to illustrate the fact:

We feel this chart illustrates a prominent cycle driven by two factors: the incorrect but initially popular idea that expansion of the money supply predicates economic growth, and that the assets themselves are repriced in "weaker dollars," taking more of the now more plentiful dollars to buy the same asset. The first factor weakens with each iteration as market participants begin to recognize that printing merely rearranges the factors of production.

In the free premium article, Why Buy Gold Now?, we profile in detail the top three reasons to begin saving in real money:

• Loss of the Dollar's World Reserve Currency Status

• Rate at Which Gold is Adopted Defines Demand

• Bankers Fighting Deflation

The last point is that private central banks are compelled to print to save their system. reports where the Federal Reserve (Fed) sees the triggers, quoting Chairman Ben Bernanke in his most recent speech: "It's very important that we see sustained progress in the labor market and avoid deflation risk. Those are the things we'll be looking at as the committee meets later this month and later this summer."

So while we know that Bernanke is very concerned with deflation, moreover, he is concerned with the risk of deflation as he says. The risk of deflation is based around expectations. The expectations of market players drive lending and predicate their behavior, and therefore the future money supply. We remarked in June, after looking at previous statements of Fed presidents, that they would print dollars when consensus was formed that their employment goals would not be met.

Beyond the Chairman himself, other Federal Reserve policymakers have laid the groundwork for a third round of bond and mortgage-backed securities (MBS) purchases. San Francisco Fed branch President John Williams told reporters after a speech in Coeur D'Alene, Idaho:

We are right at that edge, that if economic data keep coming in below our expectations--and our view is we are not making progress on our mandates, or we don't expect to make progress on our mandates--then I think we would need more accommodation

More recently in the Financial Times, Williams added that unless the Federal Reserve eases its policy further, it will make little progress tackling the high unemployment levels before 2014. He pointed out that the argument is not against further action, but centered around the question of uncertainty around the effects, costs and benefits of doing so. Basically, they want to ensure the best way to get a positive response with respects to the timing of and the manner in which printing occurs.

Speaking in Bangkok earlier, two of the Fed Presidents were even more adamant. Per Reuters:

"Additional monetary accommodation is needed to more quickly boost output to its full potential level," Chicago Federal Reserve Bank President Charles Evans told the Sasin Bangkok Forum. "The economic circumstances warrant accommodation."

Addressing the same forum, the president of the Boston Federal Reserve, Eric Rosengren, backed that view, saying he saw slower growth and higher unemployment than most of his colleagues.

"So far data has been coming in weak and I gave a weak forecast myself," he told reporters after his speech. "I think it's appropriate to have more quantitative easing."

Atlanta Fed branch President Dennis Lockhart says it would take "more bad news" for more dollar printing.

As the big banks agreed in June, the market must act as the attack dog, forcing policy makers to react. The confluence of events between terrible economic data, automatic fiscal cuts, and the debt ceiling debate will add worry into the already queasy earnings season in coming weeks. The ongoing European fiscal situation will advance the trend.

In the past, the Fed has felt comfortable printing dollars when oil was under $80. Today we have fallen to just under $90 from the $115 area earlier this year. Deflation is running at roughly $100 billion a month, and the consumer price index (CPI) came in near 0%.

We maintain that now is a prudent time to save, rather than to invest, as we watch the dark clouds form. The manner in which you save should be diversified, with silver, gold and dollars held outside of the banking system the mediums of choice. Adding to your "stack" of silver and gold coins will prove prescient as new dollar printing ensures that it will take more weaker dollars to exchange for money that can not be, like the dollar, conjured from thin air.

wealthcycles.com