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And who are more powerful than Central Bankers? Markets are more powerful than Central Bankers and we should never forget it.

Watch The Markets, Not The Fed

May 8th, 2013 by Kurt L. Smith
  • The Federal Reserve, along with most Central Banks around the world, are creating Cash and Credit at an unprecedented pace in the most ambitious economic experiment of all time.  Yet despite Central Bankers attempts to create Cash and Credit (and hence inflation), the price of Gold fell from over $1900 to almost $1300.

    Nobody likes lower prices, least of all Central Bankers.  Rising prices, from Stocks, to Homes, to Wages, to Artwork, to Gold, you name it, are a sign of progress and growth.  Everyone likes more — it is the natural way of the world. Growth is American!

    Lower prices are indicative of one of two things.  Either the lower prices are temporary, a buying opportunity before the normalcy of higher prices resumes or lower prices are indicative of something being wrong, perhaps very wrong.

    Let’s address the temporary case first.  There was no doubt Gold prices were on an upward torrid pace following a 2008 swoon.  From a $700 low in 2008, Gold surpassed $1900 in September 2011.  So when Gold began to back off in price in 2012 it was a buying opportunity for Gold bulls.

    Central Bankers are people too and they saw the price pullback as a buying opportunity.  And buy they did.  According to the World Gold Council, Central Bankers bought more Gold in 2012 than in any year since 1964, buying 534 tons of it!  I am sure Central Bankers were not alone in their buying either as other Gold bulls saw the buying opportunity as well.  Yet with all this demand, with all this buying, with all this bullishness and a buying opportunity, Gold prices continued to fall.

    Falling prices do not fit anyone’s current economic narrative.  Everyone knows Central Bankers are creating trillions of dollars in Cash every year in an attempt to keep prices high.  And who are more powerful than Central Bankers? Markets are more powerful than Central Bankers and we should never forget it.

    I have spent the years of the Financial Crisis (since 2007 remember) showing you how Central Bankers, led by our Federal Reserve, do not have the power to turn markets.  One may make the argument that Central Bankers failed to muster much response at all to the housing crisis but NOW they have all their energies coordinated to creating Cash, Credit and Inflation for the world.

    The collapse in Gold prices is but the latest evidence of Central Bank’s failure since the advent of Quantitative Easing.  Gold of course is not alone as other Commodities are joining in the worldwide price swoon as well.

    These past years I have counseled patience, patience and more patience. Central Bankers could create all the Cash they want (they certainly have) but it will not be enough to create an environment where prices will not fall.  There is the power of Central Banks and there is the power of the market.  I am placing my money (and my faith) in the market.

    Markets go down as well as up.  There is no doubt additional Cash (and Credit) in the marketplace can and does add inflation to the mix and higher prices ensue.  How much of the Great Bull Market of 1981-1999 was real growth and how much was credit expansion and inflation?  I don’t know.  But when credit is no longer expanding then contraction will occur.

    Central Banks are attempting to make up for what everyone else once did but are now failing to do: borrow money and spend it.  Either we will do it or the government will do it, but bottom-line it must be very important that we keep borrowing and spending.  Whenever faced with a crisis in the past, borrow and spend more has always been the answer.

    My contention going into 2007 has been that Central Bankers have never seen a crisis like this.  I understand they had to do SOMETHING, but make no mistake, the Central Bankers will soon be fighting the market and they are deep in a game they cannot win.

    The market is the market.  Whether you have a home for sale (or several) or Stocks, Bonds, or Gold you will always be selling at the market.  Therefore I believe you should take your cues from the market, not from the Central Bankers.  Let the recent plunge in Gold prices remind you how the Federal Reserve may appear all powerful, they must follow the dictates of the market just like everyone else.

    If Central Banks cannot control the price of an asset that represents an iota of wealth on this planet then what chance do they have with Real Estate, Stocks and Bonds?  I believe Cash is where you should be.  Your patience should be rewarded…rewarded with lower prices.

    Alief Independent School District, TX
    Moody’s: AAA (PSF Enhanced) AA1 Under
    Permanent School Fund Guaranteed
    DUE 2/15 DATED 6/1/13 MATURITY: 2/15/2033
    SALE AMOUNT: $31,740,000

    YEAR MATURITY COUPON YTM*
    0 2013 2.00% 0.25%
    1 2014 2.00% 0.30%
    2 2015 2.00% 0.45%
    3 2016 2.00% 0.62%
    4 2017 2.00% 0.77%
    5 2018 2.00% 0.94%
    6 2019 2.00% 1.18%
    7 2020 2.00% 1.42%
    8 2021 2.00% 1.60%
    9 2022 3.00% 1.78%
    10 2023** 4.00% 1.95%
    11 2024** 4.00% 2.10%
    12 2025** 4.00% 2.30%
    13 2026** 4.00% 2.46%
    15 2028** 3.00% 3.05%
    16 2029** 3.00% 3.10%
    17 2030** 3.00% 3.16%
    18 2031** 3.125% 3.23%
    19 2032** 3.125% 3.27%
    20 2033** 3.25% 3.32%

    *Yield to Worst (Call or Maturity) **Par Call: 2/15/2022
    Source: Bloomberg
    This is an example of a new issue priced the week of 5/7/13
    Prices, yields and availability subject to change

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