What Money Goes Around Comes Around
Peter is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
2012 has been feeling an awful lot like 2008 to me for most of the year. We've seen a peak in Gold (NYSEMKT:GLD) and commodity prices, exemplified by crude oil pushing towards $110 per barrel in late February. In 2008 we had another commodity and gold price spike that resulted in the destruction of Bear Stearns, their buyout by JPMorgan (NYSE: JPM) and a subsequent 30+% drop in commodities across the board. This was the result of Fed monetary policy in the same way that policy shifted on a dime on February 29th of this year and gold, approaching a secondary peak at $1,800 per ounce, was sold without prejudice, dropping more than $100 that day.
Oil prices had stalled in the two weeks previous as President Barack Obama did his best George W. Bush impression and held a press conference vowing to go after evil oil speculators.
We are now looking at a similar situation brewing in gold and oil and it is due to a toxic mix of foreign policy maneuvers, central bank machinations and capital flight from the West. The reason for the crisis then was the first stage in the breaking of the international monetary system. It was fomented by Fed Chairman Bernanke naively thinking he could pull back on the monetary spigot after Greenspan’s drunken orgy post-9/11 and not bust the economy built entirely on a housing expansion whose foundation was made of digital and not concrete money.
While the parallels are unmistakable (tight Fed monetary policy, volatile commodity and gold prices and a rising stock market) there are differences that make this situation even more worrisome than 2008.
We have had four years of countries around the world divesting themselves of their need for U.S. Dollars to facilitate international trade. The U.S. banks are profitable only because of accounting gimmicks as they drain their loan-loss reserves, $1.77 billion by Bank of America (NYSE: BAC) in the past quarter alone. At the same time, they are now open to more litigation risk than they were even just two years ago over the robo-signing fiasco with the rigging of the LIBOR. MacQuarie valued that risk to the 19 banks potentially involved at $176 billion, and frankly, the number could easily be multiples of that when one factors in the $500 trillion in interest rate swaps and derivatives that are linked to LIBOR, which has been massaged 5 to 10 basis points over the last four years.
But, the real worry at that point should be the flow of dollars that has to be soaked up by the Federal Reserve as China and other major trading nations have signed bi-lateral trade agreements to use their currencies and not the U.S. Dollar to buy and trade oil. At the center of this are the U.S. and the E.U. putting massive economic pressure on Iran to halt their nuclear program, which is but a cover for trying to maintain complete control over the flow of dollars through the oil markets. China, Turkey, India and now South Korea are working with Iran through barter and indirect payment methods to skirt the expulsion of Iran from the SWIFT payment system. This has withdrawn those Dollars from the flow of the oil trade and, in order to maintain the exchange rate of the U.S. Dollar and attempt to crash the economies of their rivals, namely the BRICS, the Federal Reserve tightened monetary policy.
This created extreme worry over Europe pushed trillions of Dollars into U.S. and Japanese Treasury securities across the yield curve allowing the mopping up of excess Dollars to occur. This excess supply of Dollars is also why the SPDR S&P 500 ETF (NYSEMKT:SPY) and the Dow Jones Industrials have been steadily grinding higher on ever lower volume. The money has to go somewhere. It pushed into Treasuries creating record low rates, similar to the extreme fear that occurred after the fall of Lehman Bros. in 2008 as well as high grade corporate paper and is recently begun putting a bid under higher yielding U.S. equities.
With the Fed now engaging in normal repo operations, that may be a signal that they are beginning a period of loose monetary policy, if so that would be very dangerous in light of the recent and rapid drop in U.S. Treasury prices from their late July highs, which means that the fear trade that was sopping up excess liquidity is no longer functioning and that the Fed has stopped buying the long end of the yield curve, known as Operation Twist. The latest 10 year auction was one of the worst in history, after being one of the best the month before.
I don’t see at this point where the Fed has the room to do this and accommodate the banks if they are in need of more capital injections and relief from their deteriorating assets. JPMorgan’s restatement of their earnings is a symptom of this problem, erasing another $459 million from last quarter’s bottom line.
The signs are everywhere that the Dollar is under ever increasing stress, even though it has looked invincible since March. It looked that way during the summer of 2008 as well. And we know what happened then.
PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America and JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.