It has been 2 months since I last had a chance to respond to reader comments. This seems like a good time to pause and take the opportunity to do so again. Keep them coming!
Today, since I’m in a contrarian mood, I thought I’d focus on ever-so-kindly replying to people who don’t see eye to eye with me…
I really enjoy these exchanges. They get my creative analytical juices flowing, and force me to consider alternative viewpoints which I may not have done initially.
In fact, the more rebuttals I write, the kinder I feel! Which is why I’ve decided to report a special gold opportunity today (continuing our prickly theme with an investment that is the very definition of contrarian right now).
More on that below (or you can skip my introduction and go straight here.)
But first, let’s jump into the ring with some of my most outspoken critics, the friendly commentariat on Sure Money and Money Morning.
We’ll start with Michael, who, it turns out, agrees with me even though he doesn’t know it.
Michael: First I would like to correct a part of your article. A recession is NOT 2 qtrs in a row of declining growth. Your statement implies that if in qtr 1 GDP is 2.6 % and in qtr 2 its 2.0% it would mean we are in an official recession. This is NOT correct. A recession is 2 qtrs in a row of NEGATIVE growth. e.g qtr 1 GDP is -1.0% qtr 2 GDP is -.5%. That would be a recession
Lee: Just to set the record straight, here’s the only mention I made in that post in reference to the definition of a recession. “Officially it takes 2 quarters in a row of falling GDP for the NBER to call a recession.” Apparently, Michael and I were in agreement from the get-go.
Glenn, on the other hand, challenged me with something that I didn’t quite say precisely enough to make clear.
Glenn: Good article. You said that with QT there would be another 10 billion removed every month until October when it would total 50 billion. October is 8 months away. Could you restate and revisit the math. Trying to understand it correctly. Thanks.
Lee: I definitely could have done a better job spelling that out instead of “The rate of withdrawal doubled in January, and will go up by $10 billion per month every quarter until it hits $50 billion per month in October.”
Buried further down in the post, I broke it down-” The schedule calls for the Fed to take $30 billion per month out of the banking system in April, then $40 billion in July, and finally $50 billion per month in October. By the end of the year the Fed will have withdrawn $450 billion from the banking system.”
So the monthly drain will increase by $10 billion in April, July, and October.
James and I disagree on a much more fundamental level – but that just makes things interesting.
James: Lee, the massive deficits are fueling strong economic growth. That means companies will report strong year over year earnings gains. Beating the street by a wide margin won’t cause stocks to go down. You’ll have to learn the hard way.
Lee: I’ve been watching markets for 50 years. I have observed that analyst estimates seem to follow stock prices. I have observed that stock prices move in the direction of liquidity. Economic data and corporate profits also move in the direction of liquidity. Stock prices, corporate profits, and analyst estimates are corollaries. Liquidity is the driver.
Central banks tighten monetary conditions when the economic news is good. That’s why good news is bearish and bad news is bullish. Liquidity – money – is the driver. Money is the fountainhead.
The tax cuts require more government borrowing. That additional borrowing pulls money out of the financial markets and yes sends money into the economic stream. I agree that the economic data could be very strong as the year goes on. But the money must come from the financial sphere at the same time as the Fed is also pulling money out of the system.
In fact strong economic data will encourage the Fed to possibly step on the brakes even harder. Remember, markets top out when the news is good because that’s when the Fed pulls the punchbowl. The stronger the numbers, the more the Fed worries about overheating and inflation.
Most analysts are telling you that tax cuts are bullish, including some for whom I have the utmost respect. You will place your bets according to your own belief system. I believe that massive tax cuts adding to Treasury supply at the same time as the Fed is pulling billions and billions from the market is as bearish as it can get.
We will know one way or the other later this year.
Barry: Or, as James would say:
Step 1: Print money
Step 2: Buy stuff
Step 3: Repeat until RICH!
Lee: Now, now! We mustn’t be cynical.
And then we have Pat, who has been getting his information from all the wrong places….and John, who is doing a little too much speculation.
Pat: I heard per Nanex that Yellen dumped all $20 billion of bonds in one day in the market on her way out the door causing the market correction.
Lee: Not sure what “dumped all $20 billion worth of bonds” means. The Fed isn’t selling bonds at all. It is redeeming them as they mature. Even if the Fed were selling, a $20 billion sale would be enough for a couple of downticks, not a crash of the proportions that we saw then.
I think the less attention paid to unsubstantiated, and usually ridiculous, rumors the better. The February plunge was caused by a liquidity shortage. It was the first warning shot across the bow.
John: A few questions please. Jim Rickards is talking about the IMP instituting The SDR “basket” of currencies to be used as a means of settling international trade transactions. That doesn’t bode well for the dollar or US bond rates with demand dampened. Have you heard anything about that scenario? If so what effect do you see on the markets?
Lee: This raises another principle of my analysis. I don’t think it serves a useful purpose to speculate about scenarios. Markets respond to changes in the level of liquidity, not to anticipation of those changes. In fact, traders tend to ignore them until they can’t anymore.
And finally, there were a few comments on this post that actually was about the stock market bubble. But it used the 2009-11 gold bubble as an example of what bubbles look like and what happens in the aftermath. Just mention the word “gold” however, and it gets people’s juices flowing.
Vijay was especially curious:
Vijay: Where is the gold going from 1315 to?
Lee: Ah, that’s a good question. And it leads me right to the gold opportunity that Money Morning research director Matt Warder told me about just yesterday. Matt is a very sharp guy who watches markets like a hawk, looking for subtle patterns that can yield big profits in special situations.
As you know, I dive into the Federal Reserve data to expose the real mechanics of how the Fed tries to control the market. However, you may not know that I also track the gold market and gold’s price data very closely (I follow it in the Wall Street Examiner Precious Metals Pro Trader, for those of you who are interested). Yesterday Matt Warder told me about a pattern his team has noticed in the price of gold around the last few Fed rate increases. In each case, the price of gold has increased after a Fed rate decision even though it “should” have gone down.
Why is this important? Well, there’s a Fed meeting coming up where the Fed has put the word out through its Wall Street media handmaidens another rate hike is baked in. If gold follows its own historical pattern it will increase in price immediately after that.
And here’s the kicker. If it manages to pierce its resistance area of $1365-75, that could augur the beginning of a huge bull market in gold.
I know that a lot of you are interested in gold. And many of you believe that it’s about to enter a bull market where it could hit $3,000.
If that happens, there’s a special kind of investment which could multiply your gains on gold. Gold has been forming a huge base for nearly 5 years. When it breaks out, it is likely to be the beginning of the next major bull market upleg.
I want you to be aware of this setup and the potential that it holds before that Fed meeting.
If you’re a gold bull, follow this link to learn how to maximize your profits from a gold price surge.
Note: Questions have been edited for length and clarity.