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The News, the Spin, and the Reality of the FOMC Meeting

Friday June 21, 2013 12:41

The collapse in the markets today has not been pretty. This article will focus on the news provided by Bernanke that preceded today’s market anxiety. We’ll also look at some factors that may explain today’s market interpretation as well as look through the spin to find a glimmer of reality.

The News
The Fed cuts its forecasts for 2013 GDP, unemployment and inflation
2013
• Sees 2013 at 2.3-2.6% compared to 2.3-2.8% prior
• Sees 2014 at 3.0-3.5% compared to 2.9% to 3.4%
• Sees 2013 unemployment rate at 7.2%-7.3% compared to 7.3%-7.5%
• Sees 2014 unemployment rate at 6.5-6.8% compared to 6.7%-7.0%
• Sees 2013 PCE inflation at 0.8%-1.2% compared to 1.3%-1.7%
• Sees 2014 PCE inflation at 1.4%-2.0% compared to 1.5%-2.0%

The Spin
Bernanke says:
Inflation has been below objective ‘for some time’.
If the incoming data are broadly consistent with forecasts, the Fed would moderate QE later this year.
Bernanke says ‘fundamentals look a little better’. The reasons he cites as contributors for improved economic growth include housing, less drag from state and local governments, and generally improved financial conditions.
Bernanke further explained that the economy is growing solidly despite the economic effects induced by sequestration and he downplayed the effect of higher mortgage rates on consumers.
Finally, Bernanke thought the unemployment threshold, if adjusted as a target, would be adjusted downwards, not upwards.

GoldTrends Overview

The Reality

Bernanke Point #1

Inflation has been below objective ‘for some time’.

Let’s give Ben credit (put intended). This one he is correct on. The Fed has not been able to do their job when it comes to inflation as the chart below shows. (Yes, I know the core inflation number is not the real rate of inflation).

Core Inflation

Bernanke Point #2

If the incoming data is broadly consistent with forecasts, the Fed would moderate QE later this year.

As you will see in the following chart, there will be no need to moderate QE because it has done next to nothing to improve our economy. Let’s look at the velocity of today’s money with this chart from the St. Louis Fed:

Velocity of Money

The velocity of money is what causes inflation. Does Bernanke’s massive mission of printing money (QE) appear to have improved the outlook for inflation?
Bernanke Point #3

Bernanke says ‘fundamentals look a little better’.

US Economy

  • IBM is going to lay off 6-8,000 employees world-wide.
  • CAT will lay off one third of its workers in Wisconsin."With lower orders from mining customers, we must take steps to bring production in line with demand."
  • Chrysler plans to freeze salaried employee's pensions in an effort to limit liability." On Friday Chrysler announced plans to freeze pensions for 8,000 salaried employees at the end of the year, joining a growing group of companies seeking to limit the amount of money they have to set aside now for future retirees."

Global Economy
Even the International Monetary Fund (IMF) has now revised its forecast for German economic growth down sharply. We have been warning that during 2013 Europe will turn NEGATIVE on its GDP growth. The IMF now sees major risks that the German economy is not recovering and that Germany should abandon austerity.

Bernanke Point #4

Bernanke expects better growth in the housing market, along with less drag from state and local governments and better financial conditions:

Housing

As many as 90 percent of REOs are withheld from sale, according to estimates recently provided to AOL Real Estate by two analytics firms. It's a testament to lenders' fears that flooding the market with foreclosed homes could wreak havoc on their balance sheets and present a danger to the housing market as a whole.

Online foreclosure marketplace RealtyTrac recently found that just 15 percent of REOs in the Washington, D.C., area were for sale, a statistic that is representative of nationwide numbers, the company said.

Some of Detroit's creditors are asked to accept pennies on the dollar. "Deep cuts alone cannot save Detroit thus painful sacrifices must be shared. The proposal includes an offer that amounts to less than 10 cents on the dollar on some of the city’s unfinanced debt obligations."

Local Governments

MarketNews International (Jack Duffy): “France and Germany are on a collision-course with the European Commission as EU leaders approach a crucial summit that could decide key questions about the future of the Euro zone. With leaders scheduled to meet in Brussels on June 27-28 to decide details of the EU's proposed banking union, the Euro zone’s two largest economies are determined to ensure that final decisions over when and how insolvent banks are shut down remains with national governments.
The Commission is putting forth its own plan to consolidate such power in Brussels. ‘There is a real confrontation here,’ said Zsolt Darvas, research fellow at… think tank Bruegel. ‘While it may make sense to do this at the European level, nothing is going to happen without the participation of France and Germany,’ he said.”
Bernanke Point #5

The economy is growing solidly despite the sequester and Bernanke downplays the effect of higher mortgage rates on consumers.

Do we need to say more that what the chart already says?

Real GDP


Bernanke Point #5

If the unemployment threshold is adjusted as a target, it will be downward, not upward.

Unfortunately, the real figures reveal a much scarier statistic.
"The employment-to-population ratio is the best measure of labor market conditions and it currently shows that there has been almost no improvement whatsoever over the past three years," Paul Ashworth, chief North American economist for Capital Economics, writes in a note to clients obtained by CNN. That figure, which accounts for the proportion of working Americans compared with the number of adults in the country, is a lot higher than 8 per cent.
For now, 58.7 per cent of American adults are working if the actual employment-population ratio is taken into consideration, leaving about 82 million, or almost 41 per cent of people unemployed. Only 8 per cent, however, are even interested in work, leaving 33 per cent of Americans not only jobless undefined but with no desire for work.
"The ratio expresses more clearly how many people find working to be a 'good or attractive deal,'" Tyler Cowen, economist and director of the Mercatus Center at George Mason University, adds to CNN.
Liquidity
GoldTrends has been documenting for a few years and again since just after the beginning of February, saying “The one thing that can bring gold (and everything else down) is another liquidity squeeze.” In February, when the gold stocks began to tank as occurred in 2008, we began saying “Something is wrong here.”
Conclusions

The bottom line is that what we heard from the Fed and what the reality seems to be looks to us like a total disconnect. And as we continue to say, that the evidence to us is that gold needs economic growth at this point in order to rally, and the reason that it keeps selling off is because the situation is looking more and more like a 2008 scenario and this time it’s on a global scale.

All trends remain down in metals at the moment.

GOLD CHART

The first chart has the Fibonacci 38% retracement at 1283. Thus the 1278-1283 area is now first support. The 2011 low at 1307 has been taken out and thus the situation is now in massive selloff. Additional support is the 1250 area next.  The green channel line has 1190 also as a support point.  It takes a weekly close back above 1355-1365 to relieve pressure.

http://www.goldtrends.net/Resources/Pictures/2013/June/Intra%20Day/XgldDaily20Jun.gif


A weekly chart shows long term support lines of 1250 – 1090 and 930. A weekly/monthly close below 1250 activates the next set of channel lines. 
Charts by Coughlin

http://www.goldtrends.net/Resources/Pictures/2013/June/Intra%20Day/GolWklyCougSupportJun2013.gif


Silver Chart

The break in silver has next support in the 18.50 area and the lower line at 14.00.  It takes a close back above 23 to relieve pressure.
http://www.goldtrends.net/Resources/Pictures/2013/June/Intra%20Day/XslvWkly20JunIntra.gif

Another view of silver on a weekly chart shows if 18 area doesn't hold the next target is 14 area.

http://www.goldtrends.net/Resources/Pictures/2013/June/Intra%20Day/SilWklyCoughJun2013.gif


Medium Term Cycle

The next medium term cycle is due June 20th --- plus or minus 2.5 weeks.  At the moment, this is the only thing that the gold bugs have in the technical analysis category that has hope a bottom is going to form.  

 

http://www.goldtrends.net/Resources/Pictures/2013/June/Daily/GoldCyclesMediumTerm11Jun2013.gif

 

There is one final chart to view and it pertains to the stock market.  Kimball charting solutions posted this on their website a few weeks ago.  The last time I saw this chart was where the first volume spike occurred.  Needless to say it was a major peak in the stock market that preceded a crash.

Penny stock volume as a percentage of Nasdaq volume

In summary, the Fed has spoken and the markets have given their opinion and they did not like what they heard.  Perhaps they are not going to afford Bernanke enough time to exit his post before a crash.  Markets have a way of getting even by dishing out a lot of losses. 

The situation as we see in many instances is a liquidity problem and is growing and escalating in many markets and financial institutions.  This is what the Fed has been most likely been trying to stop from developing.  If it does, then all assets could undergo a lot more pressure than what we’ve seen.  At GoldTrends this is what our suspicion has been since February.

As far as gold goes today, there is no need to say manipulation as this was liquidation.

By Bill Downey  
www.goldtrends.net

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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