Bernanke Didn’t Pump, Equities Get Dumped

So what happens now QE3 hasn’t occurred? Let’s see what I wrote last month:

QE3 has already been priced in so there would be shock. Confidence would plummet, followed swiftly by asset prices, especially the blown-up pufferfish S&P, DJIA and Nasdaq. Two exceptions would be gold, which would shoot up — well above $2000 — and treasury bonds, whose yields would edge ever lower. And plummeting asset prices would mean debt-deflation, leading to more bank failures, and the debt-deflation spiral posited initially by Irving Fisher, and later by Friedman, Schwarz and Bernanke.

And here’s what has happened today.

From the BBC:

World stock markets have dropped sharply after a series of grim warnings over prospects for the global economy.

Christine Lagarde, head of the International Monetary Fund, said the economic situation was entering a “dangerous place”.

Earlier, the president of the World Bank, Robert Zoellick, said the world’s economy was “in a danger zone”.

The comments came after the Federal Reserve warned that the US economy faced “significant downside risks”.

In Europe, the UK FTSE 100 was down 4.7%, while France’s Cac-40 fell 5%. In the US, the Dow Jones fell 3%.

Mrs Lagarde told a news conference at the IMF’s annual meeting in the US that the “path to recovery is narrower that three years ago,” when developed economies sank into recession.

She said that international leaders must act quickly on fiscal consolidation, the repair of household debt, and reforms of the public sectors. “Time is of the essence,” she said.

One thing that I missed is that while Treasury yields are lower gold hasn’t spiked, and is actually dropping to the support level of $1700:

It looks like gold may well be stagnant-to-lower until Bernanke announces QE3. The central-bank-liquidity-dependent markets are heading toward turmoil without further printing, so I have no doubt Bernanke will respond to global freefall with a co-ordinated global interest-free pumping operation, causing assets to levitate, and gold to spike over $2,000. Any promises made to the Chinese central bank to stabilise the value of the dollar would go out of the window, as Bernanke’s true money-printing, aggregate-demand-boosting impulses come to the fore.

Meanwhile, gold might even turn upward before further printing. The main downward pressure is liquidation, as investors seek to gold cash to stave off losses and margin calls that accompany the downward spiral. But gold’s long-term purchasing-power stability will keep a steady stream of money flowing in. There is upward inflationary pressure (driven by food and fuel fundamentals) even without further money printing. Funds and investors will still be keen to safeguard their purchasing power.

16 thoughts on “Bernanke Didn’t Pump, Equities Get Dumped

  1. I cant see why gold is plummeting still, when the economic outlook has become explicitly cut and some economists are talking of structural problems… Are the sellers either stupid enough to expect a fiat-deflation or just tired of all the trading business and wanna throw all their belongings to the nature,or so?

    • Well, a liquidity freeze (even with the food and fuel pressures) would probably result in fiat-denominated deflation (at least in the short term).

      But I think it’s mostly hedge funds and institutional investors concerned about margin calls and wanting to raise their cash reserves…

        • Yeah — it sucks, but this is what happens when you get a liquidation. Too many people in the gold and silver market have forgotten how much leveraged hedge fund/ speculator action there is in gold and silver. And the modus operandi of the speculators is when shit hits the fan they liquidate positions to get dollars as a buffer. I’m not worried — I only have positions that cost far less than these dips.

  2. In a bull market a correction is healthy and is a sign we’re not near the final parabolic stage of it. Maybe the voodoo technical analysts will be satisfied that gold catches up to the 20 EMA (or something) 😛

    • I agree. Corrections are healthy. Blow off tops just lead to bigger corrections. I don’t get too heavily into technical analysis, but I’m not surprised gold found a support level today at $1720, because gold is the metal I am particularly concerned about. Turd Ferguson was hoping silver would find support at $37, but it didn’t, and I’m not that surprised. Short-to-medium term I see the industrial downside on silver as causing stagnation between $33 and $45 in 2011.

  3. What hope is there for America? Address international oil and manufacturing dependency. Military spending is causing too much debt acquisition and subsidising Chinese goods and Arab oil. America would do well to cut military spending and reinvest a whole lot of that by handing it back to taxpayers and (in spite of Solyndra) repairing roads and improving alt. energy infrastructure (artificial petroleum would be a good start).

  4. I agree aziz.Those are practical ideas and achievable if we were not living under a false construct in terms of the whole world being under a cooperate fascist system, (Central Bankers and Military might) Will the tree of liberty have to be refreshed with the blood of both the tyrants and patriots in order to get us to these ideas?

    • I hope the tree of liberty will be refreshed by the cannibals and asset strippers on Wall Street destroying the global financial system (all the zombies and parasites) so we can create a new organic system and experience high growth in new industries.

      Unfortunately I think governments around the world will bail out the system again, and create more centralisation and consolidation, storing up more problems for the future. But the crash-bailout-crash half life has got much shorter… 1980… 1990… 2001… 2008… 2011…. 2013?

  5. Thanks aziz. Absolutely love your insight. Keep doing what you do. I will spread the word about you. BTW, you need a donation link. Being compensated if even its just a little in Federal Reserve Notes so you can buy Gold and Silver never hurt anyone.

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