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The Unmitigated Mistake Central Banks Are Making (…and your Capital Wave Forecast)

0 | By Shah Gilani

President Trump just forced the Fed’s hand by calling out China as a currency manipulator.

What the President couldn’t do by publicly ripping the Fed via Tweets for raising rates and demanding to lower them, he accomplished by a more acceptable, and politically brilliant maneuver.

Calling out China for lowering the value of its currency to make its exports cheaper as it struggles with U.S. tariffs and slowing economic growth draws attention to how the value of the U.S. dollar rises against currencies that are manipulated lower, making U.S. exports more expensive, imports cheaper, inflation lower, and U.S. multinational companies’ overseas earnings weaker when they are translated back into more expensive dollars.

To offset a strengthening dollar and its negative implications the Fed can and will lower rates to at least match other central banks lowering their benchmark rates.

President Trump just guaranteed that, and at the same time gave the Fed cover to sell the public on it lowering rates again come September, on account of potentially negative economic implications stemming from the ongoing trade war with China.

They won’t say they’re lowering because the President forced their hand, or because they want to soften up the dollar. They’re too independent to admit they’ve been played.

But central banks are kowtowing to politicians, like never before, and it’s going to end badly.

Here’s why central bank independence is a joke, how politicians are forcing them to keep manipulating rates lower, and what it means for the future of markets…

The Joke of Central Bank Independence

Without making this a history of central banking lesson, let me cut the story down to a simple fact.

Central banks are “independent” only in theory. In practical terms they only exist because governments let them exist, so they are beholden to the governments under which they operate.

Take the central bank closest to home, our Federal Reserve System. It’s supposed to be independent.

But it had to be legislated into existence; otherwise, it couldn’t and wouldn’t exist.

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Of all the reasons the Fed was ushered into existence, most of which are negatives, the only one that mattered, the one that outweighed all the negatives of the Fed’s creation, was its ability to print money to buy U.S. government issued debt.

How do you think America’s able to keep raising the debt ceiling, borrow more, not raise taxes, and spend, spend, spend without crowding out private investment, without causing rates to rise?

Because the Fed is absorbing the debt issued by the Treasury. The Fed’s fake money regime allows it to stockpile trillions of dollars of government debt and lower rates while doing it.

That’s the bottom line of central banks. They’re tools of governments.

They’re not independent of politics. They just pretend to be.

And governments pretend they are too, because they don’t want the public to understand the game.

What’s the game? Extend and pretend.

That’s extend debt maturity realities and pretend that economic growth will eventually generate more revenue to retire increasing mountain ranges of public debt.

Politicians who want to get elected and reelected will never come clean about the game, about the frightening reality that government debt will never be paid off, that eventually creditworthiness will be ratcheted down, the cost to borrow from the public will rise, taxes will have to be raised and the myth of central banking fake financing exposed.

That day’s a long way off. At least in theory it’s a long way off. That’s because people still believe in the magic of central banking. Because they just don’t know the whole edifice, the leveraged debt we keep piling on ourselves, is a house of cards, with no real-money foundation.

All I can tell you, by way of a long-term prognostication is, “If it keeps on raining the levee’s going to break.” Thank you, Led Zeppelin.

Closer to today, in terms of your Capital Wave Forecast, here’s what equity markets are looking like and where the support levels are.

After an ugly week last week and a frightening Monday selloff, equity markets have rebounded.

No, we’re not out of the woods. There wasn’t a lot of upside volume on the bullish days, including yesterday’s big 371 point up-move for the Dow. For the most part, volume on the last few up-days has been between two-thirds and three-quarters what it’s been on the down days.

That’s weakness, not strong bottom-fishing or bargain hunting.

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Most of the big up-moves in stocks resulted from few big sell orders when markets looked like they were trying to rally. As traders pulled their offers, buyers had to pay up at higher levels to buy from somewhat reluctant sellers. Those reluctant sellers pulled their offers to see how bids would react.

Because most of the action this week was driven by high frequency trading bots, bids took out whatever offers were there to drive prices higher on small volume trades, in order to trigger more bids and to chase offers higher.

That’s what drove prices higher on the up days this week.

The lack of solid volume on up-days is indicative of technical trading. That means we’re not out of the woods.

A strong close today and follow-up buying next week will change the complexion of markets and psychology. If we even see that.

If we don’t see follow-up buying, markets are prone to increasing volatility and a buyer’s strike.

If buyers don’t step up their bargain hunting, we’re going to test support levels.

  • For the Dow Jones Industrials: there’s support at 26,000 which is 1.4% from Thursday’s close. There’s support at 25,500 that’s 3.3% from Thursday’s close. Then there’s serious support at 25,000 which is 5.5% from yesterday’s close and 8.92% below the Dow’s all-time high.
  • For the Nasdaq Composite: there’s support at 8000 (which we’re below as I write this). There’s major support at 7500 which is 6.71% from Thursday’s close. At 7500 the Nasdaq would be off 10% from its all-time highs.
  • For the S&P 500: there’s support at 2900 which is 1.3% lower than Thursday’s close. There’s support at 2800 which is 4.6% lower than yesterday’s close. And there’s major support at 2700, which would be a 10.83% drop from the benchmark’s all-time high.

These worst-case support levels being tested means we’re hitting 10% correction territory, levels that can easily be reached.

It’s below those support levels that real panic could result.

We’ll be watching.

Sincerely,


Shah

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