Is This the Great Unraveling?

IDW-2015-11-13

I have increasingly been showing this chart because in my mind it suggests that Keynesian lies are now starting to be revealed and that the con artists in government, the CFR and the Federal Reserve, no matter how slick they are, are on the verge of being “Pinnochioized.” There can be no doubt that from the depths of despair in 2009, QE1 and then QE2 “revived the patient.” But most assuredly, the performance of my IDW since it peaked at 159.87 on April 28, 2011, demonstrates that all manner of anti-free-market machinations did not fix underlying problems. All massive intervention and monetization did was to ensure that the criminal enterprises that created the problem in the first place were saved.

changeMost notably, the real economy is being destroyed by allocating money to bail out the shareholders of the Federal Reserve Bank, which are the major banks of the U.S. My IDW measures global items that that are meant as proxies for the global economy and the financial markets. What has been abundantly clear since the peak of my IDW is that items directly attached to the real economy like energy, copper, and silver have entered into a depression, while proxies for the real economy and financial markets have risen substantially in value. But despite all manner of money creation, interest rate manipulation and bailouts of every kind, the real economy (and hence my IDW) is not only rolling over, but is now plunging below the three-year and five-year moving averages. Now with equities very possibly on the verge of a major decline if not an outright crash and with no sights of economic growth anywhere in the world, I ask the question: Is this the great unraveling that the likes of Prechter, Gordon, and McHugh have been talking about?

PPI
Given the weakness not only in the U.S. but throughout the global economy, will the Fed raise rates in December? I have been adamantly declaring that they will not because they cannot. And just this Friday morning, the BLS reported its October PPI numbers, which are pictured in the charts above. The headline number for October was minus 1.6%, down from minus 1.1% in September and well below expectations of minus 1.2%. This is definitely consistent with what my IDW is saying.

Previously the Fed has blamed falling prices on the plunge in energy, but they can’t blame energy for the October decline because energy prices were unchanged and in fact gasoline was up by 3.8%. In fact, as reported by Zero Hedge on Nov. 13, price declines in the October numbers were extremely broad throughout most service other categories including apparel, jewelry, footwear, and accessories retailing; loan services; portfolio management; wireless telecommunication services; and health, beauty, and optical goods retailing also declined.

There was a modest rebound in prices for truck transportation of freight which rose 0.3 percent. The indexes for food retailing and deposit services (partial) also increased. But among goods, over one-third of the October decline in the final demand goods index is attributable to prices for light motor trucks, which fell 1.8 percent. The indexes for chicken eggs, iron and steel scrap, beef and veal, boxed meat, and electric power also moved lower. The indexes for pharmaceutical preparations and corn also advanced.

The evidence against a rate hike seems to me to be building once again, at least if as the Fed says, it is based on “data dependency.” However, I do hold the door open for a possible rate rise despite a global economy heading over into the abyss, and the reason for that is based on geopolitics. I think a remark made by Secretary of State John Kerry at the time President Obama was in the process of pushing through the agreement on nuclear weapons with Iran has largely gone unnoticed. But essentially he said that the U.S. dollar’s reserve status may be threatened if we walk away from that treaty. He suggested that even our European allies might turn on us because we have asked them to engage in sanctions against Iran that have hurt them economically so that we could force the Iranians to make a nuclear deal with the U.S. And now, if we then walk away from the success of a deal with Iran, our European partners may become outraged with us and they may be tempted to walk away from the dollar as well.

What Kerry didn’t say, but what is certainly true now, is that the Chinese and Russians are already net sellers of Treasuries. China in particular had been an enabler of American extravagance where year after year, they sent us their goods in exchange for petrodollars that were created out of nothing. Now as China herself has increasing economic problems and needs to draw down her savings, why should she want to hold U.S. Treasuries that pay no interest, especially when those U.S. Treasuries help fund Navy destroyers that seek to keep China from controlling her own sea lanes?

So the bottom line is this. The world economy is in shambles and getting worse by the minute. There is no way that strong economic data, even though it is manipulated to look better than it is, will justify a rate hike. That said, we might get one anyway if the very status of the dollar is at stake. Because if the dollar is destroyed, so will be the American Empire, which is based on a phony currency backed not by market demand but by military force. If rates rise, we may well see a massive stock market decline, which by the way I think may well be what finally turns gold and silver upward. And if you are thinking that gold and silver shares will have to tank along with the general market, my question to you is, “How much further can gold and silver decline? And if gold and silver are in a bottoming process, how much further can gold and silver mining companies decline, especially those that are financially solid and generating strong cash flows?”

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.