We have all seen it countless times before: visual confirmation that without the Fed's (and all other central banks') liquidity pump, the S&P would be about 70% lower than were it is now.
The recovery from the lows after Bullard spoke yesterday is another reminder how addicted markets still are to liquidity. Indeed in today's pdf we reprint and update a table from our 2014 Outlook showing the various phases of the Fed's balance sheet expansion and pausing over the last 5-6 years and its impact on equities and credit. We have found that the relationship broadly works best with markets pricing in the Fed balance sheet move just under 3 months in advance. We've also included our oft-used chart of the Fed balance sheet vs the S&P 500 to help demonstrate this. So end July / early August 2014 was always the time that this relationship suggested markets should enter a new more difficult phase. So we still think central bankers hold the key to markets going forward and there seems to be a hint of change in the Fed.
So now that "best Keynesian practices" are out of the window, and everyone has once again turned Austrian, and only the "flow of money" (either inside or outside) matters, the question is how much do central banks need to inject to keep the stock market from crashing, let alone continuing to levitate. Luckily, Citi's Matt King has just done the math, and the answer is...
Here is his answer:
We think the markets’ weakness owes more to an almost belated reaction to a temporary lull in central bank stimulus than it does to any reduction in the effect of that stimulus in propping up asset prices. Figure 5 shows the rolling 3m combined liquidity injection by the Fed, the ECB, the BoE and the BoJ, plotted against the rolling 3m change in spreads. While the relationship is not perfect – liquidity flows across asset classes and across borders, and there are announcement and confidence effects in addition to the straightforward impact on net supply – it is this, not fundamentals, which we would argue has been the major driver of markets for the past few years (Figure 6 shows the same series plotted against global equities).
In case anyone missed it, and in case there is still any debate about this issue which we first explicitly stated nearly 6 years ago and were widely mocked by the all too serious intelligentsia, here is the key sentence again:
"it's the liquidity injections, not fundamentals, which we would argue has been the major driver of markets for the past few years."
And with that piece of New Normal trivia behind us, we continue:
For over a year now, central banks have quietly being reducing their support. As Figure 7 shows, much of this is down to the Fed, but the contraction in the ECB’s balance sheet has also been significant. Seen from this perspective, a negative reaction in markets was long overdue: very roughly, the charts suggest that zero stimulus would be consistent with 50bp widening in investment grade, or a little over a ten percent quarterly drop in equities. Put differently, it takes around $200bn per quarter just to keep markets from selling off.
If anyone ever needed any confirmation of what we said in June 2012, that "The Stock Is Dead, Long-Live The Flow: Perpetual QE Has Arrived", now you have it, and only qualified but quantified. Because to translate what Matt King - Citi's most respected strategist and the only person on Wall Street to warn about the Lehman collapse and its consequences before it happened, just said - if and when the global central bank liquidity tracker ever drops to $200 billion per quarter or less, the market will crash.
Where is my money safe? How can I ensure that European and American central bankers do not steal or deflate away my life savings? Should I invest in Bitcoin, gold, silver, savings accounts, CDs, the stock market, real estate, or what?
This article focuses on Bitcoin as a hedge against banker and government theft. Consider this a single chapter in a very long book on central banking dynasties and their warmongering.
A lot of people have asked my opinion about bitcoin and I often have given a generic answer similar to the following: “Bitcoin is better than fiat but worse than physical silver or gold”, an answer that seems to make bitcoin fanatics lose their minds as if I am “hating” on bitcoins. However, this is so far from reality that I decided to write a more detailed explanation about what I like about bitcoin but why I don’t consider bitcoin to be sound money, nearly as solid (no pun intended) as owning 100% physical gold or physical silver, and why precious metals still trump bitcoins on a risk/reward analysis enough that I still favor the accumulation of physical gold and physical silver over the accumulation of BTCs. Furthermore, given the recent bitcoin price explosion and the negative media beating gold and silver have taken recently, I wanted to release this article now rather than as a reaction to problems that I feel BTCs will encounter down the road that would lead to accusations of "Monday morning quarterbacking". I think if you are a bitcoin advocate that you will find my logic in this article to be totally rational. Bitcoin is infinitely better than fiat money because unlike fiat currency, in which only a few families in the entire world maintain the power to create this type of money, with bitcoin, those that own infrastructure with enough of the considerable processing power necessary to run the bitcoin network can create new bitcoins. So while there are computer infrastructure limitations on who can create new bitcoins and not everyone has the money to own the type of infrastructure needed to create bitcoins, this is the only limitation one has on being able to create new bitcoins until the maximum pre-designated limit is reached. However, this barrier to entry is a significant barrier as, according to the World Food Program, nearly 1 in 7 people suffer from malnutrition and go to sleep hungry every single night and it is doubtful that any of these people could ever afford a $2,499 50GH/s bitcoin miner. Furthermore, nearly 2/3rds of the world, according to statistics compiled by Nielson Online, the International Telecommunications Union, et al, are not yet connected to the internet, which makes it problematic to create or purchase bitcoins for a large percentage of the world's population. However, it is a myth propagated by the anti-Precious Metals community that gold and silver are beyond the reach of the world's poor. In India, there are prolific anecdotal stories of the poor converting rupees into gold when it is possible for them to do so to guard against the wealth destruction inflicted upon them by Indian bankers.
Secondly, all fiat currency is created as debt. Every dollar, Euro, Yen and Pound Sterling is created with an interest component that must be paid off, which means that devaluation, or more simply put, “banker theft of your wealth held in fiat currencies”, is an inevitable fact of “modern” fiat currency. Bitcoins are created without this debt component. If government treasuries worldwide directly created money instead of bowing down to the private banking families that own Central Banks and surrendering this power, then fiat currencies could be created without a debt component as well. Thus, this distinction between bitcoins and fiat currency is merely one of power. If government treasury departments worldwide were more powerful than the private banking cartels, or had not already been co-opted by these families a long time ago, they could feasibly seize control over the creation of fiat money, and voila, fiat money would no longer be created with a built-in debt component that enslaves humanity. US President John F. Kennedy tried to remove the power of money creation from these families many decades ago and failed. Bankers were furious of Kennedy’s attempt to free humanity from their immoral control and it has been widely speculated that they played a significant role in his execution. (Google JFK's Executive Order 11110 as well as Lincoln's "greenbacks".)
Thirdly, bitcoins are capped at a supply of 20,999,999.9769 BTC, whereas the private banking families that own a monopoly on fiat money creation can push a button and create as much, unlimited digital Euros, Yen, Pound Sterling, and US dollars as they want. Another resounding checkmark for bitcoins over fiat currency.
According to BitCoin’s FAQ page, BTCs are “based on the cryptography that is an integral part of its structure, and that is readily available for any and all to see. Instead of one entity keeping track of transactions, the entire network does. Though the developers of BitCoin aver that it would be extremely difficult to create BTCs that escape detection due to its security infrastructure, they also admit that this task is not foolproof and “it can be cheated.” Perhaps some brilliant genius will figure out a way to expand the bitcoin supply more than 20,999,999,999.9769 BTCs, but I concede the point that this will be extremely difficult to execute. To the contrary, all private bankers that run the world’s Central Banks are currently actively counterfeiting dollars, yen, pound sterling and Euros right now (just refer to this article). Again, yet another win for BTCs over fiat currency.
So yes, I do agree with all BTC advocates that the above discussion points are very solid points for holding BTCs over fiat. But I disagree strongly with the BTC fanatics that are so blinded by BTCs’ recent run higher on the back of the Cyprus fiasco that they cannot see the dangers that are also associated with BTCs over the long run. So here is why physical gold and silver still trumps BTCs as the best form of sound money, hands down. With all the positives of BTCs I discussed above, why do I still vehemently stand firm to my position that BTCs are infinitely better than fiat currency yet still does not fit the definition of sound money? The answer is actually a quite simple and logical one. The private banking families that have a stranglehold on all monetary creation today in wide distribution view any competitive currency to their counterfeit fiat currency as a currency to be crushed with an iron fist. These private banking cartels that own and run Central Banks will not tolerate any type of serious competition and will seek to either strip all owners of bitcoins of their BTCs or to destroy the BTC network as they definitely view BTCs as a threat to their criminal system even if they haven’t yet expressly voiced this opinion. The theft in Cyprus should illustrate how quickly bankers can turn people’s lives upside down at a moment’s notice. The founder of bitcoin states that the BTC network remains secure “as long as honest nodes collectively control more CPU power than any group of attacking nodes…If a majority of CPU power is controlled by honest nodes, the honest chain will grow the fastest and outpace any competing chains…If a greedy attacker is able to assemble more CPU power than all the honest nodes, he would have to choose between using it to defraud people by stealing back his payments, or using it to generate new coins…We proposed a peer-to-peer network using proof-of-work to record a public history of transactions that quickly becomes computationally impractical for an attacker to change if honest nodes control a majority of CPU power."
Thus, a huge assumption is necessary at this point to trust that the BTC network will not, and has not been hacked or infiltrated by agents unfriendly to the interests of BTC holders. That assumption is that bankers have ignored BTC up to this point and have not infiltrated the network as agent provocateurs that are posing as honest people that support the BTC model. If bankers have already infiltrated the BTC network, then BTCs have counterparty risk just like fiat currency because bankers can now defraud people. In addition, if assessing the above statement, “if a greedy attacker is able to assemble more CPU power than all the honest nodes”, who is greedier and has more resources than bankers? No one. Who is best known for pumping commodities sky high very quickly, only to deliberately crash them to make money on both the upside and downside? The bankers. These are all real possibilities BTC owners must consider as BTCs have soared but have not experienced any significant correction as of yet. However, the only way bankers can introduce counterparty risk to physical gold and silver owners is by producing fake tungsten filled bars or impure bars and selling them as four nine fine bars (99.99%). However, sophisticated but simple ultrasound testing can easily spot this banker fraud with gold and silver so the counterparty risk is non-existent as long as all bullion is tested. I think it is naïve to not assume that bankers have had their eye on BTCs since the day they were first introduced several years ago.
Again, many may say it is a stretch to state that bankers have already infiltrated the nodes that control the majority of CPU power, but the reality is that no one can really accurately assess the likelihood of this possibility having already occurred, as if bankers were to have infiltrated the bitcoin network, they would not be as stupid as to reveal their identity. I do believe it is inevitable that bankers will attack the BTC network. It is just a matter of how they will do it. Just research how the private bankers went after Bernard von NotHaus, stole his silver and gold from his warehouse, imprisoned him, and used their control of the legal system to have US Attorney Anne M. Tompkins, in her own words, say that NotHaus’s “attempts to undermine the legitimate currency (USD) of the [United States of America]” were an “act of domestic terrorism.” This ruling alone should serve notice to BTC users that all banker–controlled governments (which is every government in the world) clearly view all BTC holders as terrorists as well and will eventually seek to destroy all BTCs. The only point of contention is whether or not they will have success in their efforts. In fact, two years after his arrest, von NotHaus has still not been sentenced, and just this week he filed for a re-trial or dismissal of his case as the "Justice" department has had great difficulty indicting von NotHaus of clear "intent to counterfeit money." Of course we report this with great irony as Anne Tompkins has taken great care to uphold the illegitimate currency of the Federal Reserve and the US Justice Department could convict the Feds and all commercial banks of clear intent to counterfeit money beyond a shadow of a doubt within five minutes of testimony from any competent person that understands the mechanisms of our modern day banking system.
“@maxkeiser: If everyone in America had sold their guns last year and bought Bitcoins; the avg. American family would be $90,000 richer.” — NewsBitcoin (@NewsBitcoin) April 9, 2013
That said, I’m not here to debate whether the agents of these bankers could possibly corrupt the BTC system, counterfeit BTCs deliberately, or deliberately cause frequent flash crashes in the BTC valuation that discredits its use as money. I know that BTC's founders state that all of the aforementioned are nearly impossible to accomplish, but I sincerely believe that nothing is ever impossible. Extremely difficult? Yes. Impossible? No. BTC has already suffered a couple of flash crashes due to its digital nature. Yes, I am aware that governments could choose to come after not only BTC owners but all physical gold and silver owners as all pro-BTC, anti-gold people state. However, since probably over 90% of gold and silver owners are also gun owners, I believe it would be more difficult for bankers to send cops, soldiers, etc into people’s homes to steal their physical gold and silver without suffering major casualties versus finding some way to confiscate digital bytes of air. Again, confiscating digital money and physical assets are both possible, but the mechanism for confiscation of something that is digital will always be easier than confiscating something in someone’s physical possession.
So let’s now look at why I believe that gold and silver are superior to BTCs as sound money. It is absolutely a lie propagated by bankers that deflation leads to recession and no economic growth. Bankers hate deflation because people’s wealth grows under deflation and they lose control over the people as the people’s wealth grows. This is the number one reason why we have had continuous inflation in every country after private banking families and cartels established a unified system of control, otherwise known as the Central Banking system. During the 1800s in the US, there was steady consistent economic growth for nearly an entire century in which deflation persisted for most of this time. The only reason the price index was nearly the same in the early 1900s as it was in the early 1800s, despite this prolonged period of consistent deflation and economic growth, was the massive inflation and economic instability that accompanied the abandonment of the gold standard during the Civil War. Though people may love a scenario in which their money’s purchasing power increases sharply over time, continued steep deflation over long periods of time is not a desirable quality for sound money as such a scenario will eventually lead to a period of steep inflation. I believe that sound money should exhibit price stability over time. Price stability over extended periods of time is a necessary quality for money to possess to grant people confidence in being able to assess and plan for the longevity of their savings. For example, because bankers have destroyed the purchasing power of the Euro, the Pound Sterling, the USD in recent decades, 75-year old retirees that thought their savings were adequate to last the rest of their lives are now seeking employment again (Just read this article "The Greatest Retirement Crisis In American History" in which millions of elderly Americans are described as "too frail to work, too poor to retire"). Since one gold coin could buy you about the equivalent amount of goods today as it could several thousand years ago during the Roman empire, we already know that gold exhibits price stability over a huge duration of time.
BTCs' common trait with all fiat currencies ultimately precludes it from ever serving as sound money. BTCs have zero intrinsic worth as it is a 100% digital currency backed by nothing but air. On BTC’s own website, the founders of BTC state the BTCs have value “because they are scarce.”While true, scarcity is only one of many fundamental traits that all sound money must possess, including durability, being easily divisible, consistency, and having intrinsic value. BTCs are easily divisible, even more so than gold, are consistent, but unfortunately lack durability (as they are backed by air) and intrinsic value. In my opinion, the most significant characteristic of all the prerequisites of sound money, and the one most vital to protecting the interests of the people that own this form of money, is the possession of intrinsic value. Though a BTC’s valuation originates primarily from its scarcity, divisibility and growing acceptance, it is still a digital currency backed by the commodity of air, and this presents a huge problem for BTCs serving as a stable store of value over long periods of time. Of course, since BTCs have only been in existence for a little over four years, we do not have a large enough sample at the present time to fully understand how BTCs will serve as a store of value over time. However, bitcoins’ founders admit that BTCs are “vulnerable to price manipulation. It doesn't take significant amounts of money to move the market price up or down and thus bitcoin remains a volatile asset.” Gold and silver owners also realize that gold and silver prices are vulnerable to immense price manipulation as well, as we have seen over the past decade, so vulnerability to price manipulation alone does not exclude a money from qualifying as sound money.
The billion dollar question (inflated from the standard million dollar question, which is now not worth nearly as much today), is the “escapability” factor from price manipulation.
And this is where intrinsic value comes into play. Currently, millions upon millions of paper ounces of gold and silver backed by nothing but air are sold into the market by large players like HSBC, JP Morgan, Scottia Mocatta, et al for the sole purpose of suppressing the price and introducing volatility into the price. People that don’t understand this banker manipulation will be shocked in the future when gold moves higher by several hundred dollars an ounce and silver by five dollars an ounce in a single day. These immoral bankers have wreaked havoc on the price stability of gold and silver as bankers have committed reverse alchemy and have turned hard assets into air through their invention of paper derivative products that have fooled the masses into believing they are as good as physical when clearly they are not. However, as REAL PHYSICAL demand for gold and silver keeps increasing and REAL PHYSICAL supplies of gold and silver simultaneously keeps dwindling, the reality of the physical markets will eventually trump the banker shenanigans in the paper markets and eventually lead to the collapse of gold and silver futures contracts in New York and London. The fact that people can opt out of these “fake” gold and silver markets by purchasing the hard assets of physical gold and silver will eventually trump all the scams bankers have executed to manipulate gold and silver prices.
However, with BTCs, demand and supply for air/digital bytes provide no manipulation “escapability” for BTCs. In the event that BTCs are not manipulated but banker-controlled governments resort to shutting down BTCs or threatening jail time for anyone caught making transactions with BTCs, then one can escape to another country and use BTCs. Bankers can of course, resort to the same threats with those holding gold and silver. However, nearly every informed gold and silver owner also holds physical gold/silver outside of their country of residence. Since physical gold and silver are universally accepted as money in all 193 countries in this world, gold and silver not only provide better “escapability” from manipulation but also from banker confiscation.
I have mentioned that price stability is necessary for a commodity to be determined to be sound money. However, once the physical gold and silver markets escape the bankers’ manipulation throes, we are likely to not see very much stability but huge volatile swings in price with the direction of these swings, both up and down, eventually bringing forth much higher prices. However, this temporary instability will only exist because there has never been a free market price for gold and silver since any of us have been alive. Once gold and silver prices are no longer suppressed by bankers and allowed to settle into a free-market price, then mild, instead of massive, volatility would become the norm and perhaps like the bulk of the period between 1800 and 1900 we would experience a steady slow period of mild deflation and relative price stability.
A medium of money that has intrinsic value is ALWAYS better than money that lacks intrinsic value because it allows the owner of that money to punish the creators of that money should they ever commit fraud.
If those in control of the gold standard commit fraud by creating more money without buying the gold to back the creation of additional money, this fraud will always be evident through inflation of the currency, and the loss of purchasing power. When people note this, under a gold standard, people bring their devalued notes to bankers and convert them into gold at a higher rate than the true valuation of the notes. Consequently, bankers are forced to return an asset of intrinsic value, gold, to the people, while they receive devalued and counterfeited notes in return. Yes, money with intrinsic value allows the people to have power over the bankers and call their bluff. History has proven this point. People called the bankers’ bluff and demanded gold for their devalued notes with the gold-backed Pound Sterling after WWI and again, with the gold-backed USD in the early 1970s, even though neither system used an ideal 100% fully gold-backed currency. So even a pseudo-gold standard allows people to call a banker’s bluff.
The problem with all fiat currency in widespread use today all over the world is that all fiat currencies have zero intrinsic valuation. Thus under this current fraudulent fiat monetary system, one cannot call the bluff of the bankers when they commit the fraud. Since all fiat money has an intrinsic value of zero, all one can do is trade one currency backed by air for another currency backed by air. This is a huge inherent problem with BTCs as well, as the founders of BTCs state that they have “no inherent value.” In conclusion, BTCs are great as a medium of exchange in the short-term, and still far better than fiat money for purchasing power. Thus they should be used as such but viewed with skepticism in being able to provide a stable store of value over extended periods of time due to the limitations I have discussed in this article. If you want to buy money to pass on to your children, you should definitely be buying physical gold and physical silver and not BTCs. BTCs are great for use as money in every positive capacity that I outlined in this article, but they undeniably have flaws that preclude their use as sound money that gold and silver do not have. Am I saying BTCs don't have any utility? Of course not. Just re-read the beginning of this article again where I discussed why BTCs are much better than all fiat currencies. But please understand what BTCs are, and what they are not. In the end, I support the continued existence of BTCs as a competitive form of currency, even if the world eventually defeats our current immoral fractional reserve banking system and returns to sound money 100% backed by gold. In the end, whatever form of money proves to contribute to price stability and serves as a store of value over time the best will be the one that comes out on top. For this very reason, competition, even when it applies to money, is beneficial to the people. Bitcoins versus gold (and silver) is much like the parable of the tortoise versus the hare. Gold has proven itself to be a steady reliable tortoise over thousands of years. Thus far BTCs have proven themselves to be the hare up to this point. In the end, if we let the people decide what is the best form of money in a competitive monetary environment, I am quite sure that gold and silver would come out of the battle as the victors. Stay tuned next week for Part II.
About the author: JS Kim is the Founder & Managing Director of SmartKnowledgeU, a fiercely independent research & consulting firm with a mission of helping Main Street avoid the deceit and chicanery of Wall Street and of triggering a wave of global economic freedom only possible through one pathway - the end of all global fiat currency and a return to sound money.
