The Fed is fighting deflation, can it win?

Deflation has a bad rap.  I think deflation has a bad rap harking back to the gold standard days.
In those days, when deflation took hold, countries could NOT print fast enough to counter its effects.

In essence in classic deflation, people horde money and don't spend it.
That starves the entire economy, resulting in people working more for less in a never ending death spiral until the economic situation hits rock bottom.

In such situations, people with cash (banks, the rich) rule the world as they take control over much more pennies on the dollar.  If you seen the movie its a wonderful life, that is what a deflationary collapse looks like.

But like so many words, they can be used for many different things confusing situations.
Deflation can also be used to describe falling prices.  While that looks on the surface to be same deflation as I just described, it may not.

Take assets like stocks and houses.  If housing goes down by 90% in price, young adults can buy houses they cannot afford now.  In effect standard of living for buying assets such as houses goes up.  Who suffers are those who already own a house, their savings goes down.  In addition if houses have larger loans on them than the face value, banks will get stuck with the houses, causing losses not only for the home owner, but the loan holder.

Depending how you look at it, housing prices collapsing is very good for humanity, for more can afford with less.  But in production such as making good or houses, lower prices result in lower wages or fewer jobs to create the items for consumption.

As for houses, if USA didn't build an epic ponzi scheme since 2001 on real estate, I can say with confidence lower house prices is good for humanity.  The ponzi-like scheme we have built on perceived value of houses unfortunately, make it not as clear as what is the best thing for society.  Hence in comes the Federal Reserve bank where 'status quote' for the financial markets is of utmost importance.  For the Federal Reserve bank is a  PRIVATE institution with the health of the banking system front and center.

What we have seen since 2008 is an attempt to stabilize the prices and restore valuation before 2008 collapse.  As I have just pointed out, this is at a cost of the 15-35 year olds in society.  We can see the effect between jobs and living costs of that generation taking it square on the chin.

The question is, can this go on forever? The answer is simply, no.  There are two forces at work that will make the reality of housing go down, and with it other over-inflated assets.  The first and foremost is demographics.  as the 35 year olds become 40, 45, 50, etc the needs of the older will succumb to the younger.  The asset protection for the older simply becomes less important demographically as that generation dies off.  The fiscal balance sheet shifts not only in who owns the assets, but the overall support of the system as the older generation stops working and the younger force at a fraction of the income replace them.  Mathematically something will give.

There is a second force at work, technology.  I have posted about 3d printing of all shapes, including houses.  I read an article today bringing housing one step closer to a price collapse.
A 3d house printer can make 10 houses a day for cost of $5K each.  The house of course, is basically a concrete shed, hardly the American dream house.  But here is the rub, its 2014, what will that printer do in 2020? I am positive in 6 years for $5K not only will that house have more than 1 room but it will have plumbing and pipes to run wires to install electric, a fireplace, and other basic needs.  by 2030, it will print the american dream house for maybe $100K or less in today's dollars.

Once we can print as many new homes as you want at a fraction of what houses cost today, what will old houses go for? Sure, by location it will vary greatly.  Desired areas have value not because of the house build cost, but because your buying into a neighborhood.  But for many areas I predict a Detroit-like exodus issue as a potential.

Combine this with 3d printing as seen below you destroy the need for many objects to be made at all, and many made locally right in your house, destroying the needs for millions of cheap factory workers.

There is NO QUESTION, massive deflationary forces are at work, and the FED wants to keep the status quo, I predict it can't hold it forever, between now and 2017 the cracks will become apparent to all.

And the next currency must be deflationary matching the technology and demographic needs, not inflationary as current currency is.  I believe a virtual decentralized currency will meet that challenge.

Gold may take it on the chin, hardcore

I am looking at the gold futures, and I am seeing that gold price is violating the trend line up, as I posted Friday as a possibility in post "Gold, are we in for another leg down"  If Gold ends below 1280 Monday into Tuesday, I fear gold is going to new recent lows, down to 1180, and could even make a run for the psychological line of 1000 an ounce.

I hit out of most GDX and GDXJ, I may hit out of the rest, and simply watch.  GDX could easily go down 20% from here, down to 19.  It seems quite insane, but I think there are some major strains on entire financial system that is hitting the gold market hard with political meddling.
Doesn't matter really as to if there is any meddling, all that matters is being on right side of a trade.

Good luck out there, I still like long term better than ever.  As an example of the gold tension, an Indian man was cut open by doctors to confiscate smuggled gold bars in his stomach.  My original premise has come true, China and India gold buying is reaching fevered pitch, but there is market suppression that is also happening.  Only time will tell of the market will break free and start rallying.

Gold, are we in for another leg down?

I already posted I lightened up heavily on gold miners, but I am still in for long haul.
However, I have to point out that gold maybe in for another leg down.
The gold trend line from it's low is in danger of being violated.
Once violated people who watch trend lines will likely pile on to short gold, and push it down.
The next line will be to violate it's recent low.  If that is violated, gold could tumble a bit more.

See the chart, do what you must to take risk off the table.

Market Topping?

In my post January 2014, The Great Unwinding Starting in 2014, I called out mounting evidence that the global economic ponzi scheme was starting to crack in 2014.   Since then, the market has made valiant attempts to re-establish a sustained bull market, but has failed to materialize.

We had Ben Bernanke leave the Federal Reserve, replaced by Janet Yeltsin.  I think Ben knew the top was potentially near, and wanted to exist on a high note.  I am not a Ben hater, I just don't think any one person can fix the global economic system, and his attempts where I believe in good faith given the many constraints of the current model.  But if I was to believe his actual words, he is naive to think buying time by relaxing laws and policies will 'teach' people to be economically responsible.
World Ward 2 is best example how appeasement doesn't lead to better results.  Germany now is also a lesson on how LACK of appeasement does not lead to better results.

Before I go on, credit where credit is due, Gary of the Smart Money Tracker posted market topping as a possible scenario right now.  I believed the market has been topping for the last few weeks if not since January.   But that is a feeling, and I relied on Gary to give a harder signal to trigger this post.

When in doubt, I try to go to the MACRO view of the markets.  In my post about long term investing, how to spot a market top, we have NOT yet had a signal this has occurred.  So if you want to wait for the signal, please do!  Read my post When to buy stocks or get out of the market . I encourage everyone to review their holdings and pick hard stops.

Below is a picture of the current market valuation, and I recommend watching this video making a case of peak everything.

Assuming there is a near term top in the market now, the USD valuation should rise.  Latest USD chart of valuation below. Right now there is no indication USD will rise, but it isn't failing yet compared to recent years. (TheChartStore.com)

US 30 year interest rates, this is the most damning for markets.  The US government knows that interest rates for 30 year bonds MUST stay in the range below, or a crisis could trigger.  To force rates lower, we need a 'flight to safety' for investments, that is usually triggered by stock market valuation problems.  See my post on The Hard Road MUST be Taken on the global currency battle stakes.

Assuming safety is the play, I have to imagine gold is going to get hurt, and buying bonds is good now.  If the USD valuation breaks down, or interest rates break up then this assumption is likely wrong.  This is one of those periods in time, I see risk everywhere.  If the market falls, so should gold and gold miners.  HOWEVER, GDX is about to show it is entering into a bull market!  So I am torn.  I did lighten up GDX and GDXJ this past week and keep an eye out for what happens next.

Back to market topping.  A market usually tops with high fliers cracking first.  Here is a bunch of charts, while most have not shown a convincing top using 20-50 weekly SMA, many look toppish.

The Hard Road MUST Be Taken

My readers know what I believe is at stake over the next few years is the global dysfunctional financial system, and there is only one way out, the USD must lose it's status as the global currency reserve.

I have been thinking of crypto-currencies for a while, and I am starting to think the best way out is for a virtual currency (doesn't have to be bitcoin) must become the standard-bearer of currencies, the new global reserve currency.  What MUST happen is USA, Japan, Europe, hopefully (but likely not) China, and Russia agree to disagree, that NONE of them can take over for the USA as global reserve currency.  That only a NEUTRAL reserve currency none of them control must be the standard bearer.
Then all currencies will trade freely against each other against the standard.

That is the only way out for the old currency system to survive to the new one.  For the USD reserve currency is becoming a problem mathematically and politically for the world.

Unfortunately, I have learned the hard lesson since 2006, that when I make certain observations, the world refuses to acknowledge the new realities.   Stupid world ;)
I now understand this is the way it must be.
The current system is run by politics, and political decisions must appease those who most influence those decision makers.  So when a new reality hurts the them,  they basically instruct the politicians to RESIST making the right changes.  In fairness to the politicians, most probably have zero clue what to do is right vs wrong, and they just go along with the flow.   No one person can know what is right for all angles of their current job responsibilities.
When it comes to Global Currency reserve, we are asking those in decision making positions to make decisions that are PERFECT and have best outcome for USA, and the entire world!
I have never met a person who makes perfect decisions, much less at the complexity level of a multi-trillion dollar global economy.

So back on point, now that I am convinced this currency system is headed for a fundamental change, and even though I see a potential way out that would minimize damage, this of course is NOT the way the world will go.   The decision makers will fight tooth and nail to keep the existing fiat system, no matter the collateral damage on everyone.  Therefore I expect between now and 2017 the most un-fun economic atmosphere I will ever have the displeasure to experience. :(   Doesn't mean life won't be fun, for as things change, it does tend to be gradual, I do not expect a sudden currency crisis of epic proportions.
That can't happen until many other events transpire first, starting with stock market volatility, which I believe is next up.  See my next post for why.

What I think may happen is China and Russia want to take over the fiat currency system, and if USA is smart, they will let them!  I know that seems insane to say, but once they get the old system under their control, USA will be free to adopt an alternate system, hopefully one based on virtual currencies. In a weird way, the USA may know this system cannot sustain, and best let someone else hold that bag as it terminates.  The old system is based on demographics, cheap oil, and dependency of the world to agree USD as a value standard. (I need to make a new post, will update link here)The termination of the fiat currency and rise of virtual currencies as dominate winner may take a decade, but should begin in earnest by 2017.