The markets have become very volatile and unpredictable as an unintended consequence of over 6 years of ZIRP and QE (note: mortgage QE has never stopped). It was released yesterday that from April to May this year U.S. housing starts plunged by 11% yet, gold and silver yawned and did not move up. The latest reading of the Shanghai Containerized Freight Index (SCFI), which measures spot price for container shipments coming out of China– has literally collapsed by 6.8% in the last week; gold and silver continue their nap time and did not move up.
That gold and silver are not reacting is highly significant. Gold and silver function in free markets as the fire alarm when smoke appears from somewhere. Smoke and small flames are appearing from a lot of sources but the Fed and the bullion banks have cut the wires on the fire alarm. While all of the markets are highly manipulated and controlled, the Fed and the U.S. Treasury have thrown all their weight and available resources at keeping gold and silver capped in price. This effort is for blood money.
Exports from China are a direct function of economic activity – and its relative vitality – in both Europe and the U.S. If the SCFI is plunging, it’s because economic activity in Europe and the U.S. plunging. A consistent flow of negative economic reports over the last several weeks in the U.S. confirms the U.S. is in an economic contraction.
Housing and auto manufacturing are two of the three primary support beams for the U.S. economy. Government spending is the third. Auto sales are on their leg of an enormous demand stimulus push from a flood of QE liquidity into deeply subprime auto loans. If you can fog a mirror, you qualify for a loan to buy a new car. Housing is on its last legs of a QE stimulated buying spree, first from big institutions and next from mom and pop investor/flippers. The big guys have for the most part stopped buying and some are selling – to the individual “retail” flippers. The music in this game of musical chairs is about to stop playing. Everyone got their seat?
The stock and bond markets are completely immune from any concept of valuation fundamentals or risk. The Fed has effectively sterilized all fear of risk from the market. At this point, nearly every single investor – professional and retail – is “on the same side of the boat.” It will turn ugly – it’s just a question of when.
If you combine this with the European situation, specifically Greece, and the strong possibility of Greece leaving the EuroZone and the Euro, it appears our global financial markets are in for some serious shock therapy. When the Prime Minister of any country stands up before the world and announces the national debt of their country is “illegal and odious,” it should send chills through the economic and financial news outlets, not to mention the equity and bond markets around the world. But it didn’t. No one seemed noticed or care.
Complacency breeds failure. Right now the enormous degree of systematic and non-systematic risk embedded in the markets and in our political and economic system is nothing more than a silent scream. But there’s a dull roar of volatility that’s slowly rising in volume. There’s no telling which event – known or unknown – will turn the public’s hearing aid up to 10 from zero. But when that event hits, everyone including the those of who can see it coming will likely be shocked by the unintended consequences which will be unleashed.