Harry Dent: "The Fed is checkmated here"

Aaron Task recently reviewed market maven Harry Dent and the video can be found here.   Harry basically lays out the case for the end of the debt Ponzi although he does not use those words.  In short, the stock market bounce since March 2009 has been driven by low rates and other Fed stimulus.  The Fed has been doing this in order to battle deflationary deleveraging (in other words, reduction in the money supply caused by the destruction of credit and the paying off or defaultig on debt).  Bernanke knows what Alan Greenscam knows: if housing and other asset prices fall then banks will no longer be able to ignore the bankruptcy that is already built into their balance sheets but which regulatory forbearance is allowing them to legally ignore.  Bernanke's goal is to give banks essentially free money which they turn around and loan out for 4-6%.  The spread for the banks is 3-5 points or more.  That is generally a formula for making easy money.  The hope is that banks can "earn" enough money like this over the course of years in order to become solvent again. 

But this time, as Dent points out, it seems to be turning out differently.  Instead of loaning that money to people with no jobs, banks are avoiding that trade in fear of not getting repaid.  It should be clear by now that the whole concept of monetary honesty and integrity has collapsed for many people in the economy who are simply following the examples set by government and the banks.  It is no longer considered a big social crime to live in your home without making the payments.  Five years ago everyone would have frowned on this practice to say the least but today there is a lot of understanding and even sympathy for people in this position.

Dent claims that money which banks are borrowing from the Fed but which they don't lend for housing is instead going into other (gambling) assets, including the stock market, thus driving them higher.  Banks have learned that it is impossible to get into cash very quickly when a crash comes if they are invested in nonliquid assets like housing.  That's why they like paper assets so much at this point.  They think that they can just bail out with the click of a computer mouse. This widespread mentality where everyone thinks they can be faster to bail than the next guy is just the kind of setup required to achieve the massive stock market collapse that Dent sees coming later this year.  What banks are finding is that on the way up there is lots of liquidity but if this thing rolls over like Dent thinks is going to happen then everyone is going to find out very quickly what a phony market the stock market actually is.  There will be very little liquidity for the next crash and that means that sellers will have to lower prices big time in order to move their inventories of essentially worthless company shares.  In other words, not everyone can get out of a Ponzi scheme whole.  Duh.

Dent also suggests that the Fed is now damned if they provide more stimulus and damned if they don't.  He says they are checkmated here.  Nobody knows the actual timing of these things but I agree (and have written it myself many times over the past years) that the Fed will appear to omnipotent for a long time and then suddenly people will lose confidence in its ability to manipulate everything.  People will come to a sort of mass understanding that The Wizard of Fed is just a tired old man running a machine that uses smoke and mirrors to dazzle the economically ignorant.  In other words, the herd will finally wake up and realize what a scam the Federal Reserve is and once that happens there is nothing the Fed is going to be able to say or do to stop the herd from stampeding for the exits.  The details will include things like rising interest rates but the real reason for the move will be that the herd loses confidence in the con men and the con game they have been running.

Dent also believes that gold and silver will be negatively affected by these events.  In truth, if people's wealth gets sufficiently wiped out then there is a reduced need for wealth preservation mechanisms like gold and silver.  If people get massive margin calls on their leveraged debt and they happen to own some gold and silver then they will sell the gold and silver in order to cover those margin calls.  So yes, gold and silver could take a big dip along with the markets if Dent's predictions come true but once the smoke clears it will be physical gold and silver emerging as clear leaders again because everything else will be very difficult to trust.  If people don't store their remaining wealth in gold and silver after a big crash then what would they store it in, the dollar?  Maybe for a very short time but history shows that the dollar is a very poor mechanism for long term storage of wealth.  Also, the dollar (being a debt instrument) is the basis of the global debt Ponzi.  The value of Ponzi assets tends to decay exponentially in the end stages of the Ponzi. 

Even if all of people's wealth is wiped out in a global economic melt down, people will continue to work after the crash.  This will create new value and that will need to be stored somehow.   At that point gold and silver would probably have lots of appeal to the masses.