Thursday, March 22, 2012

The Bull Market In Money Printing

Now that the money printing focus has turned away from the US and toward Europe, we find that the big US banks have "exposure" to the European banks. Just what all that is remains a little murky. I don't think the customers at MF Global had a real clear handle on that. Maybe most of the murkiness is due to derivatives. These "financial weapons of mass destruction" as Warren Buffett calls them have not subsided since the crisis of 2008. They have actually gone up. You could argue that the massive growth in derivatives should be considered as quasi-money printing because, when they go wrong, a central bank somewhere has to repair the damages.

I wrote an article over at Seeking Alpha on this titled Money Printing's Biggest Show Of All Time - I suspect it will wind up being just that. I've drawn up a graphic which summarizes this new paradigm with the growth of derivatives as charted in a marketoracle piece superimposed on the Fed's recent balance sheet history (click on charts to enlarge):

Figure 1

As you can see, there was a mellowing of the official balance sheet growth since 2000 along side very mild growth of banknotes in circulation. We enjoyed mild reported inflation during this time. But the stealth, parabolic growth in all the nasty stuff was proceeding apace in the murky world of derivatives. A good portion of them blew up in 2008 and became official components of the central bank debt. Here's a comforting thought. Since that blow-up, derivatives have grown to over $900 trillion compared to the $300 trillion back then.

This is not creating "inflation" in the classical sense - too many bills chasing too few goods. It's creating something more hideous - gyration, you could call it. It is creating basic instability in the financial world, a world unto its own and pretty far removed from the real world of bills chasing goods on main street. You can only build a house of cards so high before a stability limit is reached. With complicated financial instruments, that limit seems to be reached at about a 30:1 leverage ratio. That's where Lehman and so many others began gyrating back down to the ground. If you take an estimated Euro-zone deficit of $30 trillion, the lion's share of global debt, and consider the $900 trillion we have in derivatives, and divide the later by the former, 30:1 is the result. I would much rather have the good old fashioned inflation than this new fangled gyration.

Money printing in the past has exhibited the same fractal growth patterns I've detailed in other articles on gold. You can review these as it relates to gold in those posts. And I wrote a piece on how our present Money Printing In Fractals can be viewed as a bull market. Here, I'll just include some examples of this fractal. It basically is composed of 3 elements, twin parabolas separated by a downtrend consolidation separator. For example, the recent bull market in Egypt:

Figure 2

This is the common 64 month or about 5 1/2 year scale. This size has a 1 year downtrend separator. Another example was the bull market of Denmark:

Figure 3

Historic money printing binges also commonly follow this fractal. For example, the Brazilian hyperinflation explosion of 2002:

Figure 4

This was the 7 to 9 year scale which is accompanied by a separator running well over 1 year in length, in this case about 1 3/4 years. The first parabola is malformed, but it looks like it was trying to follow the overall fractal.

Probably the most famous case of money printing was Germany in the 1920s. It also followed the fractal in the 64 month scale (1 year separator):

Figure 5

Germany's problems were similar to ours today in that they disconnected their currency from gold in 1918 to help pay for the war expenses. Nixon followed their example, and Bernanke has put it on steroids.

Today's money printing is global, the major banks are now webbed together with "swap" agreements and who knows what. So to look at our money printing bull today, one must not look at just an individual central bank. One needs to look at the activity of all the major central banks collectively.

Keith Springer recently wrote an analysis "It's Raining Money" doing just that very thing. He added all the balance sheets together of the leading 8 central banks of the world (US, UK, ECB, Japan, Germany, France, China, Switzerland) and formed one graph for a global central bank. Is it following this growth/collapse fractal? Here is his chart with my fractal notes added:

Figure 6

I have added the fractal components in orange, and it does appear to be following the 5 1/2 year scale to a tee. The downtrend separator is 1 year as it usually is in the 5 1/2 year scale. This would have us in some kind of collapse within about a year. What will happen? I don't know. Will "gyration" follow the fractal like inflation of the past? I don't know. But we do know that money printing in this day always is accompanied by stock market rallies, so the first chapter in this story may be a very good market. Hopefully some wise resolution of the world's debt problem will continue a good market. But wisdom seems to be in short supply these days.

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