Front-Running the Fed

You know what they'll do. So how to profit...?

RECENTLY, and uncharacteristically, we have begun to wonder how we could front-run the Federal Reserve, writes Bill Bonner in his Diary of a Rogue Economist.

When you know what cards the biggest, dumbest, richest, drunkest player will lay on the table...you ought to be able to profit from it.

As we've noted here at The Diary, that's what some unknown trader(s) is/are doing now – front-running Donald J.Trump and making billions of Dollars.

But it's what Wall Street's most successful hustlers and speculators have been doing for the last 30 years – front-running the Fed.

The Fed funds their gambles with ultracheap credit. And then, it all but guarantees they won't lose money. In effect, they used the Fed's money to bid up prices for their own assets...and have made more than $30 trillion as a result.

Can we play this game too? Maybe...

First, growth is slowing. Bloomberg:

"China's policy makers are preparing for two key meetings in the coming weeks with fresh evidence that sooner rather than later, the number for gross domestic product growth will start with a 5."

Five per cent growth is the slowest in China in 25 years. And it is a sign that not only are the Chinese smokestacks cooling off...so are their customers in Europe and America.

Of course, economies expand and contract naturally. Markets famously go up and down. Armies advance...and fall back. The world still turns, in other words.

But for reasons that will leave a future generation of philosophers scratching their heads, today's geniuses have decided that their job is to stop it. Round and round is all right. Up is okay. Expanding is what they want.

But neither markets nor economies will be allowed to exhale or retreat – not if the authorities can prevent it.

And they believe – against all evidence, logic, and reason – that they can stop it with "liquidity". When the going gets tough, they say, they'll add more juice.

Heck, they won't even wait for the going to get tough. Now, they're adding some "insurance liquidity," like a glass of sherry in the afternoon to keep their spirits up.

The Wall Street Journal reports:

"The Federal Reserve Bank of New York injected $104.15 billion in temporary liquidity into financial markets Thursday.

"The intervention came in two parts. One was via a term-repurchase-agreement operation that will last for 15 days that added $30.65 billion. The other was via a one-day repo operation that totaled $73.5 billion."

But it won't be long before the authorities bring out the hard stuff – even more liquidity. And this noxious brew comes in only one form – new money. It is the money launched in 1971, which has since lost 97% of its value, compared to the pre-1971 model.

How to front-run the feds' cheap new money? Simple: Just hold on to the old money – gold.

In old-money terms, US stocks have lost nearly a third of their value since 1971. The next crisis will probably wipe off another third.

And people hoping to retire on the new money coming from the feds are likely to be seriously disappointed. They may get their money...but it may not buy as much as they had hoped. They would probably be better off with the old money.

As our old friend Richard Russell put it, coming up is the most vicious, dangerous, devastating melee in US financial history.

But when the dust settles, gold will be the last man standing.