A Speculative World About To Blow

 | Mar 25, 2014 03:00AM ET

Summary
  • The Fed is creating a world speculative bubble.
  • U.S. response to Crimea is stupid and dangerous.
  • World instability creating demand for gold.

In a recent interview,  David Stockman, former director of the Office of Management and Budget, painted a grim picture of an unstable global economic system drowning in speculation due to the free-money policies of central banks around the world. Stockman said, “The greatest danger [to the world today] is the central banks.” He argued that all of the central banks are out of control. They have all expanded their balance sheets to a point that someday will be called “lunatic.” He criticized Federal Reserve Chairman Janet Yellen for pursuing a policy of “Yellen-nomics,” which continues the “folly of free money.” Instability extends to the political sphere in international relations. Stockman said, “I think there’s a lot of insanity loose in the world, and particularly on the Ukraine.” He soundly criticized the US and Western European governments for their response to the Russian seizure of the Crimea, calling their response “stupid and dangerous.” He stressed that the Crimea is not strategically important to the West and that the Crimea has long been a part of Russia, which annexed Crimea in 1783, before California even became a part of the United States. He believes the crisis is the result of the decisions taken in the 1990s to expand NATO eastward at a time when the Cold War was over and the alliance’s reason for being had disappeared. NATO should have been dissolved and the United States should have demobilized, Stockman argues.

When the world environment is so unstable, there is demand for gold, which in part explains its recent rise. Another indication of the speculative nature of the unstable international monetary system is the recent crash in copper. The copper crash may be due to reduced demand and a slowing world economy or, Stockman argued, it may be because the bubble in China is so “immense.” Stockman argued that the bubble in China “is so out of control that they are using anything they can get their hands on to get loans and using the proceeds to speculate….The copper stockpiles are no longer simply a feed into an industrial production process, but they have become gambling chips in the global casino.” He characterized “China is one huge speculative bubble,” like a volcano, and it is only a matter of time before it blows. With the high of 1392.60 made on March 17, the market has fulfilled and completed the first leg of the 2014 bull market for the yellow metal. As profit taking developed at these levels it brought the market down to a low of 1328.10 in 3 days under fast market conditions. As I said in my last report,  ”If long, use the 1360 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 1391 and 1400 levels during the week.”

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This cyclical low was anticipated and published in VC Weekly Price Momentum Indicator of 1350, it confirms that the price momentum is bearish. A close above the VC Weekly, it would negate the bearish signal to neutral. Cover short on corrections at the 1306 and 1277 levels and go long on a weekly reversal stop. If long, use the 1277 level as a Stop Close Only and Good Till Cancelled order. Look to take some profits on longs, as we reach the 1378 to 1422 levels during the week.