Lee Adler: We are on the Eve of Destruction
Tom welcomes a new guest Lee Adler to discuss how the Fed operates. The Fed creates money via their primary dealers which include banks in the U.S., Europe, and Canada. The dealers directly invest in the markets with the money they get from the Fed. This is why M1 and M2 metrics aren’t that meaningful.
Permanent open market operations are just a different name for quantitative easing. Markets respond directly to Q.E. purchases as he demonstrates with a detailed chart. When Q.E. stops markets fall until the Fed is forced to re-intervene.
Reverse Repos are also available to banks and money market funds. Lee explains the purpose of the Reverse Repo program and the excess liquidity it creates. Now that Congress lifted the debt ceiling the Fed will want to rebuild its cash balance and likely resume selling new debt.
There will be an increase in treasury yields and markets will tighten but it won’t happen until the slush fund is gone. This market top will be a slowly rounding one that will take many months. He says, “The Fed’s history has been a series of long-term serial blunders. The next mistake is required by the last mistake and each one gets larger… at some point, we reach a critical mass where it can’t be rescued.” It’s going to be very difficult to rein in inflation.
If gold can pop through resistance near these levels it will be very good for the miners. However, if it doesn’t hold then we could see lower prices. So use caution. He notes that we are very close to the top in equities and it’s getting risky. Whatever you do, don’t fight the Fed and don’t fight the trend.
Time Stamp References:
0:00 – Introduction
1:21 – M1 & M2 Money Supply
5:55 – Chart & Q.E. Correlation
9:46 – The Primary Dealers
12:42 – Reverse Repo Program
18:35 – Eve of Destruction
24:27 – Fed & Treasuries
27:09 – Melt Up?
28:15 – Fed & the next Q.E.
33:40 – Transitory or Crash
39:35 – Gold & Mitigating Risk
42:55 – News is Noise
46:08 – Wrap Up
Talking Points From This Episode
- How the Fed creates money through primary dealers.
- Purpose of Reverse Repos.
- Overall direction for yields and the markets.
- Outlook for gold and protecting your wealth in this environment.
Lee Adler is published on LiquidityTrader.com, The Wall Street Examiner, and Capitalstool. He also published and was the lead analyst for Sure Money Investor and developed David Stockman’s Contra Corner.
He has been in finance since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities.
Prior to starting the Wall Street Examiner Lee was a commercial real estate appraiser in Florida for 15 years and specialized in the analysis of failed properties. He also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s.
Lee has been charting stocks and markets and doing analytical work since he was a teenager. Yogi Berra said, “You can observe a lot by watching. I’ve seen a lot through the years, and have incorporated much of it into my research.”
He says, “I’m not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I’ve watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I’m happy to share that experience with you.”