Reposted from Bruce Krasting’s blog with his permission.

Ben Bernanke has said many times that Marriner Eccles, the head of the Federal Reserve in 1936/37 made a mistake by tightening credit (raising reserve requirements). Bernanke blames Eccles’s actions for the 50% stock market collapse in 1937 and the second leg of the depression that followed.

Bernanke’s interpretation of Eccles’s actions is widely held by historians. It was FDR who first (conveniently) blamed the Fed. I think that Bernanke is also (conveniently) blaming Eccles. He is using history’s interpretation to support his position that monetary policy must be set on MAX for the next three years. He has said that he will not make the same mistake that poor old Eccles made.

Eccles was in a bind. His job at the Fed was to maintain relative stability of prices and the stock of money. In the years prior to 1937 money flowed into the USA from Europe. This “flight capital” fled to the USA in the form of gold shipments. The money came because the holders of wealth were anticipating a major war. With gold reserves rising, so did the supply of money. M1 increased 55%, and money in demand accounts rose 71% from 1933 to 1936. More troubling were rising inflationary pressures. In the first six-months of 1936, wages rose by 11%. Wages in the critical steel industry rose by 33%. These conditions would scare any reasonable Central Banker.

The Fed itself answered the historical question of whether the Fed’s actions in 1936-37 was responsible for the 1937-38 double dip. In a research paper, (PDF Link) St. Louis Fed researcher Charles Calomiris concluded:

We find that despite being doubled, reserve requirements were not binding on bank reserve demand in 1936 and 1937, and therefore could not have produced a significant contraction in the money multiplier.

Much of today’s monetary policy is based on the historical interpretation of the consequences of the Fed’s actions. If the Fed was not to blame for the 1937 crash, then who/what was? In her book, “The Forgotten Man”, Amity Shlaes provides some answers. She points to a critical speech by then Treasury Secretary Morgenthau on November 10, 1936:

The war against the Depression had required deficit spending. But the emergency is ending, and the domestic problems we face today are essentially different from those which faced us four years ago. We want private business to expand. We believe that one of the most important ways of achieving these ends is to continue toward a balance in the federal budget.

Morgenthau’s comments 75 years ago (and the following cut backs in federal spending that took place in 1937) remind me of where we sit today. After four-years of spending like mad to fight the recession/depression of 2008, the federal government has committed itself to dramatic cuts in spending starting in January of 2013. Coupled with those cuts are across the board tax increases for every individual who has income.

In the book, Shlaes points to other factors that contributed to the crash of ’37:

*The rapid rise of wages/raw materials in 36/37 led to a conclusion by many that corporations were going to face a profit squeeze. It was this threat that led to the 1937 stock market fall. We face a similar situation today. Rising commodity prices and global wages will impact consumers and company’s bottom line. (Think Apple and Foxconn)

*Social Security was collecting money from every paycheck by 1937. This reduced disposable income and contributed to the recession. This is not unlike what we face in 2013 when SS taxes are scheduled to rise by 2%.

*FDR wanted to balance the budget. He raised taxes in 1937; this was a big factor in the decline of the economy. We face the same scenario in 2013 when large increases in taxes are scheduled.

*In November of 1936 Nazi Germany signed the Anti-Comintern Act with Japan and Italy. While there were many like Neville Chamberlain, who ignored the evidence that a war was coming, the financial markets did not. This too, has similarities with 2012.

I think we are about to re-make many of the mistakes of 1936/37. The programmed spending cutbacks, couple with the many impending tax increases on 1/1/2013, will certainly cause a sharp contraction in economic activity.

Bernanke’s Fed has sworn that it won’t make the mistakes of 1936/37. But I’ve shown (and the Fed’s own research confirms) that Fed policy was not the cause of the ’37 crash. Bernanke is relying on a false interpretation of history to justify his monetary policy today.

We will face an economic slowdown due to lower federal spending, and at the same time, inflation will be rising as a result of the excessively loose monetary policy. Stagflation is in our future. Should this be the result, the historians will say that both the Fed and fiscal policy are to blame. In other words, we have not learned a thing from our past mistakes.

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Now that 2011 is behind us, it’s worth reflecting on the eleventh consecutive year of the gold bull market.

For those not following closely, gold just put in its 11th consecutive yearly price increase, with an approximately 14% rise on the calendar year. And that wasn’t even nearly a remarkable year — the average price increase over that time span works out to about 16%!

It’s true, there have been some sizeable declines over the last decade plus (such as during the global market collapse of September 2008), but as is obvious from the long-term performance, these declines haven’t broken the back of “the bull” in gold. Plus, calendar-year performance is accorded special significance for various financial reasons, so gold should be granted the kudos it legitimately reserves for this virtually unheard-of feat.

But you (randomly-selected member of the general public) probably haven’t heard of it.  In fact, you probably think that “gold is going down”, based on what you’ve heard in the media recently (if not prevailing for the past 5 years or so).

An interesting question then remains: why has this oddity occurred?

I think there are a few reasons, with one primary and a few secondary.

Secondary are the reactions to sharp pullbacks such as the one in 2006 (from a high of about $700/oz), the one in 2008 (from about $1000/oz), and the one in 2011 (from $1900/oz). There have also been numerous “bearish” signals of interest to technically-driven market traders and analysts (such as a number of downside violations of the “200-day moving average” in the gold price).

The reactions to these events seem to have erected quite the “wall of worry” in gold, and along with the recovery from these pullbacks, have increased volatility in the gold market enough to scare people away from gold as a “safe haven” investment (Jeff Nielson has more on this phenomenon).

But all that still leaves the glaring question of why that particular pattern is happening — i.e., significant (if not “parabolic”) price spikes every few years, which rapidly correct sharply, but always result in a continuation of the bull market (rather than conversion to a “flat” market or “secular” bear market).

Because such a “strange” pattern has persisted so long, I think any honest impartial observer would have to admit at this point that sustained, downward manipulation — by interests powerful enough to do so — very likely plays a major, if not dominating role.

Some argue that manipulation is “immaterial”, if not impossible, because the market has gone up consistently for 11 years now.  True, but that ignores the very question we raised about the particular shape of the bull market (and lackluster media reaction).  Assuming the move is driven by underlying fundamentals, which have clearly not changed (indeed, the global financial problems and the central bank monetary easing response to them have only worsened), then it is odd indeed that an exponentially increasing number of market participants haven’t “caught on”, jumped in, and drawn gold into a major parabolic “blowoff” reminiscent of 1980. This is, after all, the norm, rather than the exception, when the market is presented with a long-term, “one-way bet”.

But that point gets to the core of the issue, doesn’t it? Glaring in our face is the not-so-implicit desire of Western governments and prevailing financial powers to avoid such a macro-parabolic spike for what it would reveal about their bizarre fiat money and banking system. Namely, that it is totally insolvent, with no way out — except by taking advantage of the key “feature” of fiat money; that enough of it can be arbitrarily printed/created to get the-powers-that-be out of trouble.

And were the gold market to really start to run away (and I mean in a way that would cause the media, and hence the general public, to take notice for more than a few weeks), it would not only signal distress for the status quo monetary system, it would illuminate the obvious “escape hatch” that concerned holders of paper assets could take to protect their wealth while they still can: getting the hell out of paper and into gold.  And this especially  includes government debt — with US Treasury debt the most critical of them all. Indeed, after four years of rolling bailouts, Western governments (especially the US) have now stuffed the public balance sheet such that they are more deeply insolvent than they have ever been in history.

And the numbers still show a laughable, less-than-1% global asset allocation into gold, despite a 10% allocation to gold being the “prevailing advice” from the even mainstream financial establishment (a recommendation provided mechanically, but never heeded — almost like a disclaimer — “If the economy collapses and you lose everything you’ve invested with us, remember we told you to put 10% into gold!”).  So it’s clear that there has been little, if any increased movement of investors into gold (visible to Western market statisticians, at least), despite 11 years of relentless gains. This suggests that the “raw feedstock” for a major stampede into gold remains (or “dry tinder for a major explosion”, to use another apt simile). But something first must set it off.

So there’s the motivation. And if we were part of those powers-that-be, we would make suppressing a gold price mega-spike — not a gradual gold price increase — priority #1.

Such a “dampening” of the market is all that is needed to keep the gold bull under wraps as far as the general public is concerned — totally preventing a long-term price increase is apparently unnecessary (certainly this lesson was learned with the 2006 price smash, if it hadn’t been earlier). And semi-regular “beat-downs”, from each of which a major media circus is made, fit the bill beautifully.

An added benefit to these powers-that-be with this kind of manipulation is that they, of necessity, need use far less “financial firepower” to pull it off. Were they to instead go for the goal of causing overt price declines (as they apparently did in the latter half of the 90s, barely concealed), they would probably need to resume selling off (or leasing) even more of their puny official gold hoards.

And who would want to sell gold heading into what they certainly know is coming — the ultimate denoument of their decades of monetary expansion and recent bailouts?

The upshot is, we reckon that because of this “wind resistence” style of market manipulation, they will end up either doubling the length of the gold bull from the typical run of a decade, or will have simply delayed (but not prevented) a final “blow off” phase.  Such a blow-off always dwarfs the “base”; i.e., everything up till now would still be simply the “base” — which isn’t so strange considering that the 4x plus increase in gold so far, by most measures, does not even keep up with broad central bank monetary expansion.   And after such a blow off, gold will likely remain permanently higher, to factor in all the money printing that has taken place.

So to answer the titular question, no, this gold bull is not for real — the reality is, and will likely be in the fullness of time, much more bullish.

We suggest you allocate your wealth accordingly.

NOTE: We have made repeated references to manipulation in this article without really citing specific “evidence.” That was on purpose, since the main argument is that the overall pattern of the gold bull market, when taken with the background macro-economic fundamentals, screams bloody murder. But if you’d like an inventory of specific skullduggery towards gold manipulation, we direct you to the work of the fine folks at GATA. Here’s a direct link to a summary report on the first decade of their work.

We would also suggest waking up to the obvious facts which are in full public view, such as how the IMF and individual Western central banks handle their gold sales in a way that no sane, high price-seeking private seller, would ever replicate. Or, perhaps even more glaringly, how the US overtly nationalized gold in the 1930s, kept it illegal for US citizens until the 1970s, and then publicly fixed the price (repeatedly) until the gold-backed dollar standard was totally abandoned. When you consider all this, the real question is not whether governments manipulate the gold price, but rather, did they ever really “free” the gold price?

And so we leave you with an insight from Goethe: “No man is ever so fully enslaved as the one who has been convinced he is free”.

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While there is a solution, there is a strong reluctancy from Washington to commit to it.

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Charts with this podcast.

Source- Meulendyke- US Monetary Policy and Financial Markets, Federal Reserve Bank of NY, 1998

Here’s what Bloomberg had to say about this morning’s reported jump in pending home sales (signed sales agreements).

Pending sales of U.S. existing houses unexpectedly jumped by a record 10 percent in October, indicating the industry at the center of the last recession is stabilizing as the job market improves.

Allow me to phrase this as delicately as I can.

That’s… just… horseshit.

Let’s focus on the actual, not seasonally adjusted number. In my housing updates in the Wall Street Examiner Professional Edition I convert the Realtors’ Pending Home Sales number to an actual number equating the index to the existing home sales number for the month that will be released late in the month. This number rose by 35,500 units or 9.2% m/m. Sounds good, right? Not so much when considering that September’s level of 385,500 is the worst September level in the past 15 years, including being the worst September since the housing collapse began in 2006-07.

Where does that leave the October number? At 421,000 it is the worst October since the housing collapse started, and the worst October level in the past 15 years. How is that recovery? To me, it looks like a dead cat bounce from an atrocious level in September, a simple reversion to trend, and a weak trend at that.

What about seasonality? Arbitrary seasonal adjustment factors produce a specific but entirely fictional number that almost always results in a false impression that conditions are better or worse than they actually are. Still, seasonality must be considered. The best way to do that is to compare the current month with the behavior of a representative sample of recent years.

As it turns out, October is typically an up month. This year’s gain of 35,500 compares with a gain of 29,000 last year. There was a gain of 40,500 in 2007 when the overall market collapse was in its infancy but the pundits were declaring their first of many false bottoms, and a gain of 77,000 at the tail end of the bubble in 2006. October 2008, at the nadir of the first wave of the housing crash, only saw a drop of 7,000. In the overall scheme of things, this year’s bounce from catastrophically low levels looks like nothing more than reversion to trend from weaker than trend.

Another point made by some pundits was that this uptick results in a big improvement in the inventory to sales ratio, which is more horse manure. At the current level, the inventory to contracts ratio (which due to contract fallout is always better than inventory/closed sales) stood at 9.18 units available for every unit sold. That’s still terrible. In normal markets this ratio is between 4 and 5. There is a seasonal pattern which usually peaks at the end of the year. In October 2005, the ratio was 4.9. The current level is not materially better than October 2007 at 10.11, and October 2008, at the worst point of the economic collapse, when the ratio hit 10.16. This year’s level is materially worse than last year’s 6.6. How is that recovery?

Clearly it isn’t. This doesn’t even consider the shadow inventory of 7 million units (according to Fitch). That’s nearly double the current existing homes for sale inventory. As the chart shows, this month’s downtick leaves the ratio either on or above trend, depending on how it is measured. The trend remains negative.

The best indicator of real time housing demand comes straight from the Mortgage Bankers Ass. in the form of the Mortgage Applications Index. I include a long term chart in the in the Wall Street Examiner Professional Edition housing updates.

As the mainstream media dutifully reported this week, that index has had a little bounce in recent weeks as fence sitting buyers got panicked into the market by the rise in mortgage rates over the past month. That may sound perverse, but it’s actually typical market behavior. After a long period of declines in mortgage rates during which prospective buyers sit on their hands, it is normal for a wave of them to come into the market upon signs of an upturn in rates. The problem is that this is not sustainable. If rates continue to rise, fewer people will qualify and fewer people will find payments attractive enough to entice them to enter the market. If rates begin to decline again, people will go back to sitting on their hands, motivated to stay on the sidelines by falling prices. In other words, this blip up in demand is likely to be followed by another demand vacuum.

The rise in demand in November will again show up in next month’s NAR data on pending home sales. So far, that rise, like the rise in contracts, has only been a move from an extreme below the trend back to trend. The trend is still very much down. Until we see a string of numbers that are above the downtrend lines, it is ridiculously premature to conclude that the housing industry is stabilizing. Prices will not truly stabilize until the massive inventory overhang is whittled down by a sustained rise in demand.

So far, in spite of the wishful thinking of Wall Street pundits and their infomercial conduits, there’s been no real indication that that is occurring. If that is about to change, it will begin to show up in the mortgage applications as a sustained breakthrough of the downtrend lines followed by an upward curl in the 52 week moving average. However, that still may not be enough to make a dent in the second part of the equation, that is, supply. We’ll need to keep and eye on both elements in the months ahead. I am not about to call a bottom, or even “stabilization” until I see facts that suggest that demand is on a sustained growth path sufficient to reduce the supply overhang, and that those two factors are sufficient to stop the current second crash wave now under way in housing prices.

It is that crash in prices that threatens the very survival of the financial system because it threatens the market with yet another wave of defaults and foreclosures. If that were to occur, the Fed and already overburdened sovereigns might be powerless to forestall systemic collapse.
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Here’s the best stab I’ve seen yet on explaining what happened yesterday. It comes from UnSane over at Capitalstool.com.

This is my own pig-ignorant reconstruction of what happened.

The Yen went nuts, 4c in an hour. CAD did the same thing, only less so. The currency action was crazy and started well before the market collapse.

The carry trade algs panicked and started dumping US equities.

The HFT algs which had been a large part of the liquidity of the market either started dumping or (most likely) just stepped out of the market completely as it was getting too weird. Several of them have said explicitly that they shut down.

There may well have been a problem where HFT algs stepped in front of sell orders only to find every other HFT was doing the same thing, but the smart ones had cutouts in place to avoid this.

Whatever the case, this reduced the liquidity of the markets.

The regular algs also started dumping.

The NYSE specialists were overwhelmed by computerized orders and began to cut-out individual equities so they could get a handle on what was going on.

Sell orders for these equities were then re-routed to much smaller, less liquid exchanges where they ran through the bid stack in a matter of seconds.

This caused the insane collapse in prices, as there were literally no buyers.

Within a minute or so, the NYSE started to come back on-line, which brought liquidity back in and permitted the massive covering of shorts.

I probably got some of this wrong but at least there’s a coherent narrative here. There may have been some other butterfly-wing trigger such as a stupidly large ES sell order, but this was a giant house of cards waiting to fall over.

The people who really suffered here were individual investors with market stop orders.

The Treasury finished up a light week with a 4 week bill auction that drew another wave of panic buying keep the rate near zero. There’s no real sign of a letup to the mania, as terrified investors continue to seek the “safety” of the shortest term Treasuries. Panic behavior of this nature always ends badly. Another anomaly of note is the fact that 10 year Fannie paper is now yielding less than 10 year Treasuries. This is another sign of mass psychosis. Unfortunately, the source of the infection has been Bernanke’s insane policy of piling up risky MBS paper on the Fed’s balance sheet. Wave after weekly wave of Fed buying has created one of the most ridiculous market distortions in history. Unfortunately, the problem it was designed to solve, the housing market collapse, isn’t responding. Click here to download complete report in pdf format (Professional Edition Subscribers). Try the Professional Edition risk free for thirty days. If, within that time, you don’t find the information useful, I will give you a full refund. It’s that simple. Click here for more information.