Eric King:  “Art, you’ve been warning recently about the great danger, the fact that the Fed is employing so much leverage.  KWN published a piece of yours which included comments from a couple of individuals, including Peter Tchir.  Can you talk about the danger of this leverage that the Fed is employing for the listeners (and readers) globally?”

Cashin:  “The Fed has bought up significant amounts of some of the (Treasury) issuances, particularly the 10-Year, in trying to affect rates further out.  They’ve become a dominant factor.  And I wonder how they can get to tapering because they have become kind of addicted in these purchases.

The Japanese are not buying (US Treasuries) at the rate they were buying a year ago.  The Chinese are not buying Treasuries at the rate they were buying a year ago.  So you begin to wonder, how can the Treasury manage if the 3rd leg of the stool, which is the Fed, comes apart?  So, there will be a good deal of pressure there.  They talk about, ‘Tapering is not tightening,’ but the markets may see it another way. 

Now, that having been said, they have induced the banks, who can’t get in a full lending cycle, to take the money that the Fed gives them when it buys the bonds in its quantitative easing program, and they are leaving them in the vault at the Fed under their name.  And that’s in the trillions of dollars.

Now there is no inflation at this time because that money has no velocity.  It’s locked up.  But the great concern here is should that money begin to gain velocity, that could turn into a sudden and sharp inflationary pressure, virtually coming out of nowhere.

And I do not believe the Fed would be able to stop that by raising rates.  I think they would have to take more drastic measures, perhaps raising reserve requirements, which would be like hitting the economy in the head with a two-by-four.”

Eric King:  “Art, you had the second piece KWN published.  It included comments by Peter Boockvars, as well as Ray Dalio’s comments.  And, again, both warning about the Fed.  The reason I am sticking to this (point) is because when I see you warning about something repeatedly, in this case the Fed, it’s because half a century of experience tells you that something bad is headed our way, and usually you are right.”

Cashin:  “Thank you for that, but in doing it for 50 years I have learned to begin by watching something that’s on page 13, or page 7, because pretty soon it will be on page 3, and then page 2, an then it will be a headline on page 1.  And so to be a prudent investor, one has to be careful and put together what’s going on to see if their are disparities. 

And the Fed has gotten itself, well, Janet Yellen used the word in her testimony, ‘unprecedented,’ they are in an ‘unprecedented’ position.  And we will begin to see how the market reacts -- if they begin to believe tapering looms.  Right now the market is thinking you may not see it until March.  There are some who think you may begin to see a very mild tapering in January.

Now what people have got to understand is this market may overreact.  If you are running a bond fund, you look and you see tapering beginning and you say, ‘Uh oh, I’m going to get swamped by redemptions.  People are going to start to think that the bond bull market is over and that rates are going to be going higher.’

So if I’m going to assume that redemptions are about to flood in, I don’t want to wait to be forced (into selling).  So I will begin to sell my bond portfolio earlier.  My point being that a Fed move, once it is fully suspected, not believed, but fully suspected by the market, can have an undo and rather rapid consequence.  That’s why you tend to look ahead before it gets on page 1.”

Eric King:  “Art, being around for half a century in these markets you traded gold at one point.  And I know you’ve been keeping an eye on the flow of gold from the West to the East.  Your thoughts as you watch this unprecedented drain of gold from the West over to the East?”

Cashin:  “Well, it is continuing.  And China is moving up to become possibly the largest buyer for decades.  India was the largest buyer, but because of the currency strains that they’ve suffered, the government put almost an economic embargo on the purchase of gold.  They saddled it with surcharges and taxes, and that has limited India’s purchases. 

Now, if that continues, and the Indian currency and the Indian economy continue to be under the kind of strain they are, there may be a black market developing there.  And if that is then added into the Chinese demand, then you could see the physical gold start to move up rapidly (in price).

But, again, that is a latency.  It is something to be watched for.  You don’t want to move in front of the market, but you want to be prepared for the first signs that it’s happening.”

IMPORTANT - This is an incredibly powerful and timely interview with Art Cashin where he covers the historic action in major markets around the world, the incredibly dangerous position the Fed has put the financial markets and the US in, as well as many of the great dangers facing the United States and major markets.  Cashin also covers gold.  The above information was just a small portion of his incredible interview.  The King World News audio interview with Art Cashin is available now and you can listen to it by CLICKING HERE.

IMPORTANT - KWN will be releasing extraordinary interviews all day today and this weekend with David Stockman, Art Cashin, and others.

© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.

The audio interviews with David Stockman, Art Cashin, Dr. Stephen Leeb, John Hathaway, Bill Fleckenstein, James Turk, Andrew Maguire, William Kaye, Gerald Celente, Dr. Paul Craig Roberts, Eric Sprott and Jim Grant are available now. Other recent KWN interviews include Marc Faber and Felix Zulauf to listen CLICKING HERE.

Eric King

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