Below is Fitzwilson’s exclusive piece for KWN:

Fitzwilson:  “One of the most ingenious and hysterical movies ever made is “This Is Spinal Tap”.  The brainchild of Rob Reiner and a truly gifted group of actors was released in 1984.  The story is about an aging rock band from the U.K. returning to the United States for what was billed as their comeback tour.  It was anything but a comeback tour, although the movie was one for the ages.

With each marginal to disastrous concert, the optimism for a successful tour spiraled downward.  One of the musicians, David St. Hubbins, was asked by an accompanying reporter whether or not it was the end of the band.  David replied:

“Well, I don’t really think that the end can be assessed as of itself as being the end because what does the end feel like?  It’s like saying when you try to extrapolate the end of the Universe, you say, if the Universe is indeed infinite, then how – what does that mean?  How far is all the way, and then if it stops, what’s stopping it, and what’s behind stopping it?  So, what’s the end, you know is my question to you.”

His “eloquent” response gives us a clear path as to what to expect from the so-called “taper” leaking out about the Federal Reserve’s plans for pulling away from the policy of quantitative easing (QE).  St. Hubbins’ “succinct” answer to the other question can be just as informative as to the issue of ending QE....

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“In the movie, the manager of the band concocted a “Hail Mary” plan.  It was to be a spectacular theme with a spectacular set to be custom build for the concert.  A prop was to be constructed that would provide the backdrop for the stage to make it seem as if the band were playing at Stonehenge along with Druid undertones.  The manager met with the set designer and sketched out a picture of the centerpiece for the stage.  His intent was that the prop would be massive, and descend from the sky, enthralling the concert attendees.

The prop specialist took the sketch too literally and built exactly what had been drawn.  Unfortunately, the prop specialist built the Stonehenge centerpiece to the dimensions of the paper upon which the sketch was made.

At the critical moment during the concert, the smaller version descended from the sky much to the Band’s chagrin.  Needless to say, a Stonehenge the size of a small coffee table did not generate the “wow” effect on the crowd.  Another disastrous concert for the Band.

There have been clues in the past few weeks that something monumental is afoot with regard to Federal Reserve policy.  Chairman Bernanke announced that he could not attend the Jackson Hole gathering of global bankers, a highly unusual act.  We had the traditional trashing of the oil, gold and silver markets.  Currency war is escalating and long-held assumptions about appropriate relative levels have been broken.  The Fed itself announced that it could increase the $85 billion per month of quantitative easing or decrease it, too.  Treasury rates have been rising.  Intriguing.

Earlier in the week, there was a tweet from a well-known reporter that suggested the direction of quantitative easing is about to change.  It is being called “tapering”.  The tweet was confirmed in an article released Friday afternoon.

We try to envision the ending of quantitative easing, the so-called exit strategy for the central banks.  Try as we might to imagine that, we are unsure how that would work or if it could at all.  As others have pointed out, nothing has really changed with regard to deficits, unemployment, accrued liabilities for social programs, budgets, etc.

We have not been fans of the zero interest rate policy.  It has been disastrous for retirees and retirement funds.  It has been good for those that owed money, but the flip side of that is that savers were shorn of their income.  It has also created what probably are irreparable bubbles in the stock and bond markets.

Allowing interest rates to rise now, however, is a gutsy call.  We know that government purchases of stocks has been a major factor not only in putting a floor under the stock market, but sending it rocketing skyward since January 1st.  Another factor has been the search for yield.  The only game in town was high dividend paying stocks, but that was not the normal investing venue for many.  If rates on fixed income rise, that could very well cause a stampede out of stocks back into cash.  With margin debt at record levels, to boot, it could be a recipe for a disaster.  The interest cost on Federal and state budget deficits would balloon.

While the initial QE was necessary given the circumstances in which we found ourselves, the continued use of it has achieved what feels like momentary stasis among bubbles.  It is hard not to draw the analogy of the Hunt Brothers cornering the silver market in the late 1970’s.  In this case, however, the Fed owns just about everything.  Everyone knows that it is easy to buy, particularly given unlimited money creating capability.  Just like the Hunts, however, you have no friends on the other side of that mountain as you attempt to sell.  The “Candy Man” might be trapped without resorting to extraordinary actions.

As we watch this historic experiment with unlimited fiat, we cannot know what comes next.  It could be the shock and awe version of Stonehenge that Spinal Tap’s manager envisioned, or it might be the drastically smaller version given the constraints of the global financial situation.  We should know within the next few weeks.  If there is something spectacular afoot, it is not likely to be simply cutting back on QE.

In the movie, St. Hubbins and his fellow musician quip that “It's such a fine line between stupid and clever”.  Could it be that we are about to find out?

© 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.

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Eric King

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