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The Daily Reckoning | Monday, November 15, 2010 Congratulations, the government just upped your cost of living...again, Quantitative Easing: "nothing more than monetary porn," Plus, Bill Bonner on Banana Republics, the Mother of All Puts and plenty more... ------------------------------------------------------- Options Hotline Offer Closes at Midnight, November 21... Makes as much as $536 per Day This little-known and underappreciated stock market strategy could have already made you a maximum of $1.9 million over the last 10 years...that's as much as $536 per day! Sounds too good to be true? Click here to see how for yourself (plus check out the outrageous guarantee). The Moronic Actions of an Academic Genius Why Bernanke’s “Quantitative Easing” Isn’t Fooling Anyone Eric Fry Reporting from Laguna Beach, California... According to the financial commentary of the moment, Federal Reserve Chairman, Ben Bernanke is either a genius or a moron. But your California editor would offer a slightly different perspective; he believes Bernanke to be a genius...engaged in moronic behavior. He is "too clever by half," as the old saying goes. The erudite Federal Reserve Chairman is an accomplished academic in possession of a 99th percentile vocabulary. He knows his way around a thesaurus as well as he knows his way around the esteemed monetary theories of past and present. But therein lies the problem. When a refined vernacular cavorts with monetarist musings they produce a bastard child like "quantitative easing." Chairman Bernanke portrays quantitative easing (QE) as, "just monetary policy. Monetary policy [always] involves the swapping of assets - essentially, the acquisition of Treasuries and swapping those for other kinds of assets." Not so, counters James Grant, editor of Grant's Interest Rate Observer. "The truth is that QE isn't about asset swapping but, rather, dollar conjuring." Your editor sides with Grant on this one. Quantitative easing is "just monetary policy" like pornography is "just cinema." QE and pornography both utilize the conventions of mainstream activities in order to conduct and legitimize questionable activities. Chairman Bernanke considers quantitative easing to be an oeuvre d'art - a monetary masterpiece. But to most of the outside world, QE looks like nothing more than monetary porn. The Chinese ratings agency, Dagong, scorned QE as "a practice resembling drinking poison to quench thirst... In essence the depreciation of the US dollar adopted by the US government indicates that its solvency is on the brink of collapse." Undeterred, Chairman Bernanke clings to his theories and his highfalutin euphemisms. Even though quantitative easing, at core, is nothing more than "dollar conjuring," Chairman Bernanke continuously portrays it as a highly sophisticated monetary tactic. To hear him tell the story, QE is the latest and greatest monetary invention - it is good for what ails you and producers no side effects...or at least none that we know about. From Bernanke's perspective, QE bestows all the sweetness and none of the calories of a legitimate monetary policy. And he is so sure of himself that he conducts his money-printing operation shamelessly - out in the open where everyone can see. Never has a genius behaved so moronically. In bygone eras, James Grant observes, the issuers of sovereign currency would "debase surreptitiously, as if [they] were ashamed of [themselves]...Bernanke, in contrast, is out in the open, as transparent as Facebook." Bernanke's proposed QE2 campaign is not merely transparent; it is audacious. The Fed plans to purchase almost 100% of the total net Treasury issuance. "For the next five months," Stone & McCarthy Research Associates observes, "Fed buying of $550 billion would be the equivalent of 94.2% of net Treasury issuance of $584 billion." By conducting such transparent and audacious money-printing, Bernanke seems to be daring America's creditors to blink. For the moment, most creditors are simply rubbing their eyes in disbelief. "Hearing Bernanke, but not, at first, believing him," writes Grant, "America's creditors have just now come around to accepting the astonishing fact that the steward of the currency in which they denominate a substantial portion of their national wealth is bent on inflation (only a little, he says)." But America's creditors are not accepting this astonishing fact with resignation; rather, with rebellion. They are lightening up on dollar- denominated assets and they are tiptoeing away from the long end of the US Treasury market. Apparently, many investors are beginning to fear that the unknown side effects of Bernanke's QE2 will be fully known by the time a 30-year Treasury bond matures. Long-dated bond yields have been rising rather sharply during the last three months, even though short-dated bond yields have not. As a result, the yield curve is "steepening" and the yield spread between the 30-year Treasury bond and the 5-year Treasury note has reached the highest level in more than three decades. To be sure, a variety of trends and influences could be contributing to this phenomenon. The QE process itself is helping to suppress yields at the short end of the yield curve, thereby skewing the connection between short-term and long-term yields. Nevertheless, the recent, sharp rise in long-term Treasury yields seems to be sending a very clear message: Inflation is coming. The soaring commodity markets and the slumping dollar corroborate this message. "It isn't just the paper dollar from which the gold buyers are fleeing," Grant asserts. "[They] are in flight from modern monetary doctrine, too... By exchanging currencies for Krugerrands or shares in a gold exchange-traded fund, individuals are implementing their own personal gold standards... "In our view," Grant concludes, "the rush to gold is a flight from bad ideas. The gold price is soaring - i.e., the value of the dollar is plunging - because central bankers have lost their bearings." Net-net, Bernanke's marvelous monetary sweetener may turn out to be as marvelous as cyclamates. To repeat a phrase that bears repeating, "If something sounds too good to be true, it usually is." Quantitative easing is a "short"; inflation is a "long," as Chris Mayer explains in the column below... The 10 Gold and Silver Stocks to Buy Now... It's no secret that gold and silver keep breaking record high after record high. But what many investors fail to realize is that a handful of companies are likely to post even bigger gains as precious metals prices continue to heat up. Click here for our 10 favorites right now! The Daily Reckoning Presents Inflation Is Coming! Inflation Is Coming! Chris Mayer If Paul Revere were around, maybe he'd get on his horse and start yelling, "Inflation is coming! Inflation is coming!" I think it is coming. In fact, in many ways, it's already here, just not yet widely recognized. The deflationists still hold sway in the bond market, where investors happily accept puny yields. The deflationists argue that the dollar will buy more tomorrow than it does today. It is inflation's opposite. When most people talk about inflation and deflation, this is what they mean. This definition would pain the old economists who were more careful in their use of language. Be that as it may, deflation today is an argument facing death by a thousand cuts. Every day, evidence rolls showing that the dollar is buying less. Today's Wall Street Journal points to the whale in the aquarium. One headline reads, "From Cereal to Helicopters, Commodity Costs Exert Pressure." The article goes on to point out what is painfully obvious to anyone who follows commodities and companies. The cost of nearly everything is going up. General Mills will boost the price of a quarter of its cereals to reflect rising prices for grains. Kraft is raising prices. Domino's Pizza hasn't said it will yet, but it did say the price of cheese is up 29% from a year ago. Profit margins are suffering in the meantime. There is a long list of companies battling rising costs of the commodities. As the Journal notes: "Corn is up 44%, milk is up 6.5%, hot rolled coil steel is up 4%, copper is up 29% and oil is up 14% from a year ago... Across Corporate America, more companies are wrestling with when and how much to raise prices as raw materials costs climb." Still, the Journal's article had no discernible effect on the optimistic bondholders. (Or should I write "bag holders"? For soon, they will be left holding the bag.) The bond market seemed bored and yields inched up just a touch today, such that the 10-year note recently paid a whopping 2.50%. By the time the bond market says inflation is here, it will be too late - too late for bondholders. In the meantime, the prices of gold and silver are up too. All of these things point to the obvious: The dollar is buying less. Why? Let us the count the ways. There is the US government bleeding red ink and heavily in debt. Both factors portend bad things ahead. How will they square the circle? The easiest - and the most politically expedient - way is to print more money. There is the jawboning going on between central banks of the world all trying to cheapen their currencies. The rationale is to stimulate exports. But don't be fooled; the real effect of a cheapened currency is that your dollar will buy less. There are all kinds of fancy names for what the Fed is doing - "quantitative easing" comes to mind. But at bottom, they all mean the Fed will create more money. I was at Grant's Fall Conference in NYC recently. Jim Grant, the host and editor of the excellent newsletter Grant's Interest Rate Observer, said: "Don't you sometimes get the feeling that the economists are pulling our leg? A bartender would call it watering the whiskey." That is a good way to think about it. More dollar-printing simply dilutes the buying power of all dollars. And so we see today the beginnings, the mere sprouts, of a fully-fledged inflation. It can and will get much worse. Don't pay attention to that thing called the Consumer Price Index, or CPI. It is running at about 2%. It is an engineered figure and not to be trusted. Oskar Morgenstern, who along with John von Neumann contributed so much to game theory, once described it as a "mere index of doubtful validity," as Grant relayed. Nonetheless, on the basis of this suspect fluff, the Fed tells us inflation is under control. In fact, the Fed is complaining that the inflation rate may be too low. As Grant quipped, "That's like the New York Police Department complaining about the lack of crimes." Bernanke would have us believe the Fed can calibrate inflation within tolerances of 100 basis points. But it way overestimates its powers. Once the inflation train gets going, it will be very hard to slow down. One day, the Fed will wish inflation were only 2%. In the meantime, what to do? I think we do what we have always done in my investment letter, Capital & Crisis: We try our best to invest intelligently. That includes investing in commodity companies that benefit from a higher inflation rate. Their selling prices will rise faster than their costs. The price of commodities adjusts quickly to the falling dollar. Wages always lag that. Plus, there are fixed costs that adjust more slowly - such as leases, for example. So there will be a window for commodity companies to make some serious hay. Investing intelligently also includes investing in good businesses at good prices, especially if they have the opportunity to grow much larger over time. Chris Mayer, for The Daily Reckoning Joel's Note: If you've wanted to get on board with Chris's investment research, there's never been a better time. Right now, when you sign-up for a risk-free trial of Capital & Crisis, you also get a free copy of Financial Reckoning Day. We're looking to give away 5,000 copies...but they're running out fast. Grab a trial subscription, all of Chris's research AND a copy of the book right here. Now YOU Can Beat The Bastards At Their Own Game... Hidden Gov't Documents Let You Predict Stock Moves Imagine what you could do with this intelligence... Roger Barnes of Colorado used one of these hidden documents to bank $237,000 in just 6 days... It's all perfectly legal and you can do this too! Click here to watch this shocking presentation right now. Bill Bonner How the Market Really Feels About Bernanke's Money Printing Bill Bonner Reckoning from Baltimore, Maryland... As you remember, dear reader, we decided to hoist our old, tattered "Crash Alert" flag up last week. About mid-week, as we recall. Not that we had any inside information. Mr. Market doesn't talk to us directly. We just read the papers - just like everyone else. But what we noticed last week was that the Fed had given stocks, bonds commodities, and gold the biggest push in recorded history...$600 billion was coming into the market. It was long. It was going to stay long. And if it didn't do the job...there was plenty more where that came from. Plenty more. Because this money came from nowhere. And if you can get money out of nowhere...you can get a lot of it. In effect, Ben Bernanke gave the market the Mother of All Puts. Stocks go down? Put them to the Fed. They'll buy anything. Yes, Mr. Bernanke is trying to give "risk on" investors a put - protecting them from the downside by adding more and more money. No, investors are not sure this plan is really going to do them any good. The stock market went up only very briefly on the day following Mr. Bernanke's announcement. Then, there was no follow-through. All very well to get hot and bothered speculating on the fall of the dollar (and the rise of everything else). But there is something so desperate and foolhardy in Mr. Bernanke's money-printing, it just doesn't feel right. It feels more like something a banana republic would do. A New York Times article last week compared the US to a Banana Republic. It pointed out that the rich have gotten a lot richer than the poor. A pity. The author - Nicholas Kristof - missed the point completely. He thinks he knows how much people should earn and believes the difference in income - in itself - is the problem. The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976. As Timothy Noah of Slate noted in an excellent series on inequality, the United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana. C.E.O.'s of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. Perhaps the most astounding statistic is this: From 1980 to 2005, more than four-fifths of the total increase in American incomes went to the richest 1 percent. At a time of 9.6 percent unemployment, wouldn't it make more sense to finance a jobs program? For example, the money could be used to avoid laying off teachers and undermining American schools. Likewise, an obvious priority in the worst economic downturn in 70 years should be to extend unemployment insurance benefits, some of which will be curtailed soon unless Congress renews them. Or there's the Trade Adjustment Assistance program, which helps train and support workers who have lost their jobs because of foreign trade. It will no longer apply to service workers after Jan. 1, unless Congress intervenes. So we face a choice. Is our economic priority the jobless, or is it zillionaires? To me, we've reached a banana republic point where our inequality has become both economically unhealthy and morally repugnant. This is typical. The guy doesn't bother even to wonder why the rich are so rich. He just knows he doesn't like it. So he's calling on the politicians to DO SOMETHING about it! Tax the rich bastards. Give more money to the poor. Redistribute income. He gives some lame reasons why income redistribution would be a good idea for the economy... How does he know how much people should earn? Of course, he doesn't. It's just a matter of taste. Where you sit determines where you stand. If you're rich, you probably like the fact that the rich have so much money. If you're not rich, you probably don't. But let's stick to our point. The US is doing something that usually only banana republics do. The central bank is encouraging speculation. Oh, by the way... Who speculates? Is it the poor? The middle classes? The working stiffs? No? It's the speculators, right? The rich, in other words, are the guys who can get money at ultra-low interest rates from the Fed (directly or indirectly) and use it to speculate on say, cotton (up almost 100% this year) or Chinese stocks. Let's see, how does that work again? Oh yes... The Fed gives out money to the financial elite...the rich... And then the know-nothing journalists at The New York Times want the feds to redistribute the wealth. Why not just turn off the Fed? No, that would be too simple and too honest. But back to the Fed. It's just given the elite a huge wad of cash...and a promise that it will put up more cash, if necessary... ..and yet, stocks did NOT go up much. Something is wrong. That's why we raised the "Crash Alert" flag. It is as if this market wanted to go down - no matter what the Fed was doing. Or maybe it didn't trust the Fed. Or maybe investors figured that acting like a banana republic was not really good for stock prices. Friday, we got a big sell-off...with the Dow down 90 points and gold off $35. We don't like the looks of it. So, turn your head upwards a bit. See our "Crash Alert" flag a-fluttering. And get out of all risky investments... And more... Did we say sell gold? Nope, we did not. Gold is probably beginning a serious correction. If not now...soon. A serious correction will take the price down 10%...or 20%...or 50%. What should you do if gold goes down 10%? Buy it! And what if it goes down another 10%? Buy more! And what if it goes down 50%? Back up the truck. The dollar-based money system is going to fall apart. Gold going down? It's a gift. Take advantage of it. And here is why the money system is going to come unhinged. Here's David Leonhardt, in The New York Times: Imagine that Democrats and Republicans somehow came together and agreed on a grand bargain to cut the deficit. They decided to cut the pay of federal workers over the next several years, close military bases, reduce foreign aid, eliminate earmarks, expand the payroll tax and cut Social Security benefits for high earners, as the chairmen of a bipartisan commission recommended last week. Democrats also accepted the plan from John Boehner, the presumptive House speaker, to make large cuts to social programs. Republicans accepted President Obama's proposal to let the Bush tax cuts expire on income above $250,000. If the two parties managed to do all of this, how much of the country's long-term deficit would they eliminate? About one-third of it. The government has not yet solved the deficit problem, the economist William Gale of the Brookings Institution says, because voters have not yet demanded it. They have rewarded politicians who say they are worried about the budget much more than politicians willing to make specific benefit cuts and tax increases. All of us would prefer generous benefits and low taxes. "Whatever the eventual solution is," Mr. Gale said, "it will probably be something that is not politically feasible now." Regards, Bill Bonner for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Junk Science Two years ago, when the financial world was melting down, we were told that the volcano needed to be appeased. Without immediate injection of funds, the whole system would blow up, they said. Where was the science behind that? The financial system melted down countless times in the past. No central bank came to its aid before the 1930s. The Real Effects of Printing Money and Creating Debt Government Spending: A Lesson in How to Go Bankrupt Sterilizing Money at the QE Corral If you are a normal person, then you are positively terrified by the prospect of inflation, which means that you are terrified of the Federal Reserve creating so much, so incredibly much, so staggeringly much, so unbelievably much money – which is to be almost $900 billion in the first six months of 2011 – because a lot less monetary insanity than this gigantic clot of extra money caused ruinous inflations... Why Some Think a Gold Standard Wouldn’t Work Prepare for Mass Inflation The Tale of André Prenner, a Parable for our Times (Part Two of Two) Today, we take a brief pause from our normal economic and financial market commentary with this tale of common sense economic calculation and action. And no, we do not believe that the world is any more complex than we present it here. If you want to understand economics, you need first understand two things... The Tale of André Prenner, a Parable for our Times (Part One of Two) Bernanke Equally Handy With Paintbrush, Printing Press The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor