 | | The Daily Reckoning | Thursday, February 3, 2011 |
- More Bernanke babble and the $1 trillion pump-and-dump scheme,
- The wrecking ball of 2011...and how to steer clear of its path,
- Plus, Bill Bonner on what government hasn't done for you lately and more...
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|  | | | Bernanke’s Belief in Money Printing | | When Stock Market Rallies Validate Effective Monetary Policy | |  | | Eric Fry |
Reporting from Laguna Beach, California...
In olden times, Federal Reserve Chairmen would devote themselves to safeguarding the dollar's purchasing power, while giving almost no thought to the plight of the economy or the direction of the stock market. (In very olden times, Federal Reserve Chairmen did not even exist, which meant that America's silver dollars had to safeguard their purchasing power all by themselves...without any help whatsoever from the Fed.)
Now comes Ben Bernanke, an academic with an obsession for the stock market. Bernanke knows he's supposed to pursue a "dual mandate" of "maximum employment" consistent with "stable prices and moderate long- term interest rates." This essentially impossible mandate is akin to pursuing maximum rice production, consistent with low water usage. The objectives clash head-on. But that's a story for another day.
Our story for today is the mandate Ben Bernanke seems to be pursuing: playing the stock market. Based on his recent public remarks, Bernanke seems more obsessed with the stock market than a day trader.
He justifies his obsession by asserting that a rising stock market will produce rising employment. "Higher stocks prices will boost consumer wealth and help increase confidence, which can also spur spending," the Chairman declared last November, the day after the Federal Open Market Committee formally christened QE2 - the second round of quantitative easing.
So far, so good.
"The US stock market's total value has increased by over 25% - some $3.2 trillion - since Aug. 26," Barron's Randall Forsyth observes. "That date was prior to Federal Reserve Chairman Ben Bernanke's speech to the central bank's Jackson Hole, Wyo., policy pow-wow, when he first laid out the justification for the Fed's purchases of Treasuries now known by all as QE2..."
Applauding his handiwork in a recent CNBC interview, Bernanke crowed, "Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of [quantitative easing]. The S&P 500 is up 20%-plus and the Russell 2000, which is about small cap stocks, is up 30%-plus."
In other words, Bernanke seems to countenance no distinction whatsoever between a rallying stock market and an effective monetary policy. In fact, as he sees it, the former is irrefutable proof of the latter.
One Wall Street analyst recently observed that the stock market is advancing "as if propelled by some mysterious force." But the source is no mystery; it is Bernanke's pedal-to-the-metal money printing that is powering the stock market higher...or at least helping to power it higher.
Bernanke openly admits to goosing the stock market - indirectly - for the purposes of advancing the nation's collective good. Unfortunately, the results-to-date suggest that Bernanke's meddling has merely advanced the nation's selective good...like boosting net income at Goldman Sachs.
But after stripping away all the Bernanke-babble, what you find is a guy running a $1 trillion pump-and-dump scheme. He's pumping up share prices in the hopes that something good - anything good - will result. And he says he will "withdraw liquidity" - i.e. dump Treasury bonds - once economic conditions improve.
Where's all Bernanke's money coming from? He makes it all by himself...sort of. It's called quantitative easing, but it's really just multisyllabic fraud. Quantitative easing creates money out of thin air, thereby undermining the value of the currency already in circulation.
Bernanke uses the money to buy Treasury bonds. The effect of this bizarre transaction is that one branch of the government issues debt securities, while another branch of the government purchases those securities. Seems like a pretty sweet deal. And it is...for as long as the market tolerates overt currency debasement.
Over the short run, Bernanke's quantitative easing can appear to work wonders. Over the longer term, this game is likely to become much less wonderful. High single-digit inflation is a likely result. Low double- digit inflation is possible.
Triple-digit inflation? That couldn't happen in the US could it?
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| | The Daily Reckoning Presents | | Inflation’s First Phase | |  | | Chris Mayer |
The year 2011 is the year when inflation will play the role of wrecking ball. It seems to threaten everything from emerging markets to the pretty earnings narrative of the market as a whole.
I use the term "inflation" here as the man on the street does. It is when prices for most everything go up. It is not the best definition, because it obscures the reason why prices for most everything go up in the first place. The reason is that governments everywhere can't help but print lots of money. But let us not wander off course. It is what it is.
Instead, let's think about the big emerging markets for a moment. They have been so important to the investment story of the last decade, for sure. Yet rising food and energy prices pose a big risk to them.
In India, food prices are at their highest levels in more than a year, rising 18%. The dabbawalla, when he is done delivering lunchboxes, trots off to the market and finds that the price of onions has doubled in only a few months. Even the basics, like potatoes, have become expensive to the average Indian.
One 54-year-old cloth trader in Mumbai complained: "It seems everything is going up in price, from vegetable and meat to diesel and household cooking gas. We are always worried as to what is next."
Food prices are again becoming a serious issue, as they did in 2008 when the last food crisis brought riots in 30 countries all over the world. The UN tracks an index of 55 food commodities. It rose for the sixth straight month and is, in fact, above the previous high in June 2008.
In China, the typical Chinese also faces rising prices for nearly everything. The official inflation rate recently hit a 28-month high. But it's the surging price of coal that may prove to be China's Achilles' heel, at least in the short term. Coal is what powers the great boom in China. And coal is at two-year highs.
The basics like food and energy are like brakes on these economies. I think it would be surprising if, say, China could continue to grow 8% a year in a world of $100 oil - at least initially. (Solutions are found, in time.) Of course, the US and the more mature economies are not immune to rising food and energy prices, either.
The thing is it is early in this story yet. Inflation will likely get much worse, if history is any guide. Everyone seems to know the US inflationary story of the 1970s. The official inflation rate hit nearly 14% by 1980. In other countries, it was worse. In the UK, inflation topped out at 27%; in Japan, 30%.
It was not that long ago. Who is to say how bad things can get today? We will see, and we will watch things closely.
In the stock market, inflation poses its own challenge to earnings. Thus far, out of the March 2009 bottom, earnings have exceeded expectations. The market has danced accordingly. But rising prices for commodities mean that many companies will face cost pressures. Whether they are able to pass on those increases to consumers and maintain their profit margins (and sales) is the challenge.
Plus, those expectations have shifted. The market has risen to date on the back of a skeptical and pessimistic earnings view. As all bull markets do, it has successfully climbed that wall of worry. Yet cheerful forecasts make for a market vulnerable to near-term disappointment. The consensus forecast is $96 in earnings for the S&P 500, which would top its record mark in 2006. For the upcoming quarter, the consensus calls for a 29% increase in earnings from a year ago.
We won't have to wait long to see some early indications if this is likely or not, as earnings start to roll in this week. Regardless, I'm convinced inflation is going to become the story in the markets this year. There are a number of investment consequences of the above, which we'll work out as we go along.
However, since it is still early in the inflation curve, I think commodity businesses ought to do OK for the simple reason that what they sell adjusts nearly instantly to the effects of inflation. Oil companies, coal miners and farmers don't apologize for the prices of their goods. A barrel of oil is a barrel of oil, and you either pay the price or you don't get it. It's not a bag of Doritos, for which you can switch to a knockoff brand if they raise the price on you.
But not all commodities will be on such footing. Take US lumber prices. I found this next chart very curious:
As David Wilson of Bloomberg points out, "Lumber has bounced back to prices seen during last decade's boom in US housing even though the homebuilding industry, one of the biggest sources of demand, is still in a bust."
How so? Chinese demand. But the increase is from a temporary surge. China is trying to reduce its dependence on Russia, which is China's largest supplier. Perhaps it is a long-term shift. Or perhaps the Russians will sweeten the deal to get back their market share. If so, then the earnings of Plum Creek, Rayonier, Weyerhaeuser and other US log producers may enjoy only a brief day in the sun.
In the commodity realm, I prefer longer-lasting advantages. Oil, for example, has held up well, and we know how difficult and expensive it is to find new sources of supply. The price of gold may be the most durable price of any commodity. Especially as the inflation thesis plays out. I'd stick with the smaller miners, because I think inflation will make it more attractive for big gold producers to buy smaller ones than to create such production from scratch.
Despite this big-picture guesswork, I think it will be important to be choosy. First, the recent market rally has lifted all boats, even the leaky ones. But over the long haul, the leaky ships will still sink. It will pay to be in the right names. Second, you always have to consider the consequences of being wrong. You'll fare better in such cases with a quality name, well financed, led by talented people and acquired at a cheap price. Such investments will likely make you money over time, even if you get the big picture wrong. This is what smart investing is all about.
Regards,
Chris Mayer,
for The Daily Reckoning
P.S. Did you see my inflation presentation yet? In it, I detail what I see as the greatest hidden threat to your retirement...and what you can do to avoid getting wiped out by that wrecking ball we spoke about above. The mainstream press have barely caught wind of this story yet...which, in a way, is good for those of us who act quickly. Agora Financial released the presentation to select readers last week. If you didn't get the chance to listen yet, you can still catch it, here.
| | | | Chris Mayer's Special Situations Presents... |
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| | | | Bill Bonner | | Why You Should Be Buying Gold As the Fed Prints Money | |  | | Bill Bonner |
Reckoning from Los Perros, Nicaragua...
Stocks were flat yesterday. Gold was down $8.
Just noise, in other words. Doesn't mean a thing...
But wait...sugar at a 30-year high...cotton at a record high...oil at a 28-month high...
What's going on?
Could the markets have been so wrong last year...and the year before...and the year before? All of a sudden, they're discovering that commodities are a lot more valuable than they had thought.
How could they have been so wrong before? Or are they wrong now?
Or is it just more noise?
And what's this?
"Fed passes China in Treasury holdings," says The Financial Times. So, who's the biggest holder of US debt? The Fed! And since the Fed doesn't have any real money to speak of, how did it get all those US bonds?
It simply created the money to buy them. Out of thin air.
In other words, the US didn't really borrow the money at all. It just printed money.
Whoa! Isn't that what Zimbabwe did? Isn't that what the Reichsbank did? Isn't that what Banana Republics do...just before they go bust? They can't pay their expenses honestly, so they just print up some extra currency and hope nobody notices. But people do notice, eventually. And they dump the currency.
Well, maybe this time it is different. Hope so. Because the Fed just keeps printing money. It has a mandate to buy $600 billion of US Treasury debt in the first half of this year.
Surely that isn't just noise, is it? No, it's something important. Something you need to pay attention to. It's something that affects the value of every dollar you've ever managed to save. Maybe it's why commodities are so high. And maybe it's why the euro is back up to $1.38. And maybe it's why the smart money is buying gold.
Gold is what you buy when you fear the authorities are up to no good. But so far, very few people own gold. Ask your friends and neighbors. Many will have never considered buying gold...and they'll look at you as though you were a kook for suggesting it.
In the average man's mind - at least the average mind of the average citizen of one of the average mature social welfare states - the government controls the money. And he thinks he can trust the government. Because government is a good thing. It is there to ease his suffering...
..it will make sure that the rich don't get too rich...
..and that he will have a retirement pension, public libraries, fire departments, and food tasters. If his car has a defect, he'll count on the feds to make sure it gets called in and fixed too.
..and his money? Despite the evidence of 100 years of Fed stewardship - in which the dollar lost 97% of its purchasing power - he still believes that the feds are on the case, and that they'll make sure the US dollar is a valuable and reliable way to store wealth.
And if he's wrong? Then, the feds will turn out to be less reliable than he believes. And he'll be out beaucoup dollars.
And more thoughts...
The average man doesn't care much what kind of government he has. He has a foggy view of the whole thing...a bit of Mystic Knights of the Sea combined with the Rights of Man, Democracy, and supporting the home team.
To say that he doesn't think clearly about it is misstating the situation. He doesn't think about it at all.
And why should he? He has better things to do - like earning money and watching television.
But he still expects things of government. At the most basic level, he wants the feds to keep order. Nobody likes disorder...except for people who cause it. And even their appetite for anarchy is limited and temporary. They like it only until they have a chance to impose some kind of order of their own.
Today's modern governments have struck a bargain with the common man. They keep order, of course. But there's more to it than that. Keeping order doesn't cost very much. And governments today, as Paul Krugman puts it, are "big, ambitious and expensive."
What do they do? They promise to look after the voter...to ease his pains...to succor him and support him in all his endeavors. That is, the voter looks to the government as he once looked to the church - to salve his sufferings.
But what does he suffer from? Not from want. There are very few - if any - people in America or the other developed nations who suffer from real want. Instead, having too much is likely to be their problem. They eat too much. They have too much stuff. They've spent too much. And they have too many things to do and not enough time to do them.
They suffer from plenty, not from want.
Then, what suffering does the government alleviate? What itch does it scratch? What hurt does it make go away?
As we discussed yesterday, people do not necessarily want to be richer. What they want more than that is not to be too much poorer than their neighbors. It's relative wealth that counts.
There was a wise and silly report in The Financial Times earlier this week. The writer criticized Barack Obama's drive to make America more "competitive." He pointed out that being competitive is not the same as being rich. You get richer by becoming more productive. You don't get richer - necessarily - from becoming more competitive. Someone may be even more productive than you are. So what? As long as you're able to produce more goods and services, more efficiently, you will be richer.
Trouble is, people are naturally competitive. They judge their own wealth and status in comparison to that of others. Without a point of reference, wealth - beyond what you need to survive - is irrelevant.
You're probably wondering where we're going with this. And to tell you the truth, in all the excitement, we kind of lost track ourselves...
..but here's the point: what the common man really wants is for the government to beat down the rich...and humble the powerful. His suffering is the kind of suffering the Bible condemns: envy.
He wants what isn't his. He covets his neighbor's ass. Not because he needs another ass, but because he thinks it isn't fair that the neighbor has it.
He only wants what is "fair"...unless he can get an unfair advantage himself.
Regards,
Bill Bonner,
for The Daily Reckoning
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| |  |  |  | Relative Wealth and the Struggle for Economic Dominance
Here’s a subject you’re going to hear more about: wealth inequality. The rich have gotten richer. The poor have gotten poorer. People don’t know why. But they don’t like it. And they figure it has something to do with the rich rigging the system. They’re right…but not in the way they think.
Youth and Islamic Fundamentalism
Why Most Consumer Prices Aren’t Affected by Money Printing | Anticipating a Budget Deficit
I am constantly amazed at the number of people who think that a budget deficit is the same thing as the total federal deficit, which it ain’t. Actually, I remember one time early in my career where I was so desperate to cover up the results of my own incompetence that I tried to exploit this confusion with a “budget deficit” scam of my own...
Indications of the Broadest Measure of Money Supply
The Continuing Argument Over Fiscal Policy | Commodity Prices Rise as Inflation Pressures Mount
The profit taking in the currencies ended yesterday, but there’s been no “real rebound”…yet. The mother of all cyclones hit Australia yesterday, and ripped apart homes, and destroyed anything in its path… But, the Aussie dollar (AUD) was unaffected… That’s really strange, don’t you think?
Anticipating a Budget Deficit
IMF Warns That Likelihood of Civil Wars is Increasing | |
| | 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. |  | |
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