Britannia Radio

Reckoning U.S. Edition

Home . Archives . Unsubscribe

The Daily Reckoning | Friday, February 18, 2011 Why the world's starving masses just don't "get" the benefits of QEII, How the food shock plays out back in the US markets, Plus, Bill Bonner on the Fed's academic stooges, a pure love of virtue and the importance of keeping your fingers crossed... ------------------------------------------------------- From Hulbert Financial Digest's Best-Performing Newsletter Advisory of the last 10 years...Comes... The New OIL WAR and Why Iran Threatens Your Money... According to Byron King's new presentation Hezbollah terrorists, militant Muslims and Iran's crackpot leader could be planning the deadliest surprise threat to your money and livelihood this coming year. Yet nobody in the Pentagon will talk about it, and no one in the White House has a clue. Thankfully Byron's taking action and is sharing several ways for you to take to protect yourself against the epic financial crisis ahead... Click here to watch Byron's value-packed presentation now. Debasing the Dollar for the Greater Good Rising Food Prices Through the Scope of Quantitative Easing Eric Fry Reporting from Laguna Beach, California... If only the world's poor, starving masses understood the benefits of Quantitative Easing, they probably would not be rioting in the streets over rising food prices. We simply need to educate these people. Sure, the prices of wheat and corn are soaring, but so are the profits at Goldman Sachs. These poor people just need to understand that debasing the world's reserve currency serves a greater good. It's not just about whether they can eat; it's also about whether we Americans can weasel out of our massive debts. The momentary food problems of the poor people over there -wherever they are - are a small price to pay for our resurgent economic activity over here. And remember, if we don't make lots of money over here, we can't send any handouts over there. Such is the logic that seems to inspire Chairman Bernanke's QE campaigns. During this week's Congressional hearings, the Chairman abided no connection whatsoever between Quantitative Easing and soaring food prices. Blame the weather, Bernanke suggested, or credit the economic recovery...or both. Bernanke's remarks before Congress echoed his defense of QE2 two weeks ago at the National Press Club in Washington. "Clearly what's happening [to food prices] is not a dollar effect, it's a growth effect," Mr. Bernanke explained. During that high-profile Q&A session, Bernanke completely rejected any connection between his dollar-debasing policies and the subsequent "re- pricing" of foodstuffs and other commodities. "It is entirely unfair to attribute excess demand pressures [in the emerging markets] to US monetary policy," he insisted. "In some cases, some of the emerging markets are facing inflationary pressure because their own economies are growing faster than their own capacity." Furthermore, the Chairman pointed out, "As people's diets become more sophisticated, their demand for food and energy grows." Translation: It's their problem; don't blame me. To be fair, Bernanke is at least half right; it is their problem...and it is a serious one. As to where the blame should fall, that's open to dispute. Bernanke has already presented his defense, pro se, before the court of public opinion. On the other hand, the nifty little chart below testifies persuasively for the prosecution. Agricultural commodity prices, as represented by the Rogers Agricultural Commodity ETF, seem to catch a stronger tailwind with each successive "QE" announcement. Bernanke initially entered the bond-market-manipulation business back in March of 2009. The stock market was on its back, economic conditions were deflationary and fear was palpable. He announced that the Fed would buy $750 billion of mortgage-backed bonds, $100 billion of Fannie Mae and Freddie Mac securities, and $300 billion of long-term Treasury securities. A handful of academics and a few fringy financial writers criticized this Zimbabwe-esque rescue effort. But most folks were happy to know that the Chairman was "doing something." At the time, the something that he was doing seemed to most folks to be a necessary one-off. So they did not trouble themselves with the potential inflationary implications of this rescue effort. Since Bernanke's initial QE campaign seemed to go off without a hitch, he decided that more must be better. Thus, the initial QE campaign begat QE-lite in August of last year, which then begat QEII in November. With every step down this slippery slope toward dollar debasement, the commodity markets reacted ever more violently. Bernanke says the soaring prices of agricultural commodities are a "growth effect." We say they are a "dollar effect," or rather, a "dollar debasement effect." And with every step toward dollar debasement, the investment world reacts. Some companies win; others lose. Dan Amoss, editor of the Strategic Short Report, provides some additional insight in the column below... The (common sense) Truth about Inflation... If you think inflation is good for the economy, why isn't Zimbabwe the wealthiest nation on earth? In Chris Mayer's brand new video presentation he destroys the popular myth that inflation stimulates the economy and create jobs. He also reveals the sickening truth behind Washington's endorsement of runaway money printing. Please, don't do anything else until you've learned the TRUTH... Click here to watch your FREE presentation now. The Daily Reckoning Presents The Food Crisis is a Dollar Crisis Dan Amoss At this week's hearing on Capitol Hill, Fed Chairman Ben Bernanke demonstrated a lack of understanding about what causes inflation. His comments reflected a belief that GDP growth causes inflation. But true economic growth is production-driven, and adds to the supply of goods and services in the economy. True economic growth is not inflationary. Rather, inflation is driven by runaway government deficits and bloated central bank balance sheets. And right now, we have plenty of both. So we have every reason to expect the CPI, even with all of its window-dressing shenanigans, to soar past 2% in short order. I'm surprised at how complacent the stock market remains in the face of obvious pressure building on the CPI. If the Fed doesn't react to a rising CPI by tightening policy, Treasury yields will keep soaring, and inflationary psychology will take root among most producers. If the Fed does react by ending QE and raising short-term rates, it doesn't require much imagination to guess what would happen to a stock market that's running entirely on fuel from the Fed. Either of these potential scenarios is bad for stocks. The only scenario that argues for further rallies in stocks is if - miraculously - even with unprecedented money printing and deficits worldwide, the CPI doesn't continue rising. A rising CPI will give more ammunition to the growing chorus of Fed critics in Congress. At this week's hearing, when questioned about the building pressure on consumer prices, Bernanke answered that it would be easy to stop this trend by reversing his policies. But you know he's terrified at the prospect of tightening. He's an academic with his head in the sand. When asked about the impact of QE2 on global food prices, Bernanke responded that the destabilizing spikes are due to weather and rapid growth in demand for grains in emerging markets. What a lame excuse! As an admirer of Milton Friedman, he must know that "inflation is always and everywhere a monetary phenomenon." Inflation isn't a "weather phenomenon." Without forever-growing money supplies, price spikes in one set of goods, like food, would be offset by price declines in more discretionary goods. But in today's world, demand isn't limited to what one can produce and save; it's boosted further by what one can get from government handouts and what one can borrow at the Fed window at 0%. Yet after all the experiences of recent years (including the early 2008 experience in oil and grains), Bernanke is still oblivious to the consequences of debasing the world's reserve currency. In his view, if the world doesn't conform to his personal Phillips Curve and output gap models, there must be something wrong with the world, not his models. Bernanke has the intellect to understand the negative consequences of the Fed's radical policies, but he simply chooses to ignore them or rationalize them away. By pushing on the monetary accelerator last fall (rather than wait for another "deflation scare"), Bernanke is going to undermine public support for the Fed. As a result, Bernanke gambled that he could spark a stock market rally. He indeed sparked a rally, starting last August - one that looks very long in the tooth. But the fact remains that there is no direct "transmission mechanism" from the Fed's balance sheet to the stock market. Speculators have to have a very specific, benign perspective on Fed policy in order for Fed policy to impact stocks. Today's misplaced faith in the omniscience of the Fed will soon fade, and when it does, the market will return to intrinsic value very rapidly. The day trading robots and speculators counting on a "Bernanke put" will all look to sell at the same time, and patient investors won't look to buy until prices fall much closer to intrinsic value. Using the most robust, back-tested historical valuation models, the best estimates of fair value for the S&P 500 that I've seen is somewhere in the range of 800-1,000 - 25% to 40% below current levels. At times like these, it is often constructive to contemplate probable outcomes - to thoughtfully consider the likely winners and losers that soaring food prices will create. The shares of Ag equipment guys and fertilizer companies have been soaring. For example, the shares of Deere and Caterpillar have both more than tripled since Chairmen Ben announced his very first QE program on March 18, 2009. Fertilizer company stocks like Potash and Mosaic have also been on a tear. All these companies are on the receiving side of rising food prices - more or less. But what about those companies who are on the paying side? Food producers and processors of all types are struggling to accommodate soaring food costs into their business models...and their share prices are showing the strain. Pilgrim's Pride, Tyson Foods, Sanderson Farms, Kellogg, General Mills and Safeway have all turned in conspicuously poor stock market performances during the last several months. I recently issued a bearish call on another likely victim of rising food prices. This company is subject to many of the same food price stresses that have been buffeting the companies cited above. Yet, for reasons that are not completely intuitive, the shares of this particular company continue to trend higher. Nevertheless, I suspect rising food costs will put the breaks on this uptrend and cause the stock to reverse course. This company is facing serious fundamental stresses that will cause similar problems for individuals as well. Inflation is here, folks...whether we like it or not. No use in complaining. Better to prepare. Regards, Dan Amoss, for The Daily Reckoning Joel's Note: Dan issues a brand new trade today, one positioned to profit from falling stock prices in general...and margin squeeze in particular. Dan's strategy proved invaluable to readers during the 2008 crisis, delivering them an average gain of 99% while the S&P crashed and burned, losing 42% over the same period. To learn more about his strategy and grab both today's recommendation and the name of the wobbly company he mentions above, click here. [NOTE: Given that Dan's new recommendation is due out any minute, and because we want to give readers the chance to position themselves without delay, we're including both a direct link to the Strategic Short Report order form, where you can pick up a risk-free trial, and a link to the full presentation, which you can view at your leisure.] Microcap "Stealing" Oil from Iran Could Return 4,599%! One tiny company has found a way to legally "steal" oil from Iran's largest oil field... Which means it's now sitting on oil reserves that could be worth over fifty times its total market-cap, setting the stage for an astronomical run-up of 4,599%! Resource expert Chris Mayer shares everything you need to know about this urgent opportunity in his brand new presentation... Click here to watch it right now. Bill Bonner The Like-Minded Mechanics of the Economic Machine Bill Bonner Reckoning from Baltimore, Maryland... The World According to The Daily Reckoning... First, a quick look at the news... Dow up 29 points... Gold added $10. Stocks are up about 100% from their March '09 lows... Guess we were wrong. We thought stocks were too dangerous... We've been out of them since the late '90s. Wait...you say stocks have gone nowhere since the late '90s? Investors have made nothing. Well, that makes us feel better about missing this rally. Hey, what's this? Oil is up too - it traded at more than $100 a barrel yesterday. And look at the other commodities: "Wholesale prices hit two year high," reports The Wall Street Journal. Looks like everything is a good investment. If only we had a Wall Street bank! We could borrow from the Fed at zero...and buy anything. Whatever we bought, it would go up. Especially if it were gold. Is this evidence of a robust, growing economy? Or, is something else going on? We'll come back to that... Because today you're in for a treat... The World Explained! Or, at least part of it. Ultimate Secrets Revealed! At Last...how an economy really works. And as an added bonus - we'll tell you what government is all about too. But that will have to wait until next week. How's that for a build-up? We've managed expectations so high they'll need a parachute to come down. But why not? Today, we reveal - for the first time ever - why Ben Bernanke is an idiot. And why almost all modern economists are wrong. And why all the trillion-dollar "recovery" schemes won't work. And no... We're not forgetting the bonus. We'll also tell you why all the chatter about democracy breaking out in the Mideast is just vain heavy breathing... This is an important edition of The Daily Reckoning...print it out. Share it with your friends. Put it away for safekeeping. And then, in a quiet moment, pull it out...pour yourself a stiff drink...and throw it away. Let's get started. The trouble with modern economists and most people who don't work at The Daily Reckoning, we've said so many times, is that they have the wrong paradigm. The wrong idea. The wrong metaphor. They think an economy is a kind of machine. They think they can make it work better, or fix it when it is broken, by tinkering with it. That's why they have a fellow like Ben Bernanke - a techie kind of fellow with an adjustable wrench in his pocket - at the Fed. They think he can turn some valves...and make the juice flow. 'The economy needs more liquidity,' says one expert. 'No, it's time to raise rates,' says another. 'Forget it,' says a third, 'the federal government should launch a major infrastructure program.' Each mechanic thinks he knows which screw to turn. Each has his theory...his idea...and his role to play. In fact, each is paid to believe what isn't true. If he admits that he has no idea which knob to turn, who will give him a job? Who will publish his book? Who will invest money in his hedge fund? Not the government. They want solid mechanics...guys who know how to use a screwdriver. They think their job is to control this machine. At the Fed, for example, there are hundreds of economists paid to maintain the value of the dollar, full employment and (a mission Ben Bernanke has taken on recently) a bull market on Wall Street. What about a university? Could he get a job there? Well, first, you need to be able to describe the machine even to get into the Ph.D. program. Then, you need to write a thesis about how it works...about how the Fed's interest rates effect consumer purchasing...or how you can create a complex mathematical formula that predicts capital investment booms in medieval city states. You need to add to the world's knowledge and understanding of the Great Machine, in other words. You need to give policymakers more and better tools to tinker with. Do it well enough and you may get to be the head of the Princeton economics department. Or, you might even get a Nobel Prize. In practice, academia and government are as close as ticks on a hound dog. Why do they all think the same thing and why do they all believe in the mechanical model: they're paid to believe it. This, from The Huffington Post: How the Federal Reserve Bought the Economics Profession The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found. "The Fed has a lock on the economics world," says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. "There is no room for other views, which I guess is why economists got it so wrong." One critical way the Fed exerts control on academic economists is through its relationships with the field's gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll - and the rest have been in the past. The Fed has been dominating the profession for about three decades. "For the economics profession that came out of the [second world] war, the Federal Reserve was not a very important place as far as they were concerned, and their views on monetary policy were not framed by a working relationship with the Federal Reserve. So I would date it to maybe the mid-1970s," says University of Texas economics professor - and Fed critic - James Galbraith. "The generation that I grew up under, which included both Milton Friedman on the right and Jim Tobin on the left, were independent of the Fed. They sent students to the Fed and they influenced the Fed, but there wasn't a culture of consulting, and it wasn't the same vast network of professional economists working there." But by 1993, when former Fed Chairman Greenspan provided the House banking committee with a breakdown of the number of economists on contract or employed by the Fed, he reported that 189 worked for the board itself and another 171 for the various regional banks. Adding in statisticians, support staff and "officers" - who are generally also economists - the total number came to 730. And then there were the contracts. Over a three-year period ending in October 1994, the Fed awarded 305 contracts to 209 professors worth a total of $3 million. The Federal Reserve's Board of Governors employs 220 PhD economists and a host of researchers and support staff, according to a Fed spokeswoman. The 12 regional banks employ scores more. (HuffPost placed calls to them but was unable to get exact numbers.) The Fed also doles out millions of dollars in contracts to economists for consulting assignments, papers, presentations, workshops, and that plum gig known as a "visiting scholarship." A Fed spokeswoman says that exact figures for the number of economists contracted with weren't available. But, she says, the Federal Reserve spent $389.2 million in 2008 on "monetary and economic policy," money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009. That's a lot of money for a relatively small number of economists. According to the American Economic Association, a total of only 487 economists list "monetary policy, central banking, and the supply of money and credit," as either their primary or secondary specialty; 310 list "money and interest rates"; and 244 list "macroeconomic policy formation [and] aspects of public finance and general policy." The National Association of Business Economists tells HuffPost that 611 of its roughly 2,400 members are part of their "Financial Roundtable," the closest way they can approximate a focus on monetary policy and central banking. The Fed keeps many of the influential editors of prominent academic journals on its payroll. It is common for a journal editor to review submissions dealing with Fed policy while also taking the bank's money. A HuffPost review of seven top journals found that 84 of the 190 editorial board members were affiliated with the Federal Reserve in one way or another. "Try to publish an article critical of the Fed with an editor who works for the Fed," says [James] Galbraith. And the journals, in turn, determine which economists get tenure and what ideas are considered respectable. The Huffington Post reviewed the mastheads of the American Journal of Economics, the Journal of Economic Perspectives, Journal of Economic Literature, the American Economic Journal: Applied Economics, American Economic Journal: Economic Policy, the Journal of Political Economy and the Journal of Monetary Economics. HuffPost interns Googled around looking for resumes and otherwise searched for Fed connections for the 190 people on those mastheads. Of the 84 that were affiliated with the Federal Reserve at one point in their careers, 21 were on the Fed payroll even as they served as gatekeepers at prominent journals. At the Journal of Monetary Economics, every single member of the editorial board is or has been affiliated with the Fed and 14 of the 26 board members are presently on the Fed payroll. What if you didn't believe that the grease-monkeys working for the Fed really could make things better? What if you thought an economy wasn't like a machine at all? What if you didn't believe economists could control it? Or improve it? Or even understand it? What if you thought that you could not predict what would happen...nor could you turn any screws or valves or knobs and be able to tell what effect it would have? Who would hire you? Who would publish your book? Who would ask your opinion at cocktail parties or invite you to submit articles to The Financial Times? No one. But you would be right. [Joel's Note: Fortunately, Fellow Reckoners needn't rely on the Fed's academic stooges to inform them on the finer points of liberty and morality. For that, they have Laissez-Fair Books! Agora Financial's newly-acquired trove of freedom-inclined publications contains hundreds of must-read books for intellectually curious readers to enjoy. Heck, there's even a few titles in there from Bill and Addison for your consideration, like this one. Be sure to include your DR discount code [E401M202] to grab 20% off the retail price. Happy non-Federal Reserve-approved reading!] An economy is not really like a machine at all. It is not a mechanical system. It is a moral system. Yes, dear reader, it is a system that punishes sin and rewards virtue. It gives no one what he expects...and ALMOST everyone what he deserves. The "almost" is an important qualifier, to which we will return... What do we mean when we say it "rewards virtue"? Well, that's what it does. It rewards saving, thrift, hard work, innovation, honesty, thinking about others, self-discipline, creativity and all the other qualities you normally associate with decent people and financial progress. As for sin, it punishes the obvious ones - greed, vanity, short- sightedness, extravagance, envy, laziness, lying, cheating, stealing, stupidity, self-indulgence...and so forth. When the Fed creates money out of thin air, for example, it is a lie. It is a sort of fraud. It is trying to get something for nothing. It is distorting the facts and encouraging mistakes. It surely will be punished. When? How? We can take a guess, but it's not for us to say.... Likewise, take a fellow who works hard and saves his money... Will he be wealthy? Again, we don't know. All we know is that he OUGHT to do well... So, we should return to our qualifier...it USUALLY works that way. Some greedy bastards do get rich. Some lazy fools win the lottery. We never know for sure who will make money and who won't. Why not? First, because we're not God. He sees things we don't see...and He has his own plans that he doesn't share with us. Second, because there is sin and virtue IN THE SYSTEM itself...to which we are all subject. When the Roman Empire fell apart, and Rome was sacked by barbarians, even the most virtuous Roman probably suffered a decline in his standard of living. Not much he could do about it. Why would a system that rewards virtue and punishes sin be so frustratingly unreliable? Well, that's just the way it is. It's a moral system, remember. And moral systems do not make it easy for you. If all you had to do to get rich were to respect the moral rules it would not be a moral system. It would be a simpleton's system. Everyone would follow the rules. Moral systems are more demanding. They require you to follow the rules without being sure what it will do for you. As every theological thinker from St. Augustine to Billy Sunday has noticed, you can't get to heaven just by following the rules. That would be too easy. Instead, you follow the rules...and HOPE to get heaven by the grace of God. Similarly, you have to follow the rules of an economy...knowing you might not get rich after all. There's no gaming the system. There's no pretending. There are no quick fixes...no shortcuts...and no guarantees. And even if this isn't true, you're better off believing it anyway. You have to love virtue for its own sake. And hate sin. And keep your fingers crossed. 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 On Humanity’s Instinctual Need for Democracy Is it possible that democracy is just the flavor of the month...an evolutionary development, like all the forms of government that came before it? Is it possible that it succeeded in the 20th century because it was much better adapted to leeching out the wealth and complicity of the average man? Government Spending to Perpetuate Fiscal Insanity Deferring Recession: A Short History of the “Age of Bubbles” Calculating the Misery of Inflation I wince and moan, devastated by the very concept of a trade gap jumping by almost half in One Freaking Year (OFY), a situation where we bought more from foreigners than we sold to foreigners, thus many of the Fed’s trillions of new dollars flowed out of the US and into the world economy... Why You Should Be Using Gold to Buy Your Groceries Why Silver Sales Demand Excitement Defensive Notes on the Margin Investors sharing our view that financial assets in general are fundamentally overvalued in real, purchasing-power terms naturally seek to preserve wealth in alternative assets, including commodities. However, while commodities may indeed be more fairly valued, that does not mean that they can decouple entirely from developments in financial markets. Middle East Tensions Ratchet Up the Oil Price Calculating the Misery of Inflation