But we’re not…yet.

Classic economic theory says that money supply can be used to stimulate the economy and our central bankers seem to agree. That’s why they’ve pumped more than $1 trillion dollars into the economy, engineered countless bailout bonanzas for zombie institutions, put Detroit on life support, and delivered a bunch of financial Band-Aids to the trauma ward — all in a desperate bid to make Americans feel better about the global financial crisis.

To their way of thinking, the trillions of dollars have been a success. That’s why any meeting of the Group of Eight (G8) nations looks more like a mutual affection society with central bankers anxious to claim credit and backslap each other in congratulations for having avoided the “Great Depression II.”

But by taking the Federal balance sheet to more than $2 trillion from $928 billion 2008, they’ve created a situation that should have resulted in an epic inflationary spike to accompany the 137% increase in liabilities.

Yet that hasn’t quite happened.

Core inflation — which denotes consumer prices without food and energy costs — has actually decreased from 2.5% in 2008 to 1.5% presently. And that has many investors who have heard the siren call of the doom, gloom and boom crowd wondering if they’re worried about nothing.

So what gives?

Well, there are four reasons we haven’t yet seen hyperinflation:

Banks are hoarding cash. Despite having received trillions of dollars in taxpayer funded bailouts and lived through a litany of shotgun weddings designed to reinvigorate the shattered lending markets, most banks are actually hoarding cash. So instead of lending money to consumers and businesses like they’re supposed to, banks have used taxpayer dollars to boost their reserves by nearly 20-fold according to the Federal Reserve. The money the bailout was supposed to make available to the system is actually not passing “Go,” but rather getting stopped by the very institutions that are supposed to be lending it out. Three-year average annualized loan growth rates were 9.6% before the crisis; now they are shrinking by 1.8%, according to Money Magazine.

The United States exports inflation to China, which remains only too happy to continue to absorb it. What this means is that low priced products from China help keep prices down here. And this is critical to something that many in the “China-is-manipulating-their-currency” crowd fail to grasp. If China were to un-peg the yuan and let it rise by the 60% or more it’s supposedly undervalued by, we’d see jump in prices here in everything from jeans to tennis shoes, toys, medical equipment, medicines, and anything else we import in bulk from China. Chances are, the shift would not be dollar-for-dollar or even dollar-for-yuan, but there’s no doubt it would be significant. Many economists I’ve talked to privately think 25%-35% is probable. So the next time you hear a “Buy American” extremist, you might want to share this little inconvenient truth.

Consumers are still cutting back. Therefore, the spending that normally helps pull demand through the system is simply not there. I don’t how things are in your neighborhood, but where I live, people are still cutting back. Indeed, data from the U.S. Department of Commerce and the Federal Reserve Board shows that consumer spending growth averaged 1.4% a year prior to the crisis and is now shrinking at a rate of 0.7%. What this means is that people have figured out that it’s more important to save money than it is to spend it. And, given that consumer spending makes up 70% or more of the U.S. economy, this is a monumental change in behavior that all but banishes the last vestiges of the “greed is good” philosophy espoused by Michael Douglas as Wall Street pirate Gordon Gekko in 1987.

Businesses continue to cut back rather than hire new workers. Therefore, wages and wage inflation figures are lower than they would be if the economy was truly healthy and the stimulus was working. This is especially tough to stomach because it means people are still being marginalized, laid off and “part-timed” instead of being hired. And that means that most of the earnings growth we’ve seen this season has come from expense reductions rather than top line sales growth — and those are two very different things. But while this is tough, it’s also helped keep inflation lower than it would otherwise be. Prior to the financial meltdown, job growth averaged about 1% a year over the last three years whereas now it’s falling by 4.2%.

The upshot?

Any one of these factors could change at any time. And that means investors who are relying on the Fed’s version that everything is okay and that the government is managing inflation may be in for a rude awakening.

The only thing the Fed is doing is managing to manipulate is the data, and even then, not very well.

Regards,
Keith Fitz-Gerald

November 16, 2009

P.S.: For the last several years I’ve made my insights about the Asian markets and the true nature of the global capital markets available to investors via my daily columns in Money Morning and its monthly affiliate, The Money Map Report. Now I’m making those insights available through my new book, “Fiscal Hangover: How to Profit from the New Global Economy,” which can be purchased here.

Editor’s Note: This article originally appeared in Money Morning as “Four Reason Hyperinflation Hasn’t Hit the U.S. Economy Yet.” To view the original article, please click here.

Four Reasons Hyperinflation Hasn’t Hit the U.S. Economy Yet was originally featured on Whiskey and Gunpowder

In deciding to make hardly any changes to its interest rate policy or even the language from its last statement, the Fed is encouraging traders to resume the dollar carry trade. For now, it looks safe to borrow in low-yielding currencies like the U.S. dollar and invest in higher-yielding assets like the Australian dollar, emerging market stocks, and some bonds.

Go, you bubble beauties!

It’s hard to believe the Fed is willfully stupid. The market, through the price of gold, has clearly communicated that it thinks U.S. monetary and fiscal policy is lousy. But rather than defend the U.S. dollar – indeed the integrity of U.S. monetary policy itself – the Fed is choosing to support asset prices through easy credit.

It’s also possible that the Fed thinks a weak dollar will reduce America’s trade deficit, boost its export competitiveness, and lead to higher employment. We think this is a pipe dream. And we’re not talking about a lead pipe. We’re talking William Blake-style opium.

But smoke and mirrors aside, does this mean there will be no end to the dollar carry trade? If the U.S. dollar index rallied, we expected to see a falling Aussie dollar, falling Aussie stocks, and (even though it’s strange) rising U.S. bond prices. All the leveraged risk trades would unwind a bit as dollar shorts covered.

But now what? Is this the all clear for stock indices to make new highs as traders borrow money and plow it into markets to engineer huge returns for the end-of-year statements to investors? The early returns are inconclusive. The Dow was all over the shop, unable to make heads or tails of what the Fed’s non-change means. Gold futures made a new nigh, though. And about that…

Gold is very popular lately. It’s not returning our calls anymore. And when we see it in public, all it does is glitter and bask in the glow of so many newfound admirers. That makes us very nervous, and perhaps a bit hurt. We stood by it all those years when no one loved it.

We like it all the same, although we’re just friends now and it’s based on gold’s ability to preserve the purchasing power of our wealth, not any inherent beauty it may or may not have. But as a practical matter, when you enter a position as the asset is making a new high, you usually get hammered.

That’s what happens when you go along with the crowd. It’s an axiom that an asset has to make new highs…to make new highs. But it would be nice to buy gold on a correction. Perhaps, though, we are seeing a big shift in market psychology with respect to gold. India’s purchase of IMF gold is just one sign of that shift.

One interesting result from the events of 2009, Murray Dawes mentioned last week, is that gold is decoupling from the U.S. dollar. He sent over the chart below. It shows that two times in the last five years, gold (the black line) has strengthened eve as the U.S. dollar index (the blue line) rallied. And each time after this period of dollar strength, gold then took off to a new move up.

Why does that matter? Well, gold usually moves up when the U.S. dollar moves up, and down when the U.S. dollar moves up. For gold to show strength when the dollar is strong shows that gold itself may be breaking out of its correlation to the greenback. And what would that tell you?

The bigger picture: gold breaking its negative correlation with the USD would tell you that gold is being remonetized in the world financial system. It would tell you gold is appreciating against nearly all paper currencies. And it would tell you that even if we do see a U.S. dollar rally, you could still new highs in the gold price.

Above all, it shows you how valuable it is to own an asset that is not anyone else’s liability. We are entering a global sovereign debt crisis because the world’s large economies have been engaged in a multi-decade long competition to devalue their currencies. The cheaper your currency is relative to your trading partners, the cheaper your goods are and the higher your exports.

Overly the last fifty years, nearly every country in the world has engaged in some kind of currency manipulation to keep its currency cheap relative to the American dollar. That’s because the American economy was the world’s largest, and everyone wanted to sell into it.

America’s economy is still big, of course. But a lot is changing, yet the currency manipulation has not caught up with the new economy reality. And Western Welfare states are still borrowing money as if emerging market creditors will be happy to fund fundamentally flawed fiscal policies for ever. Not likely. But tomorrow is another day.

Regards,
Dan Denning
The Daily Reckoning Australia

November 10, 2009

Editor’s Note: This article originally appeared in The Daily Reckoning Australia as “Price of Gold Communicates U.S. Monetary and Fiscal Policy is Lousy.” To view the original article, please click here.

Gold Price Says U.S. Monetary and Fiscal Policy Stinks was originally featured on Whiskey and Gunpowder

They talking, of course, about the Australians decision to hike their central bank index rate. And instantly the howls of recovery were on the lips of all the pundits.

But the recovery at large is still not on the horizon.

We may be facing a serious battle with deflation, and that the evidence is all around us, Australia notwithstanding. And now we have seen more than just anecdotal evidence.

A few days ago, the United Kingdom, which has been struggling with a weakening currency, released inflation numbers far below expectations. Not only was inflation lower than expected; the figures were actually negative.

What does that mean? Well, when inflation numbers turn negative, that is deflation. And England wasn’t alone.

The number one economy in the Eurozone, Germany, released numbers that said the same thing. Prices are not increasing, they are decreasing… and at a surprising rate!

That’s contrary to conventional wisdom, which says that the bloated money supply should be raising prices. But as I explained last week, that money supply isn’t natural — it’s being created on a whim by the central back and being pushed into its member banks.

From there, it is being held against the mountain of derivative losses, bad loans and investments, instead of flowing into the economy at large through lending.

That lack of lending is what’s preventing inflation. It won’t show up until the money is released to the public. Until then, the money supply has not effectively changed or expanded… and we’ll continue to see deflation.

Deflation, in turn, will lead to longer periods of extended “non-growth” and lower interest rates — at least in the places where they can be lowered. Where they cannot be lowered, “stimulus ad nauseam” will remain the protocol of the day.

But, of course, a flat-broke country can’t stimulate unless it can borrow. We are not like China with $2 trillion in reserves. Staying afloat requires borrowing unparalleled in history. The problem is, now that we aren’t buying the world’s widgets, the world is far less inclined to loan us anything. After all, that’s the way the game has been played. They lend to us — we buy from them. And everybody was happy. But you just can’t borrow forever.

So if deflation is going to be the name of the game, what happens to the currency markets?

Thomas Jefferson Fears the Federal Reserve

To answer that question, first we need to determine which currencies are going to move in which direction. That will continue to unfold over time. But it will likely lead to the currencies of the West doing a slow gyrating dance. Neither currency is better than any of the others, so they will just move back and forth until one of them gets their debt and banking situation under control.

Very possibly, the first nation to get rid of its central bank will be the first to really break out.

Because as we all should be well aware by now, central banks exist for one purpose and one purpose only: to bailout their banker buddies who, in the pursuit of greater profit, have made risky loans… to bail out large industries in order to preserve the job base… and to make sure that the taxpayers foot the bill. They will masquerade it in the best of terms, but at the end of the day, we are paying for their foolish business practices.

The sooner we do away with a central bank, the richer we all will be. This is not our first experiment with a central bank in the United States, but it has been our most costly. Our forefathers vehemently opposed the idea of a central bank for just this reason.

They believed that such a cartel would rape and pillage the public and increase poverty on a massive scale, until there is nothing left to take.

“I believe that banking institutions are more dangerous to our liberties than standing armies,” Thomas Jefferson wrote. “The issuing power of money should be taken away from the banks and restored to the people to whom it properly belongs. The modern theory of the perpetuation of debt has drenched the earth with blood and crushed its inhabitants under burdens ever accumulating.”

Amazing, isn’t it? Here’s a man who, two centuries ago, understood why central banks brought themselves into existence. The Federal Reserve in the United States has done nothing to improve our lot and has done everything it can to extort our wealth by the tax of inflation, then to export it to economies and dictators who live like massive welfare recipients off of the taxes your fathers have paid, and you continue to pay, and your children will have to pay.

And it will remain like this until the Fed is abolished again. As I mentioned, the population of the United States has closed more than one central bank. Former presidential hopefuls even lost their bids to the White House over their stand in favor of a central bank. Until such a day as we are sufficiently educated again to see them as a menace to our wealth and way of life, until we take it in hand to dismantle the Fed as it is, we will continue to suffer the expropriation of our hard-earned money to those who act as our overlords.

Problem is, I seriously doubt that will happen within our lifetimes. Look how long it’s taken us just to consider a bill that audits the Fed.

In the meantime, I recommend you take your capital to the place it’s treated best.

That specific place, however, is yet to be determined. Will it be Australia — the first ones to hike rates? Will be China – the almighty ones holding a financial nuclear option?

I can’t say for sure.

But I can say that, over the long run, it won’t be the greenback.

If you’re looking for a way out, diversifying your savings into another currency through the FOREX markets is an easy way to do it.

Regards,
Bill Jenkins

October 15, 2009

Who Needs a Central Bank? was originally featured on Whiskey and Gunpowder

Amid the blah…blah…blah…of Bernanke’s response was this:

“The tendency of financial systems to boom and bust …is a very long-standing problem… but I think it’s very important for us to try to put out the fire…then you think about the fire code.”

In his 1988 book, The Collapse of Complex Societies, Joseph Tainter argued that all societies – like all organisms – are doomed. Tainter studied ancient Rome as well as the Mayan civilization. He noticed that problems always blaze up. Each one – whether climatic, political or economic – rings the firehall bell. And each solution – and readers may substitute the word “bailout” for solution – brings more challenges and takes more resources. Finally, the available resources are worn out.

Tainter observes that when the costs become high enough, people seem to give up. By the end of Roman era, for example, the burdens of empire were so heavy that people sold themselves into slavery to get free of them. So many people did so at one point that the authorities had to come up with another solution; they outlawed the practice. Henceforth, Roman citizens were required by law to remain free!

Another philosopher, Giambattista Vico, writing in the 18th century, put the beginning of the decline of Rome roughly at the time of the Great Fire during Nero’s reign. Nero, partly to pay for his post-fire reforms and reconstruction, began taking the gold and silver out of the coins. All civilizations go through three stages, Vico said – divine, heroic, and human. The divine period is ruled by the gods. The heroic period is adorned with victories and statues. Then, comes the human era. (Here, we permit ourselves to add a footnote to Vico’s oeuvre: the coin of the realm in early periods is the gods’ money – gold. Later, people switch to money of their own invention – the kind of money you make from trees.) This last stage, says Vico, is when popular democracy arises, along with rational thinking and what Vico delightfully calls the “barbarie della reflessione” [the barbarism of reflection]. In earlier eras, people do what their gods and leaders ask of them. In the final era, they ask, “what’s in it for me?”

Even as late as the early ‘60s, John F. Kennedy could still appeal to heroic urge without drawing a laugh. “Ask not what your country can do for you,” he said in his inaugural address, “ask what you can do for your country.”

But 11 years later, Richard Nixon, like Nero before him, began the process of debasing the country’s money. That was a solution too; the United States had spent too much. Nixon could worry about the fire code later. First he opened up with the fire hose; he defaulted on America’s promise to exchange dollars for gold at the statutory rate.

Barack Obama tried a Kennedyesque appeal to civic high-mindedness last week. We need to “insist that the first question each of us asks isn’t ‘what’s good for me’ but ‘what’s good for the country my children will inherit,’” said the president-elect. But now, like Doric columns in a trailer park, the words are ornamental, not structural. They are the homage that one age pays to a better one.

We are in the 21st century now. Barbarous reflections rise up like swamp gas. The whole place stinks of them. Bernanke and Obama offer solutions. But their plans to save the world from a correction are little more than a swindle. They offer to bail out the mistakes of one generation with trillions of dollars’ worth of debt laid onto the next.

“Regarding the current financial meltdown,” writes Rony Teitelbaum, “it is very clear that two main factors underlie the political reactions to the crisis, the first being pressure originating from ties between the financial and the political elect, manifested by taxpayer bailouts of large institutions that continue to deliver bonuses to the executives and donate to political campaigns. For those of us who are not blind, these are clear signs of political corruption which would have made the worst Roman emperor blush. The second factor is political pressure originating from the mass public. The kind of solutions offered so far, and I may add which were received with very warm enthusiasm, were tax rebates and gasoline tax holidays. These are actions aimed at a public who “impatiently expected quick and obvious results,” to quote Cary’s description of Roman society in AD300. (A History of Rome).”

Circa 2009, there is hardly a soul in the entire world who has not been corrupted by the barbarie della reflessione of the late imperial period. Both patricians and plebes are for bailouts. Both business and labor back stimulus programs. The taxpayers and the politicians who rule them are of one mind. Liberal, conservative, rich, poor, Republican, Democrat all speak with a single voice: ‘Screw the next generation!”

The golden age is over, in other words. In the space of 40 years it passed from gold, to silver, to paper…and is now somewhere between plastic and navel lint.

Regards,
Bill Bonner

October 9, 2009

After Gods, Heroes and Gold Comes the Age of Lint was originally featured on Whiskey and Gunpowder

This has been quite a month so far, with healthcare taking center stage in the national debate. There have been rallies, shouting, fights and town hall meetings with unbelievable attendance. And, a line that I’ll bet the president wishes he could take back.

Addressing that he wants us to believe that private insurance will still be available and that you will still have options, President Obama commented, “If you think about it, UPS and FedEx are doing just fine, right? No, they are. It’s the Post Office that’s always having problems.”

Is that really what he intended to say? Does that really offer any rational support for setting up a government insurance program? He admits that the government-run postal service is failing, while its private competitors are thriving. Now, I know that public speakers are famous for their gaffs, but that one directly contradicts what he’s trying to say!

Support for the plan appears to be at an all-time low — according to a recent poll by a Rasmussen, down to just 42%.

But let’s get to the news and some longer-term commentary for the day. According to a Wall Street Journal poll, 98% approve of Ben Bernanke being re-appointed for four more years at the helm of the Federal Reserve. Citing the importance of continuity, he was given overwhelming support for bringing us through the recent difficult times.

Really?

SAME PLAY, DIFFERENT ACTS

One book I recommend reading is The Creature From Jekyll Island by G. Edward Griffin. It is an excellent treatment of the origin and goals of the Federal Reserve. I am surprised at the number of people who have never even heard of this book. It ought to be required reading in all civics classes — if they even teach that stuff anymore. Actually, I was shocked when a friend who I highly respect in our industry recently commented to me that he was just reading this for the first time.

So if you’ve never read it, get a copy. It’s available in plenty of places online. The book is a large one, and intimidating to those who are only occasional readers. But it is well worth the effort, and a real eye-opener as to why things have played out the way they have over the last year and a half.

Tracing the founding of the central bank in the United States, Griffin clearly demonstrates how and why it was formed, and how it is functioning EXACTLY as planned. The Federal Reserve is not America’s first attempt at a central bank, but all others were eventually shut down because they were recognized for what they really are — an attempt to create a cartel of bankers who, with Congressional support (even though they are not a federal agency), constantly overextend themselves in the pursuit of higher and higher profits. And when the game is up, it uses its Congressional “connection” to foist the losses onto the American taxpayer.

It always occurs with the same themes: “Too big to fail”… or “The first domino to fall in a nationwide/worldwide catastrophe.”

Each successive failure became more massive than the previous one, and a strategy emerged — start discussing amounts of money so big that the average citizen was simply mind-boggled by the size of them. As generations of public dis-education came home to roost, people increasingly believed that economics was the realm of governments rather than markets. And with that fallacy came the ingrained idea that money comes from the government, so it is the only entity able to create the resources to “correct” gargantuan fiscal shortfalls.

Of course what “everyman” missed was that the government’s creation of money out of nothing simply fleeced the citizenry in the form of the hidden tax of inflation.

Let’s take a quick and closer look at this sordid history.

I catalogued for you recently one of the failures of the central bank. It was purportedly established to stop market crashes and end recessions. But we have seen recessions in ’53, ’57, ’69, ’75 and ’81, the crashes of ’21 and ’29, the Great Depression I, Black Monday in 1987 and the current lollapalooza of 2008-?

But one of the Fed’s other foundational reasons for existence was to reduce competition from outside banks, as previously mentioned. It also planned to foster an attitude of easy lending, perpetual indebtedness and constant loan rollovers and interest charges. Then when the jig is finally up, and the indebted families, corporations or nations can no longer even afford the interest payments, the debt burden will be passed to the unsuspecting taxpayer by way of inflation.

Since the inception of the Fed, the game has been managed very well. Smaller banks were allowed to fail, just as they are now. This gives the appearance of “letting the market work.”

Let’s look at some of the worst of the big bailouts, just so you can see get a grasp of what has happened, what will happen and how that affects your money.

SAVING BAD BUSINESSES BY STEALING YOUR MONEY 

Penn Central was the nations’ leading railroad prior to 1970. And it was a pretty egregious example of how far bankers were willing to go to bilk money out of a cash cow.

Penn starting getting deeply into debt. Its loans were rolled over, and more money was forwarded to keep operations going, which included servicing interest on their current debt. But as things got worse, the huge banks who were in on the play, which included Continental Illinois, Chase Manhattan, Chemical Bank, Manufacturer’s Hanover and First National City, agreed to continue the loans only if the banks’ officers were put on the railroad’s operating board.

So essentially, the bankers lent themselves money and were in cahoots with the whole game. Also, they were privy to information about the railroad and its stock far ahead of the public. They used this information for their own private profit as the railroad bit the dust. Public records showed that the top executives saved themselves more than $1 million dollars by the sale of stock ahead of the public. A million saved is a million earned.

After all the banks who were called in to support the railroad with cash funds were given complete assurance that the Fed would guarantee the loans, the bailout was a done deal. Immediately all the unionized employees of the failing enterprise were given 13.5% raises. In the end, the Fed authorized loan guarantees of $125 million.

This was never really intended to solve the problem, and a year later the railroad was nationalized and its passenger service became Amtrak. It is a government-run enterprise to this day and continues to operate at a massive loss… only staying open with further governmental subsidies.

The freight side of Penn Central became Conrail, with the government owning 85% of its stock. Fortunately it was sold in a public offering in 1987, staged an impressive comeback and operates at a profit.

At the same time, defense giant Lockheed was also on the edge of bankruptcy. It was $400 million in debt, and Bank of America, along with several other smaller banks, were anxious to keep the milk flowing. Eventually, they marshaled an army of interested parties and went to Washington. They claimed that tens of thousands of jobs would be lost, along with suppliers and subcontractors who would be forced into bankruptcy if Lockheed were allowed to fail. So the government gave them an additional $250 billion in guarantees. That increased their total indebtedness 60%.

Of course, the government had a not-so-secret desire to see Lockheed pay off these debts, and the only way it could do that would be to earn more money. So the company became the chief winner of no-bid contracts and recipients of other governmental work. In the meantime, other defense contractors suffered, since they were essentially pushed out of the whole process in the rush to save Lockheed.

In the mid-’70s, New York City was pursuing the same path. Waste and overspending abounded in this gigantic welfare experiment. By 1975, NYC had sold so many bonds, the market was flooded with them, and there were no more lenders. Well, almost no more. Chase Manhattan and Citicorp were the banks that were benefiting the most from interest paid on these debt, but when the day finally came that interest payments were halted, both bankers and city leaders put together a caravan to Washington, D.C.

Same game plan: Threats of halting essential services… no firemen… no police… no garbage pickup. Rioting and anarchy in the streets. Spreading disease. In New York City? This could have international repercussions.

Out came the federal checkbook and draft was made for $2.3 billion, double what the city already owed. Even though there were a number of conditions placed upon the loan to balance the NYC budget and get a surplus to pay off these debts, none of them were ever honored. The city remains in debt to this day.

Then there was Chrysler for $1.5 billion.

Unity Bank, which eventually cost taxpayers just under $4.5 million.

Commonwealth Bank of Detroit, which enjoyed a $1.5 billion fed bailout — then was eventually sold to First Arabian Corporation, a firm funded by Saudi princes.

First Pennsylvania Bank was carrying $328 million in questionable loans, $16 million more than the entire stock float of the company. They received a $325 million loan from the FDIC.

Continental Illinois was the nations’ seventh-largest bank. It had assets of $42 billion, thousands of employees around the globe and an annual income of $254 million by 1981. Unfortunately, its stellar growth was based on shaky loans to risky businesses and foreign governments who could not obtain financing anywhere else.

Its stock was doing wonderfully, and it was named one of the five best-managed banks in the country. But as they began to reap the risk they had sown, the worlds’ first electronic bank run began. Customers were blissfully unaware, but the biggest depositors began withdrawing their funds, and the business was rumored to be in trouble. Creditors raised their interest rates to the banks and began withdrawing funds. In just four days, Continental’s withdrawals were so heavy, they were forced to go to the Fed for a $3.6 billion loan to cover them. Several banks extended a 30-day line of credit, but it was of no use. Within a week, the bank’s outflow ballooned to over $6 billion.

In the end, Continental’s liabilities (including those off-book) totaled $69 billion. Only about $3 billion of that was FDIC insured. The final bailout was more complicated than I can go into here. But just know that the bank was bailed out, and the taxpayers were stuck with the bill.

Then comes the subprime fiasco of 2008. Notice the fact beyond debate, that the Fed did not come to the rescue of the subprime borrowers. Nope — it rescued the banks. It was for this purpose that it was designed, and it continues in its mission today.

All in the name of preventing catastrophe, protecting the public and providing “liquidity” to the markets.

The multibillion-dollar bailout engineered last year is only chump change to what it will eventually cost the taxpayer. Protect the banks — fleece the public.

So what does all this have to do with us and options? Allow me to bring it home…

THE FED DOESN’T EXIST TO HELP YOU

The key point here is that central banks do not exist for the good of economies. They do not exist for the good of citizens. Their sole purpose is to keep the game going, and to profit from it as long as possible. After that, they clear out, leaving the taxpayers to pay off their debts. Their protection and enhancement of economies and citizens is just a means to end. As long as it helps the profits roll in, helping others is fine. But in the end, they will foist responsibility to others.

So we have to expect central banks to do whatever will profit the most and keep the game going. But, of course, in the end, you reap what you sow. It’s true for all men, including central bankers.

The fact that 98% believe that Ben Bernanke should be re-appointed to his post is evidence of the widespread misunderstanding of what he and his predecessors have done.

Regards,
Bill Jenkins

August 17, 2009

The Fed is Stealing Your Money was originally featured on Whiskey and Gunpowder

It was a truly bullish way to wrap up the week. China reported a 7.9% rise second in quarter GDP, driven mostly by a 15% surge in June consumption and a huge boom in bank lending and government stimulus. Aussie stocks felt the warm glow and rallied just below 4,000 on the ASX/200 Friday. Aussie stocks were up nearly 7% for the week.

But the even better news from the bullish camp is that perma-bear Nouriel Roubini has defected! Yes, Roubini told a conference that the “free fall” in financial losses is over and the U.S. may exit its recession by the end of the year. This was enough sweet talk to send the Dow up nearly one percent.

And then there was an upgrade to second half U.S. GDP forecasts from the U.S. Federal Reserve. In April, the Fed said second half U.S. GDP would shrink by 1.3% to 2.0%. The revised forecast released yesterday now says U.S. GDP will only shrink by 1.0% to 1.5%. A stunning upgrade!

The Fed’s revised projections also show that the U.S. economy will grow faster than it first thought in 2010, once the much-anticipated recovery takes hold. In April the Fed thought the U.S. would grow by 2.0% to 3%. But in the revised forecast now says the growth rate should soar from 2.1% to 3.3%. A stunning upgrade!

The only negative note in the Fed’s forecast is that it reckons U.S. unemployment will keep growing to over 10%. That, presumably, is a drag on the economy. But if credit conditions improve, maybe all the people who’ve lost jobs because the U.S. economy is not producing and not competitive can, you know, get a credit card and live off of that.

But putting on our serious face, and while we are giving valuable publishing space to the optimists, we should point out that some people think the worst case scenario for the U.S. Housing market is already priced in to financial stocks. This leaves said stocks all clear to lead the market higher, along with tech, resources, bonds, and cash!

For example, Jim Cramer reckons that if you assume a 50% total write-off rate on the 14 million mortgages written between 2005 and 2007 in the U.S., you are only talking US$1.4 trillion in losses (7 million homes X $200,000 per home. ) Cramer says the banks have already written off that amount and that the banks stocks are priced for a worst-case scenario that may not materialize.

And if it doesn’t, it would lead to a faster recovery in bank balance sheets, which in turn would lead to a recovery in bank lending, which would not lead to inflation because the Fed has a plan to remove liquidity from the system and everything thing will be fine!

And you thought Neverland was a ranch in California.

Whether Cramer is right depends on which vintage of mortgages have accounted for the losses in the financial sector so far and which are still going bad. The chart below from the Cleveland branch of the Federal Reserve suggests to us that there are more losses to come than have been accounted for. Why do we say that? First the chart…

What does the chart tell us? Well, it shows that in 2003 and 2004, Fannie Mae and Freddie Mac led the surge into subprime lending. This is the vintage of loans that went bad in the last year as interest rates moved up and house prices moved down, putting many new buyers and speculators underwater. This is where the first $1.4 trillion in losses came from.

But the real issue is the quality and quantity of mortgages that were packaged up and securitized from 2005 to 2007. As the GSE’s reduced their originations, banks stepped in—often having acquired non-traditional lenders for just this purpose—to keep feeding the boom. The banks wrote the loans and sold them to each other, purchasing default insurance on the securitized loans from AIG.

These loans are not subprime but supposedly higher credit quality Option ARM and Alt-A loans. And these are the loans the banks, we’d suggest, are carrying at elevated values. We’d also suggest the banks are not adequately capitalized to realize losses on these loans should the housing market get swamped again by another wave of defaults and foreclosures. This is where the second $1.4 trillion in losses will come from.

But of course it’s wacky to suggest all that. We might as well say that aliens crashed at Roswell and that the moon landing was faked (it probably was). There’s just no way it could get any worse than it did in 2007. Could it?

Regards,
Dan Denning

July 21, 2009

Mortgage Defaults May Trump the Fed was originally featured on Whiskey and Gunpowder

In the simple press release that followed, we learned the Fed’s intentions remain the same. Its quantitative easing (QE) plans—that is the Fed’s buying of Treasuries to goose the economy—have not been expanded, nor have they been fully implemented. But if the economy forces their hand, they will!

After the Fed announcement, the dollar immediately sold off against the euro and the pound.

The end of June brought the third revision of the U.S. gross domestic product reading. It was revised to a slightly better figure than expected. In accordance with the trading patterns of late, strength returned to the dollar as its counterparts sold off strongly.

Then there was the massive Treasury auction, with a record number of Treasuries up for bid. Despite fears of no one showing up, the auction went off quite well. Bidding was strong and yields dropped from their recent highs. Of course, falling yields are bad for the dollar, so even though demand for U.S. investments held up, the dollar’s value fell.

That put the focus back on the euro and the pound, which gave the dollar a nice beating. But then on Tuesday the U.K.GDP numbers came out worse than expected. – and once again the dollar was the shining star.

Dizzy yet?

The currencies just keep vacillating from strength to weakness. The problem is, every time they show more strength, they quickly back off. It is hatefully referred to as a churning market. Lots of movement, but no real direction.

Lots to consider: GDP from Canada; Case-Shiller Home Price Index, consumer confidence, the ADP Payroll numbers, continuing jobless claims and non-farm payroll here in the United States; and rate announcements from the United Kingdom and the European Central Bank.

But the numbers you should keep a close eye on this week are the Bureau of Labor Statistics’ continuing jobless claims and the early holiday release of the non-farm payroll report (which is usually done on the first Friday of the month).

Crooked Math

Now, I’m not asking you to look at the numbers as a setup for a potential trade. It’s just that the numbers will highlight something I’ve been saying all along.

Here’s how it goes: The monthly report was expected to show a negative 350,000. That means we lost 350,000 jobs last month. However, the weekly figure will come in at a negative 600,000 (or so).

Funny, that. If have new jobless claims running at about 600K per WEEK, how can we only lose 350K jobs per MONTH?

Sometimes readers will complain about my politicizing the weekly wrap-ups in my newsletter. But doggone it, stuff like this really sticks in my craw. I have little confidence in the present administration, and I had little confidence in the last administration. And that’s just the start of it. I believe the mess we are in is the product of the last 100 years of administrations.

For far too long, our leaders have paraded themselves around in the most expensive of accommodations, spent our money like it is as plentiful as dirt, presumed to make intelligent decisions, and foisted them on the public as such when, in truth, they are no brighter than the emperor in his “new clothes.”

That bothers me. Immensely.

So when I complain about government intervention, I’m not specifically talking about the current occupiers of the White House or Capitol. (It just so happens the current administration has been big on intervention.)

For example, I’ve been asked what I meant by “the repressive taxation being currently inflicted on the citizenry.” “Where are the new taxes?” Essentially, I was being asked to point to a specific spending bill with accompanying taxes.

But that’s not exactly what I meant. My point was — and continues to be — this: whenever the “government” enacts a new law, it enacts a tax by default.

We have a current view of law that is “positivistic.” In other words, rather than making laws that restrict, we make laws that propose. There’s a huge difference. A negativistic view of the law is basically what we find in the Ten Commandments: Thou shalt NOT kill. Thou shalt NOT steal. Thou shalt NOT committ adultery. Each of them is negative or restrictive in nature.

Modern law, being positivistic, actually demands new behaviors. Thou shalt wear a helmet when riding a bicycle… Thou shalt wear a safety belt when riding in a car… Thou shalt provide insurance for former employees. Thou shalt produce cars with better gas mileage and friendlier emissions. Thou shalt purchase carbon credits for excessive pollution.

What’s all this got to do with taxes? Well, it costs money to enforce and police the new standards of behavior. They must be enforced and policed upon the entire population. Whereas the old laws were only enforced upon the minority who were murderers or thieves. In any “civilized” society, they are a minority, and the cost to enforce the law upon them, if it is done right, is miniscule.

But when you must police and enforce behavior across an entire population, the costs increase exponentially. That’s why with every new bill that is pushed out by Congress, taxes must go up. Unless we believe the Polyannic line that they will cut costs over here to pay for new “programs” over there!

Finally, without exception, I believe any taxation above 9.9% in toto is repressive and draconian. Only God is great enough to require 10%. [Any government that requires more has a lot of nerve—ed.]

Now, I say all that for this reason: These government statistics do not add up. When they don’t, we know they must be manipulated. If a government will manipulate its currency (which is downright theft), manipulating some monthly numbers will not cost them any sleep at night. And this month, at least in the weekly and monthly job figures, it will be out there for everyone to see who will look at it.

How does this play into your investment strategy? Well, if you were purely a technical trader, you’d say it doesn’t factor in at all. Technical traders only watch the charts and price action. Their mantra is, “Price action tells the whole story of the market.”

Now, I believe charts and price action have their place, but I would argue that it’s been stunted by the recent market. What should be good news for the dollar has often turned out to be bad news, and vice versa. Thus, if a trader is watching price action only, he would just be able to react to the markets reaction to the news, rather than trading what he thinks the market ought to do. So that’s why I think this kind of top-down, fundamental analysis should have a role in looking for investment opportunities.

And those fundamentals include studying the policies — and contradictions — spewing from the government.

Regards,
Bill Jenkins

July 9, 2009

DC and the Fed manipulating Interest Rates and Your Money was originally featured on Whiskey and Gunpowder

Here’s a thought—that tiny handful of investors and analysts warning how Fed policy risks hyper-inflation are in fact doing the central bank’s work.

The Fed wants you to believe hyperinflation is looming. Or at least, it should want that, if doubling its balance-sheet – purchasing and lending against investment junk – is going to work the wonders that modern central-bank theory says it can. And the Fed certainly wants you to believe it will stop at nothing to avoid deflation (”whatever means necessary” as the chairman put it back in 2002).

So anyone touting the hyperinflation risk in public is playing the shill, a decoy – seemingly unconnected – proclaiming the miracle powers of Dr.Ben Bernanke’s snake oil to CNBC anchors at every chance.

In fact, they’re doing the Fed’s work better than the Federal Reserve itself. Really.

“The major danger with a zero lower bound for the interest rate,” said Swedish policy-wonk Lars Svensson (also a Princeton colleague of the Fed chief and his credit-bubble associate Paul Krugman) in a speech earlier this year, “is that inflation expectations will be too low and even negative, and that the real interest rate will thus become too high.”

With it so far? Slashing interest rates to the very minimum of 0% suggests inflation has vanished, at least in the central bank’s eyes. But that, in turn, reduces the rate of inflation expected by consumers, investors and business. Central banks are credible forecasters, you see. At least in central-bank eyes. So in Svensson’s philosophy, the zero-rate solution to falling inflation proves self-fulfilling as people hoard cash and sit tight in bonds.

“It is thus necessary to…to counteract expectations of falling inflation, and preferably to create expectations of higher inflation,” Svensson went on. But “as Paul Krugman put it” says the Riksbank’s deputy governor, “How will the central bank ‘credibly promise to be irresponsible’…?

Heaven knows the Fed’s trying. (So’s Krugman, to no one’s surprise.) But while it’s embraced credible recklessness, the Fed’s stop short of French kissing it.

Why so coy…?

“We have a very serious recession, we have a 9.4% unemployment rate,” said San Fran Fed governor Janet Yellen in a speech in California on Tuesday. “If we were not at zero, we would be lowering the funds rate…We should want to do more.”

Just how much further would the Fed go – all the way to hyperinflation perhaps? Racing to first base, “The vigorous policy actions of the Fed and other central banks, combined with sizable fiscal stimulus here and abroad, have sent a clear message that deflation won’t be tolerated,” Yellen said.

“Based on measures of inflation expectations,” she went on, an apparently reading straight from Svensson, “the public appears confident that the Fed will adopt policies that will maintain a low, positive rate of inflation. Evidently, the credibility that the Fed and other central banks have built over the past few decades in bringing inflation down has spilled over into a belief that we won’t allow inflation to get too low either.”

Steady on, cheeky! Second base next, and “A glance at history shows that many countries with massive structural deficits and without an independent central bank turned to the printing press to pay off their debts,” Yellen continued.

Straight to third then, and “That’s a recipe for high inflation and, in some cases, hyperinflation.”

Gulp, almost home! But then, somewhere between third and fourth base, the Fed’s gone shy and rebuttoned its blouse. Because “I don’t believe the United States faces that threat,” Yellen said, showing the come-on to be just one big tease.

“Looking back in history, runaway fiscal deficits have often been accompanied by high inflation,” she explained in Tuesday’s speech in the bankrupt state of California. “But, since World War II, such a relationship has only held in developing countries. In countries with advanced financial systems and histories of low inflation, no such connection is found.”

Oh man, what a let down! Who’s gonna put out hyperinflation if not the Fed…?

“In order to make up for the collapse of credit, we are effectively creating money,” said George Soros, the legendary if only occasionally accurate hedge funder, at a Washington forum in March. “If and when credit is restarted, you would then have an incredibly swollen monetary base, which, if it were leveraged, you would have an explosion of inflation.”

The trouble comes, as Lars Svensson guessed back in January, with that “if and when”. Because it opens the door to the idea that a central bank might opt instead to withdraw all this new money after the deflation panic has ended. And that in itself is enough to make creating it useless. Pointing to Japan’s five-year experiment with ‘Quantitative Easing’ between March 2001 and March 2006, said Svensson, boosting the monetary base by some 70% failed to “noticeably affect expectations of inflation and the future price level.

“For example, the Yen did not depreciate as it should otherwise have done. Firms and households clearly believed that the expansion of the monetary base was temporary and not permanent, which subsequently proved to be true. The monetary base fell back to normal levels when the interest rate was later raised to above zero.”

Sure, the Bank of Japan’s trillions did triple Japanese Gold Prices. But even with gold refusing to drop back against the Dollar right now, eagle-eyed readers will note that, quite apart from the urgent debate in Europe, the US authorities are at pains to deny they need an ‘exit plan’ any time soon. White House advisor Christina Romer made that much plain in last week’s Economist magazine, blaming the double-dip depression of 1937 on “an unfortunate, and largely inadvertent, switch to contractionary fiscal and monetary policy.” Yellen said it again Tuesday.

So Team Bernanke have got the right idea – at least on Planet Svensson – if not the right level of irresponsibility just yet. Slip a little vodka into their juice though, and they might start talking up inflation like Alan Greenspan, Bernanke’s predecessor and the Maestro himself, writing last week in the Financial Times. He tried to spook everyone out of cash and into the stores by warning of a decade of inflation ahead!

“A pending avalanche of government debt is about to be unloaded on world financial markets,” Sir Alan of Greenspan warned sagely, almost visibly winking from behind those enormous spectacles. “The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt.”

Or given enough sauce to get really loose, the Fed might even get crazy like Asia-based doomster Dr.Marc Faber. (He’s been known to enjoy the odd cocktail or two.) Stop warning on hyperinflation. Just come out and say it instead.

“I am 100% sure that the US will go into hyperinflation,” as Faber told Bloomberg in late May, and again on June 29th. “The US central bank has structured and introduced policies without considering exponential credit growth and its consequences,” added the Gloom, Boom & Doom author in an interview with the Korea Times on Wednesday.

See what I mean about being a shill? It’s like he’s on the payroll…

“The United States will not raise interest rates for many years to come because it needs to pay off its huge debts,” he went on, recommending inflation-friendly assets such as equities and Gold Bullion. “In turn, too much money in the economy will raise costs of everything, including healthcare and education, giving rise to hyperinflation.”

There, now that’s the way to do it! Greenspan and Faber on song, while the Bernanke Fed tip-toes around stating its aim:

Spark inflation and leave it to burn. Because putting it out worsened both the Great Depression and Japan’s “lost decade” – the one that started two decades ago and hasn’t yet ended. Everyone who’s anyone in monetary theory knows that.

And if they claim otherwise, maybe they’re the ones kidding.

Regards,
Adrian Ash
BullionVault

July 6, 2009

Faber and Greenspan: Shills for Fed Snake Oil was originally featured on Whiskey and Gunpowder

The World Bank now says the global economy will contract by 2.9% this year instead of 1.7%. That could be right. But that’s not the reason stocks are falling. The rally that began in March has now run out of steam. It’s also run out of news events to send it higher. So what now?

Well, the primary trend—and by that we mean what we think the dominant trend is for the next few years—is the systematic reduction of debt in the household and business sectors. That ought to lead to write downs in asset prices and a general contraction in credit. Perhaps that is why—despite the mondo auction of $104 billion in new debt—even U.S. government bonds followed stocks and commodities down.

Let’s take a quick look at what the Federal Open Market Committee said yesterday in regard to U.S. interest rates. We’d planned to watch for language that tipped the Fed’s intentions regarding the bond market. It all begins with the bond vigilantes these days. So what did the Fed say?

It made clear low rates-at least the Fed’s target rate-are here to stay. “The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

Whether the Fed can talk down or manipulate long-term rates into staying dormant is another matter. But it had more to say on the subject. “As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year.”

The important part here is “as previously announced.” This sounds a bit like, “I really mean it. I’ll do it. I’m dead serious. Don’t make me buy those mortgage bonds. I’ll do it if I have to. Don’t push me.”

In other words, the Fed is merely repeating what it said it would do earlier. It did not announce a new policy or its intention to expand quantitative easing to keep bond yields down. We imagine it would not want to advertise its willingness to keep buying bonds. That might induce a lot of selling and have the perverse effect of pushing U.S. yields up and investors into other assets.

But just for good measure the Fed repeated itself one more time. “In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.”

So it’s a waiting game now. The Fed hopes the economy recovers this year and that it can withdraw its massive liquidity measures before they leak through into the economy to cause inflation. So far, its credit facilities have not translated into an expansion in the money supply. That’s what the bond market fears (which is also why ten-year Treasury yields were up on the day).

We reckon investors and insiders will wait to wade back into the stock market until this correction (if that’s what it is) runs its course. After all, the insiders have not been buying the rally. They’ve been selling into it.

According to research service TrimTabs insiders of S&P 500 listed companies have unloaded $2.6bn in shares in June, compared with $120m in purchases. “The smartest players in the US stock market – the top insiders who run public companies – are not betting their own money on an economic recovery,” says TrimTabs CEO Charles Biderman.

So the American insiders are bearish. They’ve been net sellers for fourteen straight weeks, according to Ben Silverman at InsiderScore. If the inside money is getting out, we reckon shares are going to do some bottom searching over the next few weeks. The World Bank announcement, then, merely confirmed what the action in the market has been telling us for the last few weeks.

Insider selling is a particularly charged bit of investment intelligence. But in our experience it is a piece of information that confirms what is already apparent through an analysis of other technical and fundamental variables. It doesn’t necessarily tell you anything you can’t figure out by other means.

It’s true that the insiders may be selling because they have access to information not known by the general public (although trading on this information would, of course, not be legal…but there you go). And insider sales—at least on large stocks with lots of liquidity—are easier to conceal in the general course of trading. But the money flow and volume still tell the tale, especially with smaller stocks.

If you step away from the technical guts of the market for a moment, the larger question is whether this last financial year will trigger any shifts in the investment habits or psyche of the Australian public. Judging by the number of people who stayed in balanced or growth funds over the last year, the Australian public is brain dead (zombies!). But then, let’s be fair. Maybe they ARE keeping their eye on the bigger picture. They just see the picture slightly differently than other living, thinking people.

The bigger picture can be seen below, courtesy of Super Ratings, in the value of a balanced Aussie super fund versus cash since 2003. Cash is slow and plodding and lazy and conservative. Very turtelish. The balances super funds, on the other hands, had three ripper years up to 2007, and two disastrous ones since. Even after an epic charge in commodities, balances super has barely beaten cash. Hmmn.

The Tortoise Cash and the Balanced Hare

You can see that after reaching parity earlier this year (at the markets slow) balanced funds have since rebounded. But you have to wonder how balanced they really are. Balance-according to our Super expert Kris Sayce-is supposed to be a kind of middle ground between aggressive growth and conservative cash. It also sounds sensible. Who is against balance? It’s prudent, right?

But if we read the latest report right from Super Ratings, the median balanced fund has 60%-76% of its investment portfolio allocated to growth assets, the riskiest type! That sounds distinctly unbalanced. It sounds, in fact, really stupid, considering this is a bear market in stocks.

Balanced zombie minds will point out that on rolling five, seven, and ten-year periods, balanced funds are all still up (4.75%, 4.99%, and 5.07%, respectively). But we would humbly suggest that there’s never been a better time to question the basic assumptions about investing in balanced funds-or any funds for that matter.

That is, a passive approach that assumes markets always go up and time is on your side is probably going to get you slaughtered in the coming years. If inflation doesn’t kill you, a few bad years could. And if your rolling period coincides with some of the frequent 17-year periods in which stock markets do not go up at all-well then the whole idea of using the stock market as a retirement machine is as dead as a zombie.

Regards,
Dan Denning
Daily Reckoning Australia

June 26, 2009

The Fed and Zombie Investors was originally featured on Whiskey and Gunpowder

What America needs desperately is a “re-set” button, just not one in flawed Russian.  We’re already being overcharged.  What would solve most of the problems (after some truly horrible tangles were unraveled) would be to go back a minimum of a hundred years and start over. 1909 would do quite nicely.

Did you gasp, “Are you mad woman?!  You would lose your right to vote!”  No, I am not insane at all.  If the price of restoring the gold standard, eliminating the Federal Reserve, dismantling the welfare state, getting rid of millions of pages of deleterious regulations, wiping out all the “laws” set by Liberal judges, and following the Constitution strictly is forfeiting my right to vote–take it with my blessing.  It would be the best trade of my life.

I’m a trader, not an “investor.”  Every time the government tells us it is “investing” in our future, the results are the same as holding stocks for the long term–with all the fun of margin calls, a thing no one with any regard for his skin would contemplate for a moment.  Hold stocks as “investments” and whatever increase you have will be eaten up by inflation or destroyed by business cycles or government actions.  Sometimes you don’t get out of Polaroid or Texas Instruments or the “war” on drugs in time.  In a moment of sentimental madness you might considered picking up some Flying Tigers or “Head Start.”

You can’t fall in love with stocks; pick ‘em up, ride ‘em up, cash ‘em out, Rawhide! and on to the next one.  It isn’t safe to fall in love with government programs, either.  They don’t pay dividends, you can’t get them out of your portfolio, and they proliferate like mongrel puppies, howling their ugly little heads off, messing on the floor, consuming ever-increasing amounts of resources, and repeating the cycle endlessly.

Making money in the stock market and running governments sensibly both need to be done cooly, intelligently, with a level head, firm principles, and a committment to getting out of anything that doesn’t work.

Regards,
Linda Brady Traynham

April 27, 2009

Obama and Clinton Are Right! was originally featured on Whiskey and Gunpowder