Currency Wars

The world is a boil with currency devaluations, interest rate cuts and quantitative easings (QEs) by numerous central banks. Because of the recent slump in oil prices, the Canadian central bank has just cut its lending rate … with another commodity exporter, Australia, expected to follow suit shortly … see: CNBC Story. And today Mario Draghi of the European Central Bank is expected to announce the start of another QE program totaling perhaps 500 billion euros … see: Another CNBC Story.

I have in the past commented on what has degenerated into a major pissing contest between the central banks of the more developed nations and what the consequences that might result are … see: Race to the Bottom. It seems to this observer that the world has been lulled into an expectation, led by the now retired Chairman of the U.S. Federal Reserve Bank, Ben Bernanke, that central banks are the panacea for all the world’s economic woes.

Clearly monetary policy, in the long run, cannot solve basic economic malaise … yet the world’s stock markets now seem addicted to the opiate of easy money and very low, even negative, interest rates. This cannot all end well … at some point, possibly sooner than we wish, as Obama’s reverend, Jeremiah Wright, would say, “the chickens will come home to roost.”

What is now an illogical deflationary monetary and commodity spiral, I somehow expect, will flip into run-away inflationary in a nanosecond. Money is, after all, just gussied-up pieces of paper representing a political promise. Be prepared for these promises to be broken …

A Ton of BRICs

It wasn’t too long ago that the BRICs were expected to be the next great economic tidal wave.  (BRIC stands for Brazil, Russia, India and China which were and are the first tier of the emerging market economies.)  Now the shine is off the shoe and these countries have suffered through the U.S. Federal Reserve Bank’s monetary shenanigan's ...  see: UK Telegraph Article.  And the Fed is now ignoring them (possibly at its peril) even though they represent a much more significant portion of the world’s economic might.

Economists worldwide are suffering monetary schizophrenia these days … undecided as to whether all the dollar liquidity with which Ben Bernanke is flooding the world will cause deflation or inflation … particularly after the Fed starts stepping on the monetary breaks (called “tapering”).  Just the expectation that this will happen has already caused the low interest rate on the 10-year U.S. government bond to increase by a full percentage point in just a few short months.  Higher interest rates here do suggest that money will be tighter and thus tending toward deflation. But emerging economies had been following our central bank’s lead and were also trying to cause their currencies to devalue … see: Race to the Bottom.  This complicates things …  possibly beyond comprehension.

So the real predictor in terms of inflation versus deflation, I think, has more to do with how rates change elsewhere.  Higher interest rates in the U.S do suggest that deflation might be the bigger bugaboo since money will flow here and away from emerging markets causing them fiscal apoplexy.  But now they have much more say as to how things turn out.  They can also halt their monetary easing in retribution with who knows what results?  Whatever these eventual outcomes are, I don’t think they will be happy.

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The Punch Bowl Saga

Federal Reserve Bank Chairman, Ben Bernanke, is testifying in front of Congress again today ... very likely for the last time.  And he is telling both houses and the stock markets exactly what they want to hear ... that monetary tightening will not be started by the Federal Reserve Bank "for the foreseeable future" (see: CNBC Story). This is in stark contrast to what he said one month ago when he suggested that the Fed's tapering-off of its quantitative easing ($85 billion of money printing per month) would begin later this year and would likely be done by mid-year next (see: How Many Angels). Predictably these previous Bernanke remarks caused interest rates to soar and the stock market to swoon.

So the candy-man, Ben has appeared to reversed himself and promised to keep pumping money into the financial markets ... an action that is now being frequently compared to providing a dope-fix to drug-users. In the past, the Fed's job has been rather compared to taking away the punch bowl just as the party is getting a "glow-on and singing fills the air."  Only this time, Bernanke has seemingly lost his nerve and is refilling the punch bowl with grain alcohol ... probably not the long-term smartest thing to do for the U.S. economy.

But then how many smart things is this country doing these days anyway?

How Many Angels …

can dance on Ben Bernanke’s head?  I just finished watching the Bernanke news conference after the Federal Open-Market Committee (FOMC) meeting yesterday and today … and a vigorous round-robin discussion on CNBC with about eight monetary policy experts.  All the while the stock market sold off over 100 points (at closing, it is now down over 200 points) and the yield on the ten-year note bounced around and then climbed to as much as 2.4%.  This was because Fed Chairman, Bernanke said that, if economic conditions continue to improve in the direction of internal Federal Reserve Bank forecasts, its quantitative easing (QE, or $85 billion monthly purchases of U.S. securities and mortgages) would begin to be scaled back later this year … with the possibility that they would end entirely by mid-2014.

What does this all mean?  Only Big Ben really knows … markets move not just on the absolute direction of interest rates … but on the first, second, and even third derivatives of same.  This is reminiscent of the middle-ages theological discussions about how many dancing angels could fit on the head of a pin … or the Talmudic discussions among Hebrew scholars about the implications of a single scripture word.

One thing investors might be able discern from this calculus … and that is, if Bernanke’s sage words do come true, the Fed will soon be "removing the punch bowl" and our economy should slow down … even from current anemic levels.  This means that the Democrats might have a more difficult time recapturing the House of Representatives in 2014 and maybe even holding onto the Senate … but then, because of the resulting economic bounce, they possibly would have an easier time retaining the presidency in 2016. 

And they say that the Federal Reserve Bank is not political …

Why is Gold in the Toilet?

The price of gold has dropped today $93, as I write this, to $1409 per ounce ... down from $1803 last August ... and an all-time high of $1920 in September of 2011.  That is almost a 27% decline and is causing a lot of consternation among the gold bugs and panic among those schlemiels who bought gold after listening to those high-pressure ads on television.  Now the question is, why has this "guaranteed investment" gone sour,  I can offer four reasons:

1) The price of gold has been anticipating the return of rampant inflation as a result of the U.S. Federal Reserve Bank and other central banks around the world printing new money as fast as they can get the paper delivered to their mints.  Like any speculative market, the price of gold was discounting the future and, when the "future" doesn't occur on schedule, things can get messy.  Ben Bernanke's interest rate manipulations and a continued weak U.S. economy/employment picture has kept a lid on inflation  ... which has pushed back the date of the big payoff for U.S. gold bugs.

2) Since there are significant carrying cost to owning gold (storage fees, margin interest cost, no dividends, and steep selling discounts), an unloading of same was almost destined due to the drawn-out timing of the expected "rally." (The price of gold in Japan, based on the recent and dramatic quantitative easing of the yen, is hitting new highs.  This maybe is another gold market bubble in the forming.)

3) Because of the austerity measures being imposed on some European Monetary Union members, there is considerable pressure on these central banks to sell gold reserves to meet their debt obligations.  Apparently last Friday, Cyprus was the first country to crack under the strain and either is or will be selling off significant amounts (tons) of gold.  Are Spain, Portugal, Italy, Greece, and Ireland to follow?

4) Independent of these three fundamental factors, clearly technical factors are now ruling the roost.  If speculators, such as hedge funds, see the price of gold plummeting, they head for the exits, elbows akimbo.  Small private investors often get crushed in the stampede.

So, dear readers ... gold now is in the toilet ... and may stay there until there are real signs of inflation rearing its ugly head again.  When might this occur?  I am not that good at predicting things.  But, I can safely say that, when it does occur, it will probably be lightning fast.

Afterward: as of 10:30 on 4/15/13 gold is selling for $1342 per ounce.

Not Not No

Of late I have been plagued by a gnawing feeling of angst … and trying to decipher what is at its source. To allay this feeling, I wanted to find what is in disarray in our public space.  Clearly there are excesses everywhere one looks -- huge sovereign debt, not just in the United States but worldwide; rampant drug use; a socially-transmitted disease pandemic (see: Were Number One); a galloping moral permissiveness (mostly centered in the media, Hollywood and Washington); governmental dysfunction at almost every level; parcels of pissant people impinging upon our freedoms; the accelerating crumbling of our time-honored social structures … enough … I’m sure you can easily extend this list.

After some sleeplessness I think I may have a clue as to what is the wellspring of my anxiety … we are rapidly losing our ability to say “no.”  Saying “no” has become a big no-no.  The Republicans are being tarred in the media with the pejorative “The Party of No.”  We are told that everything new should be unthinkingly embraced. Permissiveness is how to be hip.  Saying “yes” (to anything) is what is expected ... and makes one instantly brilliant and popular.

How should we respond if someone, who can’t afford it, applies for a home mortgage?  What do we say to our tween girls who want a personal cache of “morning after” pills?  Should Jon Corzine get away Scott free after his firm “loses” billions of his clients’ money?  Can we allow our government unfettered access to our personal records?  Should we look away when politicians abuse their positions of power … or waste billions of taxpayer dollars?  Mr. Paul Krugman, is it OK to run trillion dollar federal government deficits year after year?  Was Hillary Clinton right, in her Benghazi testimony, when she shouted, "What difference does it make?"  Mr. Ben Bernanke, is it permitted for the Federal Reserve to have printed more than four trillion dollars of new money?

Recognizing this contemporary societal flaw has set me free.  I can now view the world through puce-colored glasses … without being self-conscious.  I can now shake my head from side to side with unfettered abandon.  So the next time I am accused of being a sour-puss and a nay-sayer, I intend to secretly smile to myself.

The Warren Court

I have written before about the tyro Senator from Massachusetts, Elizabeth Warren … see: Lizzy ... basically commending her for putting a bevvy of bank regulators on the hot seat for not bring criminal charges against any banking types for the 2008 financial meltdown.  Since then Senator Warren has, from her position on the bench of the Senate Banking Committee, embarrassed two more sets of financial officials testifying there:

1) She asked the Federal Reserve Chairman, Ben Bernanke, why the “too big to fail” provisions of the Dodd-Frank financial reform law have not yet been fleshed out and implemented.  She said that not only have the big financial-center banks gotten bigger since this act was passed, but that they are benefiting from a money-cost differential between themselves and the smaller regional banks ... to the tune of something like $83 billion per year.  (See: Huffington Post Story).  Bernanke gave a dismissive response even after Warren kept pressing him on this issue.  (I must add however that, after Bernanke’s testimony was over, one could see Warren rushing up to the Fed Chairman as he was exiting the hearing room, presumably with some backtracking words.)

2) And, more recently, Senator Warren pressed Treasury officials as to why officers of HSBC bank have not been prosecuted (and/or had serious sanctions imposed on the bank) for laundering considerable drug money whereas minor drug dealers end up in the poky, see: Reddit Reference.  (HSBC did pay a $1.92 billion fine which seems to indicate that these were pretty serious offenses.)

Please don’t misunderstand me.  Although I commend Ms. Warren on her aggressive cross-examination style from the bench of the Senate Banking Committee, I still have serious questions about her own ethics regarding her long-ago claims of minority Native-American status … and the character weakness she displayed in how she ran her campaign against the incumbent Senator Scott Brown.  So I am conflicted about my above paeans for this woman ... but I do hope she continues her aggressive judicial ways from the bench.

Sugar High

Mitt Romney recently spoke to the Federal Reserve Chairman, Ben Bernanke, to ask him not to initiate the Fed's latest round of quantitative easing (QE3).  This request fell on deaf ears ... for the Fed is now pumping $40 billion a month into the U.S. housing market by printing money to buy mortgages ,,, and, unlike previous quantitative easings, there is no indication of when it will stop its monitary printing presses.  This, of course has inflated the stock market and deflated the dollar.

America is experiencing another financial "sugar high" ... with no Michael Bloomberg or Michelle Obama to nanny-state us down.  The Fed has now expanded its normal mandate to effect "full-employment" ... the diametric opposite of its primary mandate of "controlling inflation." (This is because our current administration has no clue on how our economy can otherwise reduce unemployment rates.)  Everyone who has a brain knows that this fire-hose monetary expansion (QE3) combined with the Fed's previous QE1 and QE2, will be inflationary ... eventually  The question is, "When?" 

Perhaps I can propose an answer to this query?  Bernanke and Co. have calmed some investor worries by claiming that they have "a plan" to [eventually] deleverage the Fed's balance sheet.  I will here and now guess what this plan might be -- at some point the Fed will open the flood gates and allow inflation to come charging back.  If the Fed has been, by then, able to substantially extend the maturities of the debt it now holds (which it has been doing with a vengeance under "Operation Twist"), then the price of this government debt will plummet and the Fed can either write it down on its balance sheet or buy it back with dimes on the dollar.  Of course, the fact that other investors of this debt (pension funds and many IRA retirement funds of our seniors ... among others) will be financially hosed seems not to be a concern of the Fed ... as it has bigger fish to fry (getting Obama re-elected).

The reasons that the United States is not experiencing run-away inflation at the moment are three-fold:
- First, the Fed is keeping interest rates artificially low (short term rates are essentially zero) with its open-market operations,
- Secondly, because of our rotten economy and high unemployment, there is virtually no wage inflation (Chicago teachers being a visible exception),
- And lastly, because one of the major drivers of inflation is housing costs (home selling prices are converted to equivalent rental rates), this area has been profoundly deflationary ... offsetting raging inflation in medical and education costs. (One can also argue that food and fuel prices have been obviously inflationary, but, since they are excluded from core inflation calculations, they don't have the impact that they otherwise might.)

Now, let me extend this Fed analysis ... the fact that QE3 is specifically directed toward the housing market through packaged mortgages purchasing leads me to suspect that the Fed's plan to deleverage its balance sheet may, in fact, already be underway.  What the Fed is doing is bound to reduce the cost of mortgages ... therefore increasing the cost of homes.  And, if that one deflationary drag (housing) is eliminated with QE3, might not that usher in real robust inflation?  So instead of suffering from diabetes from all this sugar, the U.S. economy will return to a hypoglycemic state (read out-of-control inflation).

Q.E.D.

100%

Back on this July 26th in this blog, I asked the question, "What are the chances?" (referring to the probability that Ben Bernanke would help Obama get re-elected by instituting additional quantitative easing ... see: Blog Entry).  As it turns out, the answer is 100% (see: CNBC Story).  Is this so surprising?  If you were Ben Bernanke, wouldn't you want to keep your lucrative job for four more years ... particularly in this piss-poor economy?  (Screw your grandchildren!)

Funny Money

Quantitative Easing (QE) ... this seems to be the central banks of the world's solution to their mounting debt crises. The European Central Bank (ECB) has just taken its cue from Ben Bernanke of the U.S. Federal Reserve Bank (Fed) and embarked on a three year binge of QE (see: Boston.com Article)  What does this mean?

It means that European banks can borrow at a 1% rate from Mario Draghi's (ECB's President) piggy bank and turn around and lend it to various European countries at north of 5% (sometimes well north) ... government largess that rivals the green-energy give-aways in the United States. This is meant  to recapitalize these banks which have been weakened by the haircuts they are taking on Greek bonds (and others to follow?)  I sometimes wonder why the ECB doesn't just give the damn money to these banks instead of this obvious artifice.

This mimics what has been happening in the United States where the Fed has been lending money to our banks at below 1% and they, in turn, have been buying government bonds at higher yields ... not quite as lucrative as in Europe, but largess nonetheless.  And where does the Fed get this money to fire-hose out to the banks?  Not from the U.S. taxpayer, but it creates it out of thin air.  It sells U.S. bonds, bills and notes to get the cash to lend out to U.S. (and foreign) banks (and to fund our huge annual deficits).

And why, you ask, does not all this selling of U.S. government debt obligations push down prices and push up yields.  Simple ... because the Fed buys for its own account around 80% of everything it offers.  This financial slight-of-hand has increased the Fed's balance sheet almost three-fold in the last three years (see: QE Comparison) ... a dizzying statistic ... if we can rely on this reporting since the Fed may also be playing Enron-like accounting shenanigans (see: Finger on the Scale).  Zowee!  If the Wall Street Occupiers only knew these funny-money tricks that were taking place at the Fed, they might move north one block and become Pine Street Occupiers (where the Fed is located).

I'm not quite Ron Paul on this issue yet, but I am getting closer.  For those not yet nodding off, I intend to blog more on this whole mare's nest later ...

Trumping Our Lenders?

The way I understand it, Donald Trump keeps his bankers in a bit of a predicament.  He owes them so much money that they can't afford to pull the plug on him.  All his properties are supposedly mortgaged up to their hilts and, although he usually and continually makes payments on these mortgages, he, often enough, refinances them for more working capital.  And occasionally, he let's one of these puppies be euthanized  (e.g., the Taj Mahal in Atlantic City) to keep his creditors fearful.  (See: Legal Zoom and Daily News.)  He clearly has a very intimidating negotiating style based upon the leverage of his leverage.  But mostly his total indebtedness just keeps growing ... and growing ... and growing. Effectively, he seems to maintain his lavish life style off of the reverse-vigorish of these banking bets.

Does this all not sound a lot like how the United States Treasury and our Federal Reserve Bank operate?  Only, whereas The Donald does not seem to have any limit to his hubris (and borrowing), The Barry does have an increasingly skeptical Congress which thinks that maybe enough indebtedness is enough. Yesterday, the United States's debt limit was reached and Congress refused to increase it. And no matter how much gorilla dust Timothy Geithner and Ben Bernanke throw up about the calamity that will eventually ensue from this event, I think that the United States's bankers here and around the world may just be a little more disciplined than Mr. Trump's. (See PIMCO Selling)

America for Sale

Of all things, the Japanese yen just hit an historic high against the dollar!  And Europe, with all its many troubles (the credit ratings of Portugal, Spain, Greece, and Ireland have all recently been downgraded ... with more to come) still enjoys a strong euro.  One can only conclude that George Soros and his ilk still believe that the United States is not about to fix its fiscal situation any time soon.  And Ben Bernanke is keeping our interest rates effectively at zero (and flooding the world with dollars) in order to stabilize the U.S. financial sector (primarily mortgage debt) here at home.

All this dollar weakness comes with a cost ... which the United States is beginning to pay.  This cost is that foreign companies are beginning to use their strong(er) currencies to buy up American companies.  Anheuser Busch (Budweiser) is now owned by a Belgium company. Coors Brewing is now owned by a Canadian company.  Citigroup is substantially owned by mideast sovereign-wealth funds.  And now the New York Stock Exchange is about to fall to a German company.  And this trend is bound to continue.

And, while Obama is vacationing in Brazil this weekend with his family, rumor has it that a "For Sale" sign is being installed on the White House lawn.