Ben Bernanke

Here is Part 2 of my article “The Argument of Bitcoins v. Gold Laid to Rest, originally released at my blog, www.theundergroundinvestor.com on April 9, 2013. Yes, money that is real and tangible is really better than money that is just a digital valuation backed by air.

In a world in which one bank after another has scrambled to downgrade its outlook on gold, both before the recent bank CEO huddle with Obama last Thursday - the day the bottom fell out of the gold market - but especially after, when the real onslaught on gold truly started, it has been an outright blasphemy for the sellside to even hint at having a bullish outlook on gold. After all, how dare someone allocate capital to the barbaric metal at a time when the US is recovering nicely (it's not), and when the US currency is one again deemed safe (with the Fed diluting its monetary base by 3% per month every month until the end of 2014 and likely forever, it isn't), any deviation from this latest script which desperately attempts to push savers out of the safety of gold into the fiat paper, where the proceeds are invested into stocks or simply spent (a la what happened in Cyprus and the latent fear of deposit confiscation everywhere in Europe), is not permitted. Yet this is precisely what CLSA's Chris Wood, author of the famous Greed & Fear, which is never afraid to be contrarian or to break the lemming mold, has done. His brief take on the recent gold plunge? "This is a buying opportunity too good for investors to miss." Buyers of physical gold everywhere in the world agree.

Investors take note, the global economy appears to be contracting again. China’s recent GDP miss is the just the latest in a series of economic surprises to the downside. And stocks are always the last asset class to realize this.

Remember when the last time a cluster of Hindenburg Omens nearly toppled the market in August 2010 and the only saving grace was Ben Bernanke's QE2 announcement at Jackson Hole which sent risk soaring? Today, nearly three years later, we got the first instance of the Omen again. Will it be a one-off fluke, or a cluster, which is needed to confirm this dreaded technical formation? Stay tuned in the coming days to find out...

The problem with cutting the links between risk and consequence and the real economy and the stock market is that a market deprived of feedback from reality is prone to disorderly disruption. Why is this so? Participants make decisions based on the information made available to them. If the information from the real world is suppressed or limited, then the decisions made by participants will necessarily be misinformed, i.e. wrong.  If feedback from the real world is suppressed, then decisions will necessarily be bad. The only choice for participants who have lost faith in central planning's promise of permanently higher markets will be to abandon the manipulated markets entirely.

A high level overview of the drivers of the capital markets.

Curious how Abenomics is progressing six months after its announcement? These charts courtesy of Diapason should provide a convenient status update.

We live in a world now which may be described as, "Nothing Matters."

The money pours in each month from America, Europe and Japan and overrides anything and everything else. With pre-payments and calls the estimated amount of money provided by the Fed for the world's monetary supply is approximately $100 billion every month. It is not just the American banks that are the recipients of the hand-out but the foreign ones who ship it back to Europe or buy European sovereign debt courtesy of Mr. Bernanke. I suspect that if the American taxpayers were aware of the scheme that the citizens would not be pleased but then what the Fed is doing is not generally part of polite conversation in America and so it is not discussed.

There was little in terms of overnight newsflow to spook algos, but the tone is decidedly sour this morning following a lack of either the now traditional Japan or Europen-open buying ramps. The primary reason for this may well be the ongoing decline in the USDJPY which failed to breach the 100 barrier yesterday, coming as close as 99.95 before the Mrs. Watanabe onslaught had to be called off despite some more jawboning from Kuroda whose headlines are now summarily ignored, and which appears to have set a line in the sand for Japan, whose market naturally closed lower following this strengthening in its currency. Similarly troubling was the dip in the SHCOMP which closed down -0.58%, this despite the epic M2 and credit injection reported yesterday: if new liquidity can't send the market higher, what can?

Cost reductions and layoffs are the drivers for bank earnings... Watch those ski tips.  

Typically the public enters the market after a large run up, in time to buy at the top. Not there yet. 

The money printing of the Federal Reserve with no anchor to gold has allowed the welfare state to grow to immense proportions. It has allowed politicians to buy votes by spending taxpayer dollars on multi-million dollar Keynesian zero return albatrosses. It has allowed politicians to enslave black people on a welfare plantation of entitlements. Bernanke and his cronies reward mal-investment through their policies. They reward bad behavior (borrowing & spending), while punishing good behavior (saving and investing). West Philly is a testament to failed economic policies, government waste, lack of personal responsibility, corrupt politicians, excessive union costs, and the delusional belief that government can create economic growth. The 30 Blocks of Squalor is descending further into squalor and it will accelerate as Bernanke’s policies further destroy what remains of capitalism in this country.

The bond king is pissed:

GROSS: Fed’s secret Email list bothers no one it seems.I’ll give up my rant but remember it please.

— PIMCO (@PIMCO) April 11, 2013

Reported U.S. food inflation has been a paltry 1.6% over the last 12 months, one of the lowest growth rates in food & beverage CPI since late 2010. However, ConvergEx's Nick Colas notes that the severe drought in the Midwest over the summer of 2012 will likely drive up food costs this year 3-4% across the board, by the USDA’s estimates. These headline numbers, however, don’t accurately reflect the prices of the real "basket of goods" that we bring to the checkout counter every week at the grocery store. Consequently, Colas warns, the CPI report doesn’t necessarily mirror the increase in our grocery bill. Nor does it take into accountdifferent food choices (e.g. healthy vs. junk food), farm prices, or demographics, all of which the USDA publishes separately. The actual, visible inflation at the checkout counter may lead the American consumer to think – perhaps inaccurately – that overall CPI is rising or falling at a similar pace. For a more detailed, accurate reflection of food CPI, then, we have to aggregate all of these indicators to see how they compare to overall CPI. In short, inflationary expectations may well be set to rise dramatically in 2013: “shopping cart inflation” was upwards of 1.3% last month, almost double the 0.7% overall CPI.

Given that the Fed and the BoJ has our back (and will add a further $1.75tn or so to their balance sheets by 2013 year-end), we should expect US equity prices to rise to infinity and beyond. As one smart chap on the television noted, "stocks won't go down again," but given expectations for earnings in 2013 (which include the remarkable hockey-stick in Q4 - which surely would only occur if things were strong enough to warrant the Fed pulling back in a reflexive vicious circle), the S&P 500 will trade at a rather expensive 19.5x P/E at end-2013 (which we are sure we will be told is still cheap).