Quantitative Easing

As Mark Grant so poignantly reminded us yesterday, the Fed is printing $188 million per hour. That is the cost of Dow 14,000 -- that is the price we pay to see Jim Cramer and company consecrate the new bull market via impromptu CNBC specials. This hourly rate is of course implied by the $85 billion of assets the Fed now buys each and every month.

• Kuroda to Hit ‘Wall of Reality’ at BOJ, Ex-Board Member Says (BBG)
• Venezuelans mourn Chavez as focus turns to election (Reuters)
• South Korea says to strike back at North if attacked (Reuters)
• Milk Powder Surges Most in 2 1/2 Years on New Zealand Drought (BBG)
• As Confetti Settles, Strategists Wonder: Will Dow's Rally Last?  (WSJ)
• Pollution, Risk Are Downside of China's 'Blind Expansion' (BBG)
• Obama Calls Republicans in Latest Round of Spending Talks (BBG)
• Ryan Budget Plan Draws GOP Flak (WSJ)
• Samsung buys stake in Apple-supplier Sharp (FT)
• China Joining U.S. Shale Renaissance With $40 Billion (BBG)
• Say Goodbye to the 4% Rule  (WSJ)
• Traders Flee Asia Hedge Funds as Job Haven Turns Dead End (BBG)
• Power rustlers turn the screw in Bulgaria, EU's poorest country (Reuters)

Though a gold bull, I called for a correction late last year and believe more downside is likely from here.

Just in case Lagarde (and everyone else except for the Germans, who have a very unpleasant habit of telling the truth), was lying about that whole "no currency war" thing, China is already one step ahead and is fully prepared to roll out its own FX army. According to China Times, "China is fully prepared for a looming currency war should it, though "avoidable," really happen, said China's central bank deputy governor Yi Gang late Friday." We look forward to the female head of the IMF explaining how China is obviously confused and that it is not currency war when one crushes their currency to promote "economic goals." Of course, that same organization may want to read "Zero Sum for Absolute Idiots" because in this globalized economy any attempt to promote demand (by an end consumer who has no incremental income and stagnant cash flow) through currency debasement has no impact when everyone does it. But then again, this is the IMF - the same organization that declared Europe fixed in 2009, 2010, 2011, 2012, 2013 and so on.

Do you ever get the feeling that no one in the Washington power elite is willing to seriously deal with the major economic threat to future prosperity facing the United States today: mounting government debt and the associated deficits? As a taxpayer, you did not borrow the funds, you did not spend the funds, and you have no moral obligation to repay the funds. Rothbard’s recommendation: “I propose, then, a seemingly drastic but actually far less destructive way of paying off the public debt at a single blow: outright debt repudiation.” Repudiation is not only a sound economic solution to our fiscal crisis, but it is also the morally correct solution.

There was once a rough and logical correlation between the level of government borrowing, and the rate of interest on government debt. If the government borrowed more money, the cost of borrowing rose and the private market’s appetite for government debt fell. But that correlation totally broke down around the year 2000. In 2008 we hit the Minsky moment, and today we are in the deleveraging phase. The spread between government borrowing costs and government borrowing levels remains huge. And the long, slow grind back to a sustainable debt-to-GDP ratio is slow and depressionary. Japan hit their Minsky moment in the 1990s, and today still remain trapped in the deleveraging phase. The question that remains unknown is how the distortions will resolve. In the long run, the data is clear. The Greenspan-Bernanke era Federal Reserve wilfully built up bubbles and distortions, which grew out of control, and sucked the economy into a black hole. At the very best, this has led to a Japanese-style depression.

With gold dropping nearly 3% on February 20, we had to look closely at the FOMC minutes, which were partially responsible for that movement. Since there are quite a few highlights, we have split this analysis into three sections: the confusion over the minutes in the market; the ambiguous language hinting at deep problems; and a few quotes to make your blood boil.

A successful entrepeneur's take on the European sitaution...

Gold is trading flat today near a one and a half week high hit yesterday as Federal Reserve Chairman Ben Bernanke defended the U.S.  ultra loose monetary policy.

The selloff in gold ETFs in February underscores the weakness in gold sentiment among retail investors that has been prominent recently. 

The underlying question in Bill Gross' latest monthly letter, built around Jeremy Stein's (in)famous speech earlier this month, is the following: "How do we know when irrational exuberance has unduly escalated asset values?" He then proceeds to provide a very politically correct answer, which is to be expected for the manager of the world's largest bond fund. Our answer is simpler: We know there is an irrational exuberance asset bubble, because the Fed is still in existence. Far simpler.

In many Western industrialized nations, debt has overwhelmed or is about to overwhelm the economy's debt-servicing capacity. In the run-up to a debt crisis, bad debt tends to move to the next higher level and may ultimately accumulate in the central bank's balance sheet, provided the economy has its own currency. Many observers assume that, once bad debt is purchased by the central bank, the debt crisis is solved for good; that central banks have unlimited wealth at their disposal, or can print unlimited wealth into existence.

However, central banks can only create liquidity, not wealth. If printing money were equivalent to creating wealth, then mankind would not have to get up early on Monday morning. Only a solvent central bank can halt hyperinflation. The longer governments run large deficits, the longer central banks continue to monetize them, and the longer their balance sheets grow, the higher the potential for enormous losses and thus hyperinflation.

Necessary preconditions for hyperinflation are a quasi-bankrupt government whose debt is monetized by a central bank with insufficient assets. One way or another, owning physical gold is the safest and most effective way of insuring against hyperinflation.

Monday's selloff gives us opportunities pick up stocks for less and to write additional puts at better prices. 

One of the least well-known precious metals continues to shine brightly this year - palladium.

Waste and Fraud Are the Real Causes of the Deficit

The publication, earlier this week, of the FOMC minutes seemed to have a similar effect on equity markets as a call from room service to a Las Vegas hotel suite, informing the partying high-rollers that the hotel might be running out of Cristal Champagne.  Around the world, stocks sold off, and so did gold. The whole idea that a bunch of bureaucrats in Washington scans lots of data plus some anecdotal ‘evidence’ every month (with the help of 200 or so economists) and then ‘sets’ interest rates, astutely manipulates bank refunding rates and cleverly guides various market prices so that the overall economy comes out creating more new jobs while the debasement of money unfolds at the officially sanctioned but allegedly harmless pace of 2 percent, must appear entirely preposterous to any student of capitalism. There should be no monetary policy in a free market just as there should be no policy of setting food prices, or wage rates, or of centrally adjusting the number of hours in a day. But the question here is not what we would like to happen but what is most likely to happen. There is no doubt that we should see an end to ‘quantitative easing’ but will we see it anytime soon? Has the Fed finally – after creating $1.9 trillion in new ‘reserves’ since Lehman went bust – seen the light? Do they finally get some sense? Maybe, but we still doubt it. In financial markets the press, the degrees of freedom that central bank officials enjoy are vastly overestimated. In the meantime, the debasement of paper money continues.