The US Federal Reserve read somewhere that if people 'feel' wealthier, they'll borrow and spend more. Simple enough, all they had to do was to make people feel wealthier and when it comes to wealth in America, there’s no better barometer than the stock market. One can see that as the Federal Reserve printed more and more money, the stock market increased more and more as well. This made Ben Bernanke a happy man. Yes, Americans are now wealthier and now all the world has to do is wait for them to start their borrowing and spending engines. Except this hasn’t happened. It’s our view that as economic, political and social lives experience very little progress, governments and central banks will not only continue with their same failing policies, but they will actually implement more of these same failing policies.
In mountaineering lore, summiting Everest, McKinley or even the Vinson Massif certainly warrants a notch in your ice axe. However, the mountain that always produces jaw-dropping admiration, respect and outright fear, has been and always will be K2.
The World’s second highest mountain, is rarely guided and attempted only by the most skilled, the most patient and the most determined climbers – and for good reason, falls, slips and nasty tricks can happen in a moments notice. And when they occur, knowing how to swiftly execute a self arrest, or a belay can be the difference between a tragic fall and living to climb another day.
Now, when it comes to belays, American Pete Schoening has become synonymous with not just any belay, but the “miracle belay.” In 1953 at 25,000 feet high in the clouds on K2, one precarious moment turned Mr. Schoening into a climbing legend when he single handedly saved five of his rope mates from plummeting off the mountain. Naturally the climbers were all shaken; yet they learned from this experience and enjoyed many more years of climbing.
In 2009, 2010, 2011 and if you can believe it again in 2012, global financial markets were also hanging from a ledge. But each time, instead of having an experienced professional to save everyone involved, the World was dependent upon central banks whose entire legacy was smeared with economic and monetary failures.
In 2009, the Americans lead by Hank Paulson and Ben Bernanke threw unlimited amounts of money to the financial sector to self arrest the entire plant from spiraling out of financial control. These financial acts of bravery stabilized the system and so we were told would set the stage for a recovery.
Alas, one year later in 2010 the same Ben Bernanke announced that the recovery had completely stalled and he would once again save the system by printing even more money. Of course in 2011 he repeated the same strategy and began yet another round of more money printing to save us again.
And, then in 2012 the Europeans felt that everyone needed even more life saving, and told the World that just like the Americans, the Europeans too would watch your back.
Those who disagree with history conveniently forget it was actually the US Federal Reserve who created the housing bubble, by creating the technology bubble, by bailing out a Wall Street hedge fund. To add more ice cream to this dish, let’s not forget the central banks role in the Asian crisis, the Mexican crisis and the savings & loan crisis. As you can see, these are not one-hit wonders, and sadly the Fed’s Greatest Hits are anything but great.
Certainly, the stock market has recovered – and this is exactly what the US Federal Reserve wanted. At the time, they read somewhere that if people “feel” wealthier, they’ll borrow and spend more. Simple enough, all they had to do was to make people feel wealthier and when it comes to wealth in America, there’s no better barometer than the stock market.
Chart 1 above shows the cumulative effect on the US stock market from all the various forms of quantitative easing, or money printing programs. One can see that as the Federal Reserve printed more and more money, the stock market increased more and more as well.
This made Ben Bernanke a happy man. As demonstrated in chart 2 above , the household net worth of Americans has just hit its highest mark EVER.
Yes, Americans are now wealthier and now all the world has to do is wait for them to start their borrowing and spending engines.
Except this hasn’t happened.
It’s our view that as economic, political and social lives experience very little progress, governments and central banks will not only continue with their same failing policies, but they will actually implement more of these same failing policies. Yes, people should prepare for more austerity and then less austerity, followed by more.
The same will be true for money printing. One thing that won’t change however is the trend of higher taxes and the trend for increasingly more regulation and tax reporting.
It is this continuation of failed policies that will become the driver behind a stronger US Dollar. Private capital will leave Europe, leave Japan and any other country that becomes an auxiliary victim of these global policies gone wrong. Of course, as the US Dollar strengthens and its stock market rises the talking heads will be talking about the miracle economic recovery - we advise that this reasoning will be proven wrong.
Global private capital is fluid, and just as people become comfortable with the next new paradigm of a super duper America, another bubble will have formed right before them. Eventually of course, this global capital will flow away from the US and back to where it came, meaning after the rise of the USD, investors should prepare for a decline, as well as the opposite reaction – a rising Asia.
For a reference point to this view, consider the 1987-90 Japanese market.
Keith Dicker's full IceCap Asset Management August Letter below explains it all...