Ben Bernanke

Bernanke's recognition of his penalizing savers with low rates as an 'issue for people' sparked an interesting note from the WSJ on how sensible and stoic savers are being herded (unsafely) into risky investments. Bernanke's insistence that "our savers collectively have to hold all the assets of the economy and a strong economy produces much better returns in general" must be juxtaposed with comments from a money manager that "I don't think that's a fair-trade" for money intended to be invested safely. By removing the last shred of hope for a rise in savings rates anytime soon, the Fed is once again creating the potential for major unintended consequences as the 30% drop in interest income for US savers from the 2008 peak forces them to extend duration (TSYs), lower quality (corporate bonds), and/or increase leverage/risk (equities). One only has to look at Treasury yields, Muni yields, investment-grade bond yields, and now high-yield bond yields for how tempted investors (retail and professional 'insurance/pension' assets) have become to take their safest net worth asset (low risk liquidity) and expose it to the business/credit cycle and all its myriad event risks. While reducing the rate of savings might seem sensible for the short-term from the Fed perspective, it leaves a wholly unsustainable recovery (or bubble in who knows which asset class next) and as Nordea notes this week, based on their models, a considerably higher savings rate will be needed going forward (for any sustainability) even as 'saved money' is rotated into risk or spent on quality-of-life maintenance. Perhaps it is time for many to listen to the sensibilities of the WSJ's last (75 year-old) interviewee who notes "At my age, I can't be a risk-taker anymore" as maybe it is time to consider the reality of the recent good US data in relation to coinciding elements such as inventory build-up, plummeting household savings, and lower gas prices when adding to that risky investment.

Over the weekend, we commented on Dylan Grice's seminal analysis which excoriates the central planning "fools", who are perpetually caught in the "lost pilot" paradigm, whereby the world's central planners increasingly operate by the mantra of “I have no idea where we’re going, but we’re making good time!” and which confirms that in the absence of real resolutions to problems created by a century of flawed economic models, the only option is to continue doubling down until terminal failure. Basically, the take home message there is that once "economists" get lost in trying to correct the errata their own models output as a result of faulty assumptions (which they always are able to "explain away" as one time events), they drift ever further into unknown territory until finally we end up with such monetary aberrations as "liquidity traps", "zero bound yields" and, soon, NIRP (which comes after ZIRP), if indeed the Treasury proceeds with negative yields beginning in May under the tutelage of the Goldman-JPM chaired Treasury Borrowing Advisory Committee. Today, it is Bill Gross who takes the Grice perspective one step further, and looks at implications for liquidity, and the lack thereof, in a world where one of the three primary functions of modern financial intermediaries - maturity transformation (the other two being credit and liquidity transformation) is terminally broken. He then juxtaposes this in the context of Hyman Minsky's monetary theories, and concludes: "What incentive does a US bank have to extend maturity to a two- or three-year term when Treasury rates at that level of the curve are below the 25 basis points available to them overnight from the Fed? What incentive does Pimco or banks have to buy five-year Treasuries at 75bp when the maximum upside capital gain is two per cent of par and the downside substantially more?" In other words, Pimco is finally grasping just how ZIRP is punking it and its clients. It also means that very soon all the maturity, and soon, credit risk of the world will be on the shoulders of the Fed, which in turn labor under a false economic paradigm. And one wonders why nobody has any faith left in these here "capital markets"...

As an ever greater portion of the world succumbs to authoritarian control (whether it is of military disposition, or as we first showed, a small room of economists defining the monetary fate of the future as central banks now hold nearly a third of world GDP within their balance sheets) we can't help but be amazed as the population simply sits idly by on the sidelines as the modern financial system repeats every single mistake of the past century, only this time with stakes so high not even Mars could bail out the world. Unfortunately, with the world having operated under patently false economic models spread by hacks whose only credibility is being endorsed by the same system that created these models over the past century, the only temporary solution to all financial problem is to "try harder." Sadly, the final outcome is well known - a global systematic reset, in which the foundation of all modern democracies - the myth of the welfare state (which at last check, was about $200 trillion underfunded on an NPV basis globally and is thus the most insolvent of all going concern entities in existence) is vaporized (there's that word again) leading to global conflict, misery and war. Sadly that is the price we will end up paying for over a century of flawed economic models, of "borrowing from the future", of ever more encroaching central planning, and of an economic paradigm so flawed that as Bill Buckler puts it, "Keynes’ response to those who questioned the “longer-term” consequences of his advocacy of credit-creation as a basis for money was - “In the long run, we are all dead”. It is difficult to overemphasise the venal arrogance of this remark or the destructiveness of its legacy." Alas, the last thing the central planning "fools" (more on that shortly) will admit is their erroneous hubris, which in the years to come will claims millions of lives. In the meantime, we can merely comfort ourselves with ever more insightful analyses into the heart of the broken system under which we all labor, such as this one by SocGen's Dylan Grice, whose latest letter on Popular Delusions is a call for "honest fools" - "Frequently, when we make mistakes we try to correct them not by changing the flawed thinking which led to the mistake in the first place, but by reapplying the same flawed thinking with even more determination. Behavioural psychologists call it the “lost pilot” effect, after the lost pilot who tried to reassure his passenger: “I have no idea where we’re going, but we’re making good time!” Policy makers on both sides of the Atlantic are treating today’s malaise with the same flaky thinking which created it in the first place. How can that work?" Simple answer: it can't.

With $US 1 TRILLION plus annual deficits stretching out into the indefinite future, the Fed is certainly not going to “run out of Treasuries to purchase”. On top of that, there is the $US 2.8 TRILLION of maturing Treasury debt which must be rolled over this year. The simple truth of the matter is that ever since they were rescued by QE1 back in March 2009, the markets have become used to the idea that the financial “powers that be” will not let the concept of “risk” return to sully the rewards they now expect. The “Greenspan put” has turned into a “Bernanke guarantee”. Ben Bernanke reminded the world that the government does have such a thing as a “printing press” way back in 2002. Since he became Fed Chairman, he has left world markets in no doubt of that fact. And that is what they are relying on.

Daily news.

A week ago, we asked (rhetorically), whether "Bernanke Has Become A Gold Bug's Best Friend?" While we knew the answer, today's reponse by the market confirms it. Beginning just before 10 am, or the moment Ben's prepared remarks went off embargo, gold and silver have been on a relentless tear (chart 1), with Gold passing $1760/ounce and now just $150 from its all time nominal highs. And while risk is on elsewhere, stocks priced in gold are down 0.9% since their highs yesterday and at their lows in real terms (chart 2), even as they hit new nominal highs, confirming that fear of the coming monetary tsunami will benefit precious metals. So while the lemmings focus on meaningless nominal gains, their real purchasing power just lost another 1%. Thank you Chairsatan - you are a good man.

Federal Reserve Board Chairman Ben Bernanke will testify at House Budget Committee (Chairman Paul Ryan, R-WI) full committee hearing on "The State of the U.S. Economy." The highlight of today's hearing will be watching Bernanke face his nemesis runner up, Paul Ryan, who will surely grill Blackhawk Ben with questions that are far more intelligent than the press corps could come up with during the last FOMC canned remark presentation. Watch the full testimony live at C-Span after the jump.

Punxsutawney Ben, who just saw the printer's shadow, and predicts six more trillion of free money, will address the House Budget Committee later this morning. We will also get the latest BS from the BLS how thousands of mass layoffs every day result in a drop in initial claims.

Corruption is only possible if the benefits to the parties engaged in it far outweigh the potential consequences. However, as soon as the potential consequences become real, that’s when everything changes: people start talking/ confessing, and the corruption begins to come unraveled.

While sounding just a tad preachy in his February newsletter, Bill Gross' latest summary piece on the economy, on the Fed's forray into infinite ZIRP, into maturity transformation, and the lack thereof, on the Fed's massive blunder in treating the liquidity trap, but most importantly on what the transition from a levering to delevering global economy means, is a must read. First: on the fatal flaw in the Fed's plan: "when rational or irrational fear persuades an investor to be more concerned about the return of her money than on her money then liquidity can be trapped in a mattress, a bank account or a five basis point Treasury bill. But that commonsensical observation is well known to Fed policymakers, economic historians and certainly citizens on Main Street." And secondly, here is why the party is over: "Where does credit go when it dies? It goes back to where it came from. It delevers, it slows and inhibits economic growth, and it turns economic theory upside down, ultimately challenging the wisdom of policymakers. We’ll all be making this up as we go along for what may seem like an eternity. A 30-50 year virtuous cycle of credit expansion which has produced outsize paranormal returns for financial assets – bonds, stocks, real estate and commodities alike – is now delevering because of excessive “risk” and the “price” of money at the zero-bound. We are witnessing the death of abundance and the borning of austerity, for what may be a long, long time." Yet most troubling is that even Gross, a long-time member of the status quo, now sees what has been obvious only to fringe blogs for years: "Recent central bank behavior, including that of the U.S. Fed, provides assurances that short and intermediate yields will not change, and therefore bond prices are not likely threatened on the downside. Still, zero-bound money may kill as opposed to create credit. Developed economies where these low yields reside may suffer accordingly. It may as well, induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper." Let that sink in for a second, and let it further sink in what happens when $1.3 trillion Pimco decides to open a gold fund. Physical preferably...

You've just crossed over...

Yesterday we asked rhetorically if Ben Bernanke has become the gold bug's best friend courtesy of his FOMC announcement which led to a surge in gold, and a kneejerk whimper in stocks, which has now been completely wiped out courtesy of a subpar GDP number. Today we note that it is not only the Fed, but the US Treasury, and specifically the ravenous Mr. Geithner, who just got a green light to issue another $1.2 trillion in debt, and bring total debt to $16.4 trillion, which would still be 107% of today's GDP (which we don't see growing much if at all over the next year), that can be added to the list of best Goldbug friends. As the chart below demonstrates quite vividly, in addition to global and local monetary expansion, the price of gold tends to correlate quite well with the US debt ceiling. Which means that per yesterday's Senate 52-44 vote authorizing Timmy to go hog wild (which in turn means that Bernanke will have to step in and monetize much of this new debt issuance), the price of gold just got a green light for at least $250 in upside - the implied price just got raised to $1960. Of course, anyone who thinks the US will stop issuing debt there needs a brain MRI stat. Thank you Senate. And thank you Timmy. And, of course, thank you Ben.

In all, the President's speech was reminiscent of George Clooney’s in Ides of March. We’ve heard it all before, maybe with slightly different words: America lost 4 million jobs before I got here, and another 4 million before our policies went into effect, but in the last 12 months, we added 3 million job. We must reduce tax loopholes, and provide tax incentives to businesses that hire in America. We must reform taxes for the wealthy (though he signed an extension of Bush’s tax cuts.) We must train people for an apparent abundance of expert jobs. We need more clean energy initiatives.  We created regulations (big sigh of relief he didn’t use the word ‘sweeping’) to avoid fraudulent financial practices. We will help homeowners. Wall Street must ‘make up a trust deficit.”   Like Jamie Dimon cares. In other words, Obama gave Wall Street a pass, while waxing populace. Don’t get me wrong. I expected nothing different. I will continue to expect nothing different, when he gets a second term, given the lame field of contenders all around.

Humans are a flawed species. Our minds are easily manipulated. We don’t like pain. We prefer instant gratification. We are susceptible to mass delusion. We will often choose hope over critical thought. Those with higher IQs will regularly attempt to take advantage of those with lower IQs. Fear and greed are the two motivations used by the minority in power to control and manipulate the majority. The American people have been led astray by a small group of powerful men. We were herded through a door in the wall of perception that promised an American dream of material goods, entitlements and pleasure with no obligations or responsibility to future generations. There is only one choice that can save this country from ruin. Each individual must make a choice to either to continue supporting the manipulative, corrupt status quo or coming back through the Door in the Wall.

“The man who comes back through the Door in the Wall will never be quite the same as the man who went out. He will be wiser but less sure, happier but less self-satisfied, humbler in acknowledging his ignorance yet better equipped to understand the relationship of words to things, of systematic reasoning to the unfathomable mystery which it tries, forever vainly, to comprehend” – Aldous Huxley

All you need to read.