Bernanke and pals believe that if they can make the stock market rise, people will feel richer and will start spending money again, insuring that the US economy (which is 70% based on the consumer) will come roaring back to life. This sort of thinking is that it’s so superficial as to be laughable, especially for those claiming to have an advanced education from a top university. Indeed, the fact that the S&P 500 goes from 1,000 to 1,330 DOESN’T mean that those who own stocks are that much wealthier. This is because the nominal price of stocks (what the S&P 500 is priced at) IS NOT the same as the PURCHASING POWER of stocks.
Gold’s two consecutive days of nominal record highs have seen some profit taking as oil is flat, the dollar is marginally higher and the euro has fallen. The ECB’s 0.25 % interest rate hike may lead to further profit taking today but rising interest rates in an increasingly inflationary environment will be positive for gold as it was from 1965 to 1981 (see charts below). It is only when real interest rates turn positive (nominal interest rates are again above the nominal rate of inflation) that gold and silver’s secular bull markets may be challenged. Inflation in the eurozone is 2.6%. Today’s interest rate rise will leave eurozone interest rates at 1.25% well below the 2.6% rate of inflation meaning that savers continue to lose out due to very low yielding deposits. Negative real interest rates will likely lead to precious metal prices continuing to rise or rather very low yielding fiat currencies falling in value versus non yielding finite gold. Rising interest rates are bullish for gold also as they may see the primary asset classes of equities, bonds and property come under pressure again.
There are two problems with the consumerist paradise that is the foundation of the U.S. economy. One is that people slowly awaken to the realization they don't really need additional goods and services, as their attention becomes focused on preserving their access to those they suddenly value, such as shelter, food and electricity. In moving (out of a foreclosed house or on to another job, etc.) they suddenly feel the great freedom of no longer being enslaved to all their stuff; they realize it owned them, not the other way round. In having to come face to face with their mountains of "cute blouses," old electronic toys, busted Ikea furniture, bicycles nobody rides, etc., then they slowly realize the return gained from buying all that stuff was increasingly marginal. They might also awaken to the reality that partly why they have no capital or assets is that they squandered much of their income on instant gratification and marginal-return toys of various sizes and shapes, and costly "experiences" such as fine dining and cruises.
"Dear Dr. Paul...There are serious questions about the legality of Quantitative Easing. You are among the few who are well-qualified and well-placed to get to the bottom of it. Most people believe, and the media confirm them in that belief, that the Fed can legally create dollars ‘out of the thin air’ in any quantity, and can do with them as it pleases. This may well be the pipe dream of Dr. Bernanke who is quoted as saying that the U.S. government has given the Fed a tool, the printing press, to stop deflation — but it hardly corresponds to the truth. The Fed can create new dollars only if some stringent legal conditions are satisfied, and then, it can only dispose of them in certain ways prescribed by law." Antal Fekete
Congress, you need to wake up. The people who are acting as your financial advisors are lying to you about the economy and our financial system. They’re also lying to you about the effectiveness of their policies. You are supposed to represent us. You are supposed to defend us against threats both internal and external. Bernanke is lying to you and all of us. He is an internal threat to our financial wellbeing.
DO SOMETHING ABOUT IT.
The REAL Crisis (of which 2008 was the warm-up) is fast approaching. When I say REAL Crisis I mean full-scale systemic meltdown, a situation in which the market accomplishes what the Fed, regulators, and US Government at large have failed to do: clean house. The plain facts are right in front of us. The US is broke on every level: Federal, State, Local, and individual/ consumer. We all know this, but we don’t want to admit it because doing so would likely mean wiping out at minimum 30% of what we have today.
Nobody could have foreseen this. Nobody. In other news, Ben Bernanke has just ordered an extra absorbent set of Huggies.
Portugal’s downgrade has sent markets negative this morning, with more tightening in China and rising oil prices not helping the situation. Republicans in the House of Representatives today will release a budget plan set to shave off $6T from President Obama’s plan through the next ten years. The proposal will include a phase out of Medicare and an overhauled tax code. During a speech yesterday, Fed Chairman Ben Bernanke described the U.S.’s current level of inflation as “transitory.” The European Commission has reported that no short term loans would be made available for a country without a full rescue fund request, thus it remains to be seen whether loans can be made without austerity measures being accepted. The news was sobering for Portuguese government officials that have been calling for a bridge loan to get them through steep upcoming maturities. Tomorrow will see the first of five T-bill auctions designed to push the country through upcoming maturities and is planned to raise between €0.75B and €1.0B. PMI data out this morning. China saw another 25bp interest rate hike today. The 1Y lending rate now stands at 6.32% and the 1Y deposit rate at 3.25%. Further tightening is likely.
One hour ago the PBOC announced the most recent Chinese rate hike, second in 2011, and fourth since October 2010, in the country's ongoing fight with excess-liquidity driven (both courtesy of the Fed and the PBoC itself) inflation, which has been running near a 28-month high of 5.1% hit in November. Benchmark one-year deposit rates will be lifted by 25 basis points to 3.25 percent, while one-year lending rates will be raised by 25 basis points to 6.31 percent, the People's Bank of China said in a statement on its website. The hike will be effective beginning Wednesday, April 6.
At this point it is certain: the Fed is determined to baffle them with bullshit.
Next week is bound to be a doozy. The SPY and NYA are sitting just under their highs, and The Bernank is schedule to give his post-FOMC "King's Speech" on April 27. What are the odds that the market is going to have a significant correction going into this speech? At the same time, thousands of hedge fund managers who stepped aside during the recent correction will be forced to get back in to stocks if they take out new highs. After all, the desperation is reaching March Madness levels to "make your year" so they can temporarily "retire" at The Hamptons for the summer.
Going forward, we’re going to see economic data become even MORE divorced from reality, assertions that the economy is back on track, and that at worst there is the specter of a “double-dip” recession looming. Heck, even these fears are sugar-coated… literally (making an economic nightmare sound like an ice-cream sundae is a GENIUS marketing move).
There is too much cheap money sloshing around markets these days. This is not a good thing for true market based price discovery, and ultimately leads to the creation of market bubbles.
Punchline from Dudley's Puerto Rick speech just hitting the wires: "We must not be overly optimistic about the growth outlook. The coast is not completely clear—the healing process in the aftermath of the crisis takes time and there are still several areas of vulnerability and weakness. In particular, housing activity remains unusually weak and home prices have begun to soften again in many parts of the country. State and local government finances remain under stress, and this is likely to lead to further spending cuts, tax increases, or job losses in this sector that will offset at least a part of the federal fiscal stimulus. To sum up, economic conditions have improved in the past year. Yet, the recovery is still tenuous. And, we are still far from the mark with regard to the Fed's dual mandate. In particular, the unemployment rate is much too high." Word count of iPad: zero.
Tomorrow's NFP number will be one of the most critical releases from the BLS: if on one hand the number is far greater than expected, it will effectively mean that QE3 will not begin immediately after the end of QE2, just like QE1 ended on March 31, 2010 only to see QE Lite implemented 4 months later. That the Fed is not willing to take a political gamble and send oil to $150 is conceivable, which is what would happen should Jon Hilsenrath start leaking QE3 rumors. On the other hand, the economy is once again turning lower as recent diffusion data (not to mention housing) has been indicating. Should the Fed implicitly tighten, by not loosening, the economic contraction will accelerate drastically, and capital markets will follow suit. And since as Hugh Hendry noted earlier, there is no China to pick up the slack, the stakes on the all in gamble in this bet that the virtuous cycle has picked up, will likely cost Bernanke his job if he ends up wrong and QE3 is needed anyway. Of course, as many believe, and as Bernanke himself has said, manipulating the market and stimulating inflation is and continues to be the Fed's only objective. Obviously, the waterfall effects in either direction here are huge. Which is why if tomorrow's NFP number is a beat and not just any beat but a massive one (read well over 250,000), it will be an attempt by the administration to cement the idea that the economy is now recovering. Anything at or below consensus will merely push the decision one month forward, however it will be too late to prepare the political landscape for QE3 in May, just two months ahead of the end of QE2. So tomorrow is likely D-Day on QE3 (or at least a direct continuation of POMO past the June 30 expiration date).