Posts Tagged ‘Federal Reserve’
Bernanke’s Burn Notice – Why Now? Research Reveals Insight Into Fed Chairman’s Popularity
By Elliott Wave International
Like a spy who gets a burn notice, Federal Reserve Chairman Ben Bernanke has suddenly lost his support.
Bernanke has gone from being Time magazine’s Man of the Year in 2009 to … what? A Fed chairman embroiled in a controversial reconfirmation process before U.S. Congress. Why the sudden turnaround in his fortunes?
Robert Prechter, president of the research firm Elliott Wave International, has written about the history of the Fed and its chairmen several times over the years, and his research shows that their popularity rises and falls with social mood, which is measured by the stock market. Here is a compilation of excerpts from Prechter’s monthly market letter, The Elliott Wave Theorist, from 2005-2009 about the trouble he sees brewing at the Fed.
Can the Fed Stop Deflation? Robert Prechter answers this all-important question in his Free Deflation Survival Guide. The guide gives you a 60-page ebook that will help you understand deflation and its effects on society; you’ll even learn how to survive and prosper in such an environment. Download Your Free 60-Page Deflation eBook Here.
(November 2005) The Coming Change at the Fed | Public figureheads have a way of representing eras. This is certainly true of entertainment icons and politicians. The history of Fed chairmanship implies a similar tendency for changes of the guard to coincide with changes in social mood and therefore stock prices and the economy. [The chart below] depicts our social-mood meter—the DJIA—since the Fed’s creation in 1913, marked with the reigning chairmen according to a list on the Fed’s website.
The first chairman, Hamlin, presided over a straight-up boom. As it ended, Harding took over and presided over an inflationary period that accompanied a bear market, exiting just as a new uptrend was developing. Crissinger took over at the onset of the Roaring Twenties, and Young presided over the boom, the peak and the rebound into 1930. Meyer took over just as confidence was collapsing and left the office in early 1933 at the exact bottom of the Great Depression. The next three chairmen struggled through the choppy years of the 1940s. Then Martin presided over virtually the entire advance from the early 1950s through 1969, exiting just before the recession of 1970. Burns and Miller presided over a bear market and exited as the new uptrend was developing. Volcker, after weathering an inflation crisis, presided over the explosive ’80s. Greenspan has presided over the manic ’90s and the topping process. [Ben Bernanke] will have his own era. Given the eras that have immediately preceded the coming change in leadership, the odds are that this new environment will be a bear market.
(June 2006) Economists are convinced that the Fed can “fight” inflation or deflation by manipulating interest rates. But for the most part, all the Fed does is to follow price trends. When the markets fall and the economy weakens, the price of money falls with them, so interest rates go down. When the markets rise and the economy strengthens, the price of money rises with them, so interest rates go up. The Fed’s rates fell along with markets and the economy from 2001 to 2003. They have risen along with markets and the economy since then. Regardless of the Fed’s promise to keep raising rates, you can bet that the price of money will fall right along with the markets and the economy. Pundits will say that the Fed is “fighting” deflation, but it will simply be lowering its prices in line with the others.
It is highly likely that the next eight years or so will test the nearly universally accepted theory—among bulls and bears alike—that the Fed can control anything at all. The Great Depression made it look like a gang of fools, as will the coming deflationary collapse. We have predicted unequivocally that the new Fed chairman will go down as Hoover did: the butt of all the blame, and if you are reading the newspapers you can see that it’s already started. “When Bernanke Speaks, the Markets Freak” (San Jose Mercury News, June 10, 2006); “Bernanke is being blamed for spooking Wall Street” (USA Today, June 7, 2006); “Bernanke to blame for volatility” (Globe and Mail, Canada, Jun 13, 2006). The new chairman had a brief honeymoon (which we also predicted), but it’s already over.
By the way, I heard his commencement speech at MIT last week, and in it he spoke eloquently of the value of technology and free markets. But he also opined that economists have successfully applied technology to macroeconomics. We believe that the collective unconscious herding impulse cannot be tamed, directed or managed. In our socionomic view, the Fed cannot control the mood behind the markets, but rather, the mood behind the markets controls how people judge the Fed. We’ll ultimately find out who’s right.
Can the Fed Stop Deflation? Robert Prechter answers this all-important question in his Free Deflation Survival Guide. The guide gives you a 60-page ebook that will help you understand deflation and its effects on society; you’ll even learn how to survive and prosper in such an environment. Download Your Free 60-Page Deflation eBook Here.
(December 2009) Bernanke’s greatest achievement was not the measly $1.25t. of debt that he arranged to have the Fed monetize; it was convincing the government to shift the burden of debt default from the speculators and creditors to taxpayers.
(September 2009) Thanks to the Fed Chairman and two Treasury Secretaries, profligate bankers have been cashing checks off the Fed’s and the Treasury’s accounts, and the poor savers and taxpayers who fund these institutions are unaware that their personal bank accounts are being tapped by counterfeiters and thieves.
That lack of awareness may soon change. Declining social mood is fueling the drive to expose the Fed’s secrets. [Ed. note: Bloomberg News has sued the Fed under the Freedom of Information Act; Congressmen Ron Paul, R-Texas, and Barney Frank, D-Mass., are leading a charge to audit the Fed.] Exposing the Fed’s secret deals could lead to scandal and the collapse of major money-center banks. But most important to our monetary outlook, it will serve to curb the Fed’s reflation efforts. As I have written many times, deflation will win. Social mood is impulsive and cannot be stopped. The downtrend will claim its victims by whatever measures it must take to do so.
(August 2009) On July 26, in a speech in Kansas City, MO, Fed Chairman Ben Bernanke declared, “I was not going to be the Federal Reserve chairman who presided over the second Great Depression.” (WSJ, 7/27) We think this implication of a fait accompli is premature. Clearly, the Fed Chairman and the majority of economists are of the opinion that the worst of the financial crisis is past and that the Fed’s unprecedented lending has averted deflation and depression. But wave 3 down in the stock market will dispel these illusions. Years ago, we suggested that Chairman Greenspan quit if he wanted to keep his lofty reputation. He didn’t do it. Now Chairman Bernanke should consider this option.
So will Bernanke serve a second term as Fed chairman? The January 2010 Elliott Wave Financial Forecast says, “Social mood is still too elevated to deny Bernanke reappointment as head of the Fed. … But rising political tension confirms that his next term will be far more stressful than his first.”
Can the Fed Stop Deflation? Robert Prechter answers this all-important question in his Free Deflation Survival Guide. The guide gives you a 60-page ebook that will help you understand deflation and its effects on society; you’ll even learn how to survive and prosper in such an environment. Download Your Free 60-Page Deflation eBook Here.
Robert Prechter, Chartered Market Technician, is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.
Why the Fed Likes Independence
Last week it was revealed that when Treasury Secretary Tim Geithner was Chairman of the New York Federal Reserve, he urged AIG officials not to disclose to the Securities Exchange Commission relevant details of agreements with banks to bail out Goldman Sachs. Apparently he felt at the time that regulators and the public would be angry that taxpayer money was used to fully compensate bankers who made some horrifically bad investment decisions. These banks should have suffered the consequences of the huge risks they were taking. After all, they kept plenty of rewards when times were good. Instead, the Fed found a way to socialize these major losses so these banks could survive and continue making more bad decisions, at the expense of the American people and the value of the dollar.
Geithner claims that they had to take politically unpopular actions to save the economy from collapse. Half of that is right – it was politically unpopular, but it is extremely premature at best, to claim the economy has been saved. It was just reported that the economy shed 85,000 more jobs in December. Unemployment stands at 10 percent officially, and 22 percent according to more traditional calculations. It is hard to argue that this sort of government waste has done anything but harm to our economy. Raiding Main Street to bail out Wall Street is a foolish idea. Main Street productivity and the strength of the dollar is the bedrock of the economy. You cannot gut this foundation without eventually toppling everything else. This is what too many policy makers either don’t understand or refuse to face. Or even worse, perhaps they do understand, but don’t care!
In any case, this revelation makes precisely my point about the need for Fed transparency. This claim that the Fed should have “independence” is a canard. They very much enjoy their comfortable pattern of bailing out friends and devaluing the currency with no oversight and no accountability. Geithner specifically asked officials at AIG not to disclose to the SEC or to the public particulars about this special deal for his friends. We only know these details now because AIG was eventually forthcoming when Congress demanded some answers.
We should be getting this information, and information on all such dealings, straight from the Fed. The Fed should be accountable to Congress because it is a creature of Congress. The Constitution gives Congress the authority to oversee the integrity of the monetary unit. We have unwisely and unconstitutionally delegated this authority to the Federal Reserve, which has in turn devalued our dollar by 95 percent and counting. When the Federal Reserve engages in harmful policies, Congress is still ultimately responsible. If the Fed is not made accountable through a GAO audit at least, it will continue to be accountable to no one, and that is unacceptable.
Geithner expects to be praised and thanked for his actions instead of rebuked and fired. He expects to be given more power to engage in “experimental” monetary policy in the future. But he has just given us a very good idea of what the Fed and Treasury would do with more power, what they consider good monetary policy, and why they like their so-called independence.
Brought to you by Alan’s Finance Blog:
Greenspan Misapplied Free Market Theory
(My Comments on “Frontline; The Warning”)
Silver Stock Report
by Jason Hommel, October 23rd, 2009
Thanks to my wife, God bless her, I watched “Frontline: The Warning” night before last. It aired on Oct 20th, 2009. You can view it online, here:
http://www.pbs.org/wgbh/pages/frontline/warning/view/
There are 679 comments on it already.
The show is about “the warning” given by Brooksley Born, who, while acting as Chair for the CFTC (the commodities Futures Trading Commission), warned of the dangers of “black box,” “over the counter” derivatives. After she was shut up by Congress and Alan Greenspan, 6 weeks later, LTCM (Long Term Capital Management) blew up in early 2000. http://en.wikipedia.org/wiki/Long-Term_Capital_Management
Frontline shows that Greenspan was one of Ayn Rand’s top students, who believed in a philosophy that government is the problem, and that markets are the solution, and thus, self-regulating.
Frontline shows the absurd conclusion of Greenspan’s philosophy when it showed that Greenspan invited Born to a meeting, where Greenspan said something like, “I suppose you think fraud should be regulated. I don’t.” He thought the market would figure it out.
Shockingly, the film shows Greenspan painfully admitting that his philosophical views that he held for 40 years were wrong. He does not elaborate. Perhaps he’s still not exactly sure where he went wrong.
Perhaps I can help.
Being familiar with Ayn Rand’s free market views, here’s where I believe Greenspan went wrong.
Greenspan tried to apply the views of an atheist, Ayn Rand.
IN MY OPINION, Greenspan tried to let markets be free, but Greenspan did not understand the basic definition of markets, or freedom.
In my opinion, markets are where things are traded, not where people are traded by entering into contracts.
Markets are where multiple sellers compete with multiple buyers, in the open, and trade, and walk away, free to choose another trading firm tomorrow.
Black box, over the counter, derivatives, are not markets, even if they ever do trade in the open.
The spot market is like freedom. Futures contracts, and OTC derivatives, are like slavery.
In my opinion, futures contracts, like debt contracts, lead to compulsory performance, and thus slavery. And slavery is the exact opposite of freedom! That’s Greenspan’s big error, the failure to see that slavery is the opposite of freedom!
Again, as an example, allowing people the freedom to trade slaves does not promote freedom, it promotes slavery!
Allowing banks to enslave people with too much unpayable home loan debt is a fruit of that error.
Allowing banks to enslave one another so that if one topples, they all topple, is another fruit of that error.
Allowing people to enslave banks to perform what they cannot, so that they “need” bailouts, is another fruit of that error.
FRONTLINE: The Warning – Video
Hi everyone. I’ve got a really cool documentary that I’d like to share with you. It’s called The Warning.
In The Warning, veteran FRONTLINE producer Michael Kirk unearths the hidden history of the nation’s worst financial crisis since the Great Depression. At the center of it all he finds Brooksley Born, who speaks for the first time on television about her failed campaign to regulate the secretive, multitrillion-dollar derivatives market whose crash helped trigger the financial collapse in the fall of 2008.
“I didn’t know Brooksley Born,” says former SEC Chairman Arthur Levitt, a member of President Clinton’s powerful Working Group on Financial Markets. “I was told that she was irascible, difficult, stubborn, unreasonable.” Levitt explains how the other principals of the Working Group — former Fed Chairman Alan Greenspan and former Treasury Secretary Robert Rubin — convinced him that Born’s attempt to regulate the risky derivatives market could lead to financial turmoil, a conclusion he now believes was “clearly a mistake.”
Born’s battle behind closed doors was epic, Kirk finds. The members of the President’s Working Group vehemently opposed regulation — especially when proposed by a Washington outsider like Born.
“I walk into Brooksley’s office one day; the blood has drained from her face,” says Michael Greenberger, a former top official at the CFTC who worked closely with Born. “She’s hanging up the telephone; she says to me: ‘That was [former Assistant Treasury Secretary] Larry Summers. He says, “You’re going to cause the worst financial crisis since the end of World War II.”… [He says he has] 13 bankers in his office who informed him of this. Stop, right away. No more.’”
Greenspan, Rubin and Summers ultimately prevailed on Congress to stop Born and limit future regulation of derivatives. “Born faced a formidable struggle pushing for regulation at a time when the stock market was booming,” Kirk says. “Alan Greenspan was the maestro, and both parties in Washington were united in a belief that the markets would take care of themselves.”
Now, with many of the same men who shut down Born in key positions in the Obama administration, The Warning reveals the complicated politics that led to this crisis and what it may say about current attempts to prevent the next one.
“It’ll happen again if we don’t take the appropriate steps,” Born warns. “There will be significant financial downturns and disasters attributed to this regulatory gap over and over until we learn from experience.”
Watch the documentary here:
I’d like to thank PBS for putting out this informative documentary. Please folks remember to support your local PBS station.
Take care,
Alan
The Federal Reserve Is Openly Telling You to Buy Gold and Silver
At the end of last year, I began writing about what I saw happening as the Federal Reserve started assuming the liabilities of the investment banks and the federal government began deficit spending at an unprecedented pace.
I’ve been calling these changes the “End of America” because I believe the fiscal policies of the U.S. will result in a massive devaluation of the dollar and the end of the U.S. dollar as the world’s reserve currency
To get an idea of why I’m concerned, have a look at a chart James Bullard, president of the Federal Reserve Bank of St. Louis, included in a recent presentation to the National Association for Business Economics.
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What you see here is Bullard’s estimate of the future growth of Federal Reserve assets.
A lot of people seem to have forgotten something that is very much on Bullard’s mind: The growth of the Fed’s balance sheet isn’t nearly finished. In fact, the Fed has only completed purchasing about half of the $1.75 trillion worth of assets it has promised to buy. The assets are mostly mortgages and mortgage-related securities.
Even though these direct purchases are unprecedented, that’s only about 10% of the story. Since the beginning of the crisis, the Fed has lent, spent, or guaranteed $11.6 trillion.
That includes providing a backstop on the entire system of mortgage finance in the United States, a system that currently shows nearly a $1 trillion loss.
Since the expansion of its balance sheet got started in earnest last fall, the trade-weighed value of the dollar has fallen -15%. Keep in mind, the Fed’s assets form the base of our monetary system. The more it grows, the more money and credit become available to the banking system. And the faster the money supply grows, the more likely the value of the dollar will continue to fall.
As Bullard points out, a doubling of the monetary base won’t necessarily cause an immediate doubling of inflation… But suppose it takes 10 years? The average inflation rate would still be 7% a year. If inflation does grow to this average level, at least a few of those years will see inflation running at or near double digits.
Nothing in our financial markets is prepared for this kind of inflation. Inflation at these rates would cause the average multiple of earnings for equities to fall by at least -50%. Likewise, we would see high-yield corporate bonds yielding at least 20% — double what they are now. And U.S. Treasuries would probably see their yields triple. The destruction of wealth in the bond markets would be unprecedented in modern finance.
It’s going to happen. I guarantee it.
My forecast only assumes the Fed’s actions don’t continue past what’s been announced so far. My bigger concern is what happens if Congress decides the Fed did such a good job fixing the housing bubble that perhaps it should lend a hand on health care or the entitlement time bomb? Although a small handful of people have been writing about the enormous fiscal challenges that all the Western democracies face over the next decade, I’m sure most of today’s equity investors don’t really understand what lies ahead.
Consider these numbers: Right now, today, without counting any of the unfunded liabilities of our government (which are very real obligations, by the way), our national debt is $12 trillion. There are roughly 100 million American households. So that’s a national debt of roughly $120,000 per family. That’s more than the average American owes on his mortgage.
Think about what this means in terms of interest payments. Even with interest rates at all-time lows around the world, the U.S. will spend almost $400 billion on interest to service our existing national debt — that’s a 3.3% interest rate. Currently, the U.S. takes in roughly $2 trillion in taxes, half of which come from income taxes. So the interest on our debt is already consuming 20% of all tax receipts, or 40% of all income taxes.
It seems obvious to me this money will never be repaid — could never be repaid. The only real question is how much of a “haircut” our creditors are willing to accept in terms of the loss of purchasing power of the U.S. dollar. So far, inflation remains relatively benign. Our creditors don’t seem to be losing very much. But we know this will change and could change rapidly, as the Fed continues to expand its balance sheet with less and less creditworthy assets. At what point will our creditors finally decide they can’t finance any more of our deficit spending because we’re simply not worth the risk?
No one in Washington realizes you can’t borrow money endlessly. By the time Barack Obama leaves office (assuming he is reelected), the national debt will likely exceed $20 trillion. What will our creditors charge us to finance this debt? How will our debts compare to the value of our economy? It is impossible to know what will happen. But here’s the one thing that seems most obvious: Our borrowing costs will go up, a lot.
At some point in the next few years, our creditors are going to stop believing in our ability to pay our debts in honest money. I don’t know what will break first, but we can’t go on printing money to prop up our banks and spending money we don’t have to prop up our culture of entitlement.
And I don’t believe there’s any way to avoid it — certainly not with the political system we have in place right now. To protect yourself, you’ll have to be very good at managing your assets. You also need to make sure to take the advice we’ve been issuing for years: Buy and hold plenty of real, honest money that cannot be debased by the government. Buy and hold plenty of gold and silver.
– Porter Stansberry
Founder
Stansberry and Associates Research
The Fed’s Perfect Scenario
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If you consider all of the structural problems in the U.S. economy, there has not been a lot of progress toward getting things back on track. The root causes of what created the near debilitating financial and economic crisis still remain:
Banks are still saddled with toxic assets,
Housing prices are still 30 percent lower,
Foreclosures are still hitting new record levels,
Credit is still tight and demand for credit is still contracting sharply,
And now …
The U.S. government has thrown trillions of dollars at the problem. And the actions they’ve taken, for the time being, have helped to avoid a collapse of the financial system that would have caused a massive run on banks, a standstill of economic activity and a worldwide economic depression.
There are plenty of areas to question and debate the decisions made by the U.S. Treasury, the Fed and other government types. But the stabilizers and backstops, to this point, have managed to avert an economic freefall. Of course, the ultimate outcome of policy actions has yet to be determined.
But it’s clear that the U.S. and economies around the world remain fragile.
Even so, people are grasping tightly to the idea that a sharp bounce back is in progress and that a return to normalcy is near.
For the Fed, it’s this type of optimism that is driving a perfect operating scenario.
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| Government action has averted financial disaster, but global economies remain fragile. |
What Is the Fed’s Perfect Scenario?
If the Federal Reserve and the U.S. Treasury could have scribbled out a wish list for financial market conditions last March when global economies and global markets were in freefall, it might have looked something like this …
Wish #1: Please give us rising stock prices.
Rising stock prices improve the sentiment of investors and consumers. They replenish some lost paper wealth and make companies feel better about the future. It’s amazing what a 64 percent rise in stock prices can do for confidence.
Wish #2: Please give us stable interest rates.
Demand is massively depressed by things like evaporated consumer wealth, tight credit, and high unemployment. And deflation has been, and remains, the immediate problem.
The Fed’s answer: Zero interest rates and “printing money.” These tools are at work to prevent a deflationary spiral and to influence low mortgage rates to curb the housing implosion.
But consumer credit and mortgages are priced based on market-driven interest rates, not rates set by the Fed. So a move higher in market interest rates, like interest on 10-year Treasury notes and Libor, would create a big problem for the Fed. It would drive up interest rates on consumer credit and mortgages, which would create even bigger problems for consumers and for the housing market. But that hasn’t happened.
Wish #3: Please give us stable commodity prices, especially oil.
Crude oil is down 50 percent from its high a year ago. In a period where consumers are more inclined to save, not spend … stable gas prices are critical.
Wish #4: And a gradually declining dollar wouldn’t hurt …
This is the icing on the cake. Even if global demand for everybody’s exports is still in the gutter, the effect of a weaker currency on GDP is a nice kicker. A weaker dollar means we import less and perhaps we export a little bit more … but most importantly, the net value that comes from importing less and exporting a little more is a key positive contribution to GDP.
Despite all of the fear about the future of the dollar, it’s important to realize that a weaker currency is actually good for an economy when economic growth is depressed. Our trade balance is narrowing and our current account balance has diminished dramatically.
Now, when the economy is growing at a healthy rate, then a stronger currency is preferred because it helps improve quality of life.
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| A weaker dollar is actually good for a depressed economy because it helps narrow trade and account balances. |
A Gift Without Staying Power
By coincidence, or not, all the Fed’s wishes have come true. And this confluence of gifts from the financial markets has bought some time to address some of the structural economic problems. But the structural problems haven’t been repaired.
Financial markets are rarely compliant to wish lists, especially when the performance defies fundamentals. At some point, the markets will find fundamental equilibrium.
The key question is: When will markets revert to reality?
That’s the hard part.
The U.S. stock market continues to be the gauge of how investors feel about the prospects of a sustainable recovery. Higher stock prices equal more optimism. And more optimism equals higher risk appetite.
But at this stage, the idea of chasing returns that are not supported by fundamentals is a high-risk, low-reward proposition. And it’s not hard to find a reference point of the type of pain that can be associated with the divergence between market prices and fundamentals.
It was only twelve months ago that currencies, commodities and stock markets made sharp and abrupt collapses.
As for the Fed and the Treasury’s wish list … when the rise in stocks ends, so will confidence and any hopes for a sharp economic recovery. And when confidence wanes, investors feel more risk averse.
What Does That Mean for Currencies?
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| Fears of the dollar’s demise may be premature when compared to other currencies. |
Despite all of the ugly issues surrounding the U.S. economy, it will have among the smallest of economic contractions in 2009 compared to other G-7 countries, second only to Canada. And for 2010, the U.S. is expected to outperform all other major developed market economies.
That says something about the state of the rest of the world.
And when it comes to the dollar, and currencies in general, you have to respect the relative nature of currency values. Currencies don’t operate in a vacuum.
A country’s currency is never valued based on how well or how poorly its particular economy is doing in isolation. It’s always measured against another country’s currency. So it is always valued based on how a particular economy is doing relative to another economy.
For those that are fearing darker days for the dollar, remember that the least ugly currency can still win the beauty contest. Also, any rise in risk aversion is a positive for the dollar.
Regards,
Fed Promises Easy Money for an Extended Period
by Claus Vogt
Every few weeks the world’s most powerful and influential central bankers — those in charge of the world’s number one reserve currency, the U.S. dollar — come together in what’s called the Federal Open Market Committee (FOMC).
They discuss the economy, interest rates, financial markets and whatever else they deem important. Then they decide to set the Federal Funds Rate at a level they think is appropriate.
And last week was their week. So today I want to analyze what their decisions mean for the stock market and for you as an investor.
The Fed Statement Reassures
A Very Lax Monetary Policy …
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| The FOMC meets regularly to decide where to set the Federal Funds Rate. |
After each FOMC meeting, the Fed releases a statement. And the one for September 23, 2009, is very telling in my opinion. Here’s its most important part:
“The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”
As you can see, the Fed is promising a continuation of its extremely lax monetary policy “for an extended period.” So all the recent media talk about a soon-to-begin exit strategy or a normalization of monetary policy was obviously premature. The Fed is reassuring us that there will be easy money for as far as the eye can see.
Why?
Two reasons come to mind:
First, the Fed is still very concerned about the economy … the employment situation is dire … and a double-dip recession is a real possibility.
Second, and more important, is that they know how precarious the banking situation still is. They know that the bad debt problems have not been solved … that most banks would go bankrupt if they had to implement mark-to-market rules … and that the banking system is still on life support.
This Is Important News
For the Stock Market
Since the Fed is confronted with two major problems — a shaky economy and an unstable banking system — it’s not worrying about a possible stock market bubble in the making.
Why is this so important?
Just look at the charts below. The stock market has rallied some 60 percent since the March low. But earnings are still very depressed. Hence the classic version of the P/E ratio — using twelve months trailing GAAP earnings — shot to the stratosphere!
Source: www.decisionpoint.com
Twelve-month trailing earnings as of the first quarter 2009 were a mere $6.86 for the S&P 500 making for a P/E ratio of 154. According to Standard and Poor’s, these earnings are estimated to rise to $7.51 in the second quarter, and $7.61 in the third quarter. Then they’re expected to jump to $39.35 in the fourth quarter and $43.58 in the first quarter 2010. Based on this last figure the P/E ratio will decline to 24.
Historically the normal range for this very P/E ratio — based on 12-month trailing GAAP earnings — has been between 10 (undervalued) and 20 (overvalued). Hence even if the corporate sector will see the estimated jump in earnings, the stock market is still very expensive.
Classic stock market valuation metrics show that this is a highly overvalued market. And overvalued markets can stay overvalued for a long time and even become more overvalued — as long as the Fed does not take away the proverbial punch bowl.
This means one of two things …
We’re Witnessing the Next Bubble, Or
Earnings Have to Increase Dramatically!
![Fed chief Bernanke's inflationary stance could be the fuel that ignites the next stock market bubble.]](http://alansfinanceblog.com/wp-content/uploads/HLIC/c263204cdbb2101e6290e026a393aede.jpg) |
| Fed chief Bernanke’s inflationary stance could be the fuel that ignites the next stock market bubble. |
Right now I can’t rule out either one. I do, however, lean towards the first. And in reading the Fed’s FOMC statement one thing becomes obvious: If we’re on our way to a new stock market bubble the Fed will not prick it any time soon.
The September 23 statement that I cited earlier is as clear as you can expect from the Fed. Much clearer than anything Greenspan said during his long reign. His famous “irrational exuberance” speech, which was never followed by any action, is a perfect example.
Bernanke is much different …
From the very beginning of his career at the Fed he made it known that he’s a first class inflationist, and he strongly believes prosperity can be achieved by printing money. Now the Bernanke Fed is clearly reiterating this inflationary stance. By doing so the Fed is rubberstamping the current stock market rally and apparently not worrying about a possible bubble!
There is an old Wall Street saying: “Don’t fight the Fed.” I think it’s wise to heed it in today’s environment.
Best wishes,
Claus
Will Banks Rescue FDIC?
By Robert J. Samuelson
NewsWeek
It seemed like a classic “man bites dog” story. America’s banks, having been repeatedly rescued by the government in the past 18 months, were about to turn the tables and rescue the government by lending billions of dollars to the beleaguered Federal Deposit Insurance Corporation. So reported The New York Times. Well, it could happen, but it’s a long shot, and even then, the banks wouldn’t quite be rescuing the FDIC.
True, the FDIC—which insures bank deposits up to $250,000—has experienced a dramatic decline in its cash reserves as more U.S. banks have failed. It needs money. So far in 2009, 94 banks have failed. At the end of June, the FDIC also had 416 banks with $300 billion in assets on its “problem list,” the largest number since 1994.
All this has had a devastating effect on the fund that the FDIC taps to pay depositors in failed banks. In mid-2008, the FDIC’s cash reserves totaled almost $56 billion. A year later, they had dropped to $42 billion and, worse, $32 billion of that was already committed to failures that the FDIC anticipated in the coming year. The remaining $10 billion is a thin cushion for additional failures. Indeed, the FDIC has projected that failures over the next five years will cost another $70 billion. Click here to find out more!
Where is the FDIC going to get the extra dough? In some ways, its plight isn’t as dire as it seems. Unlike most federal agencies, the FDIC isn’t supported by taxpayers. Fees on banks cover its costs. In 2009, those regular fees will total about $12 billion, and similar amounts can be expected in the future. The FDIC could supplement its regular fees with a special assessment. The agency did that in the second quarter of 2009, raising almost $6 billion. But there’s a catch: the fees count as a bank expense and, by dampening bank lending, may hamstring the economic recovery.
“What they’re learning is that such large expenses can do more harm than good,” says James Chessen, chief economist of the American Bankers Association. “It’s a hit to bank capital. It makes it more difficult for banks to lend in their communities.”
The FDIC could also borrow from the U.S. Treasury. It could receive up to $100 billion almost immediately, says FDIC spokesman Andrew Gray, and could go as high as $500 billion with approval from the Treasury and the Federal Reserve. But there may be political and public-relations obstacles. Shelia Bair, head of the FDIC, has had spats with the Treasury, and the Times quotes one industry official as saying that Bair “would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help.” Banks also dislike Treasury borrowing because it looks like another industry bailout.
It’s in this context that borrowing from banks themselves has been discussed. The banks would lend to the FDIC and would then be repaid from the future insurance fees levied on (yes) banks. Just whether the existing fees would suffice or future fees would have to be raised is unclear. Any Treasury borrowing would similarly be repaid from banks’ future insurance fees. “[I]t is a question of the timing of bank premiums, not of the willingness of banks to fully support the [FDIC],” Edward Yingling, head of the ABA, wrote Bair last week. However, FDIC spokesman Gray says that the bank borrowing is “not an option being given serious consideration.”
One other possibility is that the FDIC could advance all the quarterly fee payments for 2010 to the beginning of the year. This would provide more upfront cash to deal with failures, though it would not increase the FDIC’s total cash. The five-member FDIC board is expected to make some decision next week.
Federal Reserve Admits Hiding Gold Swap Arrangements
Press Release
Source: Gold Anti-Trust Action Committee Inc.
On Wednesday September 23, 2009, 9:30 am EDT
MANCHESTER, Conn.–(BUSINESS WIRE)–The Federal Reserve System has disclosed to the Gold Anti-Trust Action Committee Inc. that it has gold swap arrangements with foreign banks that it does not want the public to know about.
The disclosure, GATA says, contradicts denials provided by the Fed to GATA in 2001 and suggests that the Fed is indeed very much involved in the surreptitious international central bank manipulation of the gold price particularly and the currency markets generally.
The Fed’s disclosure came this week in a letter to GATA’s Washington-area lawyer, William J. Olson of Vienna, Virginia (http://www.lawandfreedom.com/), denying GATA’s administrative appeal of a freedom-of-information request to the Fed for information about gold swaps, transactions in which monetary gold is temporarily exchanged between central banks or between central banks and bullion banks. (See the International Monetary Fund’s treatise on gold swaps here: http://www.imf.org/external/bopage/pdf/99-10.pdf.)
The letter, dated September 17 and written by Federal Reserve Board member Kevin M. Warsh (see http://www.federalreserve.gov/aboutthefed/bios/board/warsh.htm), formerly a member of the President’s Working Group on Financial Markets, detailed the Fed’s position that the gold swap records sought by GATA are exempt from disclosure under the U.S. Freedom of Information Act.
Warsh wrote in part: “In connection with your appeal, I have confirmed that the information withheld under Exemption 4 consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you.”
When, in 2001, GATA discovered a reference to gold swaps in the minutes of the January 31-February 1, 1995, meeting of the Federal Reserve’s Federal Open Market Committee and pressed the Fed, through two U.S. senators, for an explanation, Fed Chairman Alan Greenspan denied that the Fed was involved in gold swaps in any way. Greenspan also produced a memorandum written by the Fed official who had been quoted about gold swaps in the FOMC minutes, FOMC General Counsel J. Virgil Mattingly, in which Mattingly denied making any such comments. (See http://www.gata.org/node/1181.)
The Fed’s September 17 letter to GATA confirming that the Fed has gold swap arrangements can be found here:
http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf
While the letter, GATA says, is far from the first official admission of central bank scheming to suppress the price of gold (for documentation of some of these admissions, see http://www.gata.org/node/6242 and http://www.gata.org/node/7096), it comes at a sensitive time in the currency and gold markets. The U.S. dollar is showing unprecedented weakness, the gold price is showing unprecedented strength, Western European central banks appear to be withdrawing from gold sales and leasing, and the International Monetary Fund is being pressed to take the lead in the gold price suppression scheme by selling gold from its own supposed reserves in the guise of providing financial support for poor nations.
GATA will seek to bring a lawsuit in federal court to appeal the Fed’s denial of our freedom-of-information request. While this will require many thousands of dollars, the Fed’s admission that it aims to conceal documentation of its gold swap arrangements establishes that such a lawsuit would have a distinct target and not be just a fishing expedition.
In pursuit of such a lawsuit and its general objective of liberating the precious metals markets and making them fair and transparent, GATA again asks for financial support from the public and from all gold and silver mining companies that are not at the mercy of market-manipulating governments and banks. GATA is recognized by the U.S. Internal Revenue Service as a non-profit educational and civil rights organization and contributions to it are federally tax-exempt in the United States. For information on donating to GATA, please visit here:
People also can help GATA by bringing this information to the attention of financial news organizations and urging them to investigate the Fed’s involvement in gold swaps particularly and the gold (and silver) price suppression generally.
Contact:
Gold Anti-Trust Action Committee Inc.
Chris Powell, Secretary/Treasurer, 860-646-0500×307
Thank the Fed For Your Lack of Purchasing Power
By: Richard Daughty, The Mogambo Guru – The Daily Reckoning
In case you were wondering, there is no way to stop spending a debt-based currency once you start, which handily explains why Doug Noland, in his Credit Bubble Bulletin, asks “what about an exit strategy? Well, I see a ‘No Exit’ sign. These distortions have been going on for too many years and become too systemic. Indeed, government interventions are at the core of systemic fragilities that ensure Washington will continue to meddle.”
And that explains why Bloomberg reports, “Economic policy makers are signaling they plan to leave emergency stimulus in place even as the global economy pulls out of recession, delivering what Credit Suisse Group AG and Bank of America Corp. call a ‘sweet spot’ for financial markets.”
Well, being a guy who almost never turns down a chance to be scornful and gratuitously rude in response to ridiculous things being said by people who are supposed to know better than to sound so abysmally stupid, let me interpret that for you.
By “sweet spot” they mean a spot where Ben Bernanke and the other central bankers produce excess money and credit by pulling it right out of their nasty butts, and as for how “sweet” it is, look around you! Doesn’t it resemble a world going down the (in keeping with the “butt” theme) toilet? How sweet is that? Hahaha!
And now, although I groan aloud at the idea and my disgusting way with metaphors that seem to center around excretory functions lately, the central banks are promising more of the same, only much more of the same, and probably much, MUCH more of the same, but the same, nonetheless, only, like I said, much, much more, like in “so freaking much money that the whole financial landscape is changed into something weird where the laws of economics don’t even work anymore”, which was hitherto thought impossible but which is, obviously, not.
This confusing, disorienting “weirdness” is why I was happy to get an email from Junior Mogambo Ranger (JMR) David R., as it came just in time to indicate that, yes, things are weird! Thanks!
And, as a bonus, I see that I could use the email as a handy rebuttal to, as far as I could tell, everybody’s opinion that the only people who read my stupid Mogambo Guru newsletter are mental defectives and weirdo crackpots, with assorted gold bugs and gun nuts, and creepy guys who like looking at long-legged women dressed in short skirts and high heels.
Anyway, you can sense his high-powered intelligence when he asks, “Will this current experiment in fiscal insanity require a few hundreds of quadrillions MORE violations of the (economic) Rule Of Law before it all collapses into an economic black swan singularity? Is this where Hawking meets Von Mises??” which he closed with the rare “double question mark” as punctuation.
I was especially appreciative of this choice of punctuation, as it says, “Not only am I a smart guy who reads, or has read, the Mogambo Guru newsletters either once or perhaps many, many times and fully enjoyed them all, each more than the last, perhaps because the newsletter deserves to win a Pulitzer Prize or some other distinguished award that has a large cash component, but I also have an IQ so high that I can utilize various punctuation options in clever and highly emphatic ways, as befits my high intelligence, which you would not ordinarily know about me because people know that I read the Mogambo Guru newsletter, and those people are, (so I hear) mental defectives and weirdo crackpots, which I am not.”
I mention this only because Trichet, the head of the European Central Bank, said that he was willing to continually and always create more and more money, and that “it would be premature to declare the crisis over”, and decided that the European Central Bank should hold its benchmark rate at a record low of a measly 1%, which may have been what caused Bloomberg to decide to add the cryptic “to keep handing as much cash as banks want for up to a year at that rate”!
And on this side of the Atlantic, it gets weird that Bloomberg reported Fed Bank of Dallas President Richard Fisher as saying, “We are likely to see a prolonged period of sluggish economic performance”, which is odd, because I don’t remember the mission of the Federal Reserve, a private bank owned by who-knows-who, being able to achieve “prolonged periods of sluggish economic performance.”
The Fed was, as I recall, charged with maintaining a “stable currency”, which they have manifestly failed to do, seeing that the dollar has lost 96% of its value since 1913, which is now officially “enough of all of it that it can be considered to be all”, a lesson in “rounding off” that I learned after I took a lousy $20 from my wife’s purse when she wasn’t looking, and when I came back, there she was, bad mood and all, holding her stupid purse like I needed some kind of audio-visual materials to refresh my memory or something. So, to keep it from being a total loss, I gave her what I had left: 80 cents.
“But,” I explained, “you got back 80 cents, which is only a loss of 96% of the original $20, which is the same loss that the Federal Reserve has given us in the purchasing power of the dollar, but you don’t make a big fuss with the Federal Reserve! You won’t even sign the hate mail that I write for you to send to them, with your signature and your fingerprints on the paper, wherein you protest their glaring incompetence and their neo-Keynesian econometric stupidities!”
Well, let me tell you that I never, ever heard the end of the story about that damned $20. Never! But I noticed, and constantly protested, that nothing is ever, ever said of the 80 cents I gave her back. Nothing!
And why is that? Because it proves that, as far as she is concerned, I have lost “all” of the money, which she demonstrated by throwing the handful of change right at my head from point-blank range. One of the quarters hit my forehead with a “thunk!” where it left a red mark and a little lump, and when I cried out in my pain and mortal anguish, she laughed and said, “Good!” which shows you the kind of crap that I put up with around here all the time.
So there are several lessons here. One is that even a girl can throw a quarter hard enough to hurt the hell out of your forehead if she is standing close enough and is angry enough, and another lesson is to not spend the money you take from your wife’s purse for a few days to see if she notices it missing, and if she does, then you can seize the purse, saying, “Let me look in there!” and surreptitiously put the money back in the purse while rifling around in there so that you can “find” it and, holding it aloft, triumphantly say, “Hey!”
The biggest lesson is that the Federal Reserve is still destroying the dollar by creating so many more dollars so that the government can borrow them and spend them, which means that you should be buying gold, silver and oil in a Freaking Mogambo Panic (FMP), using the dwindling purchasing power your dollars.
And if you don’t, then you can take comfort in that you are in the majority of investors that must lose so that the minority of investors, who do, can make the money which makes it all so easy that you find yourself saying, “Whee! This investing stuff is easy!”
