Alan's Finance Blog

It Ain’t Money If I Can’t Print It!

By: Peter Schiff, CEO of Euro Pacific Capital

I have been forecasting with near certainty that QE2 would not be the end of the Fed’s money-printing program. My suspicions were confirmed in both the Fed minutes on Tuesday and Fed Chairman Ben Bernanke’s semi-annual testimony to Congress yesterday. The former laid out the conditions upon which a new round of inflation would be launched, and the latter re-emphasized – in case anyone still doubted – that Mr. Bernanke has no regard for the principles of a sound currency.

Tuesday’s release of the Fed minutes contained the first indication that a third round of quantitative easing (QE3) is being considered. The notes described unanimous agreement that QE2 should be completed, along with the following comment: “depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run.” Since the unemployment situation is deteriorating, and by all accounts will continue to do so, the Fed is essentially pledging to keep the spigot turned on. The committee also decided to look only at current “overall inflation” in making their judgments, as opposed to “inflation trends.” Since new dollars take awhile to circulate around the economy and raise prices, this means the Fed is sure to be too late in tightening once inflation starts to run away, causing more dislocations in the American economy.

If anyone had lingering faith that Mr. Bernanke actually has a plan to end the US government’s addiction to cheap money, the Chairman’s semi-annual testimony to Congress should have washed it away. In addition to claiming that his money-printing has helped the US economy, Bernanke told Congress that gold is not money, people buying gold are not concerned about inflation, and the external value of the dollar has no influence on its domestic purchasing power. He even took a moment to stump for President Obama’s plan to raise the debt ceiling.

By claiming that gold is not money, the Chairman demonstrates his ignorance of much of monetary history. He told Congressman Ron Paul that he had no idea why central banks hold gold, before speculating that it might have something to do with tradition. Yes, traditionally gold is money, which is precisely why central banks hold it. And gold is money because central bankers like Mr. Bernanke cannot be trusted with a paper substitute.

Bernanke further disputes the facts by claiming that the only reason people are buying gold is to hedge against uncertainty, or “tail risks” as he calls them. My advice to the Chairman is to ask the people who are actually buying it. As someone who has been buying gold myself for a decade, I can assure him that my gold buying has nothing to do with “uncertainty.” In fact, it’s just the opposite. I am buying gold because of what is certain, not what is uncertain. I am certain that Mr. Bernanke’s incompetence will destroy the value of the dollar and unleash runaway inflation.

If it were true that people bought gold to protect themselves from market uncertainty, as the Chairman claims, then the metal should have spiked in the midst of the ’08 credit crunch. Instead, it fell along with most other assets. People instinctively fled into US dollars and Treasuries because of their long record of stability. What Bernanke doesn’t understand is that his irresponsible monetary policy is undermining that faith in US assets, built up over generations. That is what’s driving gold: easy money, negative interest rates, and quantitative easing.

Finally, by claiming that the dollar’s exchange rate has no effect on domestic prices, Mr. Bernanke demonstrates that he probably lacks the competence to be a bank teller, let alone Chairman of the Federal Reserve. A weaker dollar means Americans have to pay more for imported goods. But it also means domestic producers have to pay more for raw materials and imported components, which raises domestic production costs as well. It also means that more domestically produced goods are exported, reducing the supply and raising the price of what is left for Americans to consume. This is Econ 101.

Given the Chairman’s confusion on the basics of economics, perhaps it’s no surprise that he’s put quantitative easing right back on the table, where, despite prior rhetoric, it has been all along. The Fed has always known that QE3 is coming; it’s just looking for an excuse to launch it.

The problem is that fighting a recession with QE is like fighting a fire with gasoline. As the flames of recession reignite, more QE, while dousing it momentarily, will only produce an even larger economic inferno.

At one point, Bernanke said, “The right analogy for not raising the debt ceiling is going out and having a spending spree on your credit card and then refusing to pay the bill.” He’s got the analogy right, but his conclusions are completely wrong. Yes, Congress has gone on a spending spree and it’s time to pay up. But raising the debt ceiling is like taking out a Mastercard to pay the Visa… it just makes the problem worse. If you or I go out one night, get drunk, and run up a huge credit card bill, we know that the way to fix it is to buckle down and pay it back. We might postpone vacation plans or put off buying a new car, we might cancel our cable TV subscription or gym membership. The point is that we would have to reduce current consumption to make up for the overspending in the past.

Obama claims that raising the debt ceiling is about getting a hold of the federal debt. Have you ever heard of anyone getting out of debt by taking on more debt? Has anyone ever reduced their debt without reducing current consumption? How can the Fed Chairman endorse such a preposterous idea?

Bernanke actually went a step further and warned against reducing current federal spending too sharply, claiming that such a move might impede the “recovery.” He apparently believes that it is the role of the Congress to go on spending sprees, and his role to pay the mounting bills with freshly printed dollars. The fact that this formula has produced larger and larger economic crises does not seem to bother him. I guess ignorance is bliss.

Euro Pacific Capital, Inc.
10 Corbin Drive, Suite B
Darien, Ct. 06840
800-727-7922
www.europac.net

Elliott Wave International’s Understanding the Fed eBook is now available

Dear reader,

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Download your free copy of EWI’s Understanding the Fed eBook, here.

Warmest regards,
Alan
———-
About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.

Leading Economic Indicators Keep Rising, but …

Last Thursday the Conference Board published its Leading Economic Index (LEI) for the U.S. In January this historically-reliable indicator increased 0.3 percent after shooting up 1.2 percent in December and 1.1 percent in November. This was the tenth consecutive rise!

Five of the ten components made positive contributions: The interest rate spread, stock prices, supplier deliveries, factory workweek, and consumer expectations.

The LEI’s much more important year-over-year percentage change also rose … from 6.7 percent in November, to 8.1 percent in December, to a very healthy 8.7 percent in January. And as you can see on the chart below, it’s approaching a high level by historical standards, too.

So the LEI is probably reaching its zenith in the year-over-year change. I would also note that six-month percentage change weakened from 6.2 percent in December to 4.8 percent in January.

So what does all of this mean?

First, it means that the big economic picture is still looking good. The bounce will probably continue for at least another two quarters, thus supporting a continuation of the medium-term stock market rally.

But thereafter the outlook isn’t so bright …

The Huge Interest Rate Spread
Is Important for the LEI

When you look deeper beneath the surface of the LEI, the picture is becoming even more ominous. Especially noteworthy is the contribution of the positive spread between short-term and long-term interest rates. Without it, the LEI would have been down 0.1 percent last month.

You might ask then: What’s wrong with that?

Well, there is nothing wrong with long-term interest rates moving higher than short-term rates. In fact, this is a major tool of monetary policy to subsidize the banks and get bank lending going again. But herein lies the problem …

Too much easy money can ultimately damage the banking sector.

In a post-bubble world, monetary policy has much less traction than under normal conditions. If too much debt and too many bad loans are weighing on the banking sector’s balance sheet, monetary policy becomes a rather toothless tiger.

That’s why relying on monetary indicators in forecasting the economy or the stock market becomes dangerous. Moreover, it’s very important to watch the particulars of the LEI.

For instance, the way I use the LEI gave me a bullish signal for the economy after the release of the June 2009 reading in mid-July. And it worked.

However, if the index were to continue to rise while the yield curve (the most heavily weighted component) remained steep and most of the other components began turning down, I would begin to doubt the validity of the LEI’s positive readings.

Remember, Secular Downtrends are Very Volatile

During secular economic downtrends and major crises, volatility increases dramatically — not just in the financial markets, but also in the economy. At least that’s what history tells us.

The LEI has just flashed a warning sign.

For example, if you look at the 1930s or the 1970s in the U.S. or the past 20 years in Japan, you can unequivocally see it.

All of these secular economic and stock market downtrends have been severe. Yet all of them have, from time to time, been interrupted by huge jumps in GDP growth — like the 5.7 percent reading for U.S. in the fourth quarter of last year.

I think the weakening in the six-month rate of change of the LEI has to be treated as a first warning sign. A warning sign telling us that the economy is not on a durable growth path. A warning sign, that the second half of this year may become very disappointing.

And with the S&P 500 trading at a 12-month trailing price-earnings ratio of 24.7 and yielding just 2.1 percent, all that’s needed for a major stock market downturn is a slowdown and some disappointment in rather exuberant analysts’ earnings estimates and strategists’ economic outlooks.

Best wishes,

Claus

Barack Obama’s Hush-Hush $1.4 Billion Carbon Competition

As the world trained its eyes on Copenhagen last Friday to learn the location of the 2016 Olympic Games, I sat in a bar in Washington, D.C., with an old friend.

We were waiting for the results of a different contest.

The race we were interested in has far larger economic ramifications than the Olympics and every bit of the games’ intense competitive spirit.

While billions of eyes around the world watched televisions to learn the location of the 2016 games, only a handful of other people even knew about the other race, the one my friend and I were watching. After all, only a few organizations could muster the resources to compete. The buy-in was at least a million dollars — and raising cash was the easy part.

The hard part was assembling a world-class team. Not of athletes, but of cutting-edge scientists and engineers. Each competitor would need a squad of the sort of visionary geniuses who can conceive and create The Next Big Thing.

So what was this contest?

Believe it or not, the United States federal government has quietly begun a race to develop an obscure technology, one only a few industry insiders even know exists.

Experts agree that this technology, properly developed and deployed, could reverse global warning. For many companies, it could end carbon dioxide emissions.

As you can imagine, the implications are immense for industry.

They’re immense for the world’s stock markets.

Some say the implications of this technology are critical for the survival of the planet itself.

Which makes me a little surprised that virtually no one’s writing about it. You saw the papers the next day and since, right? You watched the news and read the Web. Have you seen a single word about the government’s competition to develop carbon capture and sequestration technology?

Did I mention Uncle Sam is offering a prize?

It’s money. $1,400,000,000.00, to be exact, a number so big that most scientists would write as “1.4 x 10^9.”

That’s $1.4 billion U.S. dollars.

I’m not making this up. The U.S. Department of Energy said Friday that it had selected 12 competitors for the prize. It awarded 12 teams a total of $21.6 million in taxpayer funds to get the competition going. The competitors put up a total of $22.5 million of their own cash. They range from companies to labs to institutes to for-profit companies.

The results of the first wave of competition popped into my in-box late Friday afternoon, hours after Rio had been chosen for the 2016 games. My buddy — a veteran campaign apparatchik — scanned the results.

I waited.

“You called it,” he said, nodding. “They’re ninth on the list.” He paused. “Ninth out of 12.”

He gave me an appraising look, the type of look that only comes after years of friendship. I’d told him earlier in the day, when I explained what the contest was, who one of the winners would be.

Then he asked me the question I’d been waiting for.

“So how’d you know? Inside job?”

I shook my head. “Just research.”

He gave me his patented “yeah, right” look.

But I really didn’t have a stoolie inside the Department of Energy. I’d just studied the subject intensely. And earlier this summer, I’d even written about the arcane field of carbon capture and sequestration, or “CCS,” a virtually unknown technology that industrial giants have been looking at as a means to stem their output of carbon dioxide.

The idea — as all great ideas are – is remarkably simple: Grab emissions before they’re emitted and pump them into the ground instead of into the air.

Sounds easy, right?

It can be. But it’s also revolutionary. It’s a 180-degree shift from the way most industrial companies design their plants, mines and factories. Such a sea change is exactly what it will take to reverse the effects of carbon dioxide on our atmosphere.

(So while your congressman is busy debating the so-called “cap-and-trade” system that even its supporters agree will have precisely zero effect on global warming, the nation’s bureaucrats are incentivizing the private sector to come up with a real, workable solution that will reduce emissions while still allowing the economy to grow rather than force it to shrink.)

Now, because of my long interest in petroleum — where CCS got its start – I’ve been studying this emerging field of research for years. Earlier this summer, I recommended shares of the company that has the most promising CCS technology. This major corporation has found a way to use CCS technology at coal-fired power plants, the world’s leading emitter of carbon dioxide. Clean coal — cheap, clean — is the holy grail of green science.

The idea is so stunningly simple that, after you hear about it, you wonder why no one else has ever thought of it.

A few, admittedly, have. But the company I recommended controls the breakthrough, as it owns more than 200 patents related to the technology — a technology that power producers the world over are going to be clamoring for.

That’s who was ninth on the list. The company I recommended. Their application to compete in the government’s $1.4 billon race was one of 12 that Uncle Sam approved. They have the team in place. They have the money. And they have the technology that’s literally going to change the world.

Now, my friend really didn’t believe me when I told him I picked one of the 12 winners in the first round of Uncle Sam’s contest after careful research. He is, after all, a veteran campaign staffer, a professional skeptic. And, admittedly, what I was telling him then and what I am telling you about now sounds more like the plot to the next box-office action adventure film than it sounds like something that would come from the boring old Department of Energy, of all places.

I published my research on CCS in June. Very few have written about it since — and I was and remain the only one telling investors how to profit from it. This lack of mainstream coverage is why, though this company has seen a modest rise in price, it is still hugely undervalued by the market. Subscribers will find the name of this stock in my exclusive Government-Driven Investing Portfolio.

– Andy Obermueller
Chief Investment Analyst
Government Driven Investing

Paying Off The Past

By: John Rubino

The Wall Street Journal ran a great, sad article on the effects of the credit bubble on low-income people. A few excerpts:

The article goes on for another thousand or so words, detailing the hardships of people who now have to choose between years of extreme frugality and bankruptcy, and ends with:

“I was a social person. I had interest in a lot of things,” she says. “I had dreams. Now I’m just paying off the past.”

Some thoughts:

1) The designation of American citizens as “consumers” was always a little bizarre, but now it seems dangerously archaic. A nation of people who buy things will always lose out to people who create things, or who adhere to and spread an ideology, or who save and invest. Duh.

2) The “democratization of credit” was never analogous to civil rights or voting rights. By handing out home mortgages and credit cards indiscriminately, we didn’t empower anyone. Instead, we created a generation of people who were an illness, layoff, or blown transmission away from default. Much better for them if instead of paying interest, they’d banked that money until they had the cash to enter the middle class through the front door.

3) There’s no way for “good” bankers to stop this kind of credit bubble. When a government is printing paper currency and handing it to banks, the banks have to do something with it. Sitting on it is not an option because that lowers their return on assets, which leads to 1) current management being fired and replaced by more aggressive executives or 2) the bank being bought out by Citigroup or B of A, which then leverage the newly-acquired assets to the hilt. So in the same way that bad money drives good money out of circulation, it also chases away good bankers and replaces them with Angelo Mozilo and Chuck Prince. This is one of those “hidden forces of economic law” that Keynes referred to in his famous quote:

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”