The Twilight of Ben Bernanke

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Fed Chair Ben Bernanke survived the U.S. Senate vote for his reappointment, but it was touch and go for a while. The vote was 70 to 30 - an unprecedented lack of support for a sitting head of the Federal Open Market Committee. The previous lowest level of support was for Paul Volcker in 1983. His vote was 84 to 16, much better than Bernanke's. Volcker failed to get support for another nomination however. He was out in the next term. Bernanke will be lucky if he lasts even that long.

Opposition to Bernanke first arose in the blogosphere and then spread through the politically activist communities on both the Left and the Right. Even with that, the senate might still have engaged in its usual rubber stamp support for the president's nominee for Fed Chair.  The surprise upset in the Massachusetts special election for Ted Kennedy's seat indicated how angry the public was about the handling of the economy and that no senator could expect automatic voter support this fall. The one-third of senators up for reelection in November seemed particularly reluctant to support Bernanke. The White House had to get involved to salvage Bernanke's nomination. Without pressure from the president and congressional leadership, he might have gone under.

The government PR machine has been trying to turn Bernanke's first term at the head of the Fed from the fiasco it has been into a great triumph. They came up with the tag line that 'he saved the U.S. from another depression'. Obama and a number of Democratic leaders repeated this outrageous claim over and over again. There is only limited proof that this might be the case. The U.S. economy still faces a depression or at the very least an ongoing recessionary period that could last for years. The White House and the Fed may indeed be oblivious to this idea, since they both seem to believe their own press releases rather than the hard evidence that indicates otherwise. In truth, Bernanke is one of the most incompetent leaders the Fed has ever had. He failed to see the Credit Crisis coming, he failed to react quickly when it did, and when he did he took questionable actions that benefited Wall Street at the expense of Main Street. Bernanke's associates, Tim Geithner and Henry Paulson, the current and former Treasury Secretaries, also claim they did a great job handling the Credit Crisis and that they too saved the U.S. from another depression.

Why Obama submitted Bernanke's name for reappointment is indeed a mystery - at least if you believe his rhetoric about 'change you can believe in'. Bernanke was originally appointed by George Bush and is a Republican. Obama constantly complains about the big mess with the economy that George Bush left him to untangle. Yet, Obama renominates, with obsequious praise, the key architect of the Bush economy. Did he even look for someone else to fill the position?  My guess is he didn't. The rap about why senators should support Bernanke has included 'no one else would probably have done a better job handling the Credit Crisis' (an indirect admission that Bernanke didn't perform well) and 'someone else wouldn't be much different as Fed Chair'. While Washington is willing to accept mediocrity and substandard performance in top government positions, the American public seems to finally be getting fed up with Beltway incompetence.

Bernanke's loss of power is not just due to his poor handling of the economy and financial system. He is a complete contrast to the politically savvy Alan Greenspan, who survived for 19 years as Fed Chair, through both Republican and Democratic administrations. Bernanke seems to be politically tone-deaf. The Fed's actions at this month's meeting, which ended on Wednesday, included an announcement that it was closing down a number of its programs that provide liquidity to the system. Stocks gyrated wildly after the announcement and the market could easily have gone into a tailspin. Not exactly a wise move for a Fed Chair ever and particularly not smart the day before a vote for renomination where senators are looking for a reason not to support you.

Bernanke also seems to have confused the idea that the Fed should be independent with the Fed should be above the law. This imperial view does not sit well with the American public. Bernanke's renomination will only further empower the forces that want to audit the Fed and reign it in. From now on, he is Barack Obama's Fed Chair and not George Bush's. Bernanke's reappointment is likely to be one more decision that president Obama will regret having made. And if he doesn't, the voters will probably make sure he does.

Disclosure: None.
NEXT: U.S. 4th Quarter GDP - Slower Decline Leads to Growth


Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Action Speaks Louder than Words for U.S. Dollar

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

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One of the three great economic lies of our times is the U.S. has a strong dollar policy (the other two are 'inflation is subdued' and 'the economy is recovering'). U.S Treasury Secretary Timothy Geithner has been repeating this oft stated fantasy at the G-20 meeting last weekend and at the APEC (Asia Pacific Economic Forum) on Thursday. It wasn't reported if either audience laughed at him as was the case in China earlier this year. When a country's stated currency policy becomes a standing joke, you know things are going downhill fast.

There is nothing new about U.S. Treasury Secretaries claiming the U.S. has a strong dollar policy. All of president Bush's appointees ran around the world mouthing the same strong dollar mantra as if repeating it often enough would make it come true. The trade-weighted U.S. dollar is now 37% lower than it was since the beginning of the Bush administration. Things have been even worse under Obama so far. The dollar is down 16% since this March. After eight years of decline, you can't blame people for tittering when they hear the U.S. wants a strong currency. Reality indicates otherwise.

Not surprisingly, gold has been going up since 2001 as the U.S. dollar has fallen. There is no question that there is a strong inverse correlation between gold and the dollar in the long term. While the two move in opposite directions over time, this should not be interpreted as they always move in opposite directions. Even a number of high profile investment experts make this mistake. The dollar and gold can move in the same direction for months or even years at a time. Gold and the U.S. dollar moved together from May to December 2005, May to December 2003 and from 1978 to 1980 when gold had its most spectacular price move up ever. So when someone advises selling gold because the dollar is going to rally, they need to be right about two things. First the dollar has to rally and second gold has to not be in or be entering a period when it is trading in the same direction as the dollar.

There is a lot of talk about the U.S. dollar needing to rally because it is severely oversold. This is indeed the case, but a market experiencing a strong decline gets oversold and stays oversold. The trade-weighted dollar is also not at a strong support level on the charts. It is trading around the 75 level where there is no chart support. There is a strong band of support in the 72 to 74 area, with the all time low somewhat below 72. A test of the all time low is inevitable at this point. The only question is does is happen within the next couple of months or after that.

Disclosure: No positions in the U.S. dollar, long gold.

NEXT: America's Other Deficit - More Borrowing Ahead


Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

'Good' News Drives Market Higher

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The market rally continues today and is likely to do so for awhile because the momentum is on the upside. The mainstream media is doing its best to help continue the rally with the usual bullish hype. Today's bullish stories include a 3.4% rise in durable goods, the first after a six month record decline. U.S. mortgage applications are also up on the lowest mortgage rates since records have been kept. Such 'minor' bad news as Japan's exports falling 49%, with the biggest drops in exports to the U.S., and China calling for a new reserve currency to replace the dollar have been mostly ignored by the market.

The durable goods report is being interpreted as indicating the economy is improving. You can only believe this as long as you don't look beyond the headline number (most traders don't by the way, they just react immediately without getting the details). The big rise in durable goods was led by military aircraft and parts which were up 32.4% - this is 100% the result of government demand and not likely to be repeated. Heavy machinery was the next big gainer and was up 13.5% - not exactly a consumer item. Computers were up 10.1% and this would partially be accounted for by consumer purchases, although businesses are the major buyers of computers. Fabricated metal products were the only other item with a significant gain being up 1.5%. Autos and auto parts are still in heavy decline, but there was a little noticed $5 billion government bailout of the auto parts industry a few days ago that will act to prop up the industry.

The Japanese trade numbers for February gainsay any rosy interpretation for the U.S. economy that could be garnered from the Durable Goods report. While Japanese exports overall declined 49%, the biggest drop was exports to the U.S., with exports dropping 58%. Next biggest was the EU countries where exports dropped 55%. The drop in exports to China was less than 40%. While these numbers indicate a collapsing global economy, the collapse is by no means even. The U.S. is doing the worst and Europe is a close second, but Asia is holding up somewhat better.

The Chinese released a proposal a couple of days ago to replace the U.S. dollar as the world reserve currency with a Special Drawing Rights (SDR) linked currency system. Russia supports the idea. The U.S. dollar losing its reserve currency status would be devastating to the U.S. Reserve currency status keeps the value of the dollar much higher than it would be otherwise. The impact would be extremely inflationary since we would have to pay higher prices for all imports. Nevertheless, Treasury Secretary Geithner remarked this morning that the U.S. was "quite open" to the Chinese proposal. The dollar dropped like a rock for a short time thereafter. In case you have yet to realize that Geithner isn't exactly the most brilliant Treasury Secretary that the U.S. has ever had, this should remove all doubt. Someone should also tell China that a globally neutral currency has already existed for the last 5000 years - it's called gold.

The final piece of 'good' news today was U.S. mortgage applications were up 32%. Unfortunately, 79% of those application were refinancings for already existing mortgages. New purchases were only a small part of this number. Average mortgage rates fell to a record low of 4.63% last week. U.S. policy is doing its best to try to get housing prices back up to economically absurd and unsustainable levels (doing so the first time only led to the current Credit Crisis that has threatened the stability of the world financial system). The only way this can be accomplished is to create enough inflation so nominal house prices stay the same or go up. This will cause even bigger economic problems, so you should assume that this is one area where government policy will be 'successful'.

NEXT: No Longer Gilt Edged - the Inflation Implications

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

East Meets West, The Triumph of Communo-Capitalism

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

China lowered its interest rates last night for the fourth time since September. It's not yet close to zero interest rates like the U.S. and Japan, but will be be continuing to approach that level next year as will Great Britain. In China the government directly owns the banks and meddles in banking policy. While in the U.S. and Britain, it would be more appropriate to say that the banks own the government, or at least the central bank, and can directly meddle in the government policy that impacts them. In the end is there that much difference? The result is a financial system rife with corruption that engages in economically absurd behavior, which the government then has to bail out.

Final figures for third quarter GDP have just been released for the U.K. and the U.S. According to the official figures (take these with a big grain of salt and assume the reality is worse), the U.K. economy declined by 0.6% and the U.S. economy by 0.5% annualized last quarter. In the U.K. this is the biggest decline since the recession of the early 90s and in response the central bank has dropped interest rates to the lowest level since 1951. For the fourth quarter, a decline around 1.0% is expected in the U.K, while in the U.S. the consensus forecast is the economy will fall off a cliff with at least a 6.0% annualized drop - something worthy of a depression. As a reminder, both Federal Reserve chair Ben Bernanke and Treasury Secretary Paulson testified to congress in September that if the $700 billion Wall Street welfare bill, better known as TARP, wasn't passed, the U.S would face a severe recession. At the time, New York Investing said a severe recession was inevitable no matter what.

TARP is an example of fiscal profligacy, and while it is one of the worst examples, it is by no means the only one. Supporting all of the government's spending is the Fed's out of control money printing, which even mainstream economists are now starting to mention (better late than never I guess). Charts from the St. Louis Fed that New York Investing first showed in October are now getting some press attention. One of these charts, the U.S. Monetary Base shows an 86% increase during 2008, but around a 1000% increase annualized in the last 3 months. Another chart, Adjusted Reserves, shows this indicator exploding from $100 billion to $700 billion since mid-September. These charts (and around a dozen others) are so damaging that I am expecting they the numbers will either be 'adjusted' in the future or the Fed will stop making them available altogether as it did with M3 a few years ago.

While deflation is the headline issue today (based on very little reality), some economists are starting to point out that the Fed and the rest of the world's money printing central banks are going to have a lot of trouble draining all of this liquidity once there is economic recovery. History indicates that this indeed does not happen, but a hyperinflationary spiral is much more likely. This is just starting to dawn on some mainstream economists (but by no means all). The New York Investing meetup laid out this scenario in its September 2007 (yes, 2007) meeting -and so far events seem to be unfolding as predicted.

NEXT: Changes in Wall Street Firms That Led to the Credit Crisis

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.