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Bernanke’s Speech Brings Inflation to the Forefront…Sort Of

April 29, 2011 by · Leave a Comment 

The Daily Reckoning

“Our interpretation of the increase in gas prices is the economist’s basic mantra of supply and demand,” mused chairman Ben Bernanke yesterday during his first-ever regularly scheduled press conference.

At that moment, the price of oil reached a new post-2008 high.

This morning, it’s pulled back a bit, but not much. A barrel of West Texas Intermediate goes for about $113.15 right now.

“The Federal Reserve believes that a strong and stable dollar is both in the American interests and in the interest of the global economy,” he also said.

At that moment, the dollar index reached a new post-2008 low.

This morning, it recovered…barely…and clings to 73 by some very closely clipped fingernails.

Back when Bernanke signaled the advent of a new round of easy money – QE2 – during his annual speech at Jackson Hole, Wyo. last August, oil was $75 and the dollar index was at 83…

Performance of Oil and the Dollar Index Since Jackson Hole Speech

We agree it’s, as Bernanke points out, due to supply and demand, but perhaps not in the sense he meant.

“He never admits it’s the inflation of the money supply that’s the problem,” Rep. Ron Paul told MarketWatch yesterday, after putting himself through the mild torture of watching the news conference.

“The [Federal Open Market] Committee expects the effects on inflation of higher commodity prices to be transitory,” spake the chairman.

The Fed can no longer assert “inflation” is a nonissue. So the line now is that it’s a “temporary” one.

But even the Fed now admits that consumer prices will likely rise this year higher than the Fed would like. After wrapping up its two-day meeting yesterday, the Fed’s Open Market Committee forecast a headline CPI between 2.1% and 2.8% during 2011.

That’s higher than their original target zone of 2%.

(Yes, it’s the Fed’s goal for your money to be worth 18% less over a 10-year span. And true, that doesn’t seem to fit in with the Fed’s mandate of “stable prices” or their stated belief in a “strong dollar”… but that’s a story for another day. And not to worry, the Fed informs us, CPI will magically return to a 1.4-2% range in 2012.)

“I do believe that the second round of securities purchases [QE2] was effective,” Bernanke said. “We saw that first in the financial markets. The way monetary policy always works is by easing financial conditions. We saw increases in stock prices.”

And there it is… the wealth effect, writ large. The Fed favors the stock market. Savings and investment in a traditional sense be damned.

“Hear, hear!” cheered stock traders, who brought the Dow and S&P to new post 2008 highs. This morning, both indexes have added to those gains and the Dow is now a hair above 12,700.

In sum, the higher inflation target was the news nugget that made its way out of the back end of Bernanke’s dog and pony show yesterday.

Everything else was status quo: Zero-interest rate policy remains in effect… and the $600 billion in new Treasury purchases at the center of QE2 will proceed as scheduled through the end of June… after which the Fed will continue rolling over existing debt to make this chart go flat, at least for a while…

The Fed's Balance Sheet Since the Start of the Credit Crisis

As an aside: The word “gold” did not slip from the chairman’s tongue once while he held court. But the spot price powered to its own new all-time high… and sits still there now at $1,534.

Silver busted through $48 as the chairman spoke. This morning the blaise metal has powered its way to $49.08. Meaning today could be the day the 1980 record of $50 finally goes down.

Where to from here? If the past is prologue, we’re due for something along the lines of when QE1 ended in early spring last year: The S&P fell 13%… and the VIX, the market’s “fear gauge,” zoomed up 48%. Then in August, Ben gave his Jackson Hole speech, and the rest is history.

We figure the Fed will lather, rinse… and repeat: Wait for the stock market to correct, and then launch QE3.

For reference, the S&P is up 28% since, and the VIX is below 15 as we write – as low as it’s been since mid-2007.

Addison Wiggin
for The Daily Reckoning

Bernanke’s Speech Brings Inflation to the Forefront…Sort Of originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

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More articles from The Daily Reckoning….

Staying On the Right Side of the Inflation Trade

April 29, 2011 by · Leave a Comment 

The Daily Reckoning

“Stocks rose to another high for the year [yesterday],” according to the Associated Press, “after Federal Reserve Chairman Ben Bernanke said central bank officials expect the economy to continue recovering.” It’s true stocks soared yesterday, but we’re not so sure the “recovering economy” was the primary cause.

No, we’re going to stick with our working hypothesis: the stock market is soaring because the dollar is tanking. The more the dollar tanks, the more the stock market soars. This inverse correlation makes perfect sense. If you are holding a rapidly depreciating asset, why not exchange it for an appreciating asset…or at least an asset that offers the potential to appreciate?

This dynamic – falling dollar, rising stocks – is just another way of saying the stock market, in aggregate, has become little more than an “inflation trade.” This particular inflation trade may contain a variety of stock symbols and may attract continuous, hyperactive blather on financial news networks, but it is still just an inflation trade.

Believing that a dollar bill will buy less tomorrow, US investors will use their dollars to buy almost anything today, including richly valued stocks. US stocks, as an inflation trade, have performed adequately so far in 2011. The S&P 500’s 7.5% year-to-date gain roughly equals the Dollar Index’s year-to-date loss.

Over longer time frames, however, the US stock market has delivered a much less effective hedge against the falling dollar than, say, gold or silver. During the last 10 years, for example, the S&P 500 produced a cumulative total return of 33.7%…when measured in US dollars. When measured in Australian dollars, however, this gain flips to a 35% loss!

Total Return of S&P 500 Over the Last 10 Years in US and Aussie Dollars

In fact, in terms of every major world currency, as well as numerous minor world currencies, the S&P 500 has been a losing bet for the last decade. In terms of the precious metals, the S&P 500 has been a very large losing bet.

Total Return of S&P 500 Over the Last 10 Years in Currencies and Precious Metals

By simply exchanging dollars in April 2001 for any of the currencies or precious metals in the chart above, a dollar-phobic investor would have received a greater total return than by buying US stocks. Bear in mind that this chart does not include in its calculation the interest an investor could have earned in any of these foreign currencies. For perspective, the Aberdeen Asia-Pacific Income Fund (a closed end fund that holds Australian and Asian debt securities) has delivered a whopping total return of 289%!

So you see, inflation isn’t all bad, as long as you’re on the right side of the trade. The US dollar, as a store of value, has been a complete disaster for many, many years. The critical question for investors is whether this trend will continue…or reverse.

We cannot see the future, of course, but we can hear what Fed Chairman Ben Bernanke says about his future intentions. And during yesterday’s press conference we heard the chairman promise to continue pursuing inflationary policies, while also dismissing the inflation he has already created as the “transitory” result of “robust global demand.” In other words, the inflation problem isn’t a problem.

The longer he spoke, the more the financial markets seemed to realize he wasn’t kidding about this inflation stuff. The US stock market – remember, it’s an inflation trade – rebounded from early morning lows to end the day at a new three-year high. Meanwhile, the classic inflation trades, gold and silver, rocketed from early morning losses to post huge gains. Silver jumped $2.36 an ounce to a new 31-year high of $47.84. (As we write, silver is flirting with $50 an ounce). Gold gained $21 an ounce to a new all-time high of $1527.35.

And what about the almighty dollar?

Bernanke declared, “the Federal Reserve believes that a strong and stable dollar is both in American interests and in the interests of the global economy.” The foreign exchange markets seemed to choke on their laughter.

The dollar stumbled to a new two-and-a-half year low…and continues stumbling today. By contrast, the Australian dollar, Canadian dollar, Singapore dollar and Swiss franc are all hitting new all-time highs!

At some point, perhaps very soon, the “overbought” gold and silver markets will conspire with the “oversold” Dollar Index to embark on ferocious counter-trend moves. We should be prepared for such an eventuality, but not perplexed by it. The ending of QE2 in June would provide a reasonable excuse for such countertrend moves. But if/as/when the dollar rallies, don’t forget to hit the bid.

The greenback remains a sick puppy… and inflation is its life threatening disease.

Eric Fry
for The Daily Reckoning

Staying On the Right Side of the Inflation Trade originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

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More articles from The Daily Reckoning….

How to Be a Central Bank Celebrity

April 29, 2011 by · Leave a Comment 

The Daily Reckoning

Bernanke spoke!

Yes, he held a press conference. Why would the world want a press conference from a central banker? Ah…good question. Because he’s a celebrity… He’s powerful. He moves and he shakes. He’s as popular as William and Kate put together.

In the past, a central banker was meant to be anonymous…quiet…hidden away somewhere so far in the background that the ordinary man wouldn’t know his name or recognize his face.

A good central banker was one you never heard of. He did his job. He made sure that the country had enough gold to cover its foreign debts and domestic currency issuance. He did not worry about full employment. Nor did he concern himself with “growth.” His job was to make sure the money was good. That’s all. If he did it well, he was practically a nobody.

If he did it badly, on the other hand, he might be castrated. Or, at least he would be disgraced.

Times have changed. Alan Greenspan turned central bankers into celebrities. He stood with Hillary Clinton at her husband’s State of the Union address…thus signifying the union of money and power, much like the Pope and the Holy Roman Emperor standing together on the balcony of the Vatican.

And now, who wouldn’t recognize Ben Bernanke’s mug?

In fact, he is widely thought to be responsible for saving Christendom, Jewry and all of western civilization. Yes, he stepped in where fools feared to tread – and rescued the whole shebang.

And now what?

Well, the rescue effort has proven to be a big failure. TARP, TALF, QE1, QE2… The US feds put at risk more than $10 trillion to turn the situation around. Federal deficits alone add up to $4.5 trillion over the last 3 years.

And for what? Housing is still falling. The unemployment rate is still over 10%…unless you stop counting people who haven’t been able to find work. More than 40 million people are on food stamps. And every increase in gasoline or food pinches household budgets like a tax increase.

But now, not only does the central banker play a much bigger role in the life of a modern economy, so does the government. A report earlier this week told us that more than half of “income growth” in the last 10 years comes from the feds!

Wait a minute. Where does government get any money? How can the feds give more than half US households more than half their income gains? Who pays for it?

Doesn’t that money really belong to someone else? Aren’t they just robbing Peter to pay Paul?

Yes, Of course they are. But Peter isn’t old enough to vote. So who cares?

And now The Fiscal Times reports that US voters – as a whole – receive more in payments from the government than they pay in taxes.

The feds have turned half the population into incipient zombies…feeding off the other half of the population…and their children…and their children’s children.

But let’s get back to Bernanke. What did he have to say yesterday? Well…nothing!

Here’s the AP report:

WASHINGTON (AP) – The US economy and job creation have strengthened enough for the Federal Reserve to end on schedule a program of buying Treasury bonds to help the economy, the Fed said Wednesday.

Fed Chairman Ben Bernanke spoke at a news conference after the meeting. It was the first time in the Fed’s 98-year history that a chairman has begun holding regular sessions with reporters.

Bernanke said that as long as the Fed continues to say rates will remain at historic lows for “an extended period,” rates won’t rise until the Fed has met at least twice more. The Fed board meets about every six weeks.

Bernanke said he expects the economy to continue growing through next year and 2013.

He acknowledged that higher gasoline prices are creating a financial hardship for many Americans. But he said the Fed doesn’t think gas prices will continue to rise at their recent pace.

With Bernanke’s dulcet assurances still echoing in their ears, investors went back to their errors. They bought more stocks – pushing the Dow up 93 points. They bought more gold too. The yellow metal rose $13.

One thing they didn’t buy was the dollar. The greenback is at an all-time low against the Swiss franc. Against the euro, it seems to be returning to its all-time low. And against gold, of course, it passed its all time low many months ago.

And now that the economy is slowly but surely recovering – Bernanke said so! – many investors are beginning to wonder if gold may have passed its all time high too.

Let’s hope people believe it.

The more who think so, the better. Yes…sell gold…please! Sell it in a panic. Sell it cheap. Sell it to the rag and bone man! Sell it to the pawnshop! Sell it at parties organized by newspaper ads! Sell it to people who put notices on eBay! Sell…sell…sell…

And then, you know what to do, don’t you, dear reader?

Buy!

Bill Bonner
for The Daily Reckoning

How to Be a Central Bank Celebrity originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

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More articles from The Daily Reckoning….

Time To Banish Incompetent Conservatives

April 29, 2011 by · Leave a Comment 

By Jeff Nielson, Bullion Bulls Canada

While I can only speak for myself, I am completely fed up with the endless series of blunders, scandals, and flip-flops which has characterized Stephen Harper’s “reign of error” as Canada’s Prime Minister.

Though many Canadians have seemingly already forgotten, the erratic government provided by these vacuous ideologues began almost immediately after Harper took office: with his flip-flop on the tax treatment of Canadian “income trusts”. After Harper solemnly promised that he would “never change the taxation” of this corporate structure, the first thing the Harper government did upon gaining office was to break that solemn promise. Of course “breaking promises” is nothing new for Stephen Harper.

When Harper was duping Canadians into voting for him in the last election, he promised Canadians there would be “no budget deficits” under his government. Four months later he was telling Canadians that our economy would be suffering its largest deficits in history – with the Harper government actually managing to shatter the deficit-records of Canada’s second-most incompetent government: the Conservative regime under the despicable Brian Mulroney.

This is a remarkable achievement. During the greatest commodities boom in the history of the world, Canada (one of the largest commodity-producers on the planet) is experiencing its largest deficits in history – totally undoing a full decade of debt-reduction under the previous Liberal government.

Now, while most of the rest of the world steams ahead with economic recoveries (real ones), and with commodity prices breaking records on a near-daily basis, Harper’s Conservatives have have (incredibly) managed to cause Canada’s economy to shrink. What is the “secret” of Stephen Harper’s incredible ineptitude in managing Canada’s economy?

It’s simple. Stephen Harper, the self-described “economist” has bet Canada’s entire economic future on a “U.S. economic recovery”. Given that there has been no U.S. economic recovery, there will not be a U.S. economic recovery, and there cannot be any U.S. economic recovery (for reasons I have detailed in numerous commentaries), Harper has committed Canada’s economy to nothing less than economic suicide.

Despite the obvious empirical evidence of a dying U.S. economy, where full freight trucks stream northward through the Canada/U.S. border – while empty trucks head south; Harper-the-economist sits and waits for a U.S. economic recovery. The largest economic boom in global history is taking place in “BRIC” nations and other developing economies – and Canada is missing out on this, because Harper’s economic tunnel-vision doesn’t allow him to see anything other than the anemic U.S. market.

Indeed, Harper’s obsession with the U.S. (and all things “American”) goes well beyond mere economics. As many know, Harper spent two years secretly negotiating a “North American Union” (and the end of Canada) without even consulting with the Canadian people – let alone obtaining our approval to negotiate-away our sovereignty. Fortunately the deal collapsed, presumably because Mexico wasn’t ready to throw away its independence as readily as Stephen Harper.

More articles from Bullion Bulls Canada….

Silver: Runaway Move, Correction, Or Crash?

April 29, 2011 by · Leave a Comment 

Silver attempted to take out 50 on Monday of this week and instead had a big reversal day as it temporarily ran out of gas. Then after testing 45 the following day silver has moved higher after the Bernanke press conference and is once again approaching 50. For the very short term silver appears to be trapped in the 45/50 box and is awaiting a break either above or below this box.

Read more….

Silver Can’t Stop to Breathe

April 29, 2011 by · Leave a Comment 

At that point, it will be only higher rates that can stop the bleeding, and higher rates will only result in a dead economy. The cat is out of the bag: fixed-income is certain to plummet, and there is not a single exit strategy for the global banking system. Your exit strategy from the coming catastrophe is quite simple: silver bullion.

Read more….

DMR studies legal options after expropriation judgement

April 29, 2011 by · Leave a Comment 

South Africa’s Department of Mineral Resources (DMR) says it is studying a North Gauteng High Court ruling in favour of Agri South Africa (Agri SA), which claimed that unused old order mineral rights of farmers had been “expropriated” through the introduction of new mining legislation in 2004 and that private holders of mineral rights under the former arrangement were, thus, entitled to compensation.

Agri SA claimed that farmers had suffered damages as a result of mineral rights falling under the control of the State, when the Mineral Petroleum Resources Development Act became effective on May 1, 2004.

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Zimplats to conclude local ownership talks soon

April 29, 2011 by · Leave a Comment 

Impala Platinum’s Zimbabwe unit Zimplats expects to conclude talks with the government in two weeks about local ownership proposals, its chief executive said on Thursday.

Foreign mining companies in Zimbabwe have up until September 30 to comply with a law requiring them to surrender at least 51 percent of their local equity to black investors.

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SA won’t finalise existing Karoo fracking applications ahead of probe

April 29, 2011 by · Leave a Comment 

South Africa’s Mineral Resources Minister Susan Shabangu on Friday said that her department would not accept any new, nor would it finalise any existing, applications to explore for natural gas in the Karoo region until an expert study into the appropriateness of hydraulic fracturing, or fracking, of the region’s shale resources had been finalised.

The statement followed a Cabine-backed moratorium against natural gas drilling announced last week.

“Given the intensity and scale of the issue and the fact that shale gas exploration has never been done before on our shores, my department will conduct a comprehensive study which will assist us to formulate our approach after which we will go back to cabinet,” said Shabangu.

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Rio takes control of Riversdale board, seeks delisting

April 29, 2011 by · Leave a Comment 

Diversified giant Rio Tinto on Friday assumed control of ASX-listed coal miner Riversdale Mining’s board, announcing that it would seek to de-list the company at the end of the takeover bid.

Rio appointed its energy CEO Doug Ritchie as the new chairperson of Riversdale, as well as the COO of coal Australia, Darren Yeates, and VP for human resources Rosemary Fagen to the board of directors.

Read more….

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