FedUpUSA

Archive for the ‘quantitative easing’ Category

Federal Reserve Chairman Ben Bernanke went before reporters this morning in a scheduled press conference, but neglected to insure a recovery from the recent economic collapse, much to the chagrin of Wall Street.

Bernanke did not say what the Fed would be doing in the months to come to help rebuild the American economy, and acknowledged in fact that the road to recovery has been “much less robust” than the Federal Reserve had hoped.

Many on Wall Street had expected today’s scheduled press conference to announce another round of quantitative easing, which while having its own fair share of critics, would most likely stimulate markets, serving as a welcoming change to the volatility that has plagued Wall Street during recent weeks.

The government also announced on Friday that the economy grew at a rate of only 1 percent last month, which while staggering, is an improvement from the 0.4 percent increase America saw during the first quarter of 2011. Bernanke responded acknowledging that “The economic healing will take a while, and there may be setbacks along the way.”

Karl Denninger of the Market Ticker says that quantitative easing would do little to help right now, and adding that it didn’t do anything the last time either. “I don’t see why the market is looking for him to do more of what didn’t work,” said Denninger, who adds that there is no benefit at to a third QE.

The chairman remained oddly optimistic, however, adding that “the healing process should not leave major scars.”

Obviously Bernanke has not noticed that the number of unemploymed Americans continues to stay at a tally exceeding 400,000. Following his speech, the Dow Jones Industrial Average dropped over 200 points, but saw resurgence later in the day.

RT

Once in a while you sit up when an investment advisor speaks and pay attention.  That’s because unlike the pablum served up by most, you actually read something that is both factual and makes sense.

Today’s lesson in this quaint little oddity is from John Hussman.

Without question, one of the notions buoying Wall Street optimism here is the hope that the Fed will pull another rabbit out of its hat by initiating QE3. That’s a nice sentiment, but it does overlook one minor detail. QE2 didn’t work.

That, of course, depends on who you are.  It certainly “worked” for market speculators.  It “worked” for certain people in the political class who were about to see their careers go down the toilet after advocating for saving financial institutions through the promulgation of fraud in 2008 and 2009.  And it “worked” for Obama, who crowed about how it was “time to buy stocks” in 2009 as well – as that fraud was being promulgated.

But that “working” was fleeting, as all the “gains” from said manipulation disappeared in less than two market weeks, leaving one to wonder: What the hell was that?

But this is not worthy of a Ticker – I’ve spilled so much digital ink on this that the only point to be made is that despite screaming of the media about “inappropriate comments” one Rick Perry actually put the correct sentiment on the table yesterday:

Speaking just now in Iowa, Perry said, “If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in history is almost treasonous in my opinion.” Treason is a capital offense.

Please?

But then John comes up with this – the only correct use for credit in an economy – and defends it:

During the 1930′s, the Austrian economist Joseph Schumpeter captured the importance of productive investment nicely in his discussion of credit. The goal of lending activity is not the stimulation of demand per se, but rather the temporary relaxation of constraints in order to increase the stream of goods and services available to the economy:

“By credit, entrepreneurs are given access to the social stream of goods before they have acquired the normal claim to it. It temporarily substitutes, as it were, a fiction of this claim for the claim itself. Granting credit in this sense operates as an order on the economic system to accommodate itself to the purposes of the entrepreneur, as an order on the goods which he needs: it means entrusting him with productive forces. It is only thus that economic development could arise from mere circular flow in perfect equilibrium. And this function constitutes the keystone of the modern credit structure.

Exactly.

There are four uses of capital: Productive Investment, Speculative Investment, Consumption and Ponzi Investment.

Only one of them should ever be undertaken with debt – that is, leverage.  That’s the first on the list.

Why?

That’s simple, really: Only the first has a reasonably reliable set of odds in returning more economic output than both the principal and interest.

The latter two never can over the intermediate and longer term.  Consumption is nothing more than pulling forward tomorrow’s demand for goods and services into today through speculative means – the promise to produce tomorrow without proof that one can do so exactly as was lampooned by Wimpy in the Popeye cartoons while Ponzi Investment can only return a profit if one can find a bigger sucker upon which you can offload your purchase.

Note that trading – which I engage in – is the latter of these.  That is, my “investment” only has value to the extent that someone else will buy it from me (or sell it to me) at a price more favorable to my account than my original act.  On-market transactions are always of this character.  A speculative use of capital only occurs when one invests in an IPO (or secondary offering) in the capital markets (stock or bond) and the invested funds go directly to the person or firm being invested in – that is, you’re betting on their ability to productively use your capital (as opposed to using it yourself.)

Should credit ever be used for those last two purposes?  No.  But will it?  Yes, in any free society.  The problem is that the use of credit to consume or engage in Ponzi investments, in a free marketplace, is always expensive because it is inherently dangerous and everyone understands that there is a great risk that you will not pay and the lender will lose their money!

This is where the problem comes from with the so-called “backstops” and machinations of The Fed and other policymakers in preventing those losses from being realized.  Credit becomes inappropriately cheap and thus replaces production as a means of creating “advance” in output.

But that output advance is illusory.  It is in fact a public fraud, in that we “report” and then make economic decisions based on things that but for the backstop of speculators and consumers that would otherwise be forced to pay an extremely high price commensurate with their risk of failure would not happen.

Worse, these policies must eventually fail, because the ability to provide that backstop is not unlimited, and when, not if, that capacity is exhausted all of the combined and compounded damage that has been loaded into the economy as a consequence must come back off.

It is rare to see someone in the investing world speak to this truth.  Yet this is not, as some assert, about “economic theory” (e.g. Austrian, Monetarist, etc) – it is about cold, hard mathematical facts.

Indeed, it is exactly to those basic facts – so often overlooked and dismissed, and only rarely if ever mentioned by an investment house – that prompted me to write Leverage.

Investors would be wise to read Mr. Hussman’s missive, and contemplate both its message and implications.

Clearly, he “gets it.”

If you do much grocery shopping, you have probably noticed that the cost of food has been rising at a very brisk pace over the past year.  So why are food prices rising so fast?  According to Federal Reserve Chairman Ben Bernanke, inflation is still very low and the economy is improving.  So what is going on here?  When I go to the grocery store these days, there are very few things that I will buy unless they are on sale.  In fact, I have noticed that many of the new “sale prices” are the old regular prices.  Other items have had their packages reduced in size in order to hide the price increases.  But with millions of American families just barely scraping by as it is, what is going to happen if food prices keep rising this rapidly?

The food prices are especially painful if you are trying to eat healthy.  Most of the low price stuff in the grocery stores is garbage.  Eating the “typical American diet” is a highway to cancer, heart disease and diabetes.

But if you try to stick to food that is “healthy” or “organic” you can blow through hundreds of dollars in a heartbeat.  In fact, the reality is that tens of millions of American families have now essentially been priced out of a healthy diet.

Soon there will be millions more American families that will not even be able to afford an unhealthy diet.

Some recent statistics compiled by the Bureau of Labor Statistics are absolutely staggering.  According to a recent CNBC article, over the past year many of the most popular foods in America have absolutely soared in price….

Coffee, for instance, is up 40 percent. Celery is 28 percent higher while butter prices rose 26.4 percent. Rounding out the top five are bacon, at 23.5 percent, and cabbage, at 23.3 percent.

Unfortunately, it looks like the trend of rising food prices is accelerating.  Just look at what the CNBC article says happened in the month of April alone….

Just in April—the most recent month for which data is available—grapes went up nearly 30 percent, cabbage jumped about 17 percent and orange juice surged more than 5 percent.

Meat is becoming more expensive as well.  Since March 2009, livestock prices have risen by 138%.

So when Ben Bernanke tells us that inflation is very low, that really is a lie.  On the stuff that people spend money on every day (like food and gas), prices have gone up dramatically.

Sadly, this is not just a phenomenon that is happening in the United States.  The truth is that the entire planet is rapidly approaching a horrific global food crisis.

Over the past year, the global price of food has risen by 37 percent and this has pushed approximately 44 million more people around the world into poverty.

When food prices rise in the U.S. it may be painful for millions of American families, but around the world a rise in food prices can mean the difference between surviving and not surviving.

That is why it has been so alarming that the global price of wheat has approximately doubled over the past year.

But it is not just wheat that has been soaring.  Check out what a recent Bloomberg article had to say about what has been happening to many key agricultural commodities over the past year….

Corn futures advanced 77 percent in the past 12 months in Chicago trading, a global benchmark, rice gained 39 percent and sugar jumped 64 percent. There will be shortages in corn, wheat, soybeans, coffee and cocoa this year or next, according to Utrecht, Netherlands-based Rabobank Groep. Prices also rose after droughts and floods from Australia to Canada ruined crops last year. European farmers are now contending with their driest growing season in more than three decades.

Even before this recent spike in food prices the world was struggling to get enough food to everybody.  It has been estimated that somewhere in the world someone starves to death every 3.6 seconds, and 75 percent of those are children under the age of five.

So what is going to happen if food prices keep on rising at the current pace?

That is a very good question.

We really are starting to move into unprecedented territory.  Nobody is quite sure what is going to happen next.

So why is all of this happening?

Well, a lot of people are blaming the Federal Reserve.  All of the “quantitative easing” that the Fed has done has flooded the financial markets with money.  All of that money had to go somewhere.  Much of it has pumped up the prices of hard assets such as oil, gold and agricultural commodities.

But it is not just the Fed that is to blame.  The truth is that central banks all over the world have been recklessly printing money.

When the amount of money in an economy goes up, the purchasing value of all existing money goes down.  In the United States, that means that your dollars will not go as far as they did before.

But it is not just monetary policy that is affecting food prices.  In 2010 and 2011 we have seen an unprecedented wave of natural disasters and crazy weather.  This has caused problems with crops all over the globe.

In addition, U.S. economic policies are also playing a role.  At this point, almost a third of all corn grown in the United States is used for fuel.  This is putting a lot of stress on the price of corn.

Also, there are some long-term trends that are not in our favor.  For example, the systematic depletion of the Ogallala Aquifer could eventually turn “America’s Breadbasket” back into the “Dust Bowl”.  If you have not heard of this problem I would encourage you to do some research on it.

Things are going to get a lot worse, but already America is having a really hard time feeding itself.  According to Feeding America’s 2010 hunger study, more than 37 million Americans are now being served by food pantries and soup kitchens.

So is that number unusual?

Yes, it sure is.

The number of Americans that are going to food pantries and soup kitchens has increased by 46% since 2006.

That is not a good trend.

Another stat that I talk a lot about in this column is the number of Americans on food stamps.

Right now, there are 44 million Americans on food stamps.  Nearly half of them are children.

How did we ever get to the point as a nation where more than 20 million children end up on food stamps?

It is estimated that one out of every four American children is currently on food stamps, and it is being projected that approximately 50 percent of all U.S. children will be on food stamps at some point in their lives before they reach the age of 18.

So what is going to happen if the economy gets even worse?

What is going to happen if there really is a major food crisis in this country someday?

Food prices have been going up for decades and they are going to continue to go up.  But the frightening thing is how fast they are increasing now.

As the U.S. middle class continues to be destroyed, the number of Americans that can’t afford to buy enough food is going to continue to rise.  Food prices are rising much faster than wages are, and that is not likely to change any time soon.

Food is rapidly becoming one of the most important global economic issues of this decade.  The farther one looks down the road, the bleaker things look for the global food situation.

I hope you are prepared for that.

The Economic Collapse

You got a 20% debasement (roughly) in the currency, a 20% increase in the stock market (net zero) but look at what went for a rocket ride…. just all the things you need to buy….

QE2 and Bernanke: FAIL

The Market-Ticker