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Showing posts with label dow jones inflation federal reserve stock market. Show all posts
Showing posts with label dow jones inflation federal reserve stock market. Show all posts
No Bond Bubble--- Just Another Fed Machination
Bloomberg has an article about record money flowing into bonds over the last 2 years. A total of $480 billion has rushed into bonds compared to $497 billion that went into dot com stocks between 1999-2000. So does this constitute a bubble? Many economic commentators and bloggers have suggested as much. They regurgitate the usual reasons why bonds will do poorly in the future and should be avoided: low yields, purchasing power to be eroded by inflation, the dangers of following the herd into an investment. I do not think we are in a bond bubble--yet. In fact, investors are simply responding to the Federal Reserve's interventions and market distortion. Since the Fed took rates down to zero, it does not make sense to hold funds in money market accounts, but investors are still fearful of equity markets.What are they to do? Invest in bonds.
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Fed President Bullard Really Wants To Steal Your Money Through Inflation
Fed President James Bullard said in an interview with the WSJ that he wants more money printing if the US experiences anymore disinflation. Note that he did not use the Keynesian scare word deflation; instead disinflation is perceived as the the new bogeyman. Bullard went on to say that the Fed needs to resume money printing to increase inflation. What surprises me is how open Bullard is about his desire to steal America's purchasing power. There is no hiding the fact that the goal of the Federal Reserve is to create inflation. Its funny: if I put a gun to your head and steal your money, you would be angry, but if a supercilious economist at the Fed reduces the purchasing power of your currency, that is okay. Bullard argues that the US needs to achieve the 2% target for inflation and that money printing is the way to accomplish it:
If I remember right, the Fed's mandate is full employment and price stability. Having 2% inflation means that prices double every 36 years. Is this price stability? I don't think so. What I don't understand is why no one seems to object to the Fed's intention to destroy the dollar. No economist I have ever talked to has ever been against inflation. They all like the idea of 2-3% inflation because they incorrectly believe that it stimulates spending as people buy stuff before the price goes up. They fear that 0% inflation or (gasp) deflation would cause a depression as people and businesses forgo spending, waiting for lower prices. Of course, this is an absurd notion. The real reason the Fed and the government want inflation is because it reduces the real value of the government's national debt. It it just a coincidence that inflation is usually 3%, and the yearly budget deficit is around 3%, too. Bernanke in his deflation speech, confirmed that the government has a strong incentive to create inflation. It is unfortunate that the American people do not understand this concept. Even Lenin understood this and noted that the:
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Part of the goal here is you are trying to defend the inflation target from the low side. Monetizing debt is widely recognized to be inflationary. It will be both perceived as inflationary and it actually will be. You would push core inflation higher, toward target. Of course you don’t want to overdo this and create a lot of inflation down the line. But we are on the low side of the inflation target at this point so the idea is to move up toward the target.
If I remember right, the Fed's mandate is full employment and price stability. Having 2% inflation means that prices double every 36 years. Is this price stability? I don't think so. What I don't understand is why no one seems to object to the Fed's intention to destroy the dollar. No economist I have ever talked to has ever been against inflation. They all like the idea of 2-3% inflation because they incorrectly believe that it stimulates spending as people buy stuff before the price goes up. They fear that 0% inflation or (gasp) deflation would cause a depression as people and businesses forgo spending, waiting for lower prices. Of course, this is an absurd notion. The real reason the Fed and the government want inflation is because it reduces the real value of the government's national debt. It it just a coincidence that inflation is usually 3%, and the yearly budget deficit is around 3%, too. Bernanke in his deflation speech, confirmed that the government has a strong incentive to create inflation. It is unfortunate that the American people do not understand this concept. Even Lenin understood this and noted that the:
best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.It is sad that a nefarious character like Lenin had a better understanding of economics than most capitalist economists. Whatever your views about the Fed, you have to admit that they have done a terrific job of reducing the dollar's value by 96% since 1913.
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There Is No Deflation
With the recent weakness in the economy many economists have warned that the US faces a deflationary future. Their solution is to print money to counter any deflationary forces. As readers will know, I strongly disagree with this idea because there is no deflation. I am not going to get into the inflation/deflation debate because it is not productive and both sides remain obstinate. However I will note that Fed President Hoenig made a speech yesterday which noted:
The way I see it the goal of 0% interest rates is to create another asset bubble to bail out the economy. The Fed may claim that this is not their intention, but actions speak louder than words. They understand that the real economy has been permanently disabled thanks to the financial crisis and housing bubble. Under their line of reasoning the only thing that can cause a temporary recovery in the economy would be another credit bubble,which is bigger than the housing bubble. It remains to be seen whether they can accomplish this because the demand for credit throughout society (businesses, consumers, etc) is declining at a rapid rate. Another problem is that the banking system is insolvent which means banks are not going to be extending credit and loans like they did before. We know that 0% interests rates encourage speculation as people look for alternatives to 0%. However, most Americans have already given up on stocks and are piling into bonds despite the threat of inflation and low returns on 10 year Treasuries. According to traditional economic thinking this is the exact opposite of what you would expect rational people to do. They should be moving their assets into riskier investments rather than safer ones. If these trends continue expect more economic stagflation as the economy limps along and high commodity prices ensure inflation. It remains to be seen whether the Fed will get their wish of another credit bubble.
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One final note about deflation: The consumer price index was a mere 18 in 1945 but was 172 at the start of this century. Today, despite our most recent crisis, the CPI is over 219. Not once during more than half a century has the index systematically declined. I find no evidence that deflation is the most serious threat to the recovery today.People commonly mistake asset price deflation with general price deflation. Asset price deflation is part of the credit cycle. When a credit bubble bursts (e.g. housing market), prices have to fall back to a proper clearing level set by the market. However, there is a certain group of economists, who believe that the Federal Reserve should never let this process occur. Instead they postulate that the Fed should debase the dollar through inflation, which increases the nominal price of assets. They argue that the "deflationary risk" of falling prices is to great and that the Fed should do everything in their power to prevent it. This is why the Fed will not allow home prices to fall to their natural level. One other aspect of Hoenig's speech I found noteworthy was his discussion on negative real interest rates and why it it destructive to the economy. He mentioned that the Fed made the mistake in 2003-2004 of keeping interest rates artificially low for too long, which led to a speculative housing bubble. What I find unbelievable is that the Federal Reserve refuses to learn from their own mistakes. They admit that low interest rates create dangerous price bubbles, but at the same time have lowered interest rates to 0%. They have kept rates at all time lows for over a year even though they know this is going to cause unintended problems in the future. What the hell are they thinking at the Fed?
The way I see it the goal of 0% interest rates is to create another asset bubble to bail out the economy. The Fed may claim that this is not their intention, but actions speak louder than words. They understand that the real economy has been permanently disabled thanks to the financial crisis and housing bubble. Under their line of reasoning the only thing that can cause a temporary recovery in the economy would be another credit bubble,which is bigger than the housing bubble. It remains to be seen whether they can accomplish this because the demand for credit throughout society (businesses, consumers, etc) is declining at a rapid rate. Another problem is that the banking system is insolvent which means banks are not going to be extending credit and loans like they did before. We know that 0% interests rates encourage speculation as people look for alternatives to 0%. However, most Americans have already given up on stocks and are piling into bonds despite the threat of inflation and low returns on 10 year Treasuries. According to traditional economic thinking this is the exact opposite of what you would expect rational people to do. They should be moving their assets into riskier investments rather than safer ones. If these trends continue expect more economic stagflation as the economy limps along and high commodity prices ensure inflation. It remains to be seen whether the Fed will get their wish of another credit bubble.
Black Swan Insights
US Economic Outlook--3 Possible Scenarios
Market participants and economists have noted that the macro outlook for the US economy is particularly uncertain. There seems to be so many contradicting variables that lead to differing conclusions. On one hand you have strong corporate profits, easy monetary policy, and growth from emerging markets. On the other hand the US has high structural unemployment, egregious levels of government debt, and a housing depression. I believe the US economy faces 3 possible economic scenarios: Economic Stagnation (1-2% GDP growth), Economic Depression (severe economic contraction), and Hyperinflation. You will notice that there is no V-Shape economic recovery with strong growth (4-5%) option. Anyone who has studied economic history will tell you that economic and financial conditions simply do not support this outcome as a realistic possibility. The main reasons for this include de-leveraging, an insolvent banking system, collapse of housing market, record levels of government and private sector debt, and high unemployment. Under these conditions it is impossible to have a strong and healthy economy. Lets review 3 possible economic scenarios:
Elite Bankers Preparing for Hyperinflation-Evans-Pritchard
Ambrose Evans-Pritchard has written a very illuminating article titled "The Death of Paper Money" which discusses how the social fabric of society is destroyed by hyperinflation. He notes that bankers around the world are currently reading a book called Dying of Money: Lessons of the Great German and American Inflations to educate themselves on the mechanics of hyperinflation. Evans-Pritchard goes on to describe some of the conclusions reached in the book as to what sparked hyperinflation in the Weimar Republic:
People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.
"Velocity took an almost right-angle turn upward in the summer of 1922," said Mr O Parsson. Reichsbank officials were baffled. They could not fathom why the German people had started to behave differently almost two years after the bank had already boosted the money supply. He contends that public patience snapped abruptly once people lost trust and began to "smell a government rat".
Marc Faber Predicts more Money Printing by October 2010
Marc Faber was interviewed on Bloomberg yesterday and predicted that due to weakness in the economy, the Federal Reserve would begin a new round of Quantitative Easing (money printing) by October 2010 to prevent deflation. His outlook for the economy is not positive.
Here is a link to the video: Click Here
If Faber is correct and the Fed prints $2-3 trillion more this wold be a boon to gold and other hard assets. However this money printing will eventually lead to hyperinflation despite what the deflationists say. I think history is pretty clear that the Federal Reserve will never allow deflation even though it is a natural part of the credit cycle.
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Here is a link to the video: Click Here
If Faber is correct and the Fed prints $2-3 trillion more this wold be a boon to gold and other hard assets. However this money printing will eventually lead to hyperinflation despite what the deflationists say. I think history is pretty clear that the Federal Reserve will never allow deflation even though it is a natural part of the credit cycle.
Black Swan Insights
Weekend Reading and Audio July 10
1. Interview with Rick Rule-- Part 1, Part 2 Great interview where Rick discusses his view on oil (hint he thinks its going to $200), gas, and alternative energies.
2. Jim Rogers says buy metals and rice--sell bonds.
3. John Paulson facing large redemptions--- This could account for the recent weakness in the price of gold.
4. Bank of America's $10.7 billion mistake---or fraud? Its hard to tell with the major banks.
5. Oracle Octopus faces angry Germans
6. James Turk Blog article on the dollar---he correctly points out that the real threat is hyperinflation not deflation
7. King World News Interview--Jeffrey Saut, James Turk, and Bill Fleckenstein---big fan of King World News--it should replace CNBC.
Have a great Weekend!
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2. Jim Rogers says buy metals and rice--sell bonds.
3. John Paulson facing large redemptions--- This could account for the recent weakness in the price of gold.
4. Bank of America's $10.7 billion mistake---or fraud? Its hard to tell with the major banks.
5. Oracle Octopus faces angry Germans
6. James Turk Blog article on the dollar---he correctly points out that the real threat is hyperinflation not deflation
7. King World News Interview--Jeffrey Saut, James Turk, and Bill Fleckenstein---big fan of King World News--it should replace CNBC.
Have a great Weekend!
Black Swan Insights
Latest Thoughts from Marc Faber--July 1
Legendary market commentator and investor Marc Faber is out with his latest issue of the Gloom, Boom and Doom Report and it is another good one. Here are some of the highlights:
1. Stock Markets--Faber is bearish on the all markets around the world, especially Shanghai, Australia, and Canada. He believes that while markets are temporarily oversold in the very short-term and could bounce, that the direction will likely be down until Oct/Nov. He goes own to explain that the slowdown in China could turn into a crash and that it will bring markets down 20-30%. He specifically said the S&P 500 could fall down to 850-900. He does believe that the March 09 lows of 666 will hold because of money printing,
2. Gold and Precious Metals--While long term bullish, Faber is cautious in the short term on gold and thinks it may dip down to 1100, but this would present investors with a buying opportunity. He notes that from a seasonal perspective gold generally falls in July and into mid August. However he thinks the Elliott Wave deflationists are wrong about gold falling back to 500. He thinks gold could actually go to 4,000 based on M2 (money supply).
3. Gold Stocks--He likes gold stocks and will continue to hold them even though he expects them to fall with the general market.
4. Housing Market--Faber did not address US housing but pointed out that the Australian and Canadian real estate markets are in bubbles (even larger than the US housing bubble) and that with the slowdown in China could collapse.
5. Bonds---Faber said that bonds could rally a little more (between 105-110 for TLT) and he would be looking to short them. Long term you will lose holding bonds because of inflation he declares.
6. Central Bank Policies--As worldwide markets fall central banks will again resort to money printing on a scale larger than last time. And as history shows money printing works which will prevent markets from collapsing.
Good Luck!
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1. Stock Markets--Faber is bearish on the all markets around the world, especially Shanghai, Australia, and Canada. He believes that while markets are temporarily oversold in the very short-term and could bounce, that the direction will likely be down until Oct/Nov. He goes own to explain that the slowdown in China could turn into a crash and that it will bring markets down 20-30%. He specifically said the S&P 500 could fall down to 850-900. He does believe that the March 09 lows of 666 will hold because of money printing,
2. Gold and Precious Metals--While long term bullish, Faber is cautious in the short term on gold and thinks it may dip down to 1100, but this would present investors with a buying opportunity. He notes that from a seasonal perspective gold generally falls in July and into mid August. However he thinks the Elliott Wave deflationists are wrong about gold falling back to 500. He thinks gold could actually go to 4,000 based on M2 (money supply).
3. Gold Stocks--He likes gold stocks and will continue to hold them even though he expects them to fall with the general market.
4. Housing Market--Faber did not address US housing but pointed out that the Australian and Canadian real estate markets are in bubbles (even larger than the US housing bubble) and that with the slowdown in China could collapse.
5. Bonds---Faber said that bonds could rally a little more (between 105-110 for TLT) and he would be looking to short them. Long term you will lose holding bonds because of inflation he declares.
6. Central Bank Policies--As worldwide markets fall central banks will again resort to money printing on a scale larger than last time. And as history shows money printing works which will prevent markets from collapsing.
Good Luck!
Black Swan Insights
No Surprise from the Federal Reserve--the lunatics are still running the asylum
This zero interest rate policy shows you how weak and vulnerable the Fed believes the economy really is (officially of course it is recovering). I also doubt the Fed will every sell there portfolio (bought with printed money) and is more likely to expand the program to prevent housing from double dipping.
But for now the markets like it.
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How is your portfolio doing inflation adjusted
Here is a chart which shows the performance of the Dow Jones Industrial Average in both nominal and inflation adjusted terms. CNBC and the mainstream media never show you this chart. Its hard to make out on the chart but if you invested in the DOW in 1999 you would be roughly flat in nominal terms. Not bad but not really good either. But it gets worse. In real inflation adjusted terms your portfolio is down approx. 30% thanks to inflation. Who is responsible for this? The unconstitutional Federal Reserve.
What this clearly shows is that stocks do not necessarily outpace inflation as everyone on CNBC promises you. They have to keep generating reasons for you to buy more and more stock. There are also those incompetent money managers who promise to "professionally manage your money" for only a 1-2% fee per year.
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What this clearly shows is that stocks do not necessarily outpace inflation as everyone on CNBC promises you. They have to keep generating reasons for you to buy more and more stock. There are also those incompetent money managers who promise to "professionally manage your money" for only a 1-2% fee per year.
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