We keep hearing that �The worst is behind us,� but the spin
doesn�t square with the facts.
Sure the stock market has done well, but scratch the surface
and you�ll find that things are not as what they seem. Zero hedge -- which is
quickly becoming the �go-to� market-update spot on the Internet -- recently
posted an eye-popping chart which traces the Fed�s monetization programs
(Quantitative Easing) with the six-month surge in the S&P 500. The $917
billion increase in securities held outright equals the Fed�s $1 trillion
increase to its balance sheet. In other words, the liquidity from the Fed is
following the exact same upward-trajectory as stocks, a sure sign that the
market is being manipulated.
Surprisingly, traders seem to know that the Fed is goosing
the market and have just shrugged it off as �business as usual.� Go figure?
Perhaps it pays to take a philosophical approach to market rigging. Who needs
the gray hair anyway? The result, however, has been that short-sellers (traders
betting the market will go down) who have placed their bets according to (weak)
fundamentals, have gotten clobbered. They appear to be the last holdouts who
still place their faith in the unimpaired operation of the free market. (Right)
Here�s how former hedge fund manager Andy Kessler sums it up
in a recent Wall Street Journal article, The
Bernanke Market: �By buying U.S. Treasuries and mortgages to increase the
monetary base by $1 trillion, Fed Chairman Ben Bernanke didn�t put money
directly into the stock market but he didn�t have to. With nowhere else to go,
except maybe commodities, inflows into the stock market have been on a tear.
Stock and bond funds saw net inflows of close to $150 billion since January.
The dollars he cranked out didn�t go into the hard economy, but instead into
tradable assets. In other words, Ben Bernanke has been the market.�
So, the Fed has given a boost to stocks while keeping the
bond market priced for deflation. That�s quite a trick. One market is flashing �recovery�
while the other is signaling �contraction.� Bernanke has worked this miracle,
by simply changing the definition of �indirect bidders� (which used to mean �foreign
buyers� of US Treasuries) to mean just about anyone-anywhere.
Here�s an explanation of this latest bit of chicanery from
the Wall Street Journal in June: �The sudden increase in demand by foreign
buyers for Treasuries, hailed as proof that the world�s central banks are still
willing to help absorb the avalanche of supply, mightn�t be all that it seems.
�When the government sells bonds, traders typically look at
a group of buyers called indirect bidders, which includes foreign central
banks, to divine overseas demand for U.S. debt. That demand has been rising
recently, giving comfort to investors that foreign buyers will continue to
finance the U.S.�s budget deficit.
�But in a little-noticed switch on June 1, the Treasury
changed the way it accounts for indirect bids, putting more buyers under that
umbrella and boosting the portion of recent Treasury sales that the market
perceived were being bought by foreigners.� [�Is foreign Demand as Solid as it
Looks,� Min zeng]
Pretty clever, eh? So, if the Treasury doesn�t want slobs like
us to know when foreign demand drops off a cliff, they just twist the
definitions to meet their needs. My guess is that the Fed is building excess
bank reserves (nearly $1 trillion in the last year alone) with the tacit
understanding that the banks will return the favor by purchasing Uncle Sam�s
sovereign debt. It�s all very confusing and circular, in keeping with Bernanke�s
stated commitment to �transparency.� What a laugh. The good news is that the
trillions in government paper probably won�t increase inflation until the
economy begins to improve and the slack in capacity is reduced. Then we can
expect a good bout of hyperinflation. But that could be years off. For the
foreseeable future, it�s all about deflation.
No matter how you look at it, the economy is on the ropes.
Yes, there should be a rebound in the next few quarters, but once the stimulus
wears off, it�s back to the doldrums.
According to David Rosenberg of Gluskin Sheff, �All the
growth we are seeing globally this year is due to fiscal stimulus. . . . For
2010, the government�s share of global growth, by our estimates, will be 80
percent. In other words, there are still very few signs that organic private
sector activity is stirring.�
The question is, how long can the Obama administration write
checks on an account that�s overdrawn by $11 trillion (The national debt)
before the foreign appetite for US Treasuries wanes and we have a sovereign
debt crisis? If the Fed is faking sales of Treasuries to conceal the damage -- as
I expect it is -- we could see the dollar plunge to $2 per euro by the middle
of 2010. Imagine pulling up to the gas pump and paying $6.50 per gallon. Ouch!
That should be good for business.
For the next year or so, the demon we face is deflation; a
severe contraction exacerbated by household deleveraging and massive financial
sector defaults. The Fed�s money-printing operations just can�t keep pace with the
capital-hole that continues to expand from delinquencies, foreclosures, and
failed loans. Workers have seen their credit lines cut and their hours reduced,
households are $3 trillion above trend in their debt-to-equity ratio, and
unemployment is soaring. Industry analysts expect a $1.5 trillion cutback in
credit card spending. That�s why Bernanke is firehosing the whole financial
system with low interest liquidity, to stimulate speculation and reverse the
effects of a slumping economy.
Here�s a clip from the UK Telegraph�s Ambrose
Evans-Pritchard: �Both bank credit and the M3 money supply in the United States
have been contracting at rates comparable to the onset of the Great Depression
since early summer, raising fears of a double-dip recession in 2010 and a slide
into debt-deflation . . .
�Similar concerns have been raised by David Rosenberg, chief
strategist at Gluskin Sheff, who said that over the four weeks up to August 24,
bank credit shrank at an �epic� 9pc annual pace, the M2 money supply shrank at
12.2pc and M1 shrank at 6.5pc.
�For the first time in the post-WW2 [Second World War] era,
we have deflation in credit, wages and rents and, from our lens, this is a
toxic brew,� he said. [Ambrose Evans-Pritchard, �US credit shrinks at Great
Depression rate prompting fears of double-dip recession,� UK Telegraph]
The Fed has pumped up bank reserves, but the velocity of
money has sputtered to a standstill. There won�t be an uptick in economic
activity until consumers reduce their debt-load, rebalance their personal
accounts and find jobs. That will take a long time coming, which is why San
Francisco Fed chief Janet Yellen sounded so pessimistic in this week�s
presentation �The Outlook for Recovery in the U.S. Economy� in S.F.: �With
slack likely to persist for years, it seems likely that core inflation will
move even lower, departing yet farther from our price stability objective. From
a monetary policy point of view, the landscape will continue to present
challenges. We face an economy with substantial slack, prospects for only
moderate growth, and low and declining inflation. With our policy rate already
as low as it can go, it�s no wonder that the FOMC�s last statement indicated
that �economic conditions are likely to warrant exceptionally low levels of the
federal funds rate for an extended period.� I can assure you that we will be
ready, willing, and able to tighten policy when it�s necessary to maintain
price stability. But, until that time comes, we need to defend our price
stability goal on the low side and promote full employment.�
That�s from the horse�s mouth. Recovery? What recovery?
The consumer is maxed out, private sector activity is in the
tank, and government deficits are the only thing keeping the economy off the
meat wagon. Bernanke might not admit it, but the economy is sinking into
See the zero
Whitney lives in Washington state. He can be reached at firstname.lastname@example.org.