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Whenever speaking before a Congressional
committee, former Fed chief, “Easy” Al Greenspan was fond of
saying, “I guess I should warn you. If I turn out to be particularly
clear, you’ve probably misunderstood what I’ve said.” His
protégé, Fed chief Ben “Bubbles” Bernanke borrowed
the script from his mentor, and speaking in the shadow of the majestic Grand
Teton mountains, before a symposium of G-20 central bankers, in Jackson Hole,
Wyoming on August 26th, - left most his audience wondering what he
meant.
“Everything depends on proper
listening. Of ten people, who listen to the same speech or story, each one
may well understand it differently - perhaps only one of them will understand
it correctly.” Traders were anxiously waiting to hear whether Mr Bernanke would send a crystal clear signal about
another round of “Quantitative Easing,” (QE), designed to
artificially inflate the value of the stock market, with the principal aim of
defending the wealth of the financial aristocracy. At the end of the day, it
was generally understood that while the Fed hasn’t made a final
decision so far, Bernanke was careful to keep the dream of QE-3 alive.
“The Committee will continue to
assess the economic outlook in light of incoming information and is prepared
to employ its tools as appropriate to promote a stronger economic recovery in
a context of price stability,” Bernanke said. Adding a new twist, he
said the September policy meeting will be extended to two days, instead of
just one, to allow for a fuller discussion, suggesting a pleasant surprise (ie QE-3) could be in the offing next month, for
today’s buyers of risky assets. In last year’s Jackson Hole
speech, Bernanke clearly telegraphed QE-2, a plan to buy $600-billion of US
Treasury-bonds, used to monetize the debts of the US-government and spur more
spending by the wealthiest Americans. Immediately afterward, the S&P-500
Index started rising and gained +28% until May 2011, when it leveled out.
As if by déjà vu, Bernanke
ignited yet another powerful rally in the stock market, by hinting it is safe
to buy risky stocks. He dispelled fears of a looming “double-dip”
recession, by simply saying he is optimistic about the outlook for the
US-economy, even after the stock market took a drubbing in the month of
August. “With respect to longer-run prospects, my own view is more
optimistic. The growth fundamentals of the United States do not appear to
have been permanently altered by the shocks of the past four years.”
Immediately after uttering these words, the Dow Jones Industrials found good support
at the psychological 11,000-level, quickly reversed an intra-day -200-point
loss, and managed to close +134-points higher on the day, thereby forcing
short sellers to scramble to cover losing positions.
It is very interesting to note, that a
year ago, Bernanke was telegraphing QE-2, as the Dow Industrials were
teetering at the psychological 10,000-level, and quivering on latent fears of
a “double-dip”
recession. This year, Bernanke was defending the Dow Industrials at a
slightly higher 11,000-level, by hinting at QE-3. Whereas a year ago, the
yield on the Treasury’s 10-year note hit a bottom at 2.50%, this year
it found a bottom at 2-percent. Nowadays, most traders and the public at
large are mentally conditioned to look to the White House and the Federal
Reserve, to ride to the rescue of the US-economy, whenever there is a crash
in the stock market, or when the economy runs into a rough patch.
The Fed’s
willingness to print trillions of US-dollars is part of Bernanke’s unprecedented effort
to keep the stock market artificially inflated and trending higher along an
upward trajectory. It’s dubbed the “Bernanke Put,” and at
its core is the explosive growth of the high-octane MZM money supply. It’s expanded by roughly $1-trillion since
April 2010. Even as the US-economic growth rate was stumbling towards
stagnation in the first half of 2011, the hallucinogenic effects of QE were
lifting US blue-chips higher. As the MZM money supply reached a record
$10.45-trillion in August 2011, the Dow Industrials rose to the 12,750,
before the rally was rudely interrupted – by the specter of a
“double-dip” recession.
Bernanke and
Goldman Sachs alumni, NY Fed chief William Dudley paid no heed to angry
criticism from Brazil, China, and India, Tea Party Republicans and other Fed
officials, that the Fed’s QE-2 scheme had also lifted North Sea Brent
crude oil to $115 /barrel, and contributed to a doubling of corn and soybean
prices, thus stifling the global economy, with a massive tax on producer
profits and consumer incomes. In fact, the “commodity shock”
generated by the Fed’s QE-2 scheme is one of the primary causes behind
the anemic state in the US-economy, averaging just +0.7% growth for the first
half of 2011.
The Fed has
already kept short-term interest rates locked near zero for 2-½-years,
and says it would keep the fed funds rate pegged near zero-percent through
mid-2013. Such a move is hurting American retirees, earning about
$368-billion /year less on their bank CD’s compared with a few years
ago. Also, a prolonged time period of unlimited and nearly free credit is a
huge windfall to the banks, hedge funds, and speculators of all sorts, who
can now feel more confident that the Fed will underwrite new bubbles in the
markets.
Everything was
proceeding nicely, for the financial aristocracy, until the Fed decided to
take a brief hiatus from money printing. Once the printing presses turned
silent on July 1st, the QE addicts on Wall Street began to suffer
from severe withdrawal symptoms. The stock market bulls suddenly got wobbly
knee caps, and the Dow Jones Industrials crashed -2,000-points, without
warning. Likewise, the S&P-500 Index plunged -18% lower, tumbling
dangerously close to the threshold of bear market territory. Quickly, the
illusions of increasing wealth on Wall Street, conjured-up by the Fed’s
hallucinogenic QE-drug, began to wear off.
Despite all of the Fed’s
manipulative antics, designed to bolster Wall Street, traders still get very
nervous at the first signs of a soft patch in the fragile US-economy. Stock
market bulls need constant reassurance that the safety net of the
“Bernanke Put” will always be there to rescue their investments,
when risky bets go sour. Stock market bulls want to know the “Plunge
Protection Team” (PPT), will intervene in the stock index futures
market if necessary, and won’t allow a nasty correction to morph into a
bear market. At Jackson Hole, Bernanke gave a wink and a nod to his audience,
letting them know that the upcoming batch on US-economic data would be much
better than was widely expected.
Sure enough, on August 29th,
the Commerce Department backed-up Bernanke’s optimistic view of the
economy, by reporting a surprising +0.8% increase in US-consumer spending in
July, the biggest increase in two years! Furthermore, US-government
apparatchiks said Americans withdrew $55.8-billion from their savings
accounts, in order to finance their purchases of automobile and other big
ticket items. As such, Americans are spending money at an annualized rate of
$10.75-trillion, the highest figure in history. That’s +5.1% higher
than a year ago, increasing at a rate not seen since the days preceding the
“Great Recession” in mid-2007. The public is told US consumers
dipped into savings in July 2011 in order to go on a spending spree, even
when the U-6 jobless rate hovers at 16-percent.
On Aug 29th, the
government’s glowing data on consumer spending, combined with the
Fed’s hint at QE-3, lifted the Dow Jones Industrials +254-points higher
to the 11,540-level. Likewise, the S&P-500 has rebounded by +10% above
its crash bottom low, to close at the 1,210-level today. With the Fed hinting
at QE-3, equity traders were able to set aside worries about the yield on
Greece’s 2-year note, which spiked up to a record 48% earlier in the
day.
Do you believe in conspiracy theories?
Sometimes they are difficult to refute. “Imagination is more important
than knowledge”, the brilliant Albert Einstein used to say. Imagine for
just a moment that the Dow Jones Industrials has become a key instrument of
national economic policy, and that by “actively managing” its
direction, the US-government could impact the wealth of tens of millions of
US households, and by extension, influence consumer confidence and spending.
One of the most powerful weapons at the disposal of the US-government is the
ability to massage economic data, in order to jig the markets in a desired
direction.
The government’s data on consumer
spending is the exact opposite of what Americans are telling pollsters. For
instance, on August 26th, 2011, a widely followed survey conducted
by Thomson Reuters and the University of Michigan found that US-consumer
sentiment had plunged to a reading of 55.7 in the month of August, - its
lowest level since November 2008, tumbling to the depths of despair from the
Great Recession. The consumer confidence index fell sharply from 63.7 in
July. Two-thirds of all consumers reported that the economy had recently
worsened, and just one-in-five anticipated any gains during the year ahead.
Three-quarters of respondents expected bad economic times, just below the
all-time peak of 82% in 1980. Consumer buying plans also fell plunged to
their “Great Recession” lows, and 46% of respondents said they
expected unemployment to rise.
According to a new Associated Press-GfK poll, a stunning 86% of US-adults say the economy is in poor shape, up from 80% in June.
Half of those interviewed, (49%), said it worsened just in the past month. Only 27% responded that way in the
June survey. Some 75% in the
poll said the country is heading in the wrong direction, up from 63% in June.
On Aug 5th, 2011, Techno-Metrica Market Intelligence and Investors
Business Daily, showed its Economic
Optimism Index declining 13.5%, to a historic low in August posting 35.8 vs.
41.4 in July. The IBD/TIPP index is below its reading of 44.4 in
December 2007 when the economy entered into the recession, and is 14.4-points
below its all-time average of 50.2. “The weak confidence strongly suggests that the economy has fallen into
recession, driven by high unemployment, under employment and low confidence
in the government’s ability to improve the economy,” said Raghavan Mayur, president of
TIPP. “This month, 29% of
households say that at least one member of the household is looking for a
full-time job.”
At a time when Americans are
increasingly worried about a weak job market, higher costs for food,
clothing, and gasoline, and a weak housing market, the Conference Board said its Consumer Confidence Index fell to 44.5,
down from a revised 59.2 in July, and the
lowest level since April 2009. Another
measure that assesses shoppers’ outlook over the next six months
collapsed to 51.9, down from 74.9 last month. Yet US-government apparatchiks
are telling traders in the stock market, a completely opposite “feel
good” story.
Yes,
it’s true that US-corporate profits have more than doubled from the
depths of the Great Recession, to an annualized rate of $1.54-tillion in
Q’2 of 2011.
Corporate America’s cash stockpiles are at all-time highs and its
balance sheets are in much better shape now than at any time in the past
decade. Last month, Google announced Q’2 net income of
$2.5-billion and Apple made $7-billion, nearly doubling its earnings from the
same period a year ago. But
US-companies are refusing to use their stash to hire more workers.
Instead, new
plans for mass layoffs have only accelerated. Corporate profits were
generated through the elimination of 8.4-million jobs, and so-called
productivity gains, that have left US-workers desperate for any work
available, accepting of lower wages and cuts in medical benefits. At the same
time, there are now almost 46-million people in the United States on food
stamps, roughly 15% of the population. That’s an increase of +74% since
2007, just before the financial crisis and a deep recession led to mass job
losses.
What are we to
believe? The stock market bulls on Wall Street argue that one shouldn’t
pay attention to what consumers say, but rather, put your faith in the
credibility and honesty of government statistics. However, the figures
conjured-up by US-government apparatchiks on consumer spending, which accounts
for 70% of US GDP, are completely at odds with the results of private
surveys, that are not under Big Brother’s control. The
government’s report on July’s consumer spending is far beyond the
stretch of the imagination, and appears to be solely designed to jig the
market higher. Thus, trying to profit in the stock market is a game of seeing
correctly through deceit and deception, and “smoke and mirrors.”
The vast
majority of the US-public has lost faith in Wall Street, and has withdrawn
about $2-trillion from the stock market. Instead, it is estimated that the
wealthiest 10% of Americans are now left in control 80% of the outstanding
stocks. Furthermore, nearly 60% of the trading volume on the NYSE and Nasdaq is now handled by high frequency computerized
Black Box traders, and in the first half of August, they accounted 75% of the
volume. A generation ago, volatility was measured in days. Now huge moves up,
and then down, can happen in a matter of minutes. The moves are so fast these days
because computers programmed to analyze hundreds of variables and are
executing huge trades without any human intervention.
Instead of trying to outsmart computers,
many investors have turned to the reliability of Gold, as the best hedge
against abusive central banks that are addicted to money printing. Gold is
also a prime beneficiary of the “Bernanke Put.” One of the untold
secrets of QE-2, was the sharp drop in the inflation adjusted 1-year T-bill
rate, as the Fed drove short-term interest rates to -355-basis points below
the inflation rate, - the lowest in history, and locked far below the fed
funds rate, which is pegged above the surface at zero to 0.25-percent.
Combined with the massive expansion of the MZM money supply, one should not
be surprised that the Gold market went parabolic in the past few months.
“By this means, government may
secretly and unobserved, confiscate the wealth of the people, and not one man
in a million will detect the theft,”-- John Maynard Keynes.
Gary Dorsch
Editor, Global Money Trends
www.sirchartsalot.com
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