WHY IS THERE NO
INFLATION? -- Most economists, analysts, mavens of every sort and investors wonder
why the Fed’s QE 1, 2,3 and 4 programs have NOT created any inflation
to speak of and haven’t boosted the economy any more than it has, if at
all. After all, $85 billion monthly injections of money into the
economy should in normal times be highly inflationary. Had Helicopter
Ben thrown $85 billion a month out of helicopters as he said he would, our
economy would have been booming before the end of the that 1st year and our
Income Tax coffers would have been overflowing by the end of the 2nd
year. But today’s economists, as I have argued many times over the last
5 years, can’t seem to learn from their past mistakes nor anyone else’s.
Government money could not create jobs in the 1930’s and that was with a
World War going on. The Government and all their economists, including all of
our renowned academics with more than 100 years of history to learn from,
can’t seem to realize that governments can’t create jobs. They give money to
the banks and their crony Capitalists just to make a few people and of course
themselves wealthy. In the process, they destroy the main advantage that
Capitalism has over Socialism: The allocation of capital that is determined
by profits competition and Free Market entrepreneurship.
We are focused on
punishing profit and usurping the allocation function by government as we
destroy capitalism from within. The Government is so busy trying to run
everyone’s lives that they have forgotten the allocation principles of
Capitalism.
PROFIT and COMPETITION
are exactly the same as traffic lights. They tell everyone simultaneously
what to do and when. And we all know what happens to a city when the traffic
lights go out. Do you want to fix our education system? It’s simple;
just get rid of the Department of Education, eliminate tenure and Teacher’s
Unions, issue vouchers to all students and see how quickly we become the
Number One Education System in the World. Freedom, which is just another word
for Capitalism, WORKS. How could it not since it is the way of the Old
Testament.
Ben Bernanke gave a very
disappointing press conference where he laid out the Fed’s plans for exiting
their stimulus program and the market displayed its resounding displeasure
with his speech. Bond yields soared and all other asset classes sold off
sharply. The Fed got worried about the reaction and immediately sent out
numerous Fed Governors to the media trying to talk the market back up again.
Just goes to show you the complete lack of understanding that Bernanke,
the Fed and the Media have as to how the economics of an economy works.
History has proven time
and time again that manufactured, low interest rates are only good for
BLOWING UP BUBBLES, but in no way do they create jobs and/or foster a growing
vibrant economy.
The Definition of
a Bubble
The fact that the market
would react so dynamically without the Fed actually doing anything (only
talked about slowly transitioning from QE purchases in a tapering fashion
with a rather drawn out process through the summer of 2014) means the Federal
Reserve has created massive bubbles in numerous asset classes. Not only
has the Fed kept the Fed funds rate too low for far too long, but they
injected billions and billions of dollars into asset classes with their
various outright purchases, which had the effect of pushing many asset
classes several standard deviations beyond any normal sustainable
levels. 1.5% interest rates on 30 year Treasuries have completely
destroyed the FREE MARKET mechanisms for allocating investment capital. This
has resulted in 5 years of stagnation at best, leaving the Fed and the
Government with no good and workable way of getting out of the mess that they
have created for themselves, but more importantly for us (the economy).
The only way to recover
is to foster a fast Recession which would last a maximum of 2 years and let
the FREE MARKET get us out of our predicament; just as what happened in
1946-48 and 1981-82 under Reagan and Volker. Unfortunately Bernanke, the
self-proclaimed expert on the 30’s Depression, learned absolutely nothing
about the real problems of the 30’s having served his tutelage under
Socialist professors throughout his entire academic life and beyond.
SOCIALISM DOESN’T
WORK
The Socialist Catch-22 is
that it cannot exist without other people’s money. The ballooned markets
cannot exist without the $85 billion/month; they will freefall
back to natural, sustainable levels. So what does that portend for markets
that are trading at hundred year highs? The real problem is that if they
cannot exit now, then they will push markets and asset classes artificially
to even higher more unsustainable levels! The inevitable crash would then
become even more pronounced just like the Tech Bubble, where stocks that were
trading in the 100′s dropped to zero. Silicon Valley also had their fire sale
for property, as all the businesses that were built up around the
unsustainable market valuations came crashing back to reality. Exactly the
same as the real estate and stock markets around the world did after 2007.
Bernanke’s
Original Plan (Unfortunately he was joKing)
The thought or rather the
theory or hope by the FED was that they would push or support asset prices up
until the economy picked up and then the next business cycle would kick in,
take over and be able to support the overextended asset prices as they
withdrew their artificial stimulus. But it has not worked out that way. We
are now into over five years of artificial stimulus and the economy has not
recovered one bit. In fact, most likely, it has actually contracted in
real terms by 1%-2% per year compounded. There will be no economic growth at
all, let alone be strong enough to replace the Fed`s stimulus measures
without the bubble asset classes falling precipitously.
What they can’t fathom is
that the more the Government shrinks its bloated self and the greater the
move back towards Free Market principles by cutting Taxes and Regulations,
the less damaging the correction will be and the faster the economy will
recover and expand under a new found Free Market.
THE ONLY THING THAT IS
REQUIRED IS THAT THE GOVERNMENT GET OUT OF THE WAY AND TRUST IN THE
ENTREPRENEURSHIP, INGENUITY and DRIVE OF its own people. THEN JUST STAND BACK
AND WATCH HOW SMALLER GOVERNMENT AND FREEDOM SUCKS MONEY, COMPANIES AND
PEOPLE BACK HOME TO FREEDOM:THE ONLY THING THE PEOPLE WHO
FOUNDED THIS WOUNDERFUL COUNTRY EVER WANTED AND DREAMED OF IN THE 1ST
PLACE.
the Withdrawal
Effect
The talk of just letting
the portfolio on the Fed’s books expire without them selling these assets
into the markets completely misses the point. Markets react to future
expectations and not to yesterday’s news, correct or otherwise. Yes, unloading
the Bonds will make things a lot worse. These are massive positions (totaling
in the trillions of dollars) and it is a foregone conclusion that they cannot
sell these junk bonds into the market. However, it is the elimination of the
QE stimulus which leaves no way to mitigate or hedge the effects of the
withdrawal. Besides, even if the Fed’s Portfolio of Bonds is not sold, the
FED’s Balance sheet would then act like a sword of Damocles hanging over the
markets. The fear of all that selling would be worse than any actual selling.
(Will they never learn?)
When you have Amazon
going from a $50 stock to a $300 stock on several years of poor or lackluster
earnings results, or an electric car company, like Tesla, that has a stock
price at $130 a share in a boutique market and where low growth companies
like Microsoft, Yahoo and Intel are all having tremendous multiple expansions
for dying business models illustrates how much valuations have gotten
completely out of whack.
Fed Options FOR
Damage Control
No one seems to realize
that markets react to future expectations and not to present or past market
folly or to fabricated, false statistics. The best and only way is to take
our medicine is by taking the short-term pain and cancel the programs that
have NOT worked. The worst way is to continue the QE’S because of the fear of
what will happen to the bubbles if they would suddenly stop..
So they continue to blow up the bubbles, until they will get so BIG that they
crash from their own weight, as every bubble must eventually do with or
without the Fed’s participation. Given the fact that the Fed is now out of
bullets, the entire system will collapse if the Fed keeps pushing it to its
eventual end. There will be no disaster cleanup mode possible where, after
the carnage, somebody picks up the pieces and starts all over again trying to
construct healthy markets from scratch. Who could that somebody possibly be?
Even if someone like that existed, would Congress and the President
ever agree as to who that person would be and would this president give him
carte blanche, like they gave Bill Seidman to clean
up the savings and loan mess? It doesn’t seem possible since no one in power
or influence understands FREE MARKET ECONOMICS (CALITALISM). Mr. Seidman (an old time Free Market Capitalist) tried to
explain it to the President, before he died, but neither the President nor
anyone else in power would listen; even though he had the track record to
prove that his way worked wonders.
Somewhere between these
two options, the intent to stop the stimulus in the near-term in a tempering
plan can’t possibly work; as the markets always front-run the Fed; just as we
have just witnessed the market price-in the potential collapse/money flow
disruptions on their own - in essence breaking the Fed’s and the Market’s
credibility.
The Bond
Vigilantes
This is what the bond
market is already starting to do in fits and spurts. But we haven’t seen
anything serious yet by the bond vigilantes. The only thing we have seen so
far is an $80 billion withdrawal from bond funds as investors try to protect
their own principal. Make no mistake; we haven’t even begun to experience any
real serious vigilantism in the bond markets. When this happens, the worst
thing the Fed can do is try to fight them as the perception is that they are
out of touch with reality, which further erodes credibility and the market
becomes panic stricken when normal valuations and previous models go out the
window.
The Fed IS behind
the Curve due to Market Appeasement
We are in a series of
bubbles, and the first thing that must be done is to face the facts. Then and
only then can they possibly figure a way out. Hopefully the Fed realizes
it. The best and only way is to take what will be short-term pain and
cancel their programs. But with elections coming up every 2 years, the
politicians can’t and won’t even consider doing that.
Only the American People
can accomplish the impossible just as they defeated what was then the most
powerful army in the world with a rag-tag bunch of untrained, undisciplined
volunteer soldiers, many without shoes and accomplished the impossible. The
same thing happened during the Civil War. The North was losing until Lincoln
took it upon himself to replace his incompetent Generals and appointed Grant
to lead. Well all we, the American people, have to
do is get rid of our incompetent leaders, elect a new staff that will get out
of the way and we, the people, will once again demonstrate to the world who
we are and what we can accomplish!
WHAT’S NEEDED IS COURAGE.
Stop worrying about the next election, stop dreaming about the impossible,
stand up and start doing what has to be done. (The right thing is never easy
at first nor is it ever popular.) You will be criticized, especially by the
ones who have been raping the people (banks) for over 100 years. But in
the end, it will be the people who will win and the few who will lead us will
take their rightful place next to Washington and Jefferson. It is about
time we learned another fundamental economic principle, perhaps the most
important one of all:
“THERE IS NO SUCH
THING AS A FREE LUNCH”
SO WHAT DO WE INDIVIDUAL INVESTORS DO
NOW?
GOLD AND SILVER
Times are tough for the
average person and they will soon become a lot tougher. Clearly the
destruction to the Precious Metals markets wrecked by one group of banks in
the Gold sector with their savage price-manipulation is now not only directly
impacting prices but more importantly supply, with similar developments in
the Silver market. When you combine all that strong demand and waning
supply (along with the sudden “run” on physical Gold), the result is that Comex Gold inventories have collapsed by more than
two-thirds. It looks like vthe exchanges days may
be numbered.
The bullish case for both
Gold and Silver is now complete – with most of the ammunition supplied by the
Corporate Media itself. The world’s best “safe havens” for the last 5,000
years are currently decidedly undervalued with strong demand, plummeting
supply and inventories on the verge of complete collapse. Now is the best
Gold buying opportunity ever.
Meanwhile, in the largest
suckers market in the world (US Bond & Equities Markets); there is now
another Super Sized asset-bubble – which yet again
is totally ‘invisible’ to all the media talking heads and their experts. With
all these experts assuring us that these US bubble markets are going
to keep going higher and higher, we know that this bubble does not have a
long life left to love.
Thus, while there are no
more bullish drivers to come, there will soon be a panicked stampede out of
US Equity and Bond markets (after that bubble bursts) looking for a
new “home” with what’s left of investor dollars. The logical destination for
those panicked investors will be either the world’s best safe-havens or the
world’s most-undervalued assets. Fortunately for investors, both of
those avenues lead directly to precious metals. One thing for sure, it will
not be the most loved, safe havens for the last 50 years.
GOOD LUCK AND GOD
BLESS
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This article, like all my others, is for education purposes only and is
designed to help you make up your own mind; not for me to make it up for you.
Only you know your own personal circumstances, so only you can decide the
best places to invest your money and the degree of risk that you are prepared
to take.
