 | | The Daily Reckoning | Wednesday, January 19, 2011 |
- The "I-word" on almost no self-respecting central planner's lips,
- Greenspan's gobbledygook vs. Rosenberg's reason,
- Plus, Bill Bonner on mass man as the perennial non-thinker and more...
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|  | | | | The Underappreciated Threat of Inflation | | Why the "I-word" isn't getting the respect it deserves | | |  | | Eric Fry | Reporting from Laguna Beach, California...
The "I-word" is on the minds of almost no one these days...except for the minds of our colleagues and a smattering or "rogue" financial market observers. But with each passing day, inflation seems less and less a theoretical fiction, and more and more a genuine threat.
To be sure, no self-respecting economist or self-aggrandizing central banker is acknowledging any inflationary risk whatsoever. But the indifferent data points of real-world prices testify to the contrary.
"Britain's consumer price index grew in December to an annualized 3.7%," The 5-Minute Forecast reported yesterday. "Fuel prices are growing at their fastest pace since July, and food prices are zooming at a rate last seen in May 2009. Like the US Federal Reserve, the Bank of England has an inflation 'sweet spot' of 2%. But Britain's CPI has been above 3% for 13 months now. Unlike in the United States, even the 'core' rate of inflation in the UK is rising at an alarming 2.9%."
Meanwhile, over in the commodity pits, inflation is just about the only thing going on. During the last two years, the Reuters/Jefferies CRB Index of commodity prices soared 45%. Of the 19 different commodities that comprise this index, only one - natural gas - declined during this timeframe, while eight of the other eighteen commodities either doubled or tripled!
"If history is any guide," Chris Mayer contends, "inflation will likely get much worse. Everyone seems to know the US inflationary story of the 1970s. The official inflation rate hit nearly 14% by 1980. In other countries, it was worse. In the UK, inflation topped out at 27%; in Japan, 30%."
Chris is not expecting 27% inflation rates, nor even 14% inflation rates...at least not yet. But he does believe that "2011 is the year when inflation will play the role of wrecking ball. Emerging markets have been a vital part of the global investment story for the last decade. Yet, rising food and energy prices pose a big risk to them.
"In India," Chris continues, "food prices are at their highest levels in more than a year, rising 18%. The dabbawalla, when he is done delivering lunchboxes, trots off to the market and finds that the price of onions has doubled in only a few months. Even the basics, like potatoes, have become expensive to the average Indian.
"In China, the typical Chinese also faces rising prices for nearly everything. The official inflation rate recently hit a 28-month high. But it's the surging price of coal that may prove to be China's Achilles' heel, at least in the short term. Coal is what powers the great boom in China. And coal is at two-year highs. The basics like food and energy are like brakes on these economies."
Chris suspects, therefore, that an inflation problem in the emerging markets could become a widespread investment problem elsewhere in the world. He has been investigating the harsh realities of the impending inflationary environment and the impact it will likely have on you...check out his report here.
Looking further afield, Jim Rogers, a former keynote speaker at our own Agora Financial Investment Symposium in Vancouver, predicts that the current reckless spending and printing strategy in Washington will eventually ignite an "inflationary holocaust". Continuing this theme, another Vancouver veteran, Nassim Taleb, says he feels more jittery about a currency crisis now than he did when he left his native Lebanon during a meltdown.
And for good measure, check out this old video of Congressman Ron Paul laying into Ben Bernanke a while back. At the 3:43 mark he "goes off" on the Fed chairman - explaining how money printing is already hurting retirees.
"The fact is," our colleagues at The 5 wind up, "once it gets started, inflation is hard to stop. Not that Wall Street bankers or your friendly Washington representatives give a hoot. They're not the ones who get walloped when money stops buying necessities...and interest rates spiral upward out of control."
Notwithstanding the inflationary premonitions of Messrs. Mayer, Rogers, Taleb and Paul, official inflation remains subdued. On the other hand, unofficial inflation is already ablaze - especially the kind of unofficial inflation that causes share prices to soar...and tempts former Federal Reserve Chairmen to make moronic public remarks. Guest columnist, Fred Sheehan provides additional insight below...
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| | |
| | The Daily Reckoning Presents | | News Flash: Greenspan Says 'Stocks Are Cheap' | | |  | | Frederick J. Sheehan | On January 7, 2011, Kelly Evans of The Wall Street Journal interviewed former Federal Reserve Chairman Alan Greenspan. He rooted for the stock market.
Greenspan's circular logic was unenlightening: "Stocks are cheap if earnings are to continue higher." Taken as a whole, this does not mean much, akin to prophesizing: "The Red Sox will win if they score more runs than the Tigers." Greenspan's successful impoverishment of the American people often hinged on the suppression of his dependent clauses: "Stocks are cheap," was all we needed to know.
Greenspan also revealed that the (purported) economic recovery is hostage to a bigger and better stock market bubble. He did not put it that way, of course. But interviewer Evans pestered the de-accessioned relic into a defense of the current Fed's market-rigging policy. The former central banker denied any such collusion, but did claim: "The stock market overall is the only type of stimulus that you can get into the economy that doesn't have any debt associated with it." There may never have been greater debt associated with the stock market than in 2011. That, after all, is how it stays up.
Gluskin, Sheff economist David Rosenberg celebrated the New Year by publishing some unnerving charts. Margin debt at US broker/dealers has risen 24% over the past year. The hand wringing about atrophied bank lending is a narrow view. A broader investigation shows that commercial banks' trading assets surged $64 billion in December, 2010. UBS Prime Brokerage Services reported on January 12, 2011, that hedge funds have increased their leverage to within 10% of the peak in 2008. Since the bottom (when Lehman Brothers surrendered), gross leverage at hedge funds is up 43%.
In other words, lending is up...but only the kind of lending that feeds speculation and boosts stock prices.
A favorite destination for Fed-nourished re-leveraging is stock mutual funds and ETFs - they received $24 billion in net flows in December, 2010. This does not even account for the far greater leverage during buying sprees of S&P 500 futures contracts, the domain of the banks and hedge funds. The institutions have plenty at stake. They took the Fed at its word. "[H]igher stock prices will boost consumer wealth and help increase confidence," Fed Chairman, Ben Bernanke, declared two months ago.
The Fed is doing its best to maintain institutional investor confidence by continuing its money-pumping program (QE2). The bulge-bracket brokers compensate for Federal Reserve lapses by raising S&P 500 futures prices when the market flags.
It is this symbiotic relationship that lies beneath Greenspan's confident stock market forecast, an inevitable conclusion after listening to his other reasons to buy stocks, all of which are often associated with an impending crash:
GREENSPAN: "We've had an extraordinary rise in profit margins. This is coming to an end." That may seem to contradict the rationale for his "stocks are cheap" analysis, and it does. Greenspan was never a model of cogency.
The following exchange was of the same quality:
GREENSPAN: "[W]e are going on the assumption that long-term interest rates will stay down. We don't know that...We are in the position we were in 1979....There were no inflation fears, then, within three to four months, we went up 400 basis points [i.e., 4 percent].
EVANS: "Do you think something like that could happen again?"
GREENSPAN: "I think it's a danger."
Inflation had been 12% in 1974 and 9% in 1978, so the leap to 13% inflation in 1979 was not difficult to imagine, except, apparently, to the man who had led the President's Counsel of Economic Advisers from September, 1974 to January, 1977 - one Mr. Alan Greenspan.
Interest rates could very well jump 4%, but, this time it could take only 15 seconds. The government-sanctioned machinery that now nourishes the stock, bond, commodity, futures, foreign exchange, and executive- pay markets is even more susceptible to a miscue than the old "Greenspan Put" - that invisible implied guarantee that the Fed would never allow the NASDAQ to fall below 5,000. (That great unwinding receives its due in Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession.) Should interest rates revert to a proper (i.e., higher) level, it may take an additional 15 seconds for the stock market to revert to a lower level.
It is no wonder that after the interview, Business Insider choose as its headline: "Alan Greenspan Sees a Huge Chance of a Bond Collapse, While Lashing Out at His Critics." As to the second half of Business Insider's headline, the incoherent scolding of his critics was pathetic. The less said about it the better.
Regards,
Frederick J. Sheehan,
for The Daily Reckoning
Joel's Note: Frederick Sheehan is author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession and co-author of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve. He was also a director at John Hancock Financial Services where he wrote the Market Outlook and Market Review. He contributes to the Gloom, Boom Doom Report, Whiskey Gunpowder, and the Prudent Bear, among others. He also advises an investment firm and a non-profit foundation. Sheehan is a CFA and graduate of Columbia Business School.
| | | | | | | | | Bill Bonner | | Misconceptions About the Consumer's Role in a US Recovery | | |  | | Bill Bonner | Reckoning from Paris, France...
Have you been following the news, dear reader? Food prices are hitting record highs. Riots have broken out in Africa. Already, two governments have been toppled...in Tunisia alone.
Nature seems to be giving us a warning. The thermometer in England hit a 100-year low in December. Airports were blocked by snow all across Europe. Florida, too, shivered in temperatures that hadn't been seen in generations.
Floods in Australia were worse than any since the time of Noah. An area the size of France was said to be submerged. For a while, it looked like the whole continent might disappear beneath the water.
And then...in America...birds fell from the skies. Whole flocks of them. In Europe too. Thousands of them. And little fishes beached themselves and died.
Surely these are omens. The Second Coming is at hand!
Or maybe not. Even the first coming was largely ignored until hundreds of years later. At the time, only a handful of people knew or cared that Jesus had been crucified. It was only much later that it became a big deal. That's the problem with history...it's very hard to see what's going on when you're in the middle of it.
Still...you gotta guess...
A study of tree rings tells us that periods of cold, drought and famine have often been accompanied by revolutions and war. People get hungry. Then they get mad. Then they get to work...attacking the system, whatever it is.
Mass man is not a thinker. He is a reactor. He reacts to the weather...to prices...to the economy...to demagogues...and even to ideas. He accepted the system of modern social welfare economies because he was comfortable. But what will he do when the system is unable to make good on its promises? Our guess is that "the system" in the advanced countries is approaching its final stage... Why? It just can't pay.
We like to read Francis Fukayama. Not because he is right about things, but because he is wrong in a big way...
But so is just about everyone. Most economists see the financial problem in America as a typical recession caused by a lack of demand. If they could just figure out how to stimulate the consumer...everything would be okay.
And most commentators see the political problem in simpleton's terms too. Like Krugman, they think the democrats are right and the republicans are wrong. Or like Boehner, they think the republicans are right and the democrats are wrong. And then, there are those who think that if the two major parties could just get together...they could sort things out.
Uh uh.
The real problem in Washington and the economy is deeper...it won't be fixed by bipartisan cooperation - because both parties are wrong. They have to be wrong. They have to respond to the marginal voter, who is a lunkhead.
Nor will the economy recover by inducing the consumer to shop. American consumers already spend too much. They have a savings rate of just 5%...far too low to finance the kind of capital improvements the nation needs. Consumer demand needs to go down, not up.
But getting back to Fukayama, this is the man who - in the dizzy days following the fall of the Berlin Wall - lost his balance completely. He wondered whether we had reached the "end of history." The idea was that history was the march of progress and that after the triumph of American capitalist democracy no more progress could be made.
The idea was silly...but in a grand kind of way. Besides, the neo-cons loved it. It flattered them and vanity got the best of them. They figured they were the crown of creation; with their arrival on the political scene time could jolly well stop. Perfection had been attained.
That was then. In the here and now, Dick Cheney should be afraid to travel outside the US (for fear he will be arrested for war crimes)...and Francis Fukayama is having second thoughts.
The problem now, he says, is that the system in America has "ensured individual liberty and a vibrant private sector, but it has now become polarized and ideologically rigid. At present it shows little appetite for dealing with the long-term fiscal challenges the US faces."
Little appetite? As near as we can tell, the politicos are on a hunger strike. There's no way they're going to take up the greasy issue of US finances.
And more thoughts...
Cut the fat? John Boehner just proposed that the feds roll back spending to the levels of 2008. What? He'll have to do a lot better than that. Federal spending was way out of line in 2008...and it had been out of line for many, many years. Here's a report from the Independent Institute:
Runaway Federal Spending the Reality for Nearly a Decade
From 1976 through 2001, Uncle Sam could have secured and maintained a balanced budget by cutting federal spending by $570.75 per household per year, according to Craig Eyermann, creator of the online Government Cost Calculator at MyGovCost.org. After 2001, however, government spending grew faster than median household income, and the deficit soared. By 2009, the feds would have had to slash spending by $8,991 per household to close the gap.
House Speaker John Boehner proposed reducing a significant part of federal spending to 2008 levels. That measure may sound bold, but it would be totally inadequate. "That's like a sedentary senior reducing his daily calorie intake from 5,500 to 4,500; it's still way too much," writes Emily Skarbek, director of MyGovCost.org. Policymakers who call for raising the debt ceiling - as has been done 70 times since World War I - are deluded if they believe doing so would result in a substantive improvement.
"Like all gluttons struggling to reform, politicians and presidential advisers will provide plenty of excuses for increasing the debt limit - just this once," Skarbek writes in The Sacramento Bee. "But if 70 previous increases weren't enough, why will this increase be different?" Hey... Wasn't George W. Bush in charge the whole time, from 2001 to 2008? Wasn't he a republican? Couldn't he have simply vetoed these spending bills?
It was the biggest spending spree in US history. How many spending measures did George W. Bush veto? None that we remember.
No amount of bi-partisan cooperation is going to really fix America's financial situation. Because both parties believe in the same model - spend, spend, spend...elect, elect, elect. It's the model of the 20th century social welfare state. The government promises to give voters more than they pay for. The voters pledge to keep toiling in massa's fields and vineyards, paying their mortgages and their taxes. And if called up, they're ready to sacrifice their lives to keep the system in business.
(If asked, the typical US soldier will tell you that he risks his life to protect his family and his home. But the only war in which his home and his family were really under attack was the one launched by the US government against the southern states. It wasn't Kaiser Wilhelm or Emperor Hirohito who burned Atlanta. It was Abraham Lincoln.)
More to come...
*** Poor Silvio Berlusconi. The press is after him again...at least, that part of the press he doesn't own.
He is one of the richest men in Italy...
He is head of the Italian government....
He controls a vast media empire...
And he is accused of having a whole harem of beautiful young women ready to sleep with him...
..Poor fellow!
Regards,
Bill Bonner
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com
| | |  |  |  | A Word of Advice to Financial Authorities
When you have more debt than you can pay, it is always best to own up...default...hang your head...say you're sorry...promise not to do it again... ...and go about your business. And do it as soon as possible. Whence cometh this august advice? From the pages of history – recent...and not so recent.
Products of the Past
The US Deficit Recovery Program and Other Fallacies | Defining Economics
And it is this, this inflation in prices, this Worst That Can Happen (WTCH), this destroyer of economies that makes me physically ill, my stomach constantly upset, no matter how much cheap, raw whiskey I drink to forget the horror of the inflation...
Working For Profit to Prop Up the Economy
Inflation and the Damage Done | Prudence in the Rare Earths Market
"What is going on with rare earths?" reads the email from a slightly panicked reader. "They are just plunging to death, and I am afraid they are taking me with them." We don't usually start with reader mail, but this is a timely issue, as evidenced by this chart...
Is Mexico a Country on Fire?
Currencies Rally as US Dollar Weakness Continues | |
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