Posts Tagged ‘Ben Bernanke’

Are deflationists missing the elephant in the room? Or are they believing in something more sinister?

Sunday, August 1st, 2010

As you scour around the blogsphere, you will see that there are contrarians who still believe that it is impossible for the US to prevail against deflation. The most extreme of deflationists is Robert Prechter (from Elliot Wave International), who is still predicting that the Dow Jones will go all the way down to 1000. Up till March 2009, it seemed that the deflationists’ argument was correct. In the Panic of 2008, deflationary forces were so strong that asset prices were even more oversold than the infamous 1987 crash. Unfortunately for the deflationists, the subsequent rally (reflation) till May 2010 was so enduring that their argument was discredited in the eyes of many.

Our view, on the other hand, belongs to the inflationists’ camp. From what we can see, there is a big elephant in the room that deflationists miss. But as we think about the deflationists’ argument, it suddenly dawn on us that perhaps deep in the soul of the deflationists’ argument is the belief of what some may call a “conspiracy theory.” Of course, we guess not all deflationists hold (or even aware of) such a belief. But the more extreme and strident a deflationist hold on to the deflation argument, the more we suspect that they are holding on to the belief of the “conspiracy theory.” Although we do not know whether that “conspiracy theory” is true or not, it certainly helps to explain the extreme position held by some deflationists.

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Money & politics to cause more sell-off ahead?

Sunday, January 24th, 2010

Today, we are supposed to discuss the “next sequence in the time-line” from our previous article. But before we go into that, we will discuss some new developments that is more urgent.

As we all know, last week was a very bad week for the global stock markets. On Wednesday, various markets (including the commodity markets) had hit the trend lines in price charts. What this means is that prices had reached the minimum in which the up-trend was still regarded as being intact by technical analysts. On Thursday, many trend lines were breached simultaneously. The last time such a similar event happened was in August 2008, which heralded the Panic of 2008.

Is this the beginning of the correction that many (including us) since September last year (see Aborted correction)? Back then, stocks were already in highly overbought territory and some contrarian traders were even shorting stocks. In the reverse sense, that was very similar to November 2008 when stocks were in highly oversold territory and many were anticipating a rally. The rally did not arrive until March 2009. In the same way, has the long anticipated correction finally arrived?

Those who enjoy having adrenaline rushes may want to take the courageous step of shorting the S&P 500 index. Historically, years ending with zeros tend to perform badly (for whatever reason that we have no idea). Also, election years tend to be bad for stock markets. 2010 is the mid-term election for the United States.

The Chinese government’s decision to halt lending (after an orgy of lending in the first couple of weeks of 2010) was the initial pin-prick against the up-trend. Commodity prices in general fell, with the exception of palladium and platinum. But Thursday’s news that Barrack Obama is going for the jugular of Wall Street (you can read the details from the mainstream press) was the trigger for the reversal in trend that even brought down strong and steady palladium and platinum. Since 2010 is the year for mid-term elections in the US, it is hardly surprising that Obama is embracing populism with stronger gusto. Also, there are rumours that Ben Bernanke, who is perceived to be too soft on Wall Street, may be ousted as chairman of the Federal Reserve (in a vote by senators). It is no secret that Wall Street is perceived to have looted Main Street. So, in an election year, politicians will pander for the support of Main Street.

In principle, we support Obama’s stand against Wall Street. But we disagree with his counter-productive way of dealing with Wall Street by imposing more regulations. The reason why we believe this is counter-productive is because in general, more regulations:

  1. Implies more red-tape
  2. Increase costs of doing business
  3. Restrictive on the good guys as well

Instead, we take the same approach as Jimmy Rogers, whom we quoted at Jimmy Rogers: ?Abolish the Fed?,

More regulations? You want Alan Greenspan and Ben Bernanke? These are the guys who got us into this situation. They are supposed to be regulating the banking system for the past 50 years. These are the guys who let it all happen. I don?t want more regulations. Let the market regulate it. If xyz needs to go bankrupt, let them go bankrupt. I promise you, that will send a very straight signal and you will have a lot of self-regulation when these guys [Wall Street] start to go bankrupt.

Obama’s plan requires the approval of Congress. We can be sure that Wall Street, with their money, will lobby Congress and fight tooth and nail to frustrate Obama’s plan. That goes without saying.

Not only that, we believe that Wall Street will step up the pressure against Obama by dumping everything in sight on the stock market, perhaps even going to the extent of doing naked short-selling (see Short selling, who loans their share?). Since selling begets more selling, a plunging stock market will bring back memories of the Panic of 2008 to Main Street, which in turn can do damage to consumer sentiments (see Do sentiments make the economy or the economy makes the sentiments?). Of course, this is just our conjecture. If our theory is correct, then it implies that there will be more sell-offs in the days to come.

This is indeed money and politics.

What happened to gold prices?

Sunday, December 6th, 2009

On Friday, gold prices suddenly took a tumble of around 4% on high volume. The so-called narrative by the media of what happened goes like this (take care to read Mental pitfall: Narrative Fallacy):

  1. US unemployment data for the month turns out to be better than expected.
  2. Therefore, the US economy is on the way to a real recovery.
  3. As a result, Ben Bernanke is going to raise interest rates.
  4. Therefore, paper currencies are going to survive (one ‘expert’ interviewed for a media article really said that).
  5. Hence, gold got sold off.

There are many slight variations to this narrative. For example, “gold was sold because of a rebound in US dollars” or something like that.

But we take the media narrative with a grain of salt.

Firstly, the US unemployment figures are always fudged in the first place. In fact, this doctoring of statistics has enabled smart entrepreneurs to earn a living by setting up a web site ( selling non-doctored statistics. Secondly, the overall unemployment numbers showed a more disturbing trend, as A deeper look behind the jobless numbers reported,

The number of long-term jobless ? those out of work six months or longer ? is growing, while the number of short-term unemployed is declining.

In other words, the US job market is going through a worsening structural problem. That is, there is a growing mismatch between the skills demanded and skills supplied in the economy. As we wrote in Overproduction or mis-configuration of production?,

This is the key insight from the Austrian School of economic thought. Over-production or over-investment is not the problem. Rather, the trouble lies in the mis-configuration of production and mal-investments (see The first step in an economic slowdown?mal-investment in capital).

Our view is that even if the US government succeed in boosting employment by printing money (see Unemployment in Weimar Germany for an example of such) and cannibalising the private sector, it will be a sign of inflation, not prosperity. Unfortunately, the market often has the habit of being duped into thinking it is the latter as the sell-off in gold on Friday shows.

Next, is Ben Bernanke going to raise interest rates? We very much doubt so (see Permanently low interest rates for Uncle Sam?). At most, the Fed may do some token rate hikes to dazzle the market. But the main point is that the Fed Fund rate will remain low for an extended period of time.

So, will we be selling our gold? That depends on why we are holding gold in the first place. If (as we wrote in our book, How to buy and invest in physical gold and silver bullion) we are investing in physical gold bullion because of our distrust in the financial system and/or paper currencies, then there’s no reason to sell because nothing has changed.

But if we are trading in ‘gold,’ than that is a different story. To understand what’s happening, imagine a ship tilting to one side. As the ship tilts more and more, the pressure to rebalance into an upright position increases (any properly constructed ship should do that). In the same way, based on technical analysis, ‘gold’ prices are in highly ‘overbought’ territory. That is, the upward price momentum for gold is getting too high. More and more market participants are tilted to the long side of the trade. As such, a ‘rebalancing’ (i.e. correction) is overdue to get the momentum into a more balanced position.

But as in the ship analogy, there’s always a tipping point. If the ship tilts too much to one side, there will come to a point whereby its automatic stabiliser will not work and the ship will flip over. In the same way, if the momentum for gold prices keeps on increasing and go past a tipping point, it is a result of a currency crisis.

If you are a short-term trader in ‘gold,’ what should you do? So far, it is too early to tell whether this one-time correction signifies a change in trend (whereby US dollar will rebound for say, 3-4 months) or just a blip in up-trend. As we check out our cool Market Club charting tools, we find that Friday’s action barely touched the 30-day exponential moving average. In other words, so far, the up-trend still remains. But the thing to watch out for is whether the market will ‘believe’ that Ben Bernanke is going to raise interest rates (even though we all know such a ‘belief’ is ridiculous). If this belief gets entrenched, then we will see a temporary reversal in trend, which is a signal for traders to sell.

So, if you are investing in physical gold bullion because you want to sleep better at night, then Friday’s action should not concern you. If it still concerns you, then we recommend that you read our book, How to buy and invest in physical gold and silver bullion.

If you are trading in ‘gold,’ then you may want to hear Market Club’s technical update on last Friday’s action. Click here and check out the story under “2 Minute Video On What Happened To Gold Today.”

Looting tax-payers with the Geithner plan

Tuesday, March 24th, 2009

Back in December 2008, Ben Bernanke was considering whether to print money (see Bernanke ticking off another inflation trick- buying Treasury securities). Last week, the Fed finally pulled the trigger. The reaction in the currency market was swift- the US dollar was sold down.

Today, US Treasury Secretary, Timothy Geithner announced a Public-Private-Investment-Program (PPIP) plan to revive the banking system. It was portrayed as the best-of-both-world type of plan because being a partnership between the public and private sector, the ‘expertise’ of the private sector will be utilised to value toxic assets. The reaction from the equity market was swift- the Dow Jones rallied more than 6% in one day.

From this, we can see that the government will do anything and everything to try to ‘cure’ the Global Financial Crisis (GFC). But no matter what they do, these two fundamental truth remains: (1) There’s no such thing as a free lunch- there’ll be painful losses and (2) Someone has to pay for it. So, who’s the one paying for all these losses? No prize for guessing- all of us, the tax-payers.

In the first case, printing of money sounds like a free lunch. But in reality, as we said before in How to secretly rob the people with monetary inflation?, the tax-payers will have to foot the bill eventually, in the form of price inflation.

In the second case, let us describe Geithner’s plan with a given example:

  1. Suppose you are a bank with a toxic asset that has $100 face value. Let’s say, the market is only willing to pay $20 for your ‘asset.’ What can you do?
  2. Under the Geithner’s plan, you approach the FDIC.
  3. The FDIC will auction your ‘asset.’ Now, this is a funny auction. To understand how funny it is, read on.
  4. Let’s say the highest bid by an investor is $84.
  5. The FDIC will lend the investor $72. This loan is a non-recourse loan. If the investor defaults, the FDIC cannot go after the investor’s other assets.
  6. The remaining $12 will be split between the investor and the Treasury. That is, the investor will pay $6 while the Treasury will pay the other $6.
  7. That toxic asset will be the play-thing of the investor (under the watchful eyes of the FDIC). Any profit from the sale of the toxic asset will be shared between the investor and the Treasury.

No matter how the government cut it, most of the risks are dumped on to the tax-payers. For the investor, it is like a cheap call option or a highly leveraged non-recourse margin loan at a very low interest rate.

Who’s the boss? The Fed or the American people?

Thursday, March 5th, 2009

As we all know, the American tax-payers are on the hook to lend money, up to the amount of US$2.2 trillion, to ailing banks. So, isn’t it fair that the American people should at least know to whom these money are lent to?


In a Senate Budget Committee hearing (see UPDATE 1-U.S. senator wants Fed to name loan recipients), there was a heated exchange between Sen. Bernie Sanders and Ben Bernanke:

Sanders: My question to you is, will you tell the American people to whom you lent $2.2 trillion of their dollars?

Bernanke gave a generic answer by saying that the Fed explained the various lending programs on its website, and details the terms and collateral requirements. So, Sanders began to press Bernanke again for the specific names. That was Bernanke’s answer:

Bernanke: No.

What? Bernanke refused to answer this question?

Well, as he explained, doing so will stigmatise the banks and discourage them from borrowing from the Fed, which in turn is funded by the American tax-payers. Sanders cut Bernanke off,

¬†Sanders: Isn’t that too bad, they took the money but they don’t want to be public about the fact that they received it.

Later, as the senator said “businesses in his state were in trouble and needed loans, but were not permitted to borrow from the Fed.” So, he asked Bernanke,

Sanders: Do you have to be a large, greedy, reckless financial institution to apply for this money?

Bernanke replied that the Fed could not do that legally. The exchange continued,

Bernanke: We have never lost a penny doing it

Sander: Let me just say this, Mr. Chairman. I have a hard time understanding how you have put $2.2 trillion at risk without making those names available, those institutions public. It is unacceptable to me that that this goes on.

As this Bloomberg article says,

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn’t require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

So, who’s the boss?

Why are nothing-yielding US Treasuries so popular?

Sunday, February 22nd, 2009

One of the thing that confounds us is the fact that short-term US government bonds are yielding almost nothing. A 10-year US Treasury bonds yields a measly 2.79% while a 30-year bond yields 3.57%.

There are two common explanations for such a curious phenomena:

  1. It’s a flight to ‘safety’
  2. The market is pricing in price deflation in the US

With the US printing money and its government fallen in trillions of dollars worth of debt (see How is the US going to repay its national debt?), why are investors still pouring money into government bonds that are pretty close to junk?

Isn’t it obvious that the ridiculously low long-term US Treasury bonds is in a bubble? Marc Faber once said, “It’s time to short US government bonds, BIG TIME!”

Well, we have found a very good explanation for that. Remember in Bernanke ticking off another inflation trick- buying Treasury securities, we said that Ben Bernanke was suggesting that the Fed buys up US Treasury bonds? Basically, the Fed is creating money out of thin air to prop up the prices of these bonds. Therefore, what is there to fear if bond yields are ridiculously priced?

With that in mind, even mainstream investment analysts are recommending such junk government bonds. In Treasuries still strong: Merill Lynch, it reported that

Stephen Corry, Merrill Lynch, chief investment strategist for global wealth management, believes that the US Federal Reserve cannot allow Treasury yields to climb much higher than its current levels of around 2.6 per cent.

Consequently, we are seeing the weird situation whereby both gold and US Treasuries are going strong. Our bet is that gold will win eventually.

Bernanke ticking off another inflation trick- buying Treasury securities

Wednesday, December 3rd, 2008

Remember, back in Bernankeism and hyper-inflation, we had a list of Ben Bernanke’s ‘unconventional’ (read: crazy) schemes to fight deflation. One of the schemes was already implemented (see Bernanke ticking off another inflation trick- becoming a business lender). That’s one tick in the list. Another scheme in the list is

Purchase of long-term US Treasury bonds.

Today, we heard news that Ben Bernanke is suggesting just that. As reported in Bloomberg,

Bernanke yesterday said he may use less conventional policies, such as buying Treasury securities, to revive the economy, because his room to lower the main U.S. rate from the current 1 percent level is ?obviously limited.? Even so, reducing the rate is ?certainly feasible,? he said.

Watch this space.

What does an Obama Administration mean for investors?

Thursday, November 6th, 2008

Now that the initial euphoria of the Obama election victory is over, it is time to get back to reality. No doubt, although Obama’s victory is very meaningful for the aspirations and dreams of millions of African-Americans, the truth is that nothing has changed fundamentally. America’s economy (and by extension, the global economy), is still in a mess. On the geo-political and foreign policy front, there are still a lot left to be desired. Although we admire Obama for his victory against all odds, we would not like to be in his shoes because the tasks ahead is colossal. After 2 terms of mismanagement under the previous administration, we doubt Obama could undo all the damages very quickly.

As investors, we will leave the politics aside and look at what the implications of an Obama Administration for investors:

Political ideology

We are not well versed in American politics here, so please correct us if we are wrong. The Republican Party is often ideologically associated (whether rightly or wrongly, it doesn’t matter) with smaller governments and free markets. The Democrats are perceived to be leaning more towards socialism ideologically.

We vaguely remembered George Bush said something like this regarding his initial thoughts on the $700 billion bailout plan,

My first reaction is to let the market be free, but on second thoughts…

We cynically believe that this talk was probably scripted. What does this mean for investors? At the very least, we expect more government interventions and bolder economic ‘stimulus.’


While many political analysts may not describe the Obama’s victory as a landslide, it is very clear that he has the mandate of the American people to change America. Now, we have:

  1. A very charismatic Democrat president, …
  2. … whose race is rallying point for the unity of the American people,…
  3. … who has the mandate of the people and…
  4. … whose party controls both houses of Congress.

These three factors imply a greater concentration of power for the US government than before. Compared to the previous administration, we believe that government interventions will be bolder and will be done quicker and more decisively.


Is this a good thing? If you belong to the libertarian camp, then this is bad news. As we said before in A painful cleansing or pain avoidance at all cost?,

Even if Ben Bernanke is an Austrian economist, political pressure alone will do the job of forcing him to act otherwise. This is the Achilles? heel of democracy. The mob will scream at the Fed to bail them out by ?printing? money. Should the Fed refuse to comply, we can imagine the mob storming the Federal Reserve to demand the head of Ben Bernanke. Therefore, the Fed will have no choice but to acquiesce to the desire of the mob, whose aim is to avoid immediate pain as much as possible.

The American people have spoken and got what they want.

On the other hand, if Obama can use his charisma, mandate and authority to sell the message that America’s economic woes require tough medicine, then this is a good thing. But if not, it will be as we we warned in Recipe for hyperinflation,

There is no way any politician can sell the message that America needs a severe recession (or even a depression) to cleanse the economy from the gross excesses, imbalances, blunders and mal-investments. Thus, it is very likely that they will have to fight deflation till the very bitter end, till the last drop of blood from their last soldier. Since the current structure of ?rules? will be too restrictive in such a war against deflation, there will be popular momentum towards the bending and rolling back of these ?rules.? If they press on relentlessly till the final end, there can only be one outcome: the US dollar will be joining the long list of failed fiat paper money in the annals of human civilisation.

This is not to say that if hyper-inflation ever happen, it will arrive soon. Such development can take many years to unravel.

Bernanke ticking off another inflation trick- becoming a business lender

Wednesday, October 8th, 2008

Remember back in Bernankeism and hyper-inflation, we talked about Ben Bernanke and companys’ unconventional (and crazy) schemes for attempting to induce inflation in a deflationary economy. One of the listed crazy ideas was:

Loan money into existence, accepting as collateral almost any private-sector asset whatever.

Today, we found this news report: Fed announces bailout of business lending.

Congratulations, Ben Bernanke!

In this news report, the Fed fears that…

… companies not facing financial problems are at risk of default on their commercial paper if they are not able secure another round of funding when their current borrowing matures.

Therefore, it announced a program to almost lend directly to businesses, by establishing a Special-Purpose-Vehicle to buy commercial paper from issuers (i.e. borrowers that include corporations). The announcement from the Fed can be found here. The loan security arrangement for non-asset-backed commercial paper (non-ABCP) are listed in the terms and conditions document in the Fed’s announcement.

This means the Fed is bypassing the banking system in order to make loans directly to the private sector.

Where is Paulson going to get $700 billion for his bail-out plan from?

Sunday, September 28th, 2008

There’s news of a (yet another) tentative deal for Henry Paulson’s US$700 billion bailout Plan. There is a lot of public discontent and anger over the plan. After all, why should Main Street pay for Wall Street’s stupidity and greed? What about the millions of dollars of ‘golden parachutes’ for executives? The idea of the Plan sounds good in principle, but there are a lot of unanswered questions.

First, as Congressman Ron Paul grilled Ben Bernanke, if the free market has no idea how much these dodgy assets are worth, then how on earth can the Treasury and the Fed work out their value? Ben Bernanke gave a very unconvincing answer. As we explained in How much to pay for toxic debt?, if the government is too stingy in the price it pays (so as to act in the interests of tax-payers), then the Plan will become completely pointless. It’s an either all or never situation. Half-baked measures are worse then no measures.

This leads to another question. Even if it’s possible for the authorities to work out how much these toxic stuffs are worth in due time, where on earth did they come up with the figure of $700 billion? As this article reported,

“It’s not based on any particular data point,” a Treasury spokeswoman told Tuesday. “We just wanted to choose a really large number.”

In other words, that figure was just a ‘large’ number plucked from the sky.

Next, is that ‘large’ figure, $700 billion enough? We are doubtful. Total private debt in the US is a cool $41 trillion and that does not include the many trillions of dollars of public debt. Estimates of the US public debt that includes the unfunded medicare and social security liabilities ranges between $40 to $55 trillion (see How is the US going to repay its national debt?). Therefore, $700 billion is really chicken feed. Marc Faber estimated that $5 trillion is a more realistic figure.

Then, the next question to ask is this: where on earth is the money going to come from? If the US government issues new government debt, this will increase the debt-servicing burden of the US government, which in turn means that the tax burden of the American people will have to increase. But after listening to yesterday’s McCain-Obama debate, we couldn’t believe our ears when both of them were talking about tax cuts! With a national debt so astronomically high, nationalisations, bailouts and the Plan will increase it even further. How on earth could these two presidential hopefuls talk about cutting tax?

Regardless of the wrangling due to the Plan, this fundamental fact remains: the entire nation has no means to pay for its public and private debt. It’s either debt default or crushing tax for their current and future generations. If both outcomes are out of the question, then there’s only one way left. As we said before in Bush?s mortgage relief plan- who pays? back in December last year,

Bush could tax the American people to pay for his plan. But this will be politically impossible because in a democracy, the mob always want something for nothing. The next best alternative will be through stealth tax- ?printing? of money (see How to secretly rob the people with monetary inflation?). This way, the American people will pay through price inflation. That is, they will pay through the further loss of their dollar?s purchasing power.

Do you think the US will eventually resort to the monetary printing press?