The Fed’s Newspeak

by Addison Wiggin – April 27, 2011

  • Truth, Gitmo and monetary policy… The 5 previews Ben Bernanke's first press conference
  • How the Fed tries to have it both ways, why it can't and how you can prepare for when reality hits
  • Frank Holmes with a chart that points to $3,675 gold
  • "Maybe I'm being paranoid": New passport application inspires a reader's thought experiment

"The purpose of Newspeak," George Orwell, wrote in his novel 1984, "was not only to provide a medium of expression for the worldview and mental habits proper to the devotees of Ingsoc [Orwell's name for the ruling regime in 1984], but to make all other modes of thought impossible."

The columnist William Pfaff, with whom we often agree, used Orwell's quote yesterday to describe how the United States government has come to inextricably support the bases at Guantanamo, which he likens to Gulags of Stalinist Russia — only worse because Gulag sentences, at least, had an end date.

While closing the base seems to have become politically impossible, "something still might usefully be said about this situation," Pfaff writes with perceptively dying hope. It's "obviously a phenomenon of totalitarian character, emulating, no doubt wittingly, the destruction of judicial constraint in the Nazi system by means of arbitrary imprisonment in concentration camps and by methods generalized in Gestapo and SS practice, and in Stalinist Russia by its secret police and forced labor camps."

If you haven't read the piece, we recommend you do so here: Locked In.

As frightening as Pfaff's perception of Guantanamo is, we couldn't help but think of Orwell this morning when listening to NPR's coverage of Office for National Statistics' release of British gross domestic product (GDP) this morning.

Fact is, GDP in Great Britain turned positive again in the first quarter of 2011 — just barely. The statisticians in London reckon the U.K. economy grew 0.5%, making up for the 0.5% loss in Q4 2010.

The news was interpreted as a disaster by an analyst from the City talking to Morning Edition. The "austerity measures" put in place by the Cameron government will continue to "suppress" GDP, unless the central bank opens the monetary spigots to counter the closing of the fiscal ones.

Since quantitative easing (QE) in Britain has amounted to a quaint $121 billion since the panic of 2008 — out of nearly $5 trillion pursued by the U.S., European Union and Japan — the commentator presumes the English are doomed.

When asked to speculate on the effect of "austerity measures" proposed by the U.S. president for the U.S. economy, the commentator couldn't fathom it. What might actually happen if the Fed pulled back on QE and Congress actually proposed to get spending in line?

Shiver me timbers. All economic activity is derived from government spending or monetary easing. To think of the economy in any other terms has become politically "irresponsible"… even "kookie"… these days. One can't even imagine it.

The analogy between foreign policy and monetary policy would be a hoot, 5-style, if the societal trend weren't so ominous.

"Guantanamo has been a factor in what it is not unreasonable to call the totalitarianization of American political culture," Pfaff asserts in his piece, "taking place through the effective prohibition (or demonization) of certain political stances, or of the advocacy of certain political positions, deemed 'unpatriotic' and therefore unacceptable in the political discourse of the nation — including, in some cases, in congressional discourse and debate."

As much as it is heretical to disagree with foreign policy made behind closed doors by unelected officials, so is it equally impolite to question the wisdom of monetary policy made behind closed doors by another group of men in Washington.

We presume the press conferences now scheduled by the Federal Reserve, the first of which we'll be witnessing this afternoon, are designed to open the closed doors.

But still we have our suspicions.

"What are the odds?" for example, we couldn't help but thinking as we put pen to paper this morning "that on the eve of Ben Bernanke's first regularly scheduled press conference the stock market has reached multiyear highs?"

The Dow and the S&P are now at levels last seen in June 2008. The Nasdaq, on a tear, hasn't seen territory like this since January 2001.

Bernanke couldn't ask for anything better. Why, we can just imagine the setting for this press conference.

"Yeah, baby, the wealth effect!": shock and awe econostyle"

"Stock prices rose and long-term interest rates fell," Bernanke wrote in his Op-Ed in The Washington Post the day after the Federal Reserve formally launched "QE2" last November, "when investors began to anticipate" a new round of easy money. Mission accomplished.

"The Fed is turning the market into its own personal yo-yo," muses Chris Mayer. "The easiest way to see how the market spins up and down with a jerk of the Fed's massive balance sheet is to plot the two against each other:

"When the Fed expands its balance sheet (by buying stuff, thereby putting money out there), the market rises. When it contracts its balance sheet (by selling stuff, thereby taking in cash), the market sags."

Lo and behold, you see a tight correlation since the S&P's infamous 666 bottom in March 2009. What's more, you also see how the market lost steam during the six-month interregnum in 2010 when "QE" was not in effect.

But just like the 2003 edition, the 2011 edition of "Mission Accomplished" entails some, er, unintended consequences.

Here's the same overlay chart, except here the S&P 500 is replaced by the CRB BLS Spot Index… a variation on the familiar CRB commodities index:

The rising price of everything from copper to corn to cotton is affecting everyone. Even babies.

Procter & Gamble is raising prices 7% for Pampers diapers and 3% for baby wipes. Bounty paper towels and Charmin toilet paper are going up 5%.

Rival Kimberly-Clark said this week that its costs for materials, energy and transportation will rise twice as much this year as first anticipated. It's already jacked up prices for Huggies diapers and baby wipes.

"The Fed can't have it both ways," says Strategic Short Report editor Dan Amoss. "It's taking credit for pushing up stock prices, but insists its actions have not influenced commodity prices. The Fed can't fool all of the people all of the time."

How Ben wrestles with this contradiction — assuming a supine business press even challenges him with it — we'll see when he "newspeaks" later today.

In the meantime, the Federal Open Market Committee has issued its regularly scheduled statement, the final product of two days of considered deliberation, a few rounds of darts and perhaps a bottle of Johnnie Walker Blue Label passed around the conference table.

"Inflation has picked up in recent months," says the FOMC, demonstrating a keen grasp of the obvious, "but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued."

Thus, the $600 million in new Treasury purchases the Fed began last November will continue on schedule through the end of June. As for interest rates, conditions — we know this part by heart now — "are likely to warrant exceptionally low levels for the federal funds rate for an extended period."

No surprises in the statement. Any outbreaks of spontaneity will have to wait until The Bernank faces the cameras.

Here is how key markets reacted with 15 minutes of the statement's release…

  • Gold is up a few bucks, to $1,515. Silver has reversed its earlier losses and is pennies away from $46
  • Oil is up slightly, to $112.51
  • The dollar index is holding its own at 73.9, but remains stuck below 74
  • Stocks moved up a bit. The Dow had been ahead 20 points most of the morning; now it's up 40.

"Investors should withhold judgment," cautions Dan Amoss, "about whether the QE-driven stock market rally can be sustained. Stocks are claims on future profits. Profits depend on healthy household finances. And rising food and energy prices are squeezing household finances that are already strained.

"So as long as QE keeps pressure on food and energy prices, there simply won't be enough discretionary spending to satisfy the market's future profit expectations." This is the margin squeeze we've been writing about since, well, since the Fed launched QE2 last November.

"QE has acted to simply borrow stock market returns from the future," Dan concludes. "The rally since last August has pushed valuations up to lofty levels, so market returns over the next few years should be low.

"Returns will be even lower if you assume that today's near-record corporate profit margins are not on a permanently high plateau, and that the banking industry's reported profits are a work of fiction."

Those are safe assumptions from where Dan sits. You need to position yourself for the day reality sets in… as it always does. Dan was the guy who saw Lehman Bros. imploding months before the fact… and he positioned his readers to reap gains of 462% before it was all over.

Dan has outlined six ways you can position yourself now for when the reality check comes. To make it as easy as possible to act on his recommendations, we're making membership in Strategic Short Report available at an unheard-of discount… but only through this Sunday.

The Asian Development Bank warns that soaring food prices will send tens of millions of Asians back into poverty. "Left unchecked," says chief economist Changyong Rhee, "the food crisis will badly undermine recent gains in poverty reduction made in Asia."

But don't tell it to Bernanke. "Some of the emerging markets are facing inflationary pressure because their own economies are growing faster than their own capacity," he told the National Press Club last February.

"It is entirely unfair to attribute excess demand pressures to U.S. monetary policy," he added, as he suppressed the urge to cry and stamp his feet.

Orders for durable goods — everything from washing machines to aircraft — climbed 2.5% last month, according to the Commerce Department. The figure has risen three straight months, after a decline last month was revised to an increase.

Factoring out the volatile transportation sector, the number jumped only 1.3%. And to no small degree, all of these numbers amount to statistical noise. "The durable goods series," advises ShadowStats proprietor John Williams, "will be subject to a benchmark revision on May 13, 2011.

"Major downside revisions to reported activity of recent years are likely."

"Maybe I've been living here in Amerika too long and I'm just being a little paranoid," writes a reader about the government's proposed new passport application, "but I don't think that this has anything to do anything with the stated objectives list from the State Department. I think that this is just another tool in the arsenal of the government to stifle political dissent.

"Let's say that I fill out a passport application to the absolute best of my ability, but simply forgot that in 1987 I lived for a week in a small motel room before I found a decent apartment to live in nearby when I went on an engineering assignment in another state.

"Two years later, I write an anti-war piece and send it to The New York Times, which publishes it. Someone in the government gets upset by what he reads and sends it off to the State Department. They open up my government files they have on me, which are far more complete than I would ever have at my disposal, and compare them to what I've stated in the passport application and find the discrepancy.

"The next thing that happens is I have an FBI SWAT team breaking down the front door and hauling me off to jail for perjury for three years. Make the wrong people angry and with this they have a very real possibility of striking back at you even if you're a totally law abiding person, which should send chills up everyone's spine."

The 5: No doubt.

"At the federal prosecutor's office in the Southern District of New York," wrote Tim Wu at Slate in 2007, "the staff, over beer and pretzels, used to play a darkly humorous game. Junior and senior prosecutors would sit around, and someone would name a random celebrity — say, Mother Theresa or John Lennon…

"The crimes were not usually rape, murder or other crimes you'd see on Law & Order, but rather the incredibly broad yet obscure crimes that populate the U.S. Code like a kind of jurisprudential mine field: Crimes like 'false statements' (a felony, up to five years), 'obstructing the mails' (five years) or 'false pretenses on the high seas' (also five years)."

Ever send a personal email from a workplace computer? You could be nailed for "honest services fraud" if a prosecutor is motivated enough. Indeed, it's not too far out of line to suggest the average American commits Three Felonies a Day — the title of a 2009 book by attorney Harvey Silverglate.

How did we get to this state? "The answer lies in the very nature of modern federal criminal laws," he writes, which "have not only become exceedingly numerous… and broad, but also… impossibly vague."

You can get your copy of Three Felonies a Day at a 20% discount from Laissez Faire Books. Order now… or if you think you might be nailed for honest services fraud, order it when you get home.


Addison Wiggin
The 5 Min. Forecast

P.S. On a practical note, if precious metals are due for a pullback, take heart, says U.S. Global Investors chief Frank Holmes.

"We believe we're only halfway through a 20-year bull cycle for commodities," he says, "and investors can use these pullbacks as an opportunity to 'back up the truck' and load up for the long-haul."

Frank found some fascinating supporting evidence recently when we crossed paths at the European Gold Forum in Zurich. In a presentation by Dr. Martin Murenbeeld from Dundee Wealth, we see "how much gold would need to increase in order to cover the amount of money that has been printed since gold was revalued at $35 in 1934:

"Using that as the cover ratio," says Frank, "gold would need to climb all the way to $3,675 an ounce to cover all paper currency and coins.

"If you use a broader — and more common — measure of money (M2), gold would need to rise all the way to $7,931 in order to cover the outstanding amount of U.S. money supply."

Frank will be back this July 26-29 for the Agora Financial Investment Symposium. Year in and year out, he's one of our most popular speakers. We'll have familiar faces like Frank, Doug Casey and Barry Ritholtz in Vancouver this July… along with new faces, like fund manager Doug Clayton, a guy who can spot investment opportunities even in a place like Haiti.

Together, we'll weigh in on our "fight-or-flight" debate… which is becoming more urgent by the day as the U.S. government pries into the personal histories of passport applicants or begins to require disclosure of all contracts with foreign companies, among other things. Discounted registration remains available… but only through this weekend. Here's where you can secure a spot.


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