Lather, Rinse, Repeat

by Addison Wiggin – April 28, 2011

  • Bernanke opens his yap… Stocks, oil, gold hit new highs, dollar hits new lows.
  • Lather, rinse, repeat.. What happens after QE2 winds down
  • Where's my recovery? Commerce makes its first stab at Q1 GDP
  • Demise of the typewriter greatly exaggerated… Stunning growth market for this retro product
  • Readers wander into the thicket of Guantanamo, WikiLeaks… and the passport discussion that won't die

"Our interpretation of the increase in gas prices is the economist's basic mantra of supply and demand," mused chairman Ben Bernanke yesterday during his first-ever regularly scheduled press conference.

At that moment, the price of oil reached a new post-2008 high.

This morning, it's pulled back a bit, but not much. A barrel of West Texas Intermediate goes for about $113.15 right now.

"The Federal Reserve believes that a strong and stable dollar is both in the American interests and in the interest of the global economy," he also said.

At that moment, the dollar index reached a new post-2008 low.

This morning, it recovered… barely… and clings to 73 by some very closely clipped fingernails.

Back when Bernanke signaled the advent of a new round of easy money — QE2 — during his annual speech at Jackson Hole, Wyo. last August, oil was $75 and the dollar index was at 83…

We agree it's, as Bernanke points out, due to supply and demand, but perhaps not in the sense he meant.

"He never admits it's the inflation of the money supply that's the problem," Rep. Ron Paul told MarketWatch yesterday, after putting himself through the mild torture of watching the news conference.

"The [Federal Open Market] Committee expects the effects on inflation of higher commodity prices to be transitory," spake the chairman.

The Fed can no longer assert "inflation" is a nonissue. So the line now is that it's a "temporary" one.

But even the Fed now admits that consumer prices will likely rise this year higher than the Fed would like. After wrapping up its two-day meeting yesterday, the Fed's Open Market Committee forecast a headline CPI between 2.1% and 2.8% during 2011.

That's higher than their original target zone of 2%.

(Yes, it's the Fed's goal for your money to be worth 18% less over a 10-year span. And true, that doesn't seem to fit in with the Fed's mandate of "stable prices" or their stated belief in a "strong dollar"… but that's a story for another day. And not to worry, the Fed informs us, CPI will magically return to a 1.4-2% range in 2012.)

"I do believe that the second round of securities purchases [QE2] was effective," Bernanke said. "We saw that first in the financial markets. The way monetary policy always works is by easing financial conditions. We saw increases in stock prices."

And there it is… the wealth effect, writ large. The Fed favors the stock market. Savings and investment in a traditional sense be damned.

"Hear, hear!" cheered stock traders, who brought the Dow and S&P to new post 2008 highs. This morning, both indexes have added to those gains and the Dow is now a hair above 12,700.

In sum, the higher inflation target was the news nugget that made its way out of the back end of Bernanke's dog and pony show yesterday.

Everything else was status quo: Zero-interest rate policy remains in effect… and the $600 billion in new Treasury purchases at the center of QE2 will proceed as scheduled through the end of June… after which the Fed will continue rolling over existing debt to make this chart go flat, at least for a while…

As an aside: The word "gold" did not slip from the chairman's tongue once while he held court. But the spot price powered to its own new all-time high… and sits still there now at $1,534.

Silver busted through $48 as the chairman spoke. This morning the blaise metal has powered its way to $49.08. Meaning today could be the day the 1980 record of $50 finally goes down.

Where to from here? If the past is prologue, we're due for something along the lines of when QE1 ended in early spring last year: The S&P fell 13%… and the VIX, the market's "fear gauge," zoomed up 48%. Then in August, Ben gave his Jackson Hole speech, and the rest is history.

We figure the Fed will lather, rinse… and repeat: Wait for the stock market to correct, and then launch QE3.

For reference, the S&P is up 28% since, and the VIX is below 15 as we write — as low as it's been since mid-2007.

The Commerce Department released its first guess at first-quarter GDP. It's up 1.8% — a mediocre showing compared to the previous quarter's 3.1%.

Businesses are slowing down their investment in new equipment and supplies. And consumers are spending less on discretionary purchases, mostly because they're getting squeezed on the stuff they need — food and energy.

Even if you throw out food and energy, this morning's report reckons prices rose 2.2% in the first quarter — double the previous quarter's figure.

Even the "core" inflation the Fed relies on for policy decisions is stretching the boundaries of their target zone.

First time "jobless" claims rose again last week to 429,000. That's the third consecutive figure higher than 400,000. The economy needs something in the low 300s to provide jobs for all those who are claiming they don't have 'em, to not give up hope.

In the global market, weakness in the dollar is translating to improbably new highs in the euro. The Esperanto currency, for all its woes, is up to $1.482 — another 16-month high.

Congratulations to readers of Strategic Currency Trader — they're looking at a 135% gain today on the recommendation Abe made Monday in advance of Bernanke's press conference — another handsome win in the "in on Monday, out by Friday" market that Abe follows. (Nor is it too late for you to get in and secure the charter-member rate. Inquiries, here.)

Egypt has receded from the headlines with Mubarak out of power. But here's something that hasn't changed.

Yesterday, an armed gang attacked a pipeline feeding Egyptian gas to Israel and Jordan. It was the second successful attack this year, the first one coming during the uprising in February. Word from Egypt is it could be days before the line is repaired.

After the first attack, Israel redoubled its efforts to develop an offshore gas field called Leviathan — one of the world's largest new fields in the last quarter-century. We suspect cabinet meetings are under way in Tel Aviv pursuing the question of how development could be speeded up even further.

That would be nothing but good news for the tiny producer Byron King recommended in his premium advisory Energy & Scarcity Investor. You can read his write-up as soon as you subscribe. New readers also get a special report detailing an under-the-radar rare earths discovery worth $13.8 billion.

The Indian press reported this week that the inventory of typewriters at a company called Godrej & Boyce is down to 500 units.

"We stopped production in 2009," said the company's general manager, "and we're the last company in the world to manufacture office typewriters."

Not so fast, says New Jersey-based Swintec.

"We have manufacturers making typewriters for us in China, Japan, Indonesia," the firm's sales manager Ed Michael tells Minyanville.

Apparently, Swintec has found a growth market.

"We have contracts," Mr. Michael says, "with correctional facilities in 43 states to supply clear typewriters for inmates so they can't hide contraband inside them."

Popular with guys who wear orange jumpsuits?

Hey, a market is a market…right? Even if your business model depends on your government continuing to imprison its own population at a rate greater than any other in the world.

Work it.

"The legality — or wisdom — of our Middle East wars aside," writes a reader in response to yesterday's citation of Orwell's "Newspeak", "what, if anything, does Mr. Pfaff suggest should have been done with combatants captured in battle?

"Equating Gitmo with a Soviet or Nazi work camp is laughable."

The 5: We can't speak for Mr. Pfaff. We don't know him and only occasionally read him. But we do remember the people behind the first World Trade Center bombing in 1993 were successfully tried, convicted and sentenced in federal courts.

"As admirable as Pfaff's doomed hope that Gitmo gets closed and prisoners released," writes another, peeling a layer of the onion. "What about the revenge factor? If released, these guys will be pissed that they were cooped up for so long. And so will their children be.

"As Chalmers Johnson's book Dismantling the Empire says, even if we took apart our 'baseworld.' there would be a lot of fences to mend and hearts to heal for goodwill to take place. The U.S. government has pissed off a lot of people in the name of democracy. Come to think of it, they have even pissed off their own citizens.

"I, for one, sure hope Ron Paul gets the respect he finally deserves this election go-around."

The 5: The latest documents to pop up on WikiLeaks show some of the combatants labeled "the worst of the worst" did nothing more than aggravate a fellow goatherd who then turned them in to the Americans for a bounty.

"An illiterate farmhand and wood-gatherer who did not even know his own age was among the 150 innocent people incarcerated in Guantanamo Bay," writes the U.K. Telegraph, covering the leaks. (Please, if you've got a beef with WikiLeaks or the Telegraph, we recommend you post your comments here.)

"Your picture yesterday," a reader writes, "showed Bernanke as president — God forbid!"

The 5: Heh. Apologies for the nightmare.

"On the other hand," our reader asks, "could he be any worse than Obama, or Bush, or any number of other past claimants to the position?

"We haven't had more than a scant handful of presidents who had any understanding of economics (the real thing, not what is taught in the universities) in the whole history of this country — or, at least, in the last hundred years.

"As long as we continue to elect professional politicians to office, instead of relatively honest men and women, things can only get worse. Even the best of the crooks are bad — or worse than bad."

"So now they want to start erecting an Iron Curtain to keep us in," the reader continues getting even more aggressive, "just like the Soviets did. No one will get a passport unless it is in the interest of the State. That is what is coming.

"How long before people will try to float to Cuba in order to escape? Or chance dying in the minefields set up along the Mexican and Canadian borders?

"It could happen in my lifetime — and I'm 82. The country is deteriorating more and more rapidly."

"Since so many people's own records would not match what the government has on them," writes another, following the same thread, "they would be denied a passport and the ability to flee to another country from the very government that has become too oppressive."

The 5: Perhaps, as they seem to have done with the 1099 provision in the financial reform bill, they'll see the error in their ways before the new application is implemented. Heh.

"I'm 81 years old," writes another octogenarian correspondent, trying to accentuate the positive. "I for one want to thank whoever created the new passport application, as I have noticed a slight loss of memory acuteness.

"I have a passport already, but I plan to use the new application as a continuing memory exercise, and I urge everyone who feels they may be 'losing it' to take up this new challenge and make a hobby of it."

The 5: Hmmmn. Learning a foreign language may be a little more productive… and useful, the way things are going.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. "I have been reading," writes a member of the Agora Financial Reserve, "that gold and silver may pull back, awarding us with another opportunity to jump in and make some purchases.

"How deep will that correction be? Is 10% probable? Is a larger pullback probable? Notice I say 'probable,' not 'possible.'"

The 5: You're right… who can say?

Today's near highs aside, we'll give you our opinion: Gold and silver will continue to rise until the deficit spending, debt accumulation and monetary accommodation biases in Washington — and across the Western economies — work themselves out. If Mr. Bernanke's press conference yesterday is any indication, that's going to be a long time.

But no market goes up in a straight line. A 10% correction is not only probable, but would be healthy.

Accordingly, "don't try trading gold," our friend James Turk from goldmoney.com recommends. "Accumulate it. You really should take a long-term view and steadily accumulate gold month in and month out. In other words, dollar-cost average your purchases. Sometimes you might buy at a higher price, but sometimes you'll be buying at a bargain."

Here's our advice: 9 Simple Ways You Can Still Get Rich With Gold.

P.P.S. With oil at $113 a barrel, nuclear power at a crossroads after the Japan disaster and "green energy" on the tip of every bureaucrat's tongue in Washington, there's no shortage of things to talk about when it comes to energy: how we use it, how it will change in the future, where will the greatest opportunities arise?

Those very questions are the focus of a weeklong series of discussions next week airing on our friend Dan Rodricks' Midday show on WYPR, Baltimore's NPR affiliate.

Agora Financial help produce the segment… over the course of the week, four of your favorite characters from The 5 will be taking part. All of the sessions will be broadcast and archived online, so you don't have to be local to Baltimore to tune in. Check out the lineup of guests and topics here.

rspertzel

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