Addison Wiggin – January 13, 2012
- A Friday the 13th edition of The 5: Fed follies, inexplicable market movements, a fashion designer’s gold bar…
- Shocking words we’d never expect to see in The New York Times… alas, five years too late
- Chris Mayer on why we’re likely in for another year of $100-plus oil
- “High-performance mobile computing” from the seat of a Lamborghini… and other firsthand observations from our team at the Consumer Electronics Show (CES)…
- Lawmaker hoisted on his own petard… readers fancy themselves armchair generals… and more!
We had to wait five years. But it turns out our suspicion that the Federal Reserve is clueless, at best, is true. We know because we read it in The New York Times.
Welcome to a Friday the 13th edition of The 5… where if things aren’t exactly scary, they’re definitely surreal.
The Fed performed its ritual year-opening document purge overnight… unveiling the transcripts from Federal Open Market Committee (FOMC) meetings in 2006.
The account of The New York Times is so remarkable, we allow it to speak for itself: “The officials… gave little credence to the possibility that the faltering housing market would weigh on the broader economy.”
“We just don’t see troubling signs yet of collateral damage, and we are not expecting much,” said New York Fed chief Tim Geithner, who now afflicts us as Treasury Secretary.
We pause here to note that in December 2004, we posted a report called The Total Destruction of the U.S. Housing Market.
It was the only conclusion we could draw after seeing an internal Fannie Mae document revealing the firm’s exposure to the derivatives market. So provocative was the report that Fannie pulled the document off the Internet and fired the poor guy who wrote it.
Back to the Times: “The transcripts of the 2006 meetings, released after a standard five-year delay, clearly show some of the nation’s pre-eminent economic minds did not fully understand the basic mechanics of the economy that they were charged with shepherding. The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken.”
Might we submit the problem was a more basic one: Hubris. Or as Friedrich Hayek called it, The Fatal Conceit.
“The power and responsibilities of the Federal Reserve… are premised on the idea that somehow its managers know something that we do not,” writes Laissez-Faire Books executive editor Jeffrey Tucker, in an essay you can read at the bottom of this issue. “This is the essential error of the central bank’s planning powers.”
“It’s… embarrassing for economics,” grouses University of Pennsylvania econ professor Justin Wolfers to the Times. “My strong guess is that if we had a transcript of any other economist there would be at least as much fodder.”
Yeah, probably.
More surrealiciousness: A CNN alert just flashed on our desktop announcing that the Obama administration plans to elevate the Small Business Administration to a cabinet-level agency.
Whether the agency will do anything to make it easier for small business to stay in business… we suspect is another matter entirely.
Major U.S. stock indexes are down today… and in keeping with the surreal Friday the 13th theme, there’s no obvious reason.
JPMorgan’s profits are down 23% year over year… but that’s no surprise. Rumors swirl that S&P is about to downgrade Austria. And maybe France. Maybe as early as today. Or not.
In any event, the Dow and the S&P are both down about three-quarters of a percent.
The U.S. trade deficit ballooned by 10% in November, according to a report out this morning from the Commerce Department.
At $47.8 billion, the gap was wider than any of the guesses submitted by dozens of economists to Bloomberg.
It’s the first time in five months the trade deficit grew. Blame it mostly on rising prices for (imported) oil.
Oil is likely to end the week below $100. The spot price has sunk in the last couple of days to, as of this writing, $98.21.
“I expect another year of $100-plus oil,” says Chris Mayer.
“More and more of the world’s oil reserves are in the hands of government oil companies,” he explains. “They use the funds from oil for things other than replenishing oil, helping ensure prices stay high.”
“Also, oil averaged $100 a barrel in 2011. That was the first time that’s ever happened. It did this despite sluggish growth from many of the big economies. So I feel as if the oil price is pretty firm.”
Meanwhile, “it’s hard to believe, but in 2012, the U.S. could have more oil coming out of the Bakken in North Dakota than in Alaska’s Prudhoe Bay. U.S. oil production is set to rise again in 2012, reversing years of decline. Energy companies are creating thousands of new jobs. It’s incredible.”
Indeed, it is — so much so that we’ve prepared an extensive report on the trend. Look for more in this space next week.
After capturing $1,650 yesterday, gold is giving it up today. At last check, the bid is $1,637. Silver couldn’t hold $30 either; it’s down to $29.68.
If you don’t mind paying about a 10% premium over spot for your bullion, you can get gold designed by the guy who put Madonna in her infamous “cone bra” 20 years ago.
Jean Paul Gaultier has designed a 1-ounce bar for the Dallas-based gold dealer Dillon Gage Metals, which informs us this is the first time a fashion icon has put his stamp on a piece of gold.
Five thousand are available. The bid as of yesterday was $1,826.33… plus a $25 handling fee.
“The vast array of exhibitors is both bewildering and exciting,” writes Ray Blanco from the floor of the Consumer Electronics Show (CES) in Las Vegas.
Ray and Patrick Cox are navigating 15 miles of halls lined with exhibitors… and finding their Technology Profits Confidential picks well represented.
For instance, “the great majority of consumer electronics I’ve viewed that require a microprocessor are all licensed” from one of his favorite recommendations.
Electronics from another one of his picks keep the multimedia and navigation systems humming in this Lamborghini Aventador…
It “brought a whole new definition to the term ‘high-performance mobile computing,’” says Ray.
“Other huge splashes at the show,” he writes, “were LG and Samsung. Both companies showcased unbelievably clear and vivid television displays using OLED (organic light-emitting diode) technology” licensed from yet another of his picks.”
“Available in both 2-D and 3-D display formats, the stunning OLED displays kept LG’s and Samsung’s exhibits packed with attendees. LG’s 55-inch OLED TV, which is only 4 millimeters thick, won the CES ‘Best of Show’ award.
“A number of large-screen OLED TVs will be hitting the higher-end display market later this year. While the display market is expected to be relatively flat over the coming year, both 3-D and OLED display technology are expected to be rapidly growing segments within the space.”
The key to big profits in this space, Ray says, is to steer clear of the LGs, the Samsungs, and the other big electronics makers. Look instead at some of their key suppliers.
What would the world’s largest electronics trade show be if a couple members of Congress failed to show up to hold court?
In this case, it’s all good.
Rep. Darrell Issa (R-Calif.) and Sen. Ron Wyden (D-Ore.) popped in on the CES this week to declare publicly their opposition to a legislative abomination known as the Stop Online Piracy Act, or SOPA.
“[SOPA] would,” writes CNET.com’s Declan McCullough on the duo’s appearance at the CES, “allow the Justice Department to obtain an order to be served on search engines, Internet providers and other companies, forcing them to make a suspected piratical website effectively vanish, a kind of Internet death penalty.”
The “suspected” offenders would have no recourse.
“SOPA would also expand the definition of copyright infringement,” writes journalist and sci-fi author Cory Doctorow, “to include hosting a single link to a site that is alleged to contain infringing material.”
“Thus, if an author’s blog, or a book discussion group, attracts a single post that contains a single link that goes to a site that someone accuses of copyright infringement, that site becomes one with the alleged infringer, and faces all the same sanctions — without any proof required, or due process.”
In other words, almost any website could run afoul of the law — including the one hosted by Rep. Lamar Smith (R-Texas)… the lobotomized sponsor of the bill. Here’s his campaign website:
Note the background picture.
Turns out that’s the work of photographer DJ Schulte.
“I switched my images from traditional copyright protection to be protected under the Creative Commons license a few years ago,” Mr. Schulte tells vice.com, “which simply states that they can use my images as long as they attribute the image to me and do not use it for commercial purposes.”
Nowhere on the site is Schulte credited for the work.
“According to the SOPA bill,” writes the photographer, “should it pass, maybe I could petition the court to take action against www.texansforlamarsmith.com.”
Heh. Dumbass.
“Was this tongue-in-cheek, or brain-on-hold?” a reader writes of our quip yesterday about the U.S. not having the money to fight a war against Iran.
“Since when has lack of funds ever prevented the U.S. from launching a war? Could we afford our senseless invasion and occupation of Iraq? No. What about our adventures in Afghanistan? Ditto. Even our brief foray into Libya went on the credit card.”
“C’mon, Addison, reassure us that you weren’t in the doctor’s office because you fell and hit your head.”
“Love The 5.”
“Has affordability,” writes another, “ever stopped our government from doing anything it sets its mind to in the past 20-plus years?”
“When did the State ever worry whether or not they had any money?” another chimes in.
“Run the presses!”
“When authors and politicians write fiction,” writes in a fifth in reply to our additional assertion on the pointlessness of analyzing the various fictitious motives for going to war, “it has to ring true, it has to have a basic underlying base, or it doesn’t carry any weight.”
The 5: Indeed, it doesn’t.
“I think a possible war,” continues a sixth of a piece, “will give a good excuse for the U.S. to default — or in diplomacy terms, ‘renegotiate the U.S. position with allies.’”
“U.S. debt will simply ‘disappear’ like after World War II, paid by the ‘allies’ favor,’ as happened with the French gold, and Nazi and Japanese state treasures.”
“Ah, what better way to win re-election than being the sitting president during wartime,” speculates yet another reader. “With the economy in the dumps, you don’t think that idea hasn’t possibly been discussed among Barry’s comrades, do you?”
The 5: “The difference between fiction and reality?” said Baltimore’s own Tom Clancy. “Fiction has to make sense.”
Thus do we see analysis today of the assassination on Tuesday in Tehran: “Whoever targeted him,” writes Jim Lobe of Inter Press Service, “had a much broader agenda than simply killing yet another scientist working on Iran’s nuclear program.”
“I think the prospect of renewed negotiations between the P5+1 and Iran was the bigger target.”
The “P5+1” is Washington-speak for the five permanent members of the United Nations Security Council, plus Germany. Talks between Iran and the “P5+1” about Iran’s nuclear program were supposed to resume in a few weeks.
Someone — or a group of someones — might prefer those talks not take place. They might prevent a war, after all. And we can’t have that… heaven forbid.
Meanwhile as we’re writing this, a colleague passed along a new article in Foreign Policy magazine… suggesting that agents of Israel’s Mossad posed as CIA agents to help recruit members of Jundullah — a Sunni separatist group in southeastern Iran — for covert ops against the mullahs.
Seems like the perfect cap to our Friday the 13th issue. Interesting times in which we live…
“Always read your 5 Min. Forecast!” writes a reader so enthusiastic we removed the four other exclamation points at the end of that opening sentence. “Great insights with no BS! Aids me in making any decisions about investing.”
“Who says that newsmakers and wacky politicians and their policies don’t influence the market. Those who don’t think so, have their mmmmmmm, correction, head in the sand.”
The 5: Were you correcting the body part… or the location?
Have a good weekend,
Addison Wiggin
The 5 Min. Forecast
P.S. U.S. markets are closed Monday for Martin Luther King Jr.’s birthday. The 5 will return on Tuesday.
There were too many choice moments during the 2006 Fed transcripts for our mere 5 Mins. Like Tim Geithner’s blatant brown-nosing of Alan Greenspan.
We turn it back over to Jeffrey Tucker…
Mere Mortals at the Fed
by Jeffrey Tucker
The secrecy of the Federal Reserve is legendary, but pressure in recent years has led to some opening up. Already in the last 12 months, we’ve seen some eye-popping records of who received credit during the 2008-09 credit crunch. We’ve seen lists of institutions that the Fed favors, and these lists have confirmed the worst fears. Hint: It’s all about the big banks.
But now we get the really fun stuff. The transcripts, released five years after the fact, of the open market committee meetings provide a fascinating look into how the Fed was thinking about the world just before the greatest market meltdown in modern times. No one at the 2006 meetings saw it coming. Thousands of market commentators, economists and bankers saw it coming, but the Fed — the all-wise and all-knowing Fed — did not see it coming.
That the Fed actually played the largest role in producing the bubble that turned to bust only adds to the irony that the Fed was clueless about the emerging reality on the ground. Ben Bernanke saw some softening in home prices and needed correction to the run-up, but he was somehow sure that there would be a soft landing.
The meetings opened that year with Alan Greenspan at his final meeting and saying his goodbyes. There was some talk about long-term pension problems. Greenspan dismissed it, pointing out that, “We have enough trouble forecasting nine months.” Everyone laughed. Ha ha. Thanks for admitting this — in private.
At this final meeting, the group also heard one of the clearest statements in all the transcripts that there were troubles on the horizon. Fed chief economist David Stockton stated very clearly: “As I contemplate our outlook and the things that I worry about the most on the domestic side of the economy, I’d say the housing sector is clearly one of the biggest risks that you’re currently confronting.”
But the gloom didn’t last long, and the meeting ended with a wildly upbeat report from none other than Timothy Geithner, now secretary of the Treasury. He begins with an over-the-top tribute to Greenspan (“I’d like the record to show that I think you’re pretty terrific”) and continues on with an upbeat forecast of endless growth and happiness forever. Even though he was spectacularly wrong, he is now running the show.
The opening meeting with Bernanke set the tone for all the meetings that followed. Stockton probably sensed that he might be free to speak his mind for the first time in years. He compared the situation in housing to riding a roller coaster blindfolded. “We sense that we’re going over the top, but we just don’t know what lies below.”
But Bernanke intervened to stop all such crazy talk. “I think we are unlikely to see growth being derailed by the housing market,” he said. He assured all present that “the strong fundamentals support a relatively soft landing in housing.”
Ever the pleaser, Geithner agreed. “Equity prices and credit spreads suggest considerable confidence in the prospect for growth,” he said. “Overall financial conditions seem pretty supportive of the expansion.”
Later that summer, Fed Gov. Susan Bies tried again to introduce some caution, pointing out that the banks were all using models that presume falling interest rates and rising home prices. This has allowed many American families to depend on home equity loans more than they should. “It is not clear what may happen when either of those trends turns around,” she cautioned.
Once again, Bernanke smacked down the naysayer. “So far, we are seeing, at worst, an orderly decline in the housing market…As I noted last time, some correction in this market is a healthy thing, and our goal should not be to try to prevent that correction, but rather to ensure that the correction does not overly influence growth in the rest of the economy.”
From the point of view of economic theory, there is an interesting comment made by Dallas Fed president Richard Fisher. He pointed that everyone on the planet was talking about the housing problem, but he cited this as a reason not to be concerned. “If we have not discounted what has been happening in the housing market, we have been living on Mars.”
In other words, he was saying that if something awful were going to happen, it would already have happened. Because everyone was talking about something meant that the awareness of the risk was surely already built into the existing data.
This amounts to a reversal of the old joke about the economist who refused to admit that there is a $20 bill on the ground in front of him on grounds that if the bill were there, someone would have already picked it up. In the same way, if this economist were going to be hit by on oncoming truck, it would have already hit him.
The year ended with Gov. Bies again warning that the risk is much more serious than anyone has yet acknowledged. “A lot of the private mortgages that have been securitized during the past few years really do have much more risk than the investors have been focusing on,” she said. But Bernanke shoots her down yet again: There will be a “soft landing” for the economy.
Look, there is no crime in not knowing the future. No one knows: no palm reader, no philosopher, no economist. You can assemble all the data the world has to offer, but it tells you only about the past. Forecasts are fine, but they are always speculations. The people assembled in the Fed’s meeting room were doing forecasts not unlike what every business in the world does every day. Sometimes they are right, and sometimes they are not.
What is significant here is not that Bernanke did not see the future. The significance is that the power and responsibilities of the Federal Reserve itself are premised on the idea that somehow its managers know something that we do not. They are charged not with planning the past that they can know, but with planning a future that they cannot know. This is the essential error of the central bank’s planning powers.
And there is another problem. The Fed has an institutional bias, and this is clear from the transcripts. It is especially obtuse in taking note of risks and problems that the Fed itself is responsible for creating. In this way, it is just like every other government agency. They all see problems in the world but those that the institution itself caused.
The congratulatory praise of Greenspan at that opening meeting of 2006 is a metaphor for the arrogance and self-congratulatory culture of the entire institution. The Fed imagines itself to be the solution for every problem. The truth is that the Fed itself is the source of a vast numbers of our problems.