September 4, 2012
- QE to infinity: The Fed’s latest twist on the classic definition of insanity
- The Fed’s “all in” bet… and why Dan Amoss believes it will lead — eventually — to a new gold standard
- James Grant gets gold standard equal time in The Washington Post… while a Reserve member pleads with the columnist who can’t get over Ron Paul’s distrust of politicians and central bankers
- How Mao indirectly inspired U.S. dietary guidelines… another failed “I dare you to print this” attempt… a massive government fiasco, er, success… and more!
“There’s an old saying that defines insanity as doing the same thing over and over again and expecting different results,” writes our macro strategist Dan Amoss.
“The Federal Reserve wants to test that theory.”
Remarkably, Dan wrote that last week… before a story yesterday on Bloomberg removed all doubt.
“Four Fed presidents,” the article reported, “have come out in favor of an open-ended strategy for bond buying, with three calling for the program to begin now. Rather than specify a fixed amount of bonds to purchase by a certain date, such a strategy would leave the Fed able to announce a pace of purchases that it could adjust as the economy gets closer to Bernanke’s goals.”
In other words, QE2 didn’t “work,” because everyone knew it was limited to $600 billion over an eight-month span ending on June 30, 2011. Far better, this line of thinking goes, to keep everyone guessing what they’ll print money, and how much. Oy…
After a modest rally fueled by Fed chief Ben Bernanke’s annual Jackson Hole speech on Friday, the major stock indexes have given it all up today. The S&P clings to 1,400 by very closely cropped fingernails.
Much of the sell-off came after the release of the ISM manufacturing survey for August. Recall that with this number, 50 marks the dividing line between expansion and contraction.
At 49.6, the number has now been in contraction territory for three straight months.
At least misery loves company. While North Americans took the day off yesterday, the rest of the world revealed its manufacturing numbers.
The major ones look mighty sickly: China’s official number fell below 50 for the first time since last November. The eurozone’s rose a bit, but has now spent more than a year mired below 50.
We’re confused. Shouldn’t all this bad news bolster the case for more QE, sparking a rally? Or is QE already fully priced into stocks at this stage? There’s a scary thought…
Precious metals haven’t been moved one way or the other by the headlines.
Gold remains at $1,694, around where it was at the end of last week. Silver, meanwhile, moved up in razor-thin holiday trade yesterday past $32… and at last check, that level is holding.
“By preparing markets for QE3,” says Dan, dragging us back to the topic at hand, “the Fed refuses to let real-world evidence get in the way of its beloved theories.
“It’s almost impossible to imagine the Fed managing a ‘soft landing’ back to its pre-quantitative easing condition. I compare QE operations to a roach motel: easy to enter and impossible to exit in a practical manner.”
What, Dan asks, does the Fed do after doubling the size of its balance sheet yet again? “The selling pressure on Treasuries would steadily grow, undermining the value of the Treasuries already sitting on the Fed’s balance sheet.” On a mark-to-market basis, the Fed’s balance sheet would actually be negative.
At that stage, the Fed could start unwinding its Treasury portfolio, reversing QE… and locking in horrendous losses. The Fed would need a taxpayer bailout.
Can you say “riots in the street”?
“Instead,” says Dan, “the Fed will say it won’t have to mark its assets to market and will hold its Treasury and mortgage securities to maturity. But guess what this action does? It would take away the Fed’s option to shrink the U.S. money supply once consumer prices start rising.
“In short, the Fed has gone ‘all in’ on the bet that its printing won’t lead to a rise in consumer prices. It will eventually face a dilemma: destroy the stock and bond markets or risk an unpredictable loss of confidence in paper money.”
Where does this scenario lead? “For years,” Dan goes on, “I’ve expected that at the end of all this central bank printing, we’ll see the end — not a reversal — of quantitative easing programs and a re-pegging of the U.S. dollar to gold at much higher gold prices.
“A new gold standard would allow the Fed and other central banks to save face after the following sequence of events:
- Central banks inflate their balance sheets and buy up many of the bonds governments issue to fund soaring budget deficits.
- Once the largest suppliers of scarce products realize they’re exchanging products for infinitely diluted paper money, they start demanding more and more money in exchange for sending their scarce products to the marketplace.
- Consumer prices start rising.
- Calls for monetary tightening (reduction of central bank balance sheets and interest rate hikes) grow louder.
- These central banks won’t be able to slash money supplies without crashing government bond markets and stock markets. They talk about tightening, but don’t tighten.
- As central banks lose credibility, gold launches on a final, near-vertical stage of its bull market.
- In response to inflation expectations running wild, governments and central banks draw up plans to re-peg currencies to gold in order to avoid having to drain trillions worth of cash from the banking system.
“Perhaps,” Dan suggests, “once the global paper money system is restructured, involving some sort of gold standard, sanity will return to the Fed and other central banks.
“Until we see more signs of sanity, hold a core position in gold, silver and precious metal mining stocks. These asset classes will be the prime beneficiaries of future printing. Many other stocks will not.”
“Let interest rates be set free and the dollar be re-anchored in gold,” declares James Grant in The Washington Post.
The bow-tied and bespectacled keeper of Grant’s Interest Rate Observer issued a plea for the Fed to return to its roots: “When the Fed opened its doors in 1914, its job was to lend against sound collateral to solvent banks and to protect the value of the dollar.
“The Founders gave no thought to empowering their brainchild to steer the course of the economy. The future would take care of itself if the dollar were sound and the banks were solvent, they reasoned. As for the dollar, it was legally defined as a weight of gold. You couldn’t just materialize it.”
Grant’s plea served as a tonic for another article in the Post, the one by Charles Lane we mentioned last week. It called out Ron Paul’s advocacy of the gold standard, not for his “loopy assessment of costs and benefits,” but rather “his radical pessimism, his aggressive and indiscriminate distrust of humanity.” That is the notion that politicians and central bankers are not to be trusted. The nerve…
“Charles, I have enjoyed watching you and you astute opinions on the panel on Fox News,” a Reserve member from Florida wrote to Mr. Lane last week, copying us on the email.
“You always add significant insight. That is why I was so shocked to read your piece on the gold standard.
“From 1815-1914 (100 years), the U.S. (and the Western world) was on, essentially, a gold standard, and the U.S. dollar was completely stable. Since 1913 (the infamous year of the founding of the Federal Reserve), the U.S. dollar has lost 97-98% of its purchasing power.
“Madison, Jefferson and Andrew Jackson did not trust paper money, and for very good reason. Human nature is depraved! Governments cannot be trusted to not print their way into oblivion, as they are doing. Check history of Argentina, Brazil, Weimar Germany, Zimbabwe and countless others. All paper currencies have ended in the trash heap. If not a metal (gold and silver) standard (as prescribed in the U.S. Constitution),” he concludes, “then what do you suggest for this disaster?”
“Something just got the better of me,” this individual wrote Addison. “It will probably fall on deaf ears.” In the event it does not, we’ll let you know…
Studying the reflections of Messrs. Grant and Amoss, the proposition becomes simple: A gold standard now or a gold standard later. Neither way will be “easy,” but the latter will be much, much harder.
“If we act now to replace the fiat system with a stable dollar backed by precious metals or commodities, the dollar can regain its status as the safest store of value among all government currencies,” Ron Paul writes in his latest weekly column for constituents. “If not, the rest of the world will abandon the dollar as the global reserve currency.
“Both Congress and American consumers will then find borrowing a dramatically more-expensive proposition. Remember, our entire consumption economy is based on the willingness of foreigners to hold U.S. debt. We face a reordering of the entire world economy if the federal government cannot print, borrow and spend money at a rate that satisfies its endless appetite for deficit spending.”
Dr. Paul expands on this idea in his manifesto The Case for Gold… penned 30 years ago as the “minority report” of President Reagan’s Gold Commission. We’ve put it together in a package deal with Addison’s The Little Book of the Shrinking Dollar — on the theory that politicians and Fed governors will opt for “gold standard later” and the dollar’s loss of reserve currency status. In that case, you’ll need the latter book’s practical advice to safeguard what’s left of your purchasing power. Access here.
“Everyone is happy to blame fast food for all dietary problems,” writes Jeffrey Tucker in the latest Laissez Faire Today. “It’s a conspicuous target, but it is not the problem.”
Jeffrey invokes the specter of Mao Zedong’s Cultural Revolution to illustrate the point. “Millions suffered persecution and death. Collectivized land led to an extreme livestock shortage. Those who survived faced famine. Living things in general were disappearing.”
As the Cultural Revolution thrashed through its death throes in the mid-1970s, the U.S. government “told us to stop eating beef and eggs and start eating more biscuits and pasta. If we did eat meat, it should be drained dry. Shock: We ballooned.
“Interesting, isn’t it? We were being urged to adopt the diet imposed on the Chinese people during times of famine, yet do it through legislative prodding and hectoring by bureaucrats.”
An accidental inspiration for U.S. dietary guidelines…
No doubt. Sugar tariffs and corn subsidies figure into the picture, too. Jeffrey shares the whole sordid story here.
“The way you guys keep pushing the tobacco nutraceutical without giving the name of the company makes me think y’all are involved in a pump-and-dump scheme!” writes a suspicious reader.
“If so, I’m tired of getting pumped so I’ll buy your product. If not, I’m tired of getting no real information so that I’ll buy your product. Either tell us what the company is or stop sending the crap emails. I thought Agora was better than that.”
The 5: Sorry, we reserve the name of the company for paying subscribers. It’s how we stay in business…
“I took Patrick Cox’s newsletter for a while,” writes another, “and every stock I bought at his recommendation lost significant amounts of money. I believe all of the recommendations by you are overstated. What is his batting average?
“I would be a little cautious recommending his newsletter unless you have data that shows the majority of his recommendations are in the black.
“P.S. I bet you won’t publish this.”
The 5: The only way you could have lost money on Patrick’s recommendations was to sell before he told you to.
Over the last three years, Patrick has put out six sell recommendations, for gains of 86%… 108%… 134%… 153%… 235%… and 291%.
Are there open positions that are down from his initial recommendation? Sure. If you have a long-term mind-set, that makes them better buys. If you have a short-term trading mind-set, we can help you there too… but Patrick’s recommendations will take time and patience to play out.
The wait will be more than worthwhile. But if for any reason you don’t agree with us about the quality of Patrick’s research, you can get all your money back. Details of our guarantee at this link.
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. As we go to (virtual) press, we see that food stamp use has reached another record — 46.7 million participants in June, according to the Agriculture Department.
You might think of this as failure… but as we showed over the summer, the government will look upon this milestone as a smashing success. As the saying went in another time and context, mission accomplished!