December 23, 2013
- “Profits for Wall Street while impoverishing Main Street”: An ignominious anniversary
- Where Jim Grant finds opportunity despite the Fed’s machinations
- Not just the Fed: Exactly how is the NSA trying to “manipulate the financial system”?
- The supply squeeze pushing crude back toward $100
- What will $999/month buys you for housing in San Francisco… an update on the “perfect” gold stock indicator… waiting for the giant squid (still)… and more!
We interrupt the headlines of this Monday morning before Christmas — Duck Dynasty, Pussy Riot and Obamacare Deadline — to reflect, however briefly, on a headline of 100 years ago today…
President Woodrow Wilson — a world improver who we daresay puts the likes of Obama and Bush 43 to shame — signed the Federal Reserve Act into law on Dec. 23, 1913.
“One would think,” Ron Paul laments, “this anniversary would elicit some sort of public recognition of the Fed’s growth from a quasi-agent of the Treasury Department intended to provide an elastic currency to a de facto independent institution that has taken complete control of the economy through its central monetary planning.”
But no. The “creature from Jekyll Island” morphed into a terrifying monster too gradually for anyone to notice…
“If you ask economists, they will tell you that price controls are a very bad idea,” says Jim Grant, proprietor of Grant’s Interest Rate Observer. “But that’s exactly what these mandarins at the Fed are doing,” Grant says.
That is, the Fed is manipulating the most important prices of all — interest rates. Only last week, the Fed declared the fed funds rate would remain near zero “well past” the time the unemployment rate falls to 6.5%, from its current 7.0%.
“We are embarked on a unique experiment in monetary manipulation,” he tells the German business weekly Finanz und Wirtschaft. “That kind of central banking might be more accurately called central planning.”
The result is a profound drag on progress. “Interest rates are so low that companies, even in a very bad way, can survive,” Grant says by way of example. “That reduces in an unintended fashion the dynamism of our economy.
“In a dynamic society, entrepreneurs start things and other entrepreneurs finish them or bankers finish them for the entrepreneurs because the entrepreneurs have failed. Without failure, there really can’t be any success. Otherwise, you have a futile system of permanent state-sponsored enterprises.”
But it’s worse than that: There’s the Fed’s pathological fear of deflation.
The Fed pays lip service to “stable prices” — as mandated in a 1978 amendment to the original Federal Reserve Act — but it also has an official inflation target of 2%. And unofficially, Currency Wars author Jim Rickards says the Fed is “desperate” to achieve 4% inflation.
Central bankers “never make a distinction between deflation and progress,” Grant says. “In the last quarter of the 19th century, thanks to everything from the electric light to progress in the process of steelmaking or the telephone, prices and costs fell for the better part of 30 years. Real wages went up, some people suffered, many didn’t, society progressed and people got richer… By insisting on trying to raise the price level, the Fed is in effect resisting the progress of our time.”
Is it too far-fetched to suggest we’d all have our flying cars now if it weren’t for the Fed?
“We are reaping the noxious effects of a century of loose monetary policy,” sums up Ron Paul, “as our economy remains mired in mediocrity and utterly dependent on a stream of easy money from the central bank.”
The good doctor is inclined to give the lawmakers of 1913 the benefit of the doubt. “Had legislators known then what we know now, we could hope that they never would have established the Federal Reserve System.
“Today, however, we do know better. We know that the Federal Reserve continues to strengthen the collusion between banks and politicians. We know that the Fed’s inflationary monetary policy continues to reap profits for Wall Street while impoverishing Main Street. And we know that the current monetary regime is teetering on a precipice.”
Gee, that’s a downer. Talk about coal in the Christmas stocking. So what can you on Main Street do?
“Successful investing is all about having everyone agreeing with you — later,” says Mr. Grant, quoting a friend of a friend.
At his newsletter, “We are trying to live that kind of philosophy: to think of a thing that is now out of favor but has a reason to be in favor.” With that in mind, he likes the Russian energy stocks — Lukoil, Gazprom and Rosneft. All three have shares that trade over the counter in the United States. “Here are cheap stocks in an environment of great skepticism toward them and with the added appeal of substantial insider accumulation,” he explains.
Too out there for you? There’s always gold. “When the world gets a full-on glance of the new Fed Chairman Yellen and understands the measure of the policies that central bankers will likely continue to implement,” Grant says, “the gold price will go up a lot against the dollar.”
[Ed. Note: “I view one of the big myths of the [2007-08 financial] crisis as that it was purely the effect of free markets, that this is what happens when you have free markets,” says Jim Bruce, the filmmaker who recently released the documentary Money for Nothing: Inside the Federal Reserve.
“If Fahrenheit 9/11 was Michael Moore’s seminal repudiation of George W. Bush’s foreign policy,” writes Steven Perlberg at Business Insider, “Money for Nothing is writer/director Jim Bruce’s similar critique of the history of the Federal Reserve.”
The film is in limited release and available on DVD for $24.95… but we’re making arrangements so you can get a copy of your own absolutely free. Watch this space early in the new year…]
“And here I thought it was my better half who spent all the money in my checking account,” quips a commenter at the Techdirt website. “Now she can blame the NSA, and I can’t prove it.”
As long as we’re on the subject of government manipulating markets, we’re compelled to return to something we covered last Thursday. That’s the day after a White House task force issued recommendations to “reform” the NSA. Among those recommendations was: “Governments should not use their offensive cyber capabilities to change the amounts held in financial accounts or otherwise manipulate the financial system.”
We perked up because until then, no one had publicly suggested such a thing was being done.
Alas, no one has stepped forward since then to elaborate… which only leaves the rest of us to speculate.
“I’m unaware of any claims suggesting attempts to ‘manipulate the financial system’ of any particular country and/or to ‘change the amounts held in financial accounts’,” writes Techdirt’s Mike Masnick. “It seems a bit odd to come out of the blue like that, and certainly suggests that this particular bullet point likely came as a result of a rather specific thing that came up during the task force’s review.”
But for the moment that “specific thing” remains under wraps.
What we do know is many of the NSA’s methods can be adapted to forecast moves in the stock market.
Just as the NSA can use your “metadata” to predict your day-to-day movements, an NSA “hack” applied by one brilliant analyst can predict the market’s movements — with 86.7% confidence.
We’re usually skeptical of anything anyone claims with accuracy down to the decimal point… but we’ve seen the math ourselves. Best of all, you can apply this “hack” to reap gains as high as $2,571 each week. Learn how to use the NSA’s tools in your own portfolio — ethically and legally, we hasten to add — by following this link.
The Santa Claus rally is in full blast this morning; every major index is powering further into record territory. (Well, except the Nasdaq, which still has a long way to go toward the 2000 highs… heh.)
At last check, the Dow was only seven points away from 16,300. The S&P has powered up a half-percent, to 1,827.
Spot gold is still holding the line on $1,200 — barely. As we write, the bid is $1,202.70. Futures are a bit more dicey, the February contract only 40 cents above the big round number after Friday’s close of $1,203.70.
Don’t look now, but crude is back within sight of three figures.
A barrel of West Texas Intermediate fetches $98.80 as we write — and that’s down about 50 cents from Friday. Brent crude — a better barometer of prices outside the U.S. — is at $111.51. “The crisis in South Sudan, which has left hundreds dead, has started to hit global oil supplies,” says the Financial Times.
Don’t feel bad if you weren’t aware of a crisis in South Sudan — a nation-state birthed in mid-2011, midwifed by Washington. The Bush and Obama administrations worked for years to break up the pariah state of Sudan and make the oil-rich south independent. Alas, now the two major tribes in the south are at each other’s throats; yesterday, U.S. military aircraft trying to evacuate U.S. citizens came under fire, and four servicemen were hurt.
South Sudan pumps only about 250,000 barrels a day. But they’re added to losses elsewhere in Africa: Sabotage and theft have taken 350,000 barrels a day offline in Nigeria… and 1.1 million barrels a day have been lost as Libya descends deeper into civil war.
If RVs are a solution to sky-high housing costs in New York, barracks-like accommodations are the new thing in San Francisco.
Cory Doctorow at Boing Boing spotted a Craigslist ad promoting a “hub for entrepreneurs” — featuring rows of bunk beds, for which you pay “only” $999 a month.
The accommodations look a lot more attractive when the picture doesn’t show any, you know, people…
“But you also get access to plenty of whiteboards and brainstorm areas,” Doctorow writes, “and will no longer have to endure the misery of ‘hop[ping] from coffee shop to coffee shop’ as you seek to launch your tech business.
“When I moved to San Francisco in the late ’90s,” Doctorow adds, “I lived in half an illegal sublet for about $2K/month, and that was a deal by the standards of the day. But I had it better than the guy paying $800/month for the Sears shed in the backyard — I got a toilet!”
“Well, it would appear by the scolding that you got on Friday from the ’embarrassed’ reader that it is time for you to turn in your keyboard,” a reader writes with tongue firmly in cheek.
“Apparently, the Federal Reserve Bank’s grand experiment is a rousing success, all because of a reduction in counterfeiting from just over a trillion dollars per year to just under a trillion dollars per year has not shocked the market. Why do so many continue to believe that a couple of Wall Street indicators are windows into the entire economy? The various QEs have done what they were intended to do, which is to prop up the bankers, instead of making them pay for their mistakes.
“But it would seem to me that those folks who are a statistic in the lowest labor participation rate in decades really don’t care about the market, given their lack of opportunity to be a part of it.
“Oh, and the closing bit about working to make health care affordable for all? Precious, given that these cheerleaders have been telling us for several years that Obamacare was going to do just that from the time that ‘Stretch’ Pelosi told us that the bill had to be passed so she could find out exactly what it was all about.
“Thanks for letting me air my grievances, & Happy Festivus to all at The 5!”
The 5: You make an interesting point in light of the Fed’s new “forward guidance” about near-zero interest rates “well past” the time unemployment reaches 6.5%.
It’s as if the Fed were saying, “You know, tying our plan to the unemployment rate was stupid because the participation rate is so low. We’re abandoning unemployment as a yardstick, even though we won’t say so.”
We can hardly wait to see what new yardstick Ms. Yellen pulls out come next year…
“OK, so far my perfect timing indicator of when to buy mining/gold stocks appears to be failing,” writes the reader by way of follow-up. Recall this is the fellow who said a surefire bottom would come on the day he sold all his shares.
“Dec. 6 is when I hit my stops on all of my mining stocks, and that is when these stocks have always shot up in the past, seemingly as soon as I click the sell button.
“I forgot this market is completely controlled by the Fed (for now).
“What was I thinking?
“As full disclosure, I didn’t sell a single ounce of physical metal and am greedily adding more at these levels. Apparently, so are many others, as indicated by record sales at various mints, not to mention central banks.
“Apparently, even the laws of supply and demand are under the control of the Fed at the moment. Record demand and falling prices.”
The 5: The HUI index of major gold stocks was 193 on the day you bailed; right now, it’s at 190 on the nose. Hmmm…
“Was it you guys or someone else,” a reader inquires after our rare earths update last week, “who reported that the rare earth problem was solved when Japan discovered massive lodes of the stuff in offshore, deep-sea mud?
“But good luck fetching it now, in radioactive waters.”
The 5: Musta been someone else. “Even if true,” our Byron King said in this space on July 7, 2011, “it’ll take many years to turn underwater rare earths into a commercial business.”
Or as the anonymous CEO of a Canadian-listed rare earths firm told Reuters: “I’ll wait for the giant squid and the prehistoric monsters that will come out of the bottom of the sea first before we see any rare earths.”
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. U.S. markets trade for a half-day tomorrow on Christmas Eve; they’re closed Wednesday for Christmas Day. The 5 will take a two-day break and return on Thursday. Merry Christmas!