“Confusion, volatility and uncertainty” were the words used by our Jim Rickards in yesterday’s episode of The 5.
That’s what he said will be the result of the Federal Reserve’s continued threat/promise to start raising interest rates, even in the face of weakening economic numbers.
Around the time we published yesterday’s 5, the Fed issued the minutes from its March meeting.
At the risk of repeating ourselves, Fed “minutes” are not like the minutes from your local school board meetings. They’re not an objective record of who said what. They’re a political document, carefully crafted for public consumption.
Yesterday’s “minutes” served only to amplify that confusion, volatility and uncertainty.
The minutes could not paper over the fact that members of the Fed’s Open Market Committee (FOMC) are all over the map about when they should start raising the fed funds rate from near-zero. Some thought as early as this June. Others thought not until next year.
The confusion, volatility and uncertainty made itself evident in a 100-point swing on a chart of the Dow industrials…
That’s impressive. The move down and back up is almost as big as on April 23, 2013. The catalyst then: Hackers got into The Associated Press’ Twitter account and tweeted that two explosions at the White House had injured President Obama.
Then the market quickly recovered once everyone realized it was a hoax. Now the market quickly recovered… but the uncertainty lingers.
On Jan. 22 of this year, we suggested 2015 would be “the year faith was lost in central bankers.” The Reuters newswire posed the question that day, “What if central banks become as unpredictable and fallible as they are powerful?”
Then, the newswire posed it as a hypothetical. Now it’s reality.
Which makes the timing of this extra delicious…
Plans to publish “The Bernank’s” memoir were announced around the same time as the Fed minutes came out yesterday. The release date is set for Oct. 5.
The title… Man, that takes balls. There’s no other word for it, even as we acknowledge it runs afoul of the Presbyterian Standard set out by Agora Inc. founder Bill Bonner.
The two secretaries of the Treasury during the crisis gave their memoirs more modest titles. Hank Paulson’s was On the Brink. Tim Geithner’s was Stress Test.
If it was so damn courageous to lend, spend or guarantee $12.8 trillion to rescue the banks, both domestic and foreign… why didn’t Bernanke say so at the time? Why did it require a lawsuit by Bloomberg News to bring that fact into the open?
Only on Monday, New York Fed chief Bill Dudley had the temerity to declare, “The Federal Reserve already is very transparent and accountable to Congress and the public.”
Heh… Not only is the Fed increasingly unpredictable, it’s prone to believe its own BS.
“Don’t ever think for a minute that the central bankers know what they’re doing,” Jim Rickards told me in a conversation almost a year ago.
“I recently spent some time with one member of the FOMC, the Federal Open Market Committee, and another member of the Monetary Policy Committee of the Bank of England, which is the equivalent of their FOMC, both policymakers, both central bankers.
“And they said the same thing, ‘We don’t know what we’re doing. This is a massive experiment. We’ve never done this before. We try something. If it works, maybe we do a little more; if it doesn’t work, we pull it away, and we’ll try something else.'”
The “massive experiment” is ongoing, 6½ years after the crisis was in full swing. The Fed and other central banks wage their currency wars, firing into the dark — with you and me too often caught in the crossfire.
No, we’re not winding up to another pitch for Jim’s newest book, although it’s still available if you haven’t claimed your copy yet. We’re about to launch the next phase of our ongoing “Jim Rickards project” that we launched last fall.
That’s all we’re at liberty to say for now. More tomorrow…
Major U.S. stock indexes are almost ruler-flat as we write. The Dow is a hair below 17,900. The S&P rests at 2,082.
Gold sank below $1,200 yesterday after the release of the Fed minutes. At last check, it was $1,194. Crude took a further hit after we went to virtual press yesterday but has recovered to $51.74.
The latest episode of the never-ending Greek drama has passed uneventfully.
The Greek government met a $494 million loan payment due today to the International Monetary Fund. Alas, Greece is eating the proverbial seed corn to scrape the money together — “draining financial reserves throughout the government, from the central bank to job centers,” writes Jamila Trindle at Foreign Policy.
In a completely unrelated development, the U.S. Treasury has been borrowing from government pension funds since March 16 — an occasional trick it uses to stay beneath the debt ceiling. The national debt has held more or less steady at $18.152 trillion since.
As for Greece, the next crisis window arrives six days from now. That’s the eurozone’s deadline for Greece to come up with set of “reforms” to justify another can-kicking bailout. Good times…
“Japan is ground zero for studying how a deflation upsets all the normal economic assumptions we have,” writes our Chris Mayer from Tokyo.
In Japan, it pays to stuff money in a mattress — 100,000 yen stashed in a Sealy in 1995 would have bought 112,000 yen worth of goods by 2012.
“People like to write about how Japan’s economy has gone nowhere for 20 years,” says Chris. “On the surface, that seems right. But when you account for deflation, you get a different picture. If you rebased the size of the economy to 100 in 1989, then Japan’s economy is roughly at 127 today, compared with 137 for the U.S. and 144 for the U.K. over the same time frame.”
So despite a generation-long slump, few Japanese have been reduced to begging in the streets. Indeed, “Tokyo is one of the comfortable cities in Asia — or the world, for that matter,” Chris tells us.
“There are the taxis with the doors that open automatically. There are the machines that wrap your wet umbrella for you so it won’t drip everywhere. There are the toilets — soft, heated and with extra amenities such as the gentle spray of warm water that washes your behind. There are heated mirrors in the bathroom that don’t fog up when you take a shower. (‘Tokyo is a city of the future,’ a friend of mine told me before I left. I now see what he means.)
“Maybe a deflationary chill doesn’t have to be so bad after all,” Chris muses. “China, India, Brazil and other celebrated economies would be lucky if they ever achieved for their populations the widely enjoyed standard of living of the Japanese.”
It wasn’t always that way. The reason Chris mentioned 1989 earlier is that it marks “a bright line on the Japanese financial timeline. On the last trading day of the year, the Nikkei — Japan’s main stock index — almost touched 39,000. After that, everything changed forever… The bubble burst in 1990, and Japan’s markets have still not come close to that high. (The Nikkei currently sits at around 19,000.) The deflationary chill set in.
“That bust triggered the deflationary trends that followed. And while there are many differences with the U.S., the episode begs a series of questions: Could 2007 be the bright line on the U.S. financial timeline? Could the 2008 crisis that followed mark the date when things changed forever? Could we be in the midst of our own deflationary ice age?”
“This subject is getting long in the tooth,” chimes in a reader on our proper role of government thread…
[Indeed, it is. But if it inspires passion, we won’t get in the way.]
“… but I feel compelled to reply to the reader who argues that the Rural Electrification Administration (REA) took money from one segment of the population and gave it to another with no benefit to the former.
“Where do you suppose your food comes from? I would be the first to stand with him in most cases, but the REA is a success story. The REA originally subsidized rural electrification, but out of the REA came the rural electric cooperatives that are member owned and self-supporting and provide electricity at competitive rates. Hell, as a member, I even get money back from them now and then. This may indicate some bias, but the first REA pole in the country was set 10 miles from my current home.”
“First, let me tip my hat to the reader who commented on the TVA and fire departments,” writes the fellow who stood up for certain government functions on Monday. “At least he spoke to the subjects, rather than indulging in not really rational bumper sticker philosophy. So thank you, sir! My reply is:
“Fire departments: I suggest that your comments merely illuminated reasons for the problems with them in the 18th century.
“TVA: A bit more meat here. Yes, the project was a huge land grab. But I hope that you (not anyone else) will not deny the increase in living standard, not to mention efficiency, on the farms that weren’t flooded out. I remember the joy and elation my entire family felt when the grandparents’ farm was electrified, even though the AC was so slow the lights flickered.
“Given the vast increase of productivity possible with rural electrification, and the resulting benefit to the economy (this a financial letter, after all), if it was worth doing, could anyone or anything but the government pull it off?
“(BTW: The entire federal government was profitable in the late 19th century — an advantage of the nontransparency of excise taxes.)
“Did a quick read of Lysander Spooner’s essays. I’d say that his position ignores a vital point about humans and government, namely: If we don’t provide ourselves with a government, one will be provided for us. So perhaps we should live with the idea that for all our kvetching, our particular government is still preferable to the alternatives.
“Oh, and if anyone wants to check out real social contract theory, try John Locke rather than John Lott.”
“It seems to me that some government is unavoidable,” writes another reader. “How does private enterprise solve the problem of crime? How do the laws get enforced? Looking back far enough in history (before the emergence of the modern state), wasn’t the local lord a good proxy for ‘private enterprise’ taking care of ‘enforcing’ the law? Which law? His, of course ! I fail to see how private enterprise solves all problems.
“So I guess I side with those who say government has its role… as much as I hate it. It just appears to me any enterprise, public or private, tends to grow until it just becomes grossly inefficient. The problem is that unlike private enterprise, you can’t elect to not do ‘business’ with government.”
“Pretty cute how you threw the rug over my alternative tax system suggestion as ‘none proffered,'” writes a fellow we enjoy hearing from now and then.
“I am speaking of professor Edgar Feige’s APT, or Automated Payment Transaction Tax, to wit, a fractional percent be deducted from all bank and money transfers. Everyone would pay and nary anyone would feel it. The only complainers are Wall Street banks and day traders, who earn commissions on those fractional percents.
[Yes! We’re suppressing this ultimate solution to war and poverty and psoriasis! You’re on to us! Never mind that we’d never heard of it or of “professor Feige” until now.]
“And as far as narcissistic libertarian (libertine might be a better nym) philosophy of nonstealing, all I can say is pulleez. Consider the continent wrested from natives, not one treaty that the Europeans didn’t break. And then the influx of money lenders, who created the extraction system we have, underwrote the lot(s) with inflated credit and foreclosed on assets bought with all that funny money, and continues to date.
“I wish Bastiat had talked about private investment capital and fractional reserve practices as the preferred tool for stealing wealth by stealth. After all, capitalism by default means taking advantage of situations and people.”
The 5: Oy…
Best regards,
Dave Gonigam
The 5 Min. Forecast
