Saturday, October 30, 2010

Financial Media Busy Spinning the Results of Money-Printing

In addition to the diversion of the printer cartridge explosives story, a bit or two of good news has been released in the last couple of days to somewhat buoy a beleaguered administration. This report critiques these and then offers investment-oriented comments.

The first report provides sort-of-good "news" on the economy. It's not dead!

Even better, it's not dying!

The "news" comes in the form of an "op-ed" because it is basically just opinion. The Economic Cycle Research Institute (ECRI) has discerned timely good news for Democrats; from CNN:

The good news is that the much-feared double-dip recession is not going to happen.

That is the message from leading business cycle indicators, which are unmistakably veering away from the recession track, following the patterns seen in post-World War II slowdowns that didn’t lead to recession.

What business imperative of its own does ECRI have by announcing this prediction now, thus helping the "ins" rather than the "outs"?

After all, this "information" was provided for free. Voters have no right to timely release of such sensitive information. One would expect that ECRI's paying customers should have access promptly to new research such as the above, but ordinary investors/voters?

Since this is opinion and not fact, color me skeptical about the timing of this release.

It would seem that there can only be one good reason why ECRI released this information now at just the right time, just before the weekend before the election. Not that I'm Sherlock Holmes or even Doctor Watson, but when the impossible is eliminated, what remains, however unlikely, must be the answer. ECRI could have waited for Election Day, if it wanted to take an anti-Fed stand before the Fed meeting, or it could have waited till the Fed actually acted, which might be prudent should the Fed surprise ECRI by being restrained.

One reads the entire "op-ed" by the ECRI leadership and finds harsh criticism of the Fed-- though no recession is imminent--but no criticism of either President Obama or Congress. There is some vague criticism of "politicians" who are fighting each other, but that is politically neutral.

But of course, as we shall see, the Fed is merely doing what all captive central banks due nowadays, which is to monetize the debt of the central government to whatever extent is needed. Yet as we shall see below, the ECRI may just be another pro-deficit spending organization with good forecasting skills in what has become a semi-centrally planned economy.

Let's go back in time with ECRI.

Here is a link to Dr. Achuthan on Jan. 20 on a Reuters video just after the inauguration:

(He says that Mr. Obama has to move quickly to get the stimulus program enacted. ECRI thinks the "stimulus" is very important.)

Yet a mere 3 months later, after weeks of increasing optimism in its news releases, ECRI said:

The longest U.S. recession in more than a half-century will probably end before the summer is out, according to the Economic Cycle Research Institute.

The group, whose leading indicators have a solid track record of predicting turns in the business cycle, said on Thursday enough of its key gauges have turned upward to indicate with certainty that a recovery is coming.

"The end of this recession is finally in sight," ECRI said in a statement.

In fact, the ECRI had concluded as much in March . (See slides 17-18.)

Furthermore, while the document may have been dropped from its website, I recall that in spring 2009, ECRI revealed that its (non-publicly reported) Long Leading Indicators, which lead the Weekly Leading Index by months, was turning up either in or about January, raising questions about ECRI's initial support for the stimulus bill.

Where was ECRI in calling for the cancellation of the "stimulus" that it found so important in January, given that it was certain by April of a self-sustaining business recovery?

Obviously very little of ARRA had been spent when confirmation that a normal business cycle upturn was going to happen anyway. There was no Great Depression no way, no-how by January 20. That much ECRI knew for certain. No 2010-legislated stimulus was ever needed to ensure a "recovery", and ECRI knew it.

So I conclude they are just "Keynesians" (i.e. they like money printing) at ECRI and therefore despite being good at what they do, they are working from a faulty ideological framework which will introduce errors in their thinking.

I reject the concept that printing money stimulates anything useful, but I believe that it does transfer wealth from society at large to those who gain transactional income from said money-printing. Thus the financial class writ large has a thrill running up its leg from the immense sea of liquidity provided by the combination of Obama and Fed policies. It's go-go time again in the markets because of the money that has come into the system the past two years.

Meanwhile, is also doing its part to cheerlead as best it can to keep the good times rolling for its financial constituents. On its website yesterday, along with a picture of President Obama looking serious, it is running Poll Shows Voters Don’t Know GDP Grew With Tax Cuts.

Bloomberg & Co. should be doing well, and perhaps the Mayor and his company just can't understand that the people are not properly grateful for what the government has done for them, saying in the article:

The Obama administration cut taxes for middle-class Americans, expects to make a profit on the hundreds of billions of dollars spent to rescue Wall Street banks and has overseen an economy that has grown for the past five quarters.

Most voters don’t believe it.

I do believe it but don't think the poll is addressing the main points.

In keeping with John Kerry's recent point that voters are too stupid to deserve to have the right to vote when they are going against his party because they don't understand that the Dems are looking out for them (please excuse the liberties taken with Sen. Kerry's precise quote), we find Bloomberg reporting the following drivel in the same article:

A Bloomberg National Poll conducted Oct. 24-26 finds that by a two-to-one margin, likely voters in the Nov. 2 midterm elections think taxes have gone up, the economy has shrunk, and the billions lent to banks as part of the Troubled Asset Relief Program won’t be recovered.

“The public view of the economy is at odds with the facts, and the blame has to go to the Democrats,” said J. Ann Selzer, president of Selzer & Co., a Des Moines, Iowa-based firm that conducted the nationwide survey. “It does not matter much if you make change, if you do not communicate change.

No, the blame has to go to reality. It's not a failure to communicate. It's a failure to succeed. Where are the geniuses at Bloomberg to point out in this article that the U. S. has probably had the weakest recovery from a major economic downturn in its entire history and that untold millions of jobs have been vaporized (thus keeping the "rate" of unemployment much less threatening than the decline in the employment rate)? Where is the mention that three years or so into the beginning of the euphemistically-called Great Recession, organic per capita income adjusted for inflation is well below that seen three years ago? Isn't that more newsworthy than ECRI's "good news" that there will be no imminent new recession (and why should there be when the depression continues?)? And isn't the failure of Team Obama to "stimulate" the economy the real pre-election news? What about the recent statement by the President that hey, don't blame him, he found out too late that "shovel-ready" projects don't really exist? (And why are they fictions? Might it just be that there are immense bureaucratic blockages to getting anything done? Might not statism be to blame? What's the big deal about repaving a road?)

The Bloomberg article points out that voters (understandably) have trouble distinguishing the TARP accounting from the other bailouts. OK. But so what? Who cares if TARP per se can be given a nominal accounting profit (though far less than Walter Bagehot prescribed for the lender of last resort in a crisis) if the net effect of all the Federal and Fed bailouts, including ZIRP, were . . . bailouts? Handouts to the rich, but only the favored rich, not the upper-middle class "rich". Only the truly rich.

We'll move to the meat of the discussion:

The perceptions of voters about the performance of the economy are also at odds with official data. The recession that began in December 2007 officially ended in June 2009, making the 18-month stretch the longest since the Great Depression. . .

(And we all know that "official data" always reflects the real world experience of real people.)

The impressions of these voters also are dissonant with other signs of economic improvement.
A year and a half after U.S. stocks hit their post- financial-crisis low on March 9, 2009, the benchmark Standard & Poor’s 500 Index has risen 75 percent, and it’s up 15 percent for this year.

So we are now down to brass tacks so far as Big Finance is concerned. For Michael Bloomberg, the cheap money that has flooded into stocks and other financial markets rather than the real economy is a reliable sign of economic improvement that the benighted public somehow misses. Somehow Charlene Miller, referred to earlier in the article, who has been unemployed for two years, is supposed to care whether IBM or McDonald's is doing well in Asia? And let us say that due to the surge in poverty, the deep discounters such as Dollar Tree (DLTR) and Ross Stores (ROST) are able to both have robust sales and high operating margins; good for them, but lower margins would be better for her.

Language can be a slippery thing. Note the term "signs of economic improvement" in the above quote. "Signs" is not "proof". Unfortunately, real "recovery" has not yet occurred.

If you click on, you will see a form of a "crawl" at the top of the screen. This reflects Gallup's ongoing polling, which given that it is performed daily, is reliable over time and quite consistent. There, you can see that despite the "end" of the "recession", the return of jobs is at a recession level, discretionary spending is at a recessionary level, and the direction in which the economy appears to be going has appeared to the people polled to have continued downward for a remarkable length of time. People still see the economy as getting worse. This, almost a year and a half after the alleged end of the "recession"!

This type of view is supported by every poll I have seen, whether it be the Rasmussen/Discover(R) poll of consumers, ABC News' Consumer Comfort Index, various small business polls, etc.

But stocks are up!

As delineated by a non-conservative, Simon Johnson, in The Quiet Coup in May 2009, what the country endured in the third and fourth quarters of 2008 had perhaps never been seen before in a leading, financially sophisticated country. The intro to his article reads:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund (Ed.: i. e., Johnson), is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises.

And from the article:

Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

Private profits, socialized losses. (And I suspect that the massive private profits have in significant measure been converted from dollars to gold.)

Bloomberg's writers and pollsters must know that the American people "get it". That they don't know all the technical details does not matter.

Let's put aside the suspiciously politically-timed "op-ed" from the co-leaders of the ECRI. Let's ignore anyone such as the Bloomberg types who believe that a second stock market rally following a second crash in seven years has any predictive value for the real economy or reflects success in reconstituting a healthy economy.

Let's recognize that America no longer has a very cyclical economy in the classical sense. All the ECRI and BB discussions of cyclicality miss that point. When so much of economic activity comes from Pedro and Jane transferring some of their work effort to people they never met, and much of the rest of "the economy" (and per the action of gold, all of the gains in the stock market after the panic phase ended) comes from printing of new money above and beyond that needed to meet the demands of the marketplace, then you have an economy that can almost always show "growth". But we defeated the centrally-planned Soviet Union in good measure because of the power of the free market, right? Yes, but that was so long ago . . . In 1990, back when perpetrators of financial crime actually got investigated, prosecuted and convicted.

The problem with "growth" as measured by the ECRI and government statistics is that it does not distinguish between economic activity that meets the current and future needs of real people and real businesses and that which does not. For example, the USSR decided to grow cotton in an arid area south of a major sea. So it drained water from an inland sea and diverted the water to parched regions to grow cotton. All this counted as economic activity. But the result was disastrous. Sometimes it's better to just do nothing than do the wrong thing. No one would seriously argue that we should all break all our windows so that we can stimulate new production of windows, would we? Yet "cash for clunkers" didn't just subsidize new car purchases but it also mandated destruction of used cars that were in service. Wasn't that a version of Bastiat's window-breaking example of economic idiocy?

So as America attempts to regain a level of economic activity that "works" for its people, taking account environmental and social realities, among the worst things to do is to rely on aggregate government statistics that conceal more than they reveal.

Back to the Bloomberg article.

The politicians can claim, Janus-faced, that they have cut taxes, as Bloomberg argues the public is too uninformed or dumb to realize, while with no specific legislation the same political establishment forces prices to rise via the tax of monetary inflation, and they force incomes lower for the vast numbers of people who have money "in the bank" so that the favored banking institutions can continue in business with grossly offensive salaries paid to move the free money around despite creating no wealth other than for themselves. And this low- or no-cost money enhances the profits of multinational corporations with headquarters in the U. S. but that almost universally are planning their growth other than in the U. S.

On Tuesday, the Republicrat/Demopublican Party will win. Deficit spenders will win. Thus money printers will win. Thus Big Finance will win.

Perhaps, because the polls demand it, the pols will get together after the election dust settles and make a deeper bow toward Fiscal Responsibility, but they will not mean it. (Dr. Krugman will yell, though, which will enhance the credibility of said Fiscally Responsible words I believe we can expect to hear soon, and we might just get a bond and dollar rally out of said FR verbiage.)

While the Establishment continues its winning streak, ECRI believes that the economy will continue to suffer, though with an artificial mini-boom due to a new round of money-printing from the Fed ("QE2") that ECRI believes is coming soon.

The American economy is now so unfree, so centrally-influenced/controlled, that it has headwinds against developing real savings that allow for positive dynamics such as strongly positive return on invested capital. And it is increasingly unfree in part because supposedly politically neutral analysts such as Dr. Achuthan come out publicly for deficit spending even when they believe that the economic cycle is pointing upward.

As the antithesis to electronically-printed money that cost nothing to create and in turn creates no real wealth in America (though it may be creating real wealth in Brazil and India (for example), gold and silver are, in fashion terms, the "new black". Except for trading purposes, my view is that it does not matter precisely what the Fed does just after Election Day or which party wins the Senate (apparently the House is going Republican). Just so long as the Fed makes sure that the cost of borrowing short term is way too cheap, and Congress is focused on "jobs" in part via increasing exports and thus favors a weak dollar, I think that gold and silver will be well bid, as they say.

I see the following investment trends with political-economic context. The U. S. can by consent of many countries continue to be the "world's policeman" and for that service and for its willingness to be the importer of last resort can have the right of "seignorage" and continue to have its dollar serve as the world's reserve currency. Part of the payment to the American "policeman" is that said dollar can devalue over time vs. the currencies of exporting nations. Thus the nations that export to the U. S. partially in return for Treasury securities or dollar-denominated cash yielding nothing understand that they will be paid in depreciated dollars relative to their own currencies, which means that they realize they are not receiving stated valued for their exports. So be it. They are patient countries. Their people are grateful for any improvements in living standards. There's no rush on the parts of their country's elites to see things improve too quickly; it's better for the elites that improvement be steady and gradual. It's safer that way.

Along with military services, which may increasingly involve Yemen (and don't be surprised if huge energy reserves are eventually "discovered" there--of course if that occurs they already will have been found), the U. S. does have peaceable exports: high-tech and medical technologies as well as the combination of financial engineering expertise and various best practices management procedures. So along with the export of military equipment and services go the valuable services of industrial and financial companies.

Given the slack in the labor market in the U. S., CPI inflation can stay low for a while longer, especially as the excess dollars the Fed creates bleed away into other countries via the trade deficit, foreign wars, direct investment into the BRICs and elsewhere, and the like.

Various measures of stock buyers' optimism have reached very high levels, so I'd beware of a downturn soon. With that could come a move lower in long-term interest rates and perhaps (finally) a sell-off in silver (which because I and many others would view it as a buying opportunity may not come before another upsurge that fools all the fence-sitters). If indeed the non-USD theme is going to remain in force as a secular trend but the U. S. economy is going to temporarily accelerate due to QE2 coming when it is not needed, then I am going to add a new currency play to the three that I mentioned on September 8 (Norway, New Zealand and Brazil). That is the Canadian dollar (CAD). This can be purchased via the Rydex CurrencyShares Dollar Trust, stock symbol FXC.

ECRI is suggesting some post-election upside "surprises" in the U. S. economy. This will benefit Canada directly and perhaps in a leveraged fashion. Unlike our Fed, the Canadian central bank has already engaged in some interest rate rises, and has paused primarily due to the American slowdown that has fed back to the Canadian economy. Thus while Gentle Ben is predicted by Bill Gross to be on hold with ZIRP till 2013, his counterpart in Canada appears for now to be dealing with a less fragile economy that has a stronger banking system and thus has much less debt to monetize.

In the 1990's, the CAD was being called "the peso of the North" (when the Mexican peso was non-investment grade). Things have changed; click HERE for a detailed review, beginning on p. 14.

The CAD briefly went above $1.10 to the USD in 2008. It is now at 98 U. S. cents. It's easy to see the old high being reached and exceeded "sooner rather than later". I'm an owner of the CAD for several months and also plan to be a new buyer. I like the CAD in part because of its large fossil fuel reserves, and it seems to me that oil and gas prices have lagged the increases in precious metals at this point, so the CAD as well as the Norwegian kroner will benefit if oil joins the inflationary party in a larger way. (I would wait for the euro to descend vs. the USD, however, to favor the NOK over the CAD here, but that's just short-term timing speculation.)

As silver goes a bit parabolic upward, we just may see a sharp "catch-up" move up in somewhat left-behind hard-money-related assets as the Canadian dollar.

It should be an interesting next few days.

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