By Bill Bonner
02/08/10 Baltimore, Maryland – What a delight it would be to have some inflation! Yes, dear reader, that’s the real reason that fiscal stimulus appears to work. That is, that’s the reason inflation can sometimes boost employment. It creates inflation. And inflation lowers wages. Lower wages make it cheaper to hire people. And they make US output more competitive on the world market – so exports tend to increase.
And one other thing. Inflation reduces the debt burden. Right now, debt is crushing the private sector…and the whole economy. But it will soon crush the public sector too. Nouriel Roubini says government debt is a “ticking time bomb.” He’s right.
That’s why the government would love to have some inflation. Trouble is, inflation is harder to conjure up than you might think.
The more we see the Geithner, Bernanke, Summers team in action, the more convinced we are that the nation is headed for serious trouble.
Alan Greenspan was a knave, no doubt about it. But he understood how money worked. He was even a follower of Ayn Rand and a member of the libertarian ‘collective’ in New York. When he joined the president’s council of economic advisors, Rand was on the scene. She said she had ‘her man in Washington.’ Trouble was, her man was a sell-out. His convictions were no more solid than ocean foam. They disappeared as soon as he got to the capitol. After that, he spoke in gobbledygook sentences that no one could decipher…and played the game.
Here at The Daily Reckoning we don’t particularly like sell-outs, hypocrites and turncoats. We have our…Read more…
By Bill Baker
02/08/10 Baltimore, Maryland – Could the commodity and equity rallies have ended? Has a change been triggered by a resurgent dollar, meaning its purportedly strong negative correlation with gold and commodities continues to drive the process? But if so, would this also not signal the end of the reflation and carry trades? Would it not also mean that contractionary monetary forces may soon dominate? If that is the case, is other evidence that the correlation between gold and the dollar, which on average actually has been weak, might be shrinking to a benign level? Looking at the historical record, has this correlation been steady, or has it cycled up and down or faded away for extended periods?
Based upon theory and evidence, the Conservative Economist presents a case that the negative correlation of the dollar and gold has been a weak, on-and-off phenomenon, subject to degradation. This conclusion augments the theory presented in a companion essay published last week, For Whom the Gold Bell Tolls, which illustrates how central bank and fiscal interventions can be overwhelmed by an instinct to hoard. After credit booms, holders of capital distinguish between money and money substitutes, discounting the value of the latter while the former retains or increases in value.
Discounting is a form of inflation, but it differs from inflation associated with monetary expansion seen when leverage is increasing systemically, wherein all forms of money lose value equally,…Read more…
By Dan Amoss
02/08/10 Jacobus, Pennsylvania – I believe equity markets (and riskier assets in general) are in the midst of a 10-15% correction that plays out within one quarter, which is normal, not at the onset of the next financial avalanche, which lasts many quarters.
There was never any question that the extraordinary policy maneuvers of 2009 would begin to be unwound in 2010. But the culmination of events in Europe, China and the United States over the last two months have brought this all to a head very early on in 2010. Profit taking after large, sustained bull runs is a natural reaction of investors to a bout of increasing uncertainty and higher risk recognition.
On the US equity side, the Institute for Supply Management (ISM) manufacturing index has a history of tracking the year-over-year rate of change of the S&P 500. Over the past three decades, a reading on the ISM above 45 has been associated with positive capital gains on the S&P 500. A reading above 50 (like last week’s 58.4) has been associated with equity market gains above the long-term historical nominal average of 10-12%.
For this to be the onset of the next avalanche in equity prices, we would need to see the ISM composite index falling like a rock from its January high. That outcome seems unlikely with inventory rebuilding just beginning to kick into gear and leading economic indicators still on the rise.…Read more…
By David Walker
02/08/10 New York, New York – Perhaps because we are a young country, Americans tend not to pay much attention to the lessons of history. Well, we should start, because those lessons are brutal. Power, even great power, if not well tended, erodes over time. Nations, like corporations and people, can lose discipline and morale. Economic and political vulnerability go hand in hand. Remember, without a strong economy, a nation’s international standing, standard of living, national security, and even its domestic tranquility will suffer over time.
Many of us think that a superpowerful, prosperous nation like America will be a permanent fixture dominating the world scene. We are too big to fail. But you don’t have to delve far into the history books to see what has happened to other once-dominant powers. Most of us have witnessed seismic political shifts in our lifetime. In 1985, Mikhail Gorbachev settled into his job as the Soviet Union’s young and charismatic new leader and began acting on his mandate to reenergize the socialist empire. Seven years later that empire collapsed and disappeared from the face of the Earth. Gorbachev runs a think tank in Moscow now.
In a sense, the larger world is starting to resemble the nasty and brutish life that long has characterized the corporate world. Just ask Jeffrey Immelt, chairman and CEO of General Electric. Of the twelve giants that made up the first Dow Jones Industrial Average in 1896 – all of them once considered too big to fail – only GE remains. The other towering names of the era – the American Cotton Oil Company, the US Leather Company,…Read more…
Back in 2000, The Daily Reckoning announced The Trade of the Decade. It was a simple one: sell the Dow, buy gold. It worked... phenomenally. 