The Rude Awakening
Wall Street, New York
Wednesday, October 27, 2005
------------------------- - A closer look at the man set to shoulder the weight of a
nation,
- What lies ahead for the future fed head? And,
- The 9 Most Undervalued Stocks in the World's Hottest
Sector…
------------------------- [Joel's Jotting: After two days of the good Dr. Richebacher
delivering the bad news you might be wondering, "Is there
any way out?" Many emails of this ilk pummeled my inbox
over the past 48 hours. This week your increasingly vexed
President offered up a man for tackling the festering
wasteland of economic crisis left by current fed head, Alan
Greenspan. Below, Eric and Rude favorite, Justice Litle, take a closer
look at the man that is to shoulder the task of coaxing
America back from the precipice; Ben Bernanke. I know
you'll enjoy this one so, without further ramblings from
me, here's Eric… -------------------------- Eric Fry, reporting from Wall Street… Ben Bernanke is the man of the hour! President Bush and
Alan Greenspan both agree that Dr. Bernanke would be a
terrific Federal Reserve Chairman. We have our doubts.
(Then again, we have our doubts that the Federal Reserve
needs a chairman…or that America needs a Federal
Reserve.) Bernanke has impeccable credentials and a glittering
resume…and that's exactly what worries us most about the
man. This Harvard-educated, MIT-refined, Princeton-immersed
economist has spent so many years in the elite cloisters of
the Ivy League that he sometimes confuses the moronic
theories of academia for real-world wisdom. Bernanke is, as the Brits would say, too clever by half.
When, therefore, American consumers fail to save enough
money, Bernanke wags a disapproving finger at the rest of
the world for its "savings glut." And when the U.S.
economy tip-toes slowly toward a recessionary soft spot,
Bernanke reminds the entire world that the U.S. Mint
possesses printing presses that are capable of inflating
away every nettlesome deflation that should come our way. Never mind that the dollar has plummeted since November
2002, when Bernanke highlighted the magical power of U.S.
printing presses; never mind that the inflation rate has
nearly doubled over the same timeframe; and never mind that
the bond market has been falling from the moment that
Bernanke's nomination become public knowledge, this Ivy-
League indoctrinated "inflation-fighter" is to be our next
Federal Reserve Chairman. Wow! This should be very interesting…as Justice Litle
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By Justice Litle The big news this week: President Bush disappointed the
wags by refusing to appoint his personal tax accountant to
the Federal Reserve. Instead he chose Ben Bernanke, the
renowned Princeton man. With a cheery glint in his eye, a
pleasing teddy-bear persona, and solid real-world
experience under his belt, Bernanke is well-respected on
both sides of the aisle. He is a John Roberts, not a
Harriet Miers. Thank goodness for that at least. What shall we say of the future fed head? It is probably
easiest to let Mr. Bernanke speak for himself, as he did in
this November 21st, 2002 speech: "Like gold, U.S. dollars have value only to the extent that
they are strictly limited in supply. But the U.S.
government has a technology, called a printing press (or,
today, its electronic equivalent), that allows it to
produce as many U.S. dollars as it wishes at essentially no
cost. By increasing the number of U.S. dollars in
circulation, or even by credibly threatening to do so, the
U.S. government can also reduce the value of a dollar in
terms of goods and services, which is equivalent to raising
the prices in dollars of those goods and services. We
conclude that, under a paper-money system, a determined
government can always generate higher spending and hence
positive inflation." That sums things up nicely, no? As the late-night infomercials say: "But wait, there's
more! In off-the-cuff email discussion of the Bernanke
appointment, my colleague Chris Mayer called attention to
this quote from a 2004 Bernanke speech: "We believe that our findings go some way to refuting the
strong hypothesis that nonstandard policy actions,
including quantitative easing and targeted asset purchases,
cannot be successful in a modern industrial economy." In everyday language, "targeted asset purchases" translates
to state-sanctioned purchase of private assets in the event
of a crisis. Such action would not be unprecedented, even
for a modern, democratic, free-market economy. Hong Kong,
that bastion of bootstrap capitalism, did it openly and
brazenly in 1998. (Type "Hong Kong market intervention"
into Google and you will get some interesting hits.) So. In Bernanke we have a man who is well respected in
economic circles, readily accepted by the political
establishment, and almost universally hailed by the
cognoscenti as the next steady hand on the tiller. And yet
this same man has talked openly of letting the printing
presses rip, Latin-American style…and if that fails,
letting the 8,000 pound gorilla of government wade into the
private sector, nationalizing assets for the public good. I do not say this mockingly: God help us. It's easy to become agitated over the words of a single
politician (and make no mistake, the supposedly "neutral"
federal reserve is packed with political animals), but the
reality is more complex. Greenspan presented the image of a
powerful wizard, but he was always more of a showman. The
same will be true of Fed Chairman Bernanke, only more so.
The new Fed Head will wield immense rhetorical power, much
as the old one did, but at the end of the day he is just a
bagman. Fund Manager John Hussman makes a powerful argument in his
piece entitled "Why the Federal Reserve is Irrelevant." It
is worth reading, available here: http://hussmanfunds.com/html/fedirrel.htm One of Hussman's key points is that the Federal Reserve
essentially shifts assets around, employing an elaborate
charade of smoke and mirrors in the process. US Dollars and
US Treasuries are interchangeable, and it is the Federal
Reserve's job to determine the ongoing ratio of one to the
other in the marketplace. But because the Fed long ago
ceded control of the fractional reserve lending system, it
has minimal say in the creation of dollars beyond the
monetary base. And because the Fed has zero influence when
it comes to government expenditures, the total amount of
Treasuries in circulation is out of the Chairman's hands
also. Thus the fed attempts to manage and massage the
supply of money and credit, but does not control it in any
real way. At the same time, the Federal Reserve is clearly not
irrelevant. The Chairman's rhetoric and stature have
obvious psychological weight, the force of which is very
real, and Fed positioning can strongly influence short-term
market movements. In the past I have compared the Chairman
of the Fed to a jockey riding a docile elephant. The key
thing is maintaining the illusion of confidence and
control; much of the game is psychological, for elephant
and observers alike. Under normal situations, the jockey is
genuinely capable of directing the pachyderm this way and
that. But when real panic breaks loose? Forget it. When it comes to America's financial situation, Mr.
Bernanke knows he will be weaponless at the extremes,
tossed about on the wind and the waves like any mere
mortal. Perhaps this is why his past speeches have talked
openly of such extreme measures. Anointed as Chairman, Mr.
Bernanke cannot turn down his shot at greatness… but he
knows in his heart of hearts where the dark road may lead. I leave you with this pithy comment from Bloomberg
Columnist Mark Gilbert: "The march of time and the shifting sands of history may
yet diminish the Fed chairman's role. Waiting in the wings
is someone with the potential to overshadow Bernanke,
wielding even more influence over the global economy than
Greenspan ever did. Step forward Zhou Xiaochuan, China's
central bank governor." [Joel's Note: Aside from offering you his adroit insights
on many a macro economic conundrum, Justice also spearheads
one of the more successful financial newsletters out there;
Outstanding Investments. He also thoroughly enjoys
relieving your already strapped junior editor of a sly
twenty every time we play poker. No matter. It is a small
price to pay for an education as spouts off his investment
strategies and philosophies. Spare yourself an embarrassing
game of poker and head straight to Justice's profit machine
right here: Outstanding Profits with Outstanding Investments
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ahead for all those that take their financial security and
that of their family's seriously. We will continue to
monitor the situation for you as it unfolds but, in the
meantime, let us know what you think. Where is this fair
nation of the free and brave headed? What fate awaits us?
Send your ponderings to me, your graceless editor, at: aussiejoel@the-rude-awakening.com Cheers, jOEL And the Markets… | Monday | Tuesday | This week | Year-to-Date | DOW | 10,346 | 10,378 | 130 | -4.1% | S&P | 1,191 | 1,197 | 12 | -1.7% | NASDAQ | 2,100 | 2,109 | 18 | -3.5% | 10-year Treasury | 4.59 | 4.54 | 20.00 | 4.55 | 30-year Treasury | 4.80 | 4.73 | 20.00 | 4.75 | Russell 2000 | 638 | 643 | 6 | -2.0% | Gold | $470.80 | $472.50 | $3.91 | 7.6% | Silver | $7.78 | $7.79 | $0.12 | 14.2% | CRB | 324.23 | 329.19 | 1.72 | 14.2% | WTI NYMEX CRUDE | $60.84 | $62.21 | $0.21 | 40.0% | Yen (YEN/USD) | JPY 115.87 | JPY 115.07 | 0.02 | -13.0% | Dollar (USD/EUR) | $1.2063 | $1.2100 | -114 | 11.0% | Dollar (USD/GBP) | $1.7738 | $1.7837 | -62 | 7.5% |
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