We left off yesterday’s issue “When Good Falling Prices Go Bad” wondering what stock market investors were thinking. They bought stocks heavily on Monday. Then, yesterday, they sold them a bit – the Dow fell 38 points.
Yesterday was largely uneventful. Gold rose a dollar. Oil climbed to $82.
Maybe stock market investors are not really expecting to get rich. Maybe they’re trying to avoid getting poor. They may figure that the real risk is being in cash…not in stocks.
If so…they may have a point.
Here’s the low-down…
As near as we can tell, the Japanese-style correction is still underway. Consumers are careful about spending because they fear they might not have jobs. Employers are careful about hiring because they fear they might not have revenue. And banks are careful about lending because 1) few people want to borrow, and 2) the banks figure they may need the money themselves.
Meanwhile, Ben Bernanke has staked his entire reputation on being able to avoid a Japanese-style slump. He gave a famous speech about it back on the 21st of November 2002. He called it “Deflation: Making Sure it Doesn’t Happen Here.”
Well, that was when the inflation rate was not far from the Fed’s 2% target. What’s happened since? The consumer price inflation level – as measured by the government – has now dropped down to 0.5%. And many economists think it will go negative soon.
Hmmm… This leaves Mr. Bernanke in a tight spot. It looks like deflation is happening here. And it is happening after Ben Bernanke has already used most of his tricks to stop it. The Fed is lending money at 0.25% interest – effectively zero. What’s it going to do next? Pay you to take the money?
If Bernanke allows deflation to happen…and persist…he will have Congress on his back. The Fed is supposed to be independent. But every Fed member knows which side his bread is buttered on. And no one doubts where the butter comes from – the US Congress and the administration. And everyone also knows that there will be mid-term elections this year.
As it stands, the voters are not too happy. They’ve seen the banks get bailed out. They’ve watched Goldman’s boys make their millions. And they’ve begun to wonder whose interests their elected representatives are really serving – the voters who sent them to Washington? Or the special interests who write big campaign checks? (Goldman gave millions to the Obama campaign…one of the best investments it ever made…)
Unfortunately for democracy, the poor voter has no idea of what is going on or why. If he has a job and his house is rising in price, he’ll likely vote for the clowns already in Washington. If not, he’ll want new clowns.
And right now, his house is likely to be underwater…and probably sinking. As for his job, he’s lucky to have one.
Ben Bernanke must surely feel the pressure to “do something,” right?
Not only that, his reputation is at stake too. What did he say in that remarkable 2002 speech? Oh yes, that “under a paper money system, a determined government can always generate higher spending and hence positive inflation.”
Well, maybe. But so far, it is looking as though it may not be as easy as the younger Mr. Bernanke thought. We have a paper money system, no doubt about that. We also have a Fed that is determined to keep inflation positive. But we also have inflation that is becoming less positive every day…and may turn negative soon.
Bill Bonnerfor The Daily Reckoning
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010.
Why so much focus on Bernanke? On the Fed?
These people only set short-term interest rates. For the US, but a lot of stuffs are controlled outside of the US. Yes they hold the lever on credit but their instrument of control, the banking system, is screwed and not functional.
So the Fed has become just a bunch of impotent old men taking daily doses of Viagra. They can hardly control monetary policy. Have no impact on the economy, on industry, on technology, on trade, on society, and on people.
The Greenspan era of monetary worship is finished. Start treating Bernanke as just another failed regulator.
I want new clowns. Funnier clowns. WIth different costumes. I’m tired of the donkey and elephant re-runs.
“do something”—as the Great Doe Eyed Pelosi herself exclaimed, “we’ve got to do SOMEthing!”
can’t let the gamblers go broke; not in Nancy and Ben’s casino!
i, myself, really enjoy losing all my wealth on the slots or blackjack, or on highly leveraged options, futures, or swaps, then just stopping by the post office on the way home and getting back the money than i lost, so i can re-capitalize, and…do it again, tomorrow.
what, exactly, did these clowns do?
IT’S A SECRET!!!!
maybe there are no “stock market investors” at the moment ?
apart from the pros (market makers and specialists) on the one side and they that do it with other people’s money (some funds) on the other side … average Joe has not returned yet after the trashing in 2007/2008 and will not return for quite a few years …
the market now goes up on “buying because of the economy in general and the results of the big companies in particular” … but unless shares are printed on the spot, someone is also selling … insiders are one part of that, but certainly not all …
absent an easy target to take money from (average Joe), the pros and the funds in the end have to take it from each other …
this will not end in beauty …
“The Fed is lending money at 0.25% interest – effectively zero. What’s it going to do next? Pay you to take the money?”
Well, you are wrong there. The FED will not pay me or any other lowly taxpayer to take money from them.
On the other hand, they do pay the big banks and Goldman to take their (our) money.
So what we have to date, is simply a decline in the increasing rate of monetary expansion.
Next the expansion will stop.
Then is may actually start decreasing.
Once it starts decreasing, then we will be dicussing the “rate of decrease” in deflation.
We have a long way to go before deflation is as bad as inflation used to be.
Are the goldbugs nowadays so desperate that they are using all their firepower to stimulate the FED to do some meaningful QE?
There’s an easy recipe you can use to root out the strongest stocks on the market right now.
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