11/15/10 Baltimore, Maryland – As you remember, dear reader, we decided to hoist our old, tattered “Crash Alert” flag up last week. About mid-week, as we recall.
Not that we had any inside information. Mr. Market doesn’t talk to us directly. We just read the papers – just like everyone else.
But what we noticed last week was that the Fed had given stocks, bonds commodities, and gold the biggest push in recorded history…$600 billion was coming into the market. It was long. It was going to stay long. And if it didn’t do the job…there was plenty more where that came from.
Plenty more. Because this money came from nowhere. And if you can get money out of nowhere…you can get a lot of it.
In effect, Ben Bernanke gave the market the Mother of All Puts. Stocks go down? Put them to the Fed. They’ll buy anything.
Yes, Mr. Bernanke is trying to give “risk on” investors a put – protecting them from the downside by adding more and more money. No, investors are not sure this plan is really going to do them any good. The stock market went up only very briefly on the day following Mr. Bernanke’s announcement. Then, there was no follow-through.
All very well to get hot and bothered speculating on the fall of the dollar (and the rise of everything else). But there is something so desperate and foolhardy in Mr. Bernanke’s money-printing, it just doesn’t feel right. It feels more like something a banana republic would do.
A New York Times article last week compared the US to a Banana Republic. It pointed out that the rich have gotten a lot richer than the poor. A pity. The author – Nicholas Kristof – missed the point completely. He thinks he knows how much people should earn and believes the difference in income – in itself – is the problem.
The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976. As Timothy Noah of Slate noted in an excellent series on inequality, the United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana.
C.E.O.’s of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. Perhaps the most astounding statistic is this: From 1980 to 2005, more than four-fifths of the total increase in American incomes went to the richest 1 percent.
At a time of 9.6 percent unemployment, wouldn’t it make more sense to finance a jobs program? For example, the money could be used to avoid laying off teachers and undermining American schools.
Likewise, an obvious priority in the worst economic downturn in 70 years should be to extend unemployment insurance benefits, some of which will be curtailed soon unless Congress renews them. Or there’s the Trade Adjustment Assistance program, which helps train and support workers who have lost their jobs because of foreign trade. It will no longer apply to service workers after Jan. 1, unless Congress intervenes.
So we face a choice. Is our economic priority the jobless, or is it zillionaires?
To me, we’ve reached a banana republic point where our inequality has become both economically unhealthy and morally repugnant.
This is typical. The guy doesn’t bother even to wonder why the rich are so rich. He just knows he doesn’t like it. So he’s calling on the politicians to DO SOMETHING about it! Tax the rich bastards. Give more money to the poor. Redistribute income.
He gives some lame reasons why income redistribution would be a good idea for the economy…
How does he know how much people should earn? Of course, he doesn’t. It’s just a matter of taste. Where you sit determines where you stand. If you’re rich, you probably like the fact that the rich have so much money. If you’re not rich, you probably don’t.
But let’s stick to our point. The US is doing something that usually only banana republics do. The central bank is encouraging speculation. Oh, by the way… Who speculates? Is it the poor? The middle classes? The working stiffs?
No? It’s the speculators, right? The rich, in other words, are the guys who can get money at ultra-low interest rates from the Fed (directly or indirectly) and use it to speculate on say, cotton (up almost 100% this year) or Chinese stocks.
Let’s see, how does that work again? Oh yes… The Fed gives out money to the financial elite…the rich… And then the know-nothing journalists at The New York Times want the feds to redistribute the wealth. Why not just turn off the Fed? No, that would be too simple and too honest.
But back to the Fed. It’s just given the elite a huge wad of cash…and a promise that it will put up more cash, if necessary…
…and yet, stocks did NOT go up much. Something is wrong. That’s why we raised the “Crash Alert” flag. It is as if this market wanted to go down – no matter what the Fed was doing. Or maybe it didn’t trust the Fed. Or maybe investors figured that acting like a banana republic was not really good for stock prices.
Friday, we got a big sell-off…with the Dow down 90 points and gold off $35.
We don’t like the looks of it. So, turn your head upwards a bit. See our “Crash Alert” flag a-fluttering. And get out of all risky investments…
Bill Bonner
for The Daily Reckoning
Bill Bonner
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.
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Do you consider physical gold and silver a risky investment in this environment? Better to liquidate them too?
Life itself is risky. What then is the ultimate solution to end all your risks?
Mostly the rich got rich in ways that included taking risk. (Even stealing from the poor is quite risky)
United States has enormous numbers of poor people.
The poor have little hope.
But they do have guns.
How will that ultimately turn out?
and yet, stocks did NOT go up much. Something is wrong
haha, a simple market rule, the more bloated a fat man gets, the slower he waddles, the slower he waddles the more likely he is to come tumbling down. that is what’s wrong
Sorry Bill, much as I admire your pithy words and style … you seem to rub elbows with the wealthy to an extent that colors your objectivity.
The Fed is the ultimate tool of the ultra wealthy to maintain and enhance their control. Curiously, you are relatively silent on this subject. Instead you seem all to ready to palm it off on ‘controlled markets’ or some such other obfuscation.
Let’s cut to the chase.
The fed is owned by a select few ultra wealthy (never mind the cover layers of entities this is hidden behind … i.e the Adirondack Trust Company and Banco Popular).
Until you reconize that the corruption of this country emanates from the principles behind the fed, I will continue to look upon you as this sort of dude investor type, successful, but not willing to look into the shadows and acknowledge the evil that exists.
@Tom
Gold and Silver is real money, my advice keep it until you need to use it to buy an even more important commodity, food. Sure the rich have nearly all the paper–don’t be lured into their game, we have already lost.
Keep that which is important; strong family, learn to use tools, garden, become independent and free from the consumer scam. Don’t forget to pay your taxes–in worthless dollars!
At present, 88% of the Chinese approve of the way their government operates. Ditto the somewhat dictitorial government of Vladimir Putin in Russia. Contrast that with the 12% who approve of congress here in the US and it makes one wonder if we wouldn’t be better off letting the foreigners invade. If you look back through history, the collapse of most empires has less to do with defeat by external enemies, than it does complete and total indifference on the part of the empire’s denizens. Those who have surrendered to the conclusion that the current government was hopelessly corrupt won’t lift a finger to prevent its collapse. The downside, of course, is all the unpredictible collateral consequences that go along with the collapse of government. Eventually the consequences subside, but unfortunately it is seldom within the lifetime of the generation who first experienced the empire’s disintergration.
You wanna get rich, you gotta take risk, whether thats with money or time or whatever.
Is it any coincidence that Bernanke looks a lot like Lenin? Think about it