Exploiting Bernanke, Part Two of Two

Currencies everywhere were devaluing against tangible assets and necessities. Corn prices doubled between April 2006 and January 2008.  The principal cause was energy: ethanol, fertilizer, water, transportation. The best topsoil in North America had eroded from 18 to 10 inches over the past 50 years. The erosion would have been much greater without fertilizers.  More fertilizer, which might slow topsoil erosion, needed more energy. Potash Corporation from Canada expected the cost of producing potash fertilizer would rise by nearly 70% in 2007 due to increased demand for food and fuel. Cambridge Energy Research Associates estimated the worldwide cost to produce oil and natural gas (labor and equipment) had risen 53% since 2004. In some cases the rising costs had led producers to scrap exploration. Exxon estimated the cost of building a gas-to-liquids plant in Qatar at $3 billion in 2004. Estimates in 2007 were $18 billion. The joint project of Exxon and Qatar was dropped.

The United States has imported more than it has exported for decades. Central banks, such as China’s, collect dollars from its domestic exporters (from whom Americans had bought goods). The Chinese exporters are handed yuan in exchange for dollars by the central bank. This causes a rising supply of yuan in the local economy. Incomes rise. Necessities improved (more chicken and less rice was eaten) and the Chinese bought machines long considered part of the furniture to Westerners – air conditioners, refrigerators and televisions. China needed more energy.

These permutations of inflation, as they reentered the United States, were understood by Harry Landis and non-college graduates, even if Fed staffers with their “expert judgment” could not comprehend the damage.

On November 7, 2007, Bernanke demonstrated that he had no understanding of inflation. In testimony, Congressman Ron Paul accused Bernanke of a loose money policy that was devaluing the dollar and causing consumer prices to rise. According to the Fed chairman, this was not the case: “If somebody has their wealth in dollars, and they’re going to buy consumer goods in dollars, for the typical American, then the deval-, the decline in the dollar, the only effect it has on their buying power is it makes foreign goods more expensive.” This extraordinary demonstration of ineptitude was barely mentioned by the same group that thought the spelling of “potato” was of national importance.

On the same day, the Marxist president of Venezuela, Hugo Chavez, showed he understood economic claptrap better than the U.S. media, establishment economists, and the Wall Street publicists who regularly appear on Bubble TV. Chavez addressed an OPEC gathering: “Don’t you see how the dollar has been in free-fall without a parachute? The empire of the dollar has to end.” The next day, the Archaeological Survey of India announced it would no longer accept dollars for admission to the Taj Mahal The dollar had fallen 12% against the rupee since the beginning of the year.

Oil moved above $90 a barrel in October 2007: the number of dollars needed to buy a barrel of oil had risen from around $40 to $95 since the beginning of 2005. Prices across the U.S. were rising, including – maybe most importantly – manufacturing costs. The Associated Press reported that over 3.2 million factory jobs had been lost in the U.S. since 2000, many of those jobs going to countries with cheaper costs. Wilbur Ross, long-time veteran in the buyout business, was interviewed by the Financial Times in April 2007. He noted the amount of debt used in private-equity acquisitions was at an all-time high, “a very dangerous phenomenon,” with only a few making fortunes at the expense of many: “The danger isn’t so much inequality as that we’re gradually losing the middle class from the population [which is] one of the big contributors to social stability and the relative political stability of the country.”

The commercial banks supplied much of the financing for buyouts. The Federal Reserve chairman could have slowed this to a crawl. The Fed has the authority to reduce reserve ratios of the banks. This was not discussed.

In March 2008, 91% of Americans polled were concerned about inflation. Commodity markets boomed. Rice prices passed their all-time high, which had been set in 1973. Costco and Sam’s Clubs in California rationed rice purchases.

On June 9, 2008, Chairman Bernanke stated “[t]he Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing from growth as well as inflation.” Two weeks later, the

University of Michigan found consumers expected prices to rise 7.7% over the next year. Bernanke, before Congress on July 15, 2008, admitted “inflation expectations have moved higher.” He reassured the politicians: “[L]onger-term inflation expectations remain reasonably well anchored.”Given his July 2007, explanation of how the Federal Reserve thinks about inflation (see above), it is obvious he was talking through his hat.

Oil peaked at $147 a barrel in July 2008. In August 2008, the chairman told the world’s leading economists in Jackson Hole, Wyoming that inflation should moderate later in the year due to “well-anchored inflationary expectations” and the “increased stability of the dollar.” (The dollar had been rising for all of six weeks.) When had he discovered the dollar’s influence on inflation? The day before his Jackson Hole appearance, the U.S. Department of Agriculture projected 2008 food costs would be the highest in 20 years.

By the summer of 2008, the U.S. was submerging in the financial crisis, of which Chairman Bernanke has shown no more understanding than of inflation. Prices retreated but are rising again.

In August 2010, the U.N. Food and Agricultural Organization announced its (international) food index has risen 16% over the past year and is at the highest since 1990. Global meat prices are at a 30-year high. Lamb prices are at their highest since 1973. Wheat and corn prices are rising at their fastest pace since 1973, a year of severe price and social disruption. In April 1973, Time reported that “[p]rofessional thieves are increasingly hijacking meat trucks.”  False rumors of a rice shortage led frantic Californians to drag 50-pound bags of rice from supermarkets to their cars.

Official U.S. government consumer price index (CPI) numbers have not been mentioned until now. They are important to investors since the monthly calculations, offered to the public as a single number by the media, are taken at face value by the learned financial scholars who are interviewed on TV. The calculations though are a negation of the truth.

It would have been difficult to find the CPI number that was announced when Bernanke was making his comments. The Bureau of Labor Statistics (BLS), which calculates the numbers, states on its website that the press releases (on its website archive) are not the same as the releases that were sent on the corresponding date (for instance, in June, 2006). The BLS has replaced the earlier numbers with newer, revised figures.

Since they have not yet been revised, we can compare a recent distortion between BLS numbers and a more candid approximation at reality. On August 13, 2010, the BLS announced the “index for all items less food and energy rose 0.1 percent in July” 2010. Dropping down the page, the agency claimed food prices fell -0.1% in July. J.P. Morgan analysts conduct supermarket surveys, comparing 33 current to past prices. They recently found that, in the Virginia area, food prices at Wal-Mart have risen 5.9% over the past year.

In July 2010, Chairman Bernanke appeared before the Congressional Committee on Banking, Housing and Urban Development. He stated: “Inflation has remained low. The price index for personal consumption expenditures appears to have risen at an annual rate of less than 1 percent in the first half of the year.” He went on to make a statement that collected several hackneyed phrases of the sort that official bureaucrats use to disguise what they are thinking, assuming they do think: “At some point, however, the Committee will need to begin to remove monetary policy accommodation to prevent the buildup of inflationary pressures.” He finished: “Near-term inflation now looks likely to be a little lower.”

In July 2010, police in Homestead, Florida, “said thieves are striking at farms, stealing produce to sell on the black market.” Three weeks later, in West Philadelphia, a four-year-old boy was “swallowed” by the sewer system after a manhole cover had been stolen. The Associated Press reported: “In 2008, the department began installing locks on some of the 76,000 manhole covers in the city but still officials are looking at options. ‘We’re also looking into alternative materials to where [sic] they won’t be attractive for the scrap yards’ “. (The four-year old lived.) In San Francisco, federal detention centers are “slowly filling up with a new type of criminal… a rising tide of copper thieves raiding abandoned government facilities for their heavy gauge electrical wire.”

The Court’s Conclusion

To conclude: dismiss Bernanke and discussions about the Federal Reserve. Commodity prices are rising and time is better spent reading the Northern Miner and watching the Prairie Farm Report than Bubble TV. This is not a prediction that commodity prices can be extrapolated in a predictable upward path, but that investors will be able to make money by exploiting the vast ditch between the Federal Reserve’s false world and reality.


Frederick Sheehan,
for The Daily Reckoning

[For more of Frederick Sheehan’s perspective you can visit his blogs here and at www.AuContrarian.com. You can also purchase his book, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), here.]

The Daily Reckoning