The Fed Plays All Its Cards
There never really could be much doubt that the current experiment in competitive global currency debasement would end in anything less than a total war. There was always a chance that one or more of the principal players would snap out of it, change course and save their citizenry from a never ending cycle of devaluation. But developments since September 13, when the U.S. Federal Reserve finally laid all its cards on the table and went "all in" on permanent quantitative easing, indicate that the brainwashing is widely established and will be difficult to break. The vast majority of the world's leading central bankers seem content to walk in lock step down the path of money creation as a means to economic salvation. Never mind that the path will prevent real growth and may ultimately lead off a cliff. The herd is moving. And if it can't be turned, the only thing that one can do is attempt to get out of its way.
The details of the Fed's new plan (which I christened Operation Screw in last week's commentary) are not nearly as important as the philosophy it reveals. The Federal Reserve has already unleashed two huge waves of quantitative easing (purchases of either government securities or mortgage-backed securities) in order to stimulate consumer spending and ignite business activity. But the economy has not responded as hoped. GDP growth has languished below trend, the unemployment rate has stayed north of 8%, and the labor participation rate has fallen to all-time lows. In the meantime, America's fiscal position has grown significantly worse with government debt climbing to unimaginable territory. Despite the lack of results, the conclusion at the Federal Reserve is that the programs were too small and too incremental to be effective. They have determined that something larger, and potentially permanent, would be more likely to do the trick.
However, in making its new plan public, the Fed made a startling admission. At his press conference, Ben Bernanke backed away from previous assertions that printed money would be effective in directly pushing up business activity. Instead he explained how the new stimulus would be focused directly at the housing market through purchases of mortgage backed securities. He made clear that this strategy is intended to spark a surge in home prices that will in turn pull up the broader economy. Such a belief requires a dangerous amnesia to the events of the last decade. Despite the calamity that followed the bursting of our last housing bubble, economists feel this to be a wise strategy, proving that a poor memory is a prerequisite for the profession.
But now that the Fed is thus committed, the focus has shifted to foreign capitals. Not surprisingly, the dollar came under immediate pressure as soon as the plan was announced. In the 24 hours following the announcement, the Greenback was down 2.2% against the euro, 1.6% against the Australian Dollar, and 1.1% against the Canadian Dollar. A week after the Fed's move, the Mexican Peso had appreciated 2.7% against the US dollar. Many currency watchers noted that more dollar declines would be likely if foreign central banks failed to match the Fed in their commitments to print money. On cue, the foreign bankers responded.
It is seen as gospel in our current "through the looking glass" economic world that a weak currency is something to be desired and a strong currency is something to be disdained. Weak currencies are supposed to offer advantages to exporters and are seen as an easy way to boost GDP. In reality, weak currencies simply create the illusion of growth while eroding real purchasing power. Strong currencies confer greater wealth and potency to an economy. But in today's world,no central banker is prepared to stand idly by while their currency appreciates. As a result, foreign central banks are rolling out their own heavy artillery to combat the Fed.
Perhaps anticipating the Fed's actions, on September 6th the European Central Bank announced its own plan of unlimited buying of debt of troubled EU nations (however, the plan did come with important concessions to the German point of view - see John Browne's commentary). On September 17th, the Brazilian central bank auctioned $2.17 billion of reverse swap contracts to help push down the Brazilian Real. The next day, Peru and Turkey cut rates more than expected. On September 19th, the Bank of Japan increased its asset purchase program from 70 trillion yen to 80 trillion and extended the program by six months. It's clear we are seeing a central banking domino effect that is not likely to end in the foreseeable future.
Although the Fed is directing its fire towards the housing market, the needle they are actually hoping to move is not home prices, but the unemployment rate. Until that rate falls to the desired levels (some at the Fed have suggested 5.5%), then we can be fairly certain that these injections will continue. This will place permanent pressure on banks around the world to follow suit.
All of this simultaneous money creation will likely be a boon for nominal stock and real estate prices. But in real terms such gains will likely not keep pace with dollar depreciation. Inflation pushes up prices for just about everything, so stocks and real estate are not likely to prove to be exceptions. Even bond prices can rise in the short term, but their real values are the most vulnerable to decline. In fact, even nominal bond prices will ultimately fall, as inflation eventually sends interest rates climbing. But prices for hard assets, precious metals, commodities, and even those few remaining relatively hard currencies should be on the leading edge of the upward trend in prices.
While I believe the Fed's plan will be a disaster for the economy, the silver lining is that it provides investors with a road map. As the policy of the Fed is to debase the currency, those holding dollar based assets may seek alternatives in hard assets and in the currencies of the few remaining countries whose bankers have not drunken so freely from the Keynesian Kool-Aid. We believe that such opportunities do exist. Some broad ideas are outlined in the latest edition of my Global Investor Newsletter, which became available for download this week. I encourage those looking for ways to distance their wealth from the policies of Ben Bernanke to start their search today.
Posted by Bischoff on 10/06/12 02:57 AM
SCHIFF: "In fact, even nominal bond prices will ultimately fall, as inflation eventually sends interest rates climbing."
BISCHOFF: Interest rates climbing... ??? For interest rates to climb, they would have to be a market phenomenon. They are NOT. That's exactly the problem with the validity of interest rate swaps. The FOMC sets the interest rate.
In order to save the banks, the Fed has lowered the interest rate again and again. Every drop by 50%, doubles the value of the assets on the books of the banks. It doesn't matter whether the interest rate drops from 5% to 2.5% or from 1/16% to 1/32%. The effect is the same.
The Fed central banking system established with the Banking Act of 1935 began to unravel with TARP. With the advent of the QEs it is now completely gone. Federal Reserve Agents to authorize credit authorization against repayment are out of business. Frank-Dodd actually acknowledges this situation by limiting "rescue" to a handful of mega banks
But prices for hard assets, precious metals, commodities, and even those few remaining relatively hard currencies should be on the leading edge of the upward trend in prices.
Posted by dotti on 10/04/12 10:32 AM
Whenever I see references to GDP growth, I assume that it refers to nominal GDP unless it states otherwise.
this morning I saw a reference to 1-2% growth for this year and my reaction was that if you factor in inflation--even at the inaccurate (fraudulent) stated CPI rate--it is actually recessionary.
Regarding theft through printing of money and control of money flows, what has happened with fixed income investments is criminal fraud in my opinion. the increases in price of RE is no different. Wealth transfers facilitated by the Powers That Be.
I hope somebody's still reading this thread and I get some feedback!
Thanks to all.
Posted by clark on 10/03/12 11:05 PM
mava, are you ignoring the verifiable facts (you know, evidence) I posted, or are you just slamming EPJ for no particular reason?
EPJ's track record is pretty good, better than Every Keynesian economist there is. I don't know wHAt you consider an economist to be, EPJ looks to be written by an Austrian Economist. A good one at that. I think perhaps you're confusing EPJ with the War Street Journal or something.
Danny B wrote: "Wages in a given area control RE prices in the same area."
Are you familiar with the term "equity locusts" and the effect they have?
Haven't you noticed in many cities and areas low wage earners are driven out of the area due to high realestate prices?
Wages certainly do not control RE prices.
Im beginning to doubt wages even cap rental rates.
Time will tell though.
Posted by Danny B on 10/03/12 09:10 PM
Farmland is an entirely different animal. Farmland and Sturm Ruger stock have appreciated faster than gold.
RE is currently looking like a good deal. Check back with me Q2, 2013. :) :) :)
Between now and then, we face the fiscal cliff, debt ceiling and post-election let down.
Not to mention [ $1.2 T] in subprime student loans.
Click to view link
Toss into the mix a 4% decline in GDP.
Oh, and a mega collapse in Europe.
Click to view link
So, while Residential RE look ok now, The future is pretty shaky. Wages in a given area control RE prices in the same area. Wages as a percentage of GDP are the lowest in 50 years. People will just live in their cars.
Click to view link
The U.S. had a certain wage & price level. Wages are fast falling. The price structure will eventually catch up.
I wouldn't invest in houses that require a long commute or lots of heat/AC.
Posted by mava on 10/03/12 05:08 PM
I think I'd disagree with Peter Schiff, on that the nominal appreciation of RE would less than the real depreciation of the dollar.
May-be his estimate is based on a much more intricate analysis that includes the situation with mortgages?
But, in a simple approach, the owners of RE should win, because the wealth extracted from everyone who holds dollars, depreciating all the dollar stock equally (say 1%, if the FED prints new money amounting to 1% of existing stock), while the real estate nominal appreciation would be due to the fact that this new money is poured into RE first, (and that same 1% may actually represent 5 or 10% as compared to the valuation of RE market), and therefore, raises it more that it lowers the dollar.
So, simplistically, the real RE appreciation could be 5%-1%=4%, for instance. This is going to happen at the very beginning, and with time, the new money will spread further into various other markets, raising the prices there, and also reducing the real appreciation at the same time.
It looks as though there is some magic is being performed here, as we seemingly get more for less, - why don't we just invest in RE and print with abandon?
But, there is no magic, really. All that is going on is that through the assistance of the FED, the owners of RE will receive the wealth that was extracted from everyone holding dollars. It is really absolutely no different than if the FED just forcefully deducted 1% from everyone's accounts and transferred that to the accounts of the RE owners.
I think that if I was incorrect about this, then I would be in conflict with Mises's explanation of why the ruling class insists on being able to print money, - because they receive more benefit than their money depreciates, while everyone else receives less benefit and much more depreciation.
For instance, you may own a cell phone. That cell phone will appreciate in nominal price just a bit, due to the QE3, eventually. So, you will get say, 0,5% appreciation on your $500 device, giving you $2.50 "profit". However, for you, that will come at the expense of your say, $2000 cash and account balance being depreciated 1%, giving you $20 loss in real terms.
Expandable money concept was designed with one purpose - to conduct theft, and theft it will conduct.
Posted by dotti on 10/03/12 04:51 PM
Very good advice.
Posted by Just John on 10/03/12 03:49 PM
Whew, the important things I consider are... where does your potable water, food and electricity come from. Learn to provide them for yourself. Home defence is an issue no matter where you live on this planet, however, it is way down on the list if you do not have a source of food and potable water. Fill in the bottom bricks first, see Maslow for what order the bricks belong in. Gold or silver would be nice as a backup, but you cannot eat them and they are easily taken away. Build a smal rural community of like-minded souls if possible. Integrate with your surroundings. Remember the Aloha spirit and keep Hope in your heart. Love your neighbor as yourself.
Posted by mava on 10/03/12 03:31 PM
But the stuff you quote is from the EPJ! Their opinion is not an opinion of economist. They just shout what they want to start happening, hoping that we will jump into action without doing any homework. That is why the EPJ is there. Their purpose is to "form the confidence".
Not to say that the RE won't go up in nominal prices, just to note that we don't have the evidence that it already did, yet.
Posted by clark on 10/03/12 11:20 AM
Danny B wrote: "Real estate will continue to fall."
It ain't going that way right now:
Sunday, September 30, 2012
Megan McArdle: I'm Stuck in a Bubble and I Don't Know Why
"There are three parts of the country where house prices are at the early stage of a major upside break: New York City, California and Washington D.C." ...
Click to view link
Farmland is relentlessly increasing in cost too.
Illinois farmland prices still rising despite brutal season
Click to view link
Thursday, September 13, 2012
It's Now Cheaper to Buy Rather Than Rent in Top 100 U.S. Cities
"Lenders have doled out $38 billion in private jumbo mortgages during the second quarter of 2012, up 65% from 2011. This is a further sign the housing market is recovering." ...
Click to view link
Saturday, March 17, 2012
San Francisco Real Estate Market Starting to Heat Up
"Ground zero of the current tech-fueled real-estate boom is the Mission, ... Median home prices in the Mission grew 44% in December compared with a year earlier. " ...
Click to view link
Tuesday, September 4, 2012
Major Insider Take on What Is Ahead for the Economy
"Home prices are rising in half of the major housing markets in the U.S." ...
Click to view link
Posted by Danny B on 10/03/12 10:44 AM
As I posted yesterday, Asset price inflation will not raise RE prices. It can't realistically raise employment either. It is far too late for that. GOV balance sheet is too far gone.
Not to be outdone by Bernanke, the ECB has committed Hari Kari. They seem to have misplaced 22 trillion.
Click to view link
This can be expected to cause an exodus from the bond market.
FOFOA has reckoned a gold price equivalent to $55,000 an ounce in today's purchasing power. He used 2 different methodologies to come to this figure.
There is such an enormous mountain of currency in the world that, there is no place for it to hide when danger comes. The FED and ECB printing certainly rates as a danger. The bond market will certainly try to run from the danger.
With falling consumption in the West, currency can't very well hide in most equities. It certainly can't hide in bonds. Real estate will continue to fall.
Click to view link
It can't hide easily in foreign currency except, possibly the Yuan.
It can't flow to commodities when the whole world is slowing down.
Much of currency will flow to gold AND silver. While $ 55K an ounce sounds outlandish, everything responds to supply and demand. Currency is certainly in oversupply.
Posted by Don from the Republic of Lakotah on 10/03/12 10:26 AM
The Fed creates dollars to give away and nothing else.
Posted by dotti on 10/03/12 10:05 AM
Oh. And I really enjoyed the article and appreciated the facts presented with regard to other countries debasing their currencies.
Thanks Peter and DB.
Posted by dotti on 10/03/12 10:04 AM
I watch some CNBC, though not a lot. But I watched much during the crisis. One thing that I saw repeatedly was common wisdom:
We don't want to do what was done during our Great Depression, both here and globally: back then there were efforts to cut spending, raise taxes, and (especially) for nations to devalue their currencies in an effort to increase their exports at the expense of another country's.
Has anyone heard that lately??? Isn't our fearless leader supposed to be a student of the Great Depression. Aren't those three things--if not what caused the Great Depression, at least what supposedly deepened/lengthened it?
I'm not just trying to make a point here (that may be a secondary issue!)--I really want to understand how the one idea could be so prevalent--then completely disregarded, not just here, but globally.