Monday, June 05, 2006

 

Bernanke Hints At Stagflation

Reuter looks at what moved the markets. "U.S. stocks and bonds skidded and the dollar rose on Monday after Federal Reserve Chairman Ben Bernanke's concerns about inflation increased expectations of a rate hike in June. Bernanke said the Fed must be vigilant to make sure inflation stays under control even as the economy starts to show a slower pace of growth."

"'Given recent developments, the medium-term outlook for inflation will receive particular scrutiny,' Bernanke told a group of bankers."

"The Nasdaq tumbled more than 2 percent and the Dow Jones industrial average slid 1.77 percent while the 2-year U.S. Treasury note sank sharply as investors read Bernanke's remarks as an assertion that the Fed would be vigilant and suggesting the central bank may raise rates in late June to temper inflation expectations."

"Bernanke's comments 'not only dashes hopes for a pause, but it puts the rates hikes back on the table for the rest of the year,' said Barry Hyman, equity market strategist."

"The dollar rose against the yen and was little changed versus the euro Monday, after hawkish comments from Federal Reserve Ben Bernanke. The greenback recovered from a 13-month low against the euro touched earlier in the session on speculation that the European Central Bank will raise rates more aggressively than expected this week."

"'Bernanke's surprisingly hawkish comments and concern about inflation signals that we'll still see a quarter point hike at the end of this month,' said Kathy Lien, chief strategist at FXCM. 'For the time being, he is still discounting the weakness in recent data by citing strength elsewhere.'"

"Late in New York, the euro was at $1.2907, compared with $1.2918 late Friday, after rising as high as $1.2979, the highest level since May 5, 2005. The dollar changed hands at 112.16 yen, compared with 111.65 yen. The euro strengthened to 144.98 yen, the highest level since April 21, 2006 and last traded at 144.79 yen from 144.35 yen."

"The British pound was fetching $1.872 against $1.8733. The dollar traded at 1.2075 Swiss francs compared with 1.2137 francs."

"Brian Dolan, director of Research at Gain Capital, cautioned that while Bernanke's comments are highly suggestive of him 'leaning toward another rate hike,' his observations that the economy is slowing suggests 'additional rate hikes will be dollar-negative.'"

"'Slowing growth and rising inflation, aka stagflation, is one of the worst combinations for a currency in that it undermines overall asset attractiveness,' Dolan said. 'This means that further hawkish rate rhetoric is unlikely to benefit the U.S. dollar and will slowly come to be seen as an outright dollar negative.'"

Comments:
I'm a little surprised at the reaction from the PM markets. While the dollar did turn around on the Swiss franc, it was only a fraction of Fridays loss.
 
I'm beginning to understand what it means to live in "interesting times". It's as if the market feels something looming on the horizon, but isn't quite sure what it is. We have massive trade imbalances, a housing market about to collapse and take hoards of FBs down with it, oceans of cash wandering around looking for a parking place, a U.S. dollar in trouble, manic commodity markets, weakening consumer sentiment, and hints of stagflation.

FWIW, I think the Iran thing today was overblown. They love to make provacative statements to get attention. I think they realized that the news that came out over the weekend (Iran responding favorably to U.S. hints at direct talks) sounded too conciliatory and they had to ensure that we didn't start to think that they're not crazy and unpredictable, so they did a little meaningless sabre-rattling. Just my guess.
 
Not bad, Chairman Ben, the game is on. Liquidity bubble is getting pricked again. There is going to be more squeezes. Wall Street should be pretty pissed by now. If Euro and Yen follow up with this, Roach might very well be in on something.

Not good news for PM though.
 
the only problem with that is, a declining US economy will most likely cause a dollar flight. that will probably result in an increase in the price of oil and etc. the money will be flowing to countries that are traditional gold investors. they don't have the anti-gold bias that the US financial institutions have. they will buy gold on their way out of the dollar.

yes, in a recession, commodities will get hurt. but the 30s and the 70s weren't good economic times, but commodities boomed.

Veteran gold bug sees price soaring to $3,000 an ounce
 
oh, and as we know, when the global economy starts crumbling(I'm still a proponent of a short deflation), they only know to do one thing.

lower interest rates.

this will most likely cause inflation. the only problem this time is they'll be pushing on a string. there is no other boom that can help the US consumer.
 
From todays Financial Dense "best quotes from May 2006:


"Ron Paul, Texas Congressman
Remember, gold is static. Gold isn't going up, the dollar is going down. And it's going to continue until the American people demand an end to deficit spending by Congress and unrestrained creation of new dollars by the Federal Reserve and Treasury department.

Few Americans realize the extent to which their own government has sold out American sovereignty by borrowing money overseas.

The Federal Reserve may have no choice but to raise interest rates to maintain foreign enthusiasm for our dollar. It's a serious problem that new Fed Chair Benjamin Bernanke must address sooner or later: propping up the dollar with higher interest rates without killing the U.S. economy in the process."
 
Sorry I meant Financial SENSE...not DENSE. One of the best sites on the web IMHO

There is also a nice article today about Goldman Sachs. GS came out today and predicted gold at $800oz...but the site revealed they are SHORT 46K contracts split between 2/07 & 04/07.

Hmmm. One of the best things about investing in Gold IMHO is, while the big boys and hedgies are able to manipulate the market a little bit..the TRUE big boys (Cbs) can crush them at any time and they know this, Unlike stocks where the brokerages control the action.
 
Goldman should be a gold man.

Some on this board have taken gold as a religion. I am with my namesake in VA. Everything goes up and comes down in a given set of conditions. When the conditions change, they change too. Assets and instruments are all interrelated variables. The key is to understand how they work with each other.

Fiat money is one of the greatest inventions of man. It greatly facilitates economic activities and makes our lives that much easier. Other than gold though, it is prone to governmental manipulation. In AG's hand, it became something like a prostitute.

BB is still learning the ropes, so let's give him some benefit of the doubt. We have a new guy put into this critical position at this interesting time. Let's see what he is up to.

Should be fun to watch. And let's play it accordingly in a cautious manner with an open mind.
 
(Fiat money is one of the greatest inventions of man. It greatly facilitates economic activities and makes our lives that much easier.)

fiat money is the biggest fraud. it's dishonest. it's transfers money from savers to borrowers. it's abused by ALL gov'ts. it allows the rich and the bankers to accumulate more and more money and the expense of the working man. it's destroys retirements.

it's a cheat upon the people, period. it does not facilitate economic activities in the long-run, in fact, it ruins economies.

do I have to list currency after currency that has been debased and destroyed a nation's economy?

it's not even money, it's debt. it doesn't have all the properties of money.
 
Good post JohnDicht

One question though...why does one of the greatest inventions of man have to be FIAT money. What's the difference if the currency is backed by gold?
 
It's as if the market feels something looming on the horizon, but isn't quite sure what it is.

I've said so much before on the Housing Bubble blog. What do you suppose will happen when they actually figure it out?? ;-)

Some on this board have taken gold as a religion.

Far from it. Simple recognition of where we are, where we are headed, and how human nature will dictate responses to same.

It took personal bankruptcy (Chapter 13) and first-hand exposure to two economic bubbles to raise my awareness of the true state of the world around me. Scared the sh!t out of me to find out the truth. But as they say, danger and opportunity come hand in hand.
 
What's the difference if the currency is backed by gold?

I know you directed this to the other john, but here's my two cents: a gold specie standard imposes too much of a limit on credit creation. There's nothing wrong with credit creation per se, or with expansion of the money supply generally in line with the growth of economic production. The problem occurs when governments use the ability to print money to run huge deficits. However, irresponsible deficit spending and speculation can occur in any type of monetary system. The U.S. experienced horrible depressions and panics under the gold standard.

fiat money is the biggest fraud. it's dishonest. it's transfers money from savers to borrowers. it's abused by ALL gov'ts. it allows the rich and the bankers to accumulate more and more money and the expense of the working man. it's destroys retirements.

john, I think this overstates the case. Do you have an automobile? Probably more than one. Television? Check. Plenty of food in the fridge? You get my point. People in the U.S. -- even the "poor" -- enjoy a standard of living that folks couldn't even imagine 100 years ago. The fiat system has not destroyed my life. Sure, a large number of people have gotten themselves hopelessly into debt, but that's not because we have a fiat money system. It's because there are a lot of idiots out there who will sign a mortgage without reading it first. Rampant, irresponsible consumerism and an instant-gratification mindset are responsible for our debt problems, not our monetary system, IMO.
 
One more thought, guys, on BB: I think it's evident that he's put the commodities bubble in the crosshairs. I've been arguing for some time that speculation-driven commodity price increases would eventually show up in core inflation numbers and that would potentially drive more speculative money into commodities, starting a vicious cycle. The Fed has to get the speculative element out of commodities and I think they will, even at the risk of an economic slowdown. My take is that BB has fired a warning shot across the bow of hedge funds and traders, reminding them that the old adage still holds, "don't fight the Fed".
 
The Fed governors are starting to give hints of what to expect. One of them recently said that although the economy cools down, we could see a rise in inflation. Hmmm. I wonder why. Like I said, with countries beginning to sell oil in currencies other than the dollar, those dollars are coming back. That is going to mean A LOT more money chasing the same goods. They are going to need to increase rates enough to hopefully keep that money stuck in TBills/Bonds. To do that will crush the housing debacle. That will cause massive defaults on the loans which a large portion have been packaged up and sold as part of the stock market. UH OH!

PMs are selling off because right now folks are too short sighted to connect the dots. They think higher interest rates will kill the speculative bubble. Well, I didn't buy gold/silver to make a killing. I bought because I didn't want to see everything I worked to save vanish. In the way that I purchased as hard assets vice futures, etc, it wasn't an investment per say, but a store of wealth. I may still suffer a loss of purchasing power, but I feel it is the best way to minimize my loss.
 
(Rampant, irresponsible consumerism and an instant-gratification mindset are responsible for our debt problems, not our monetary system, IMO.)

yes it is. it's dishonest. it cheats people. with so much money, eventually money and credit become something that's a game- hence the rampit speculation. the only thing is, under a gold standard there is some anchor, fiat money has none.

under our system, there is no final means of payment. fiat money is not money, it's essentially debt. fiat money is like enron stock, eventually it's worthless, every single share.
 
There is a very real danger with fiat currency. That is why history has always had such dramatic upheaval when it comes to an end.

Once the debt/money is created, raising rates DOES NOT decrease liquidity. It only makes it harder to pay back. There are only two ways to get rid of it. Destroy the money that was created in the first place. That happens one of two ways. The FED/Treasury takes money in, and doesn't replace it, or people default on their debts. That is it. Otherwise, that money is still out there searching for a home. If they are lucky, they can get folks to put that money in things that won't effect the inflation numbers (the bogus CPI). Otherwise, that money will look for safe havens (commodities...people need them to an extent depending on which one). How do we think there is such a thing as stagflation? Everything else is just fancy speak from folks no smarter than anyone else. The saying "if you can't convince them, confuse them" is what is going on right now. Fancy econ terms is all it is. To get rid of all that liquidity is going to take a lot of one of the two above.
 
If we're splitting hairs here... "Guns don't kill people, people kill people". IOW, it's not fiat per se, it's the politicians. History has proven time and again government cannot be trusted with pure fiat. "Bread & Circuses"
 
if we want to take a look at standards of living, the whole world industrialized on the gold stanard. it was a period of rapid economic growth and no inflation.

today's economic system gives us crumbs, while the banks are the one's who really clean up. they'll never support going to a gold standard. why would they when they can lend out money and charge interest on money they don't have. they just create money out of thin air. that's why banks have so much of it- special privilege.

if we created money out of thin air, it's called counterfeiting. it's a crime. we all know why, because someone is being cheated. but if you put $1 dollar in a bank and they loan out $100 bucks on that $1, we call that fine.

just look at the old silver dollars to see the problem. they are marked "one dollar," yet you can sell them for a lot more than a dollar, and a lot more than the spot price of silver.

how can anyone save under that system? how can an economy survive, long-term, under a monetary system like that? where your time and labor is eroded away by legal counterfeiting?

Every dollar of a bank bill that is issued beyond the quantity of gold and silver in the vaults represents nothing and is therefore a cheat upon somebody.
-John Adams
 
TJ and John,
I'm with you both, and in the end, there will be a lot of pointing going on wondering who's at fault. Unfortunately, in a society like ours, we the people are at fault, plain and simple. What Bernanke is really saying by stating they need to reign in inflation, is that they have to get rid of a lot of money. Like I stated in the previous post, that means he is saying he's going to have to raise rates to the point where a lot of folks go bankrupt.

He is saying it in such a cute way though, that most people still won't catch on to how you take liquidity out of the system after you create it. Still the best scam going. They knew it was coming, and they attempted to protect the banks by passing the bankruptcy change last October. Unfortunately, you can't get blood from a stone.
 
'Ol Bernanke, Is going to need to take a class in that smooth 360 degree Greasepan speak. He's coming mighty close to spooking the herd. Of course rates need to and will rise, but if the wording is not just right or even obtuse it can cause the herd to turn.
 
(we the people are at fault)

you're right, we are the one's who allowed the politicians to get away from constitutional money.

I think in my lifetime we'll see hyperinflation in the US. it maybe soon, because of Mr. Bernanke, but I think he's bluffing. maybe in 20-30 years.

in reality, when you hold an older silver dollar in your hand and a one dollar bill in the other, maybe we've already hyperinflated.
 
you know, this time with China and India it is different. every bull needs a theme or story. during the 60/70s commodities bull, it was the boomers and growth of Europe. during teh 1980s and 1990s bull market in stocks, those same boomers were placing money into stocks for retirment.

this time the them for the commodities bull market of 2000-2017(?) is china, india, emerging countries and the decline of the US dollar. it truely is different this time. unilke stocks and housing, the fundamentals are real.
 
ANALYZE THIS

Somewhat O/T but I think it interesting to point out that the German word for debt and guilt, "Schuld", does not in fact distinguish between debt and guilt. Guilt and indebtedness are obligations derived from the laws of reciprocity. Relationships of indebtedness are at the core of economic and civil law relationships.
While the German notion is entwined with Christian theology (i.e., redemption et al) it is at the heart of understanding relationships of debt, guilt, and obligation in economics.

Pardon the sermon but you guys sound kind of preachy sometimes
 
maybe in 20-30 years

IMHO, more like 3 to 5.
 
This comment has been removed by a blog administrator.
 
'Ol Bernanke, Is going to need to take a class in that smooth 360 degree Greasepan speak. He's coming mighty close to spooking the herd. Of course rates need to and will rise, but if the wording is not just right or even obtuse it can cause the herd to turn.


Then again, maybe Bernanke is setting a new tone at the Fed, reminiscent of Paul Volcker. AG was way too sensitive to the markets, and I think it became a bit of a tail-wagging-the-dog scenario, with AG candy-coating his messages in obscure language to avoid any unpleasantness. Perhaps BB's view is that the job of the Fed is to promote price stability, not protect the stock market from price corrections.
 
I said in May I thought the wait until the next Fed mtg seemed like a long time. It feels so already.
 
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