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Thursday, November 4, 2010

The Bernanke Zone

There is so much ground to cover today dear reader I barely even know where to begin as our reality in the “Bernanke Zone” is beginning to feel like the “Twilight Zone”. Just when things can’t seem to get any weirder they do. Even though some of today’s post is political nature  it is relevant;  in case you have not noticed dear reader that while politics does not always have an impact on the economy at this point in time it is inseparable.

In this post election world there is bound to be some realignment and lots of chest beating and finger pointing. It looks like one of our favorite whipping boys is being thrown under the bus, I am speaking about little “Turbo Timmy” Geihtner.  First it is reported on CNBC.com by John Carney where he ponders a Geihtner “death watch” claiming that there will be heavy pressure from the Democratic Party to axe “Turbo Timmy” to signify a change in direction for the administration and that the White House is accepting its share of blame for the election losses.  Believe me I have no love for “Turbo Timmy” as I think that he should never have served as Treasury Secretary but instead should have been serving time for tax evasion. To suggest that the bludgeoning of “Turbo Timmy” would in any way be the smart thing to do politically is ludicrous and should not happen. For starters Obama has stumped and continues to on the idea that this whole mess was inherited and he has also publically praised “Turbo Timmy” repeatedly for his handling of things economic. For the Great one to come out now and dump “Timmy” would send the message that he was wrong on a variety of things and I do not believe that this President with his ego would do such a thing. Now “Timmy” may leave on his own accord because he has been exposed as the tax evading incompetent that he is but Obama is not going to row him out to the middle of the lake for a “Fredo” moment. Of course at this point the markets maybe questioning his credibility because just today was revealed in an article titled, “Geihtner Visited Jon Stewart in April, Though Not For Laughs” that “Turbo Timmy” solicited the economic insight of the comedian. “Jon Stewart is influential in America, so we took the opportunity for the two to meet and to discuss the economy,” Treasury spokesman Steve Adamske said in an e-mail yesterday.  Really, is this what we have come to the US Treasury Secretary consulting with a comedian for the pulse of the economy or perhaps he was asking what Stewart’s take was on the GM IPO? As much as I like Jon Stewart this does not give me a warm fuzzy feeling that we are in competent hands, but instead I can feel that knot in my stomach getting tighter. I mean seriously this is almost as bad as when the Administration tried to pull in ideas regarding the Gulf Oil Disaster and went calling Hollywood and specifically James Cameron…once again you can’t make this stuff up!!

The markets might initially cheer Geithner’s departure but then the uncertainty of who would replace him, let alone at this stage of the game who would want to replace him, looms. It could be very detrimental to replace Geithner at this time as we at least need continuity on the tiller of the economy. I felt that when they brought in Geithner they were scraping the bottom of the barrel already but if they do sack him they will have to delve in to the muck underneath the barrel. Looking at the situation we are in and the track record of this administration who are they going to find to step in to this role…Bueller…any one..any one???

So now that the people have spoken the administration is extending an olive branch to have the GOP leaders to meet at the White House, which I think is a good gesture although I think it is more for show than substance. I still maintain that we will have gridlock and this will be bad if the economy turns worse as I believe it will. The Republicans are riding the wave and I don’t see them feeling the need to cooperate as much as force the “Obama Agenda” in to a ditch to make him a lame duck and put the kibosh on his reelection bids. You can see the gearing up occurring less than 48 hours from the elections.

Some of the headlines indicating conflict are: “Boehner vows to repeal Obama healthcare reforms”.“ DeMint: We'll Ban Earmarks Right Away”, Conservative South Carolina Senator Says Republicans "Can't be Bribed if They're Not for Sale," Praises Sarah Palin. How about “New House Judiciary Chairman to Obama: Prepare for Investigations”. I am sure that Charlie Rangle and maybe even Barney Frank are sleeping with one eye open after seeing this, ”After electoral drubbing, Democrats must now deal with ethics trial” How about this which is tied in with the prior headline, “GOP likely to urge Obama officials not to shred documents”. “Eric Cantor lays out 22 page game plan”, which I am sure will be the next Oprah book club choice for the Democratic Party. I could go on but you can plainly see dear reader that this reads like the ”Scorned Woman’s Revenge Handbook” and while there are some signs of potential cooperation in short order it will be back to politics as usual and we will be the ones to suffer since nothing of substance will get done to fix entitlements or big government and get it the hell out of the economy. Surprisingly, the White House did extend an olive branch on the Bush Tax cuts, however, this seems like a MOPE move to me as it is not in the Administration’s DNA to swallow this without something in return that the Republicans will not tolerate, just a guess.

Knowing that under the current scenario neither side can really gain an upper hand in changing things the Republicans are truly in an advantageous position here to right their ship. How can this be good for the Republicans? What a good question dear reader. As it stands now the Oval office is controlled by Thou Who Shall Not Be Middle Named and he will veto that which he does not suit his agenda or just does not meet his “fairness” barometer. The Senate is Democrat controlled and will continue to lean to the left in the new session. I don’t think the Senate will be fertile ground for meaningful compromises as demonstrated by Reid’s position statement juxtaposed by McConnell’s quotes in the news media; it is obvious that they see the world through different prisms.  That leaves the House where the Republicans have enough votes to jam anything through even if it would meet defeat in the Senate or a Veto higher up.

If I were the Republican leadership I would propose and pass as much sweeping legislation to correct America and put it on the right path as possible. The very nature of this legislation would stick in the craw of Obama, Pelosi Reid and their ilk throughout the government and would be an indication that the Republicans are on the right track. The Democrats would fight everything tooth and nail and the Mainstream media would expose it all because it goes against their agenda. So when the next election rolls around and the economy is no better and nothing has gotten done the Republicans can plainly say “look we tried to bring America back to greatness but every piece of legislation was shot down by the Administration or the democratically controlled Senate”. They would have to be careful that the legislation was good for America and jobs and what the American people are asking for in order for this to work but it is doable. This whole process would limit the damage that the congress or president could inflict on the economy, but at the same time would provide less support going forward.

This brings up the next issue that is tied in which is the role of the FED. The position of the FED reminds me of the closing scene in “Butch Cassidy and the Sundance Kid” when they were holed up in some rundown building with the entire army of Bolivia is waiting for them weapons drawn and the two decide to go out in a blaze of glory. The Bernanke FED is quite convinced that they know what they are doing and are willing to take on the army of debt, deflation, inflation and whatever else ails the US economy. Another Article by John Carney of CNBC.Com entitled” Pay Attention: Ben Bernake Just Asserted His Independence” he puts forth the idea that Bernanke is not going to be pushed around by the markets. I strongly disagree as his rationale is that because Bernanke decided not to go with “shock and Awe” but instead QE2 Lite that he is some kind of genius because if it doesn’t work he can offset the blame of its failure by saying it was too small. This is bunk because if Bernanke were not influenced by the markets he would not have gone out of his way to survey the participants for input as to the size of the QE nor would he have been concerned about the size being too big. He is still ruled by the markets and its players but he is the only game left in town. The FED is the buyer of last resort.

It will be interesting to see what Bernanke does now as part of the QE2 was a means to get money in the system and a method by which to help drive long term rates down. Of course today long term rates are ticking up which is a double problem for the FED as the government debt rollover that they wanted to move to long term rates will cost more to finance than expected and the cost of home mortgages are rising. Even the IMF, who is usually behind the curve on everything economic, can see the government debt rollover risks worldwide. The rise in mortgage rates is particularity troubling because not only is the housing market sluggish but also a rising rate will make homes even more expensive than they already are and that will ultimately force a correction downward in prices; which is something that the FED and various government factions have been trying this entire time to prevent. Moreover, the falling prices could put even more homeowners underwater and potentially exacerbate the mortgage mess.  Additionally, the mortgage mess will fall to the FED to patch up as they are not in the business of protecting you and me dear reader instead their charter is designed to protect the monetary system and by extension all of the member banks. Latest estimates for the tab on the mortgage mess are climbing yet again and the FED will be protecting the banks, not you and me dear reader, since they are privately owned by member banks. As I stated in my prior post “Houses of Pain” I felt that the market had not priced in the true extent of the costs associated with “Foreclosuregate”. The reports on foreclosure dollar totals that I had seen from the likes of JP Morgan were estimating losses in the area of $135 Billion, but this did not jive for me. The report seemed to low especially since I had read that a Citibank official came out and said that some 80% of all the mortgages they wrote had major issues and that was only one bank in the middle of the mania. The latest figure totaling the damages to come out today is $685 Billion which I find to be more likely although I still think it may even be double that figure, even though I hope not.

So to add even further gas to the fire the Unemployment figures which are modeled and revised it seems on an hourly basis came out again today showing a rise to 457K; I know what a shocker!. On the positive side costs were down and productivity was up, of course they were. If you think about it unit labor costs were down because fewer people are being forced to make or do more with less not because of some magical innovation, but there is a point of diminishing returns on this figure and I don’t think that this is a positive for workers in general. The fact that unemployment keeps rising can’t be good for the real estate market and “Foreclosuregate” since the savings rate in America has been so low for so long unemployed people probably have little cushion for disaster such as job loss; therefore mortgages will not get paid nor property tax and the situation worsens. Nothing the FED or government is doing will reverse this trend, of course for all the money they are printing it would have been better to just mail every single American Citizen taxpayer a check in place of $13 Trillion to back stop the banks. At least in this way you could bail people and the banks out at the same time. Dear reader the idea of mailing out all those checks is a nice fantasy but it would not really solve the problem either ut the FED would get the boost in inflation it is seeking.

Now that QE2 is announced Bernake is out on the circuit pushing the idea that his money printing won’t stoke inflation, sure Ben if you use government figures as opposed to real world figures like the supermarket, gas station or stock market; just what the Doctor would order for all those unemployed people. Well Ben I guess you think we are all idiots and can be swayed and distracted by this type of MOPE, which goes against all practical teachings of economics since let’s say the beginning of time. “B52 Ben” believes we the buying working public are as dumb as Greg Marmalard in one of the last scenes of the Classic film “Animal House” where Eric Stratton of Delta House tells him “look at my thumb” just before he knocks him cold and then says “gee you’re dumb”. Ah but we are not all that dumb the world is watching and worried; Germany has voiced an opinion (and they know a thing or two about excessive money creation) as has China who we depend on for financing. It is not just the various countries that are saying things but the markets are making it know that there is a consequence to these actions contrary to what “B52 Ben “ wants everyone to believe. The Dollar has taken a hit due to this plan along with the ECB holding rates which bolstered the Euro, as the world seems to be sniffing out where this is all going. The ECB or Euro zone is not falling for this lunacy and it will be our undoing even though the EU has huge problems of its own they are at least for now going down a different path.  Even the emerging market countries understand the threat as they have seen their markets and economies levitated by “B52 Ben’s” insane money printing schemes. The money goes where it is treated best and right now that is emerging markets that are sick and tired of the distortions and exported inflation the FED is creating. Sure Benny Boy is creating jobs, lots of them in Taiwan, Singapore, Malaysia, China, India and a bevy of emerging countries, but not here in the good ole US of A. Even Senator Judd Gregg is getting in to the act grabbing headlines that we will be the next Greece,*** newsflash*** Senator Gregg if you count the unfunded liabilities we already far surpass Greece, but the more voices in the chorus the better.

The hit to the Dollar will ultimately prove to “B52 Ben” that it is inflationary and will cause a second dip recession as oil prices react. Of course the debasement of the Dollar comes at a time when OPEC is raising its demand estimates and cutting production forecasts; so if the dollar is worth less and there is more demand and less supply of a commodity what do you think happens to the price dear reader. Our whole modern Western economy depends on oil and it permeates through every aspect of it. The rise in oil prices causes recessions because of its pervasive use and the fact that it is not readily substitutable so it becomes a buried cost that drives inflation.  There are few times in our history where a rise in oil prices has not precipitated a recession and I don’t see any special reason why this time would be any different.

I am sure dear reader that you can take wild guess as to what has happened to gold, silver and commodities today once the market thought through the meaning of QE2 lite and the implications and  future unstated buying of debt that will be required going forward. As Jim Sinclair of jsmineset.com would say “QE to infinity”. I will take it one step further and update his statement in honor of my kids favorite character Buzz Lightyear “QE to infinity and beyond”.



So in the middle of all this what is our dear leader planning? A trip to India that is supposedly to increase business ties, although as the BBC reports no big outcomes are expected. So in the current situation it is justified to take 200 people on a junket costing the US Taxpayers $200 Million a day for 3 days that will produce no clear benefit?  We need to mobilize 34 battleships and spend a total of $600+ million to chat about a more productive partnership. It seems to me that this could be done on a much smaller less expensive scale to achieve the same goal, but that would not have the pomp and circumstance that our dear leader so obviously desires. I guess he misses the days when the throngs were cheering and throwing themselves at the mere sight of him; well to that I say welcome to our world and the taxpayers should be infuriated. For the same cost of this wasteful trip he could do something productive that is in keeping with his philosophy and help America, not fill his scrapbook on the taxpayer dime. Obama could outfit around 1 million homes with renewable energy which would be more helpful, he could provide about 1 Million kids with free school lunch or he could provide 4 years college tuition to about 29K students. There are many more things that Obama could do that would benefit US especially in light of the current economic conditions…for shame…

So dear reader, I apologize for the length of this screed and I typically don’t like to get political but sometimes you have to. There was too much juicy material to cover and believe it or not I even decided to cut some of it. You can plainly see that we are on the Road to Perdition and you need to take action to protect yourself. It is still not too late to do so but the clock is ticking.  Tick tock tick tock…

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