WSJ Walks Bernanke To The Gang Plank

Wednesday, April 30, 2008

-- UPDATED --
Fed chairman Ben Bernanke may be a bit unfocused at the runnning 2-day FOMC meeting. The Wall Street Journal, for the first 95 years a staunch supporter of every Fed move, walks him to the gang plank. After being equalled to an alcoholic desiring ever more liquidity and given the advice to join Central Bankers Anonymous by an anonymous writer on Monday the Wall Street Journal has stepped up its attack on Tuesday. Fed expert Greg Ip thrusts another knife into Bernanke's direction, writing,
The Federal Reserve's rescue of Bear Stearns Cos. will come to be seen as its "worst policy mistake in a generation," a former top Fed staffer said.
The episode will be seen as comparable to "the great contraction" of the 1930s and "the great inflation" of the 1970s, Vincent Reinhart said Monday at a panel...
Until mid-2007, Mr. Reinhart was director of monetary affairs at the Fed and secretary of its policy-making panel, the most senior position on the Fed's Washington-based staff. His appraisal is one of the harshest yet by a high-profile observer.
The Fed had no comment on the outspoken criticism. Does Bernanke have a revolt on his hands?
The WSJ brought even heavier slaps on Monday. Headlined "The Fed's Bender" and without a byline a scathing writeup of Bernankes (and the Fed's) failures - similar to those warnings found in blogosphere since 4 years - starts like this:
So Federal Reserve officials are whispering to reporters that they will consider a "pause" after another interest-rate cut this week. Perhaps we should be more respectful, but this sounds like the alcoholic who tells his wife he'll quit drinking next weekend, after one more bender. What Chairman Ben Bernanke needs isn't a gradual withdrawal from easy money but membership in Central Bankers Anonymous.
Ben, you are permitted to get a drink after the FOMC meeting and ponder your future career. Once writers think about being more respectful but aren't, they usually have a professional obituary in their drawers or at least their minds.
Will Bernanke Last After the Election?
It appears there will be no place for you around the fireplace in the FOMC meeting hall in the medium term. Not when the WSJ fires one salvo after salvo, ahem paragraph after paragraph. Who would want to wake to such a devastating resume like paragraph #2?
Eight months into the Fed's most recent rate-cutting spree, the evidence is overwhelming that it has been a major policy mistake. Aggressive rate cutting – taking the fed funds rate to 2.25% from 5.25% last September – has had little effect on the banking crisis it was supposed to ease.
It sounds as if somebody is really fed up with Bernanke's dismal record in ending the financial crisis soon entering its tenth month. 
Just in case that Ben Bernanke is still not getting it, the WSJ teaches him more economics 101. According to the WSJ oil could be at $70 a barrel, had Federal Reserve Notes held their purchasing power like the Euro did in the last half year. That may be a simple argument even president George W. Bush might understand.
Here's the next salvo, ahem paragraph:
As the nearby chart shows, since 2003 the dollar price of oil has climbed far more rapidly than has the euro price – 273% in dollars, compared to 146% in euros. Note in particular the oil spike in dollars since the second half of last year. This reflects the European Central Bank's sounder monetary management. And it means that had the dollar merely retained the same purchasing power as the euro, today's price of oil would be below $70 a barrel.
Does somebody want to make sure that Ben looks at the right charts?
OMG, Ben, you are really given the rough treatment in the WSJ these days.
I wonder if there is still time to develop a medical condition before there will be outright calls for Bernanke's resignation.
It appears as the next president will want to start his task of reviving the economy with somebody else at the helm of the Fed.
Readers of this blog may have been prepared for an early departure of Bernanke since October 2005. I may add now that he will become a staple in economic textbooks on the first depression of the new millennium.
What is worst is that all this should have happened to his predecessor Alan Greenspan. Bernanke's memoirs won't sell in the millions, I am willing to bet. It is not entirely his fault.
I remain waiting impatiently for an encore in Wednesday's WSJ. Will there be more policy advice just ahead of the release of the FOMC statement?
UPDATE: Tuesday's WSJ has one more piece of strong advice for Bernanke. WSJ writer John Chapman opines "The Fed Must Strengthen the Dollar" and patronizes Bernanke to come out of the ivory tower and let go of the Lafferty curve because inflation and unemployment have come hand in hand in the past.

White Noise Around Strong Trends

Tuesday, April 29, 2008

It gets difficult these days to keep a check on all the crises in the world. Roller coasting financial markets mirror the nervousness that seems to have taken a solid global grip. Soaking up news stories can become overwhelming and depressing. Every new day brings a barrage of by now almost entirely bad economic and political news.
Food Crisis
Record oil prices - at the time of writing above $118 - and soaring agriculturals suddenly squeeze inhabitants of wide parts not only in Europe and the USA, but in Asia and Africa too. Food riots change the picture dramatically. Empty stomachs can become a very strong force in a short matter of time. More than 5 billion people have begun to change their eating habits, upgrading to a more nutritious diet or at least a second meal every day. This trend will not go away.
Energy Crisis
The latest attacks on Nigerian pipelines carrying highly demanded low sulfur crude and pushing multinationals into force majeure clauses as they cannot fulfill their contractual obligations (kind of counter party risk here too) may be a foretaste of what is to come. Rapid protectionist moves as recentl observed in the food sector may soon be seen in eneryg as well. Remember the OPEC member Indonesia who has become a net oil importers some years ago? Skeptical forecasters doubt that new oil finds will be able to replace or even extend current capacities on the scale that would be needed to ease a market tightness that has now been around with us for several years. But what happens once Tata has sold 10 (or 20 or 100) million Nano cars in India? 
I see no trend change here. Triple digit oil prices are here to stay. Disregard such finds as that mega oil field off the Brazilian coast for what it is: White noise in a strong bull market. Yes, there are potentially 100 of billions barrels of oil not yet discovered globally; but we do not have the technology to pump it out yet.
Banking Crisis
The banking crisis appears to become more grave with every day. Free market ideology gives way to a growing chorus that wants everything and all regulated while stubbornly refusing to accept the fact that more credit will not be a remedy for too much credit.
The most important point, recklessly growing public deficits, gets only too rarely mentioned in the mainstream discussion.
Expect a change of trend here. As soon as money gets really, really tight questions on who squandered what will prevail.
US and Europe in a Long Term Down Trend
My fears for the last couple of years have centered on the worst downturn of the US economy since the 1930s due to the highest mountain of debt ever created, leaving Europe in the advantageous position of the main technology supplier for the industrializing southern and eastern countries.
Property Crisis
Alas, this did perspective did not materialize as Europe may not only drown in a sea of US subprime investments and off balance sheet derivatives positions, but also in its homemade property crisis that may bring down France, Italy, Spain, Greece, Portugal and the UK within the next 24 months. Growth projections for Europe have been retracted recently and one may ask rightfully whether there would be any growth left if one were to apply the rate of price raises experienced everyday when paying energy and food bills.
Forecasting Crisis
Looking back the last 4 years I note that all official inflation and growth forecasts have followed a repetitive trend where an improvement was always in the cards for the coming year. But it rather appears Europe has been on a downslope since 2005. I would say, central bankers have been dead wrong for quite a while now. Will this old trend stay with us? I presume it.
Inflation Crisis
Growth has come to a virtual stop, as can be witnessed on Europe's shopping lanes. Inflation has gone parabolic since August 2008, the last time it was in line with the European Central Bank's (ECB) target rate of 2%. The latest reading, only 8 months later, stands at 3.6%. Expect this trend to remain with us for a while.
Capital Dilution Crisis
Not that the ECB was alone in painting rosy skies. European banks were quick last summer to announce that all is well and the property fallout in the USA would not sap to their own shores. RBS looking for 12 billion pounds, Deutsche Bank wanting to raise €17 billion and most others taking writedowns on a weekly basis do not exactly raise the trust into company projections.
In order to shore up their own balance sheets European banks now deny loans to commercial customers, leading to a strong decline in investments. This comes at a time when European consumers have to pinch their purses in order to counter runaway food and energy inflation, as real wages have basically been on a standstill since the introduction of the Euro 9 years ago.
Now investors will be worse off soon too. All these rights issues are basically  the biggest capital and profit dilution crisis ever seen in Europe.
This still does not answer the question what kind of rich uncle will come forward with the cash so direly needed. Or is it maybe the ECB itself, shoveling depressed bank shares into its infamous #9 position, so called "other assets?"
This crisis is so bad that I expect all dirty tricks to be played on the way into the inevitable massive shrinking of the global finance industry. 
Consumption Crisis
Bloomberg reported on Tuesday that
European retail sales dropped the most in more than four years in April as rising fuel and food prices squeezed shoppers' budgets, the Bloomberg purchasing managers index showed.
Consumers, worn out from inflation and saddled with property debts on both sides of the Atlantic, will probably accelerate this trend, downscaling their outlays to the bare minimum. Deteriorating public pension systems will aggravate this situation. Confronted with lower pension payouts European consumers will most likely channel their disposable income into pension savings, foregoing short-term consumption lures.
Red Economic Lantern for Europe
Even if the European banking system can be protected from collapse - which I highly doubt - Europe may nevertheless be left with the economic red lantern.
The old continent faces 3 gigantic hurdles on the path of future prosperity.
  1. A lack of energy and commodity resources
  2. The highest labour costs in the world
  3. Worsening demographics.
In general it has to be questioned how important 800 million mostly indebted citizens of the hitherto first world are to the rest of the world in the medium and long term. More than 5 billion inhabitants in the industrializing world will fight for growing market shares in virtually everything as consumers will want to stuff their residences with all the amenities they have seen on satellite TV.
These trends are here to stay and become stronger with every reporting period.
Ignorance
A good dose of ignorance and/or arrogance on behalf of Western leaders who have not yet recognized that the economic hacking order is about to be turned upside down will certainly not help. I am at a loss to explain the sanguine public mood and I am shocked to learn in conversations that people have not yet realized what trainwreck Europe may become in the short term. 
Disregard the white noise. The western world is in a long term downturn, brought upon us by too much public spending and the latest build-up of debt mountains that will be deflated with higher inflation. It was never different in the past. It will not be different in the future.

A Connection Between IMF Gold Sale Proposals and the Loch Ness Monster?

Wednesday, April 09, 2008

Gold prices correctly shrugged off the announcement of the International Monetary Fund (IMF) that wants to sell 403.3 tons of gold, worth some $11 billion, to cover annual losses of $400 million. While this transaction appears arithmetically strange from the outset, the idea is not exactly new. Like the Loch Ness monster IMF gold sales have been a reliable page filler in the past couple of years.
A Google search for "IMF gold sales 2007" lists 77,100 documents and leads to Doug Casey's treatment of yesteryear's idea of the IMF. Casey could simply copy his 2007 item into this year's list of columns and he would not have missed any important beat. As in 2008 the IMF proposed a drawn out sale of 400 tons of gold in 2007 too.
The long story does not stop here. Combining the same search terms with the year 2006 yields 63,700 documents on the issue. This time Julian D.W. Phillips leads the pack with a story on the IMF's attitude towards gold.
The same search in 2005 calls up 50,100 files.
Going back one more year I came across more headlines on the same issue.
The idea to sell off some IMF gold is still older though. According to Peter George's article at gold-eagle.com such official rumours could be heard in 1999 for the first time.
As these gold sale proposals always come between February and April of each year and every year brought new rumours about Nessie too I am sure rocket scientists not busy anymore calculating CDS prices can come up with a mathematical model that will - based on past experience - find a connection between rumours on IMF gold sales and sightings of Nessie. Let me know!

iPhone Prices Slashed By As Much As 75% In Germany

Friday, April 04, 2008

So what are Apple's revenues from its overseas iPhone sales? German mobile phone service provider Deutsche Telekom has slashed prices for iPhones by as much as 75%, giving away the 8GB model for €99 instead of €399. According to a report by German daily Frankfurter Allgemeine Zeitung (FAZ) this may be a clearing of inventory as consumers wait for a model with UMTS capabilities, standard on most phones in Europe.
According to the report consumers still have to shell out a minimum of €945 to hold an iPhone in their hands. This is 40% less than before, when an iPhone, only sold with a special provider contract, went for €1,575.

Wikinvest Wire