The Contrarian's View s published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. My own material in this publication may be freely quoted provided proper attribution is given to its source; quotes from other people are subject to fair-use copyright restrictions. Subscription rate: Selections are free on the Internet. Using your favorite Web-browsing program, open URL http://onashi.org. Mailed paper subscriptions, one year for $39 to The Contrarian's View, 132 Moreland Street, Worcester, Massachusetts 01609. There is a limit of 50 paid subscribers at one time; please check for availability before sending any money. Sorry, Visa and Mastercard are not available. Overseas subscription rate, U.S. $54. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! ISSN 1536-4429 Phone: (508) 757-2881
(Why "helicopter"? As Richard Benson has pointed out, Let's not forget that central banks can create new money with a few strokes at a computer keyboard to purchase whatever assets they wish. The Federal Reserve can create any volume of money it needs to keep the economy servicing both old and new debts. It seems virtually certain that the Fed, and other friendly central banks, will print as much new money as they need to because "inflation tomorrow is better than a collapse of the financial system today." Since the U.S. Treasury is running a $450 Billion deficit and a 5 percent trade deficit, central banks have actually begun the "Great Money Printing." ....This is what the Federal Reserve Governor, Ben S. Bernanke, lovingly calls "Helicopter Money.")
Here is what Bernanke himself said in a November 2002 speech (entitled "Deflation: Making Sure 'It' Doesn't Happen Here"): Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation....If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation....
A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.
Under such a policy you certainly will be guaranteed there will be continual commodity price inflation.... that is, the Consumer Price Index, that government-buggered version of the true cost of living, will forever rise. The question in my mind is, what will happen if asset deflation (popped housing bubble, derivatives explosion, nuclear terrorist attack, whatever) should suddenly overwhelm us? Would the Fed pursue the same mindless currency-printing policy? Bernanke seems to say, yes.
At least in the early 1930s the Fed recognized it would be "pushing on a string" and had the good sense to stop before the country was ruined. (The Great Depression was bad enough.) Today's Fed seems to completely lack any such common sense.
Am I the only one who sees the moral bankruptcy of this policy? By "moral bankruptcy", here's what I mean: If I, as an individual, were able to print money for myself and spend it freely, without having to earn the money I spent, it would surely be immoral, as my actions would devalue the earnings of others. (They would have to work harder to pay the higher prices, with more money in circulation, of things I could buy at no cost.) If it is immoral for me to do this as an individual, then why is it moral for any government to pursue the same path? I have tried hard to think of any policy or action that, while immoral for an individual to undertake, is moral when undertaken on behalf of a group, even if that group is an overwhelming majority. If you, dear reader, can think of one, please let me know.... I am at a loss to come up with an example.
It's taken almost a hundred years, but now we can clearly see the stupidity of granting to government a power.... to "manufacture" money.... it never should have been given, as the Fed embarks on an accelerated path of destroying the remaining 5% of the purchasing power of the 1913 dollar.
But this is what you will get when you put ivory-tower idiot-savants in charge of a misbegotten strategy.
P.S. I wonder if Prof. Bernanke has noticed that, three years later, the $300-per-ounce gold in his example is
now trading in the neighborhood of $475 per ounce?
Statistically speaking, the growth rate of the money supply has an exceedingly small correlation with the stock market's subsequent performance. And to the tiny extent that it does, it is correlated in just the opposite way that advisers are asserting. I reached these conclusions by studying the Federal Reserve's data back to 1959 for each of the three major definitions of the money supply, from M1 (the narrowest definition) to M3 (the broadest definition). For each month I calculated the growth rate for each of these three definitions over the previous one, three, six and 12 months. I then correlated those growth rates to how the stock market performed over the subsequent same periods. I looked at the raw as well as the seasonally-adjusted data. - Mark Hulbert
From 1983 to 2003, the S&P 500 averaged a 13% annual gain; the average stock mutual fund investor earned 3.5% annually over the same period. In the real world, the only thing diversification has managed to "reduce" are investor returns. The truth is this: An ever-larger number of people give their money to an ever-smaller number of managers, who in turn oversee the taking of an ever-bigger slice of the pie. - Robert Folsom
American capitalism [has] passed out of the hands of serious capitalists and into the hands of managers, caretakers, manipulators and middlemen. In effect, it has been collectivized...owned by millions of small shareholders, and directed by employee functionaries. Now, more than half of all stocks in the United States are owned by a group of 100 large money managers. And how many corporations do capitalists themselves run? Warren Buffett holds a light, but firm, hand on his enterprises. Bill Gates is unquestionably at the helm of Microsoft. But most large companies have fallen into the grip of professional CEOs, often celebrity managers who write popular books, pay themselves absurdly grand salaries, and drive their businesses into the ground. - Bill Bonner
Historically, any substantial increases in oil and gas prices have resulted in a curtailing of spending on the part of consumers. Low-income consumers started to feel the pinch at two bucks a gallon. Now, at three, mid- and upper-income consumers are starting to cut back. That should worry everyone. Consumer spending was the only thing propping up the economy after 9/11, and its strength was considerable, even mitigating the effects of higher unemployment and corporate spending restraint. With consumers finally buckling under the weight of higher energy prices, how can the economy possibly continue revving? - Carl Waynberg
....compared to last winter, the average household will face an increase in non-discretionary spending of at least $700 per month, or $3,500 for the five-month [winter-heating] period.... it will be directly subtractive from the retailer's share of GDP - a prospect that Wall Street should not be shrugging off so blithely. The economy is headed for a precipitous fall, and stocks are going down with it. - Rick Ackerman
Sky-high gas prices are busting millions of Americans budgets and will only get worse once the winter arrives. The double whammy of filling gas tanks AND heating homes is going to be more than many households can afford. 2005 could truly become the year that the Grinch steals Christmas. - Tony Sagami
And then, compounding peoples' misunderstanding of the whole situation, you have talking heads (as often as not, they are economists) saying really dumb things like, "But in dollar terms, the oil industry is only 4% of the U.S. economy." To which I say, "Try running the other 96% of the economy without it." - Byron King
I think the stock market -- as well as the economy and housing market -- is on the verge of very serious trouble. In fact, I chose to do a fair amount of short-selling last week because I have a hard time seeing how the market can mount any sort of serious rally (though, of course, that doesn't mean I won't be wrong). The consumer is in terrible shape. We all know that the savings rate in this country is essentially negative, and we know that folks have been living off the housing ATM.... Meantime, as I have been saying, a cogent argument could be made that the housing ATM is in the process of conking out. Furthermore, the consumer faces some serious headwinds this fall: Not only are gasoline prices up a ton, but so are prices for heating oil and natural gas. Combine that with the prospective rise in 1) minimum credit-card payments and 2) the adjustable rate on credit cards and many mortgages, and you have the recipe for a decent-sized squeeze. - Bill Fleckenstein
The A/D line will normally turn down well in advance of a serious stock market decline. The very fact that the S&P, NASDAQ and Russell Indices are within a few points of matching a nearly four-year high with this indicator below zero, tells me this is a market headed for big trouble...and sooner rather than later. Over the medium-term horizon, I continue to believe the S&P 500 is forming a major top in this area and could decline fairly rapidly toward the 1065 to 1100 zone in coming months. - Frank Barbera
Are we now going into the real bear market? Yes, we are, and I expect it will surprise virtually everyone in our nation's capital and Wall Street by its ferocity, depth and duration.... It will be greater than the 1929 Crash and followed by an even greater Depression, perhaps like the 15-year old Japanese depression still underway. The bear-market rally that started in the spring of 2003 is now ending and the huge decline will not end until all of our major market averages are far below their earlier lows.... It may last for several decades and certainly will require a major change to your way of life and thinking about investing. - Robert B. Gordon
Inflation isn't the looming threat that some believe, but rather.... deflation will be impacting the American economy as a general 'unwinding of the debt-pyramid' begins. - Jay Taylor
Twice during the last century the Dow lost over 90% of its value relative to gold. If such declines could occur in an America with a strong industrial economy, ample domestic savings, and a favorable balance of payments, imagine what could happen today. History clearly demonstrates the danger inherent in over paying for stocks, both relatively to their intrinsic values and the price of gold. Those who bought into the new era nonsense of the 1990s will fare no better than those who judgments were similarly impaired during the 1920s and the 1960s. - Peter Schiff
Things are getting spookier and spookier, and the weird gyrations of the markets, the result of rampant market manipulations by (I assume) the Plunge Protection Team, don't make it any easier to sleep. - Richard Daughty
The way I understand it, a new law goes into effect in October that mandates the credit card companies to require a higher minimum payment. In a nutshell, the minimum payment would include the interest and a minimum portion of the principal. A consumer with a minimum card payment of $250 a month, will probably be required to pay around $400 to $500 a month... this could put a big damper on holiday shopping. The increased payments could also force more Americans to consolidate their bills on an equity line as a second mortgage. - Mike Hartman
I have a hard time feeling sorry for credit card companies with interest rates of 30% and fees for damn near everything bitching about not collecting every last penny from people they have no business lending to in the first place. Profits are at record levels but greed has been insatiable. Yes, some people have taken advantage of the system, but the bulk of [bankruptcy] filers have been those hit with huge medical bills, the loss of a job, or nasty divorce proceedings.... The idea behind the [new bankruptcy] law is simple: to make debt slaves out of people forever. - Mike Shedlock
Short-term interest rates have been rising 2 percent a year. Every time consumers are forced to pay another 2 percent on average for their $11 trillion of debt, they will have no choice but to raid the cookie jar for an extra $200 billion. The only problem is that most Americans haven't been saving so, unfortunately, their cookie jars are empty. Worse yet, for consumers making credit card payments, the US Treasury has new regulations that will come as a real shock this fall. The Treasury has the authority to set minimum principal payments on credit cards and is increasing the minimum from 2 to 4 percent per month. For the average American with a $10,000 credit card balance, that increases the minimum monthly payment from $200 to $400. For the big spender with $50,000 in credit card debt, the monthly payments would pop from $1,000 to $2,000! Needless to say, a large number of people are used to paying the minimum every month, and millions of card holders are maxed out on numerous cards and barely meeting monthly payments. So, even if prices weren't rising, the American debtor will be getting hung out to dry by a noose of credit cards around their neck. - Richard Benson
Total US credit market debt, both financial and non-financial, has expanded 40.4% and 48.9% since the end of 2000, respectively. In the meantime, over this same period nominal national income has risen 24.4%, roughly half the rate of total debt increases. Remarkably, many insist that these developments are the basis for a robust, riskfree future. To them, more of the same is the sinecure for a solid retirement portfolio. - Wilfred Hahn
In 2003, the amount of U.S. Treasury bonds in foreign hands rose by $175 billion. In 2004, the increase came to $295 billion. But during the first seven months of 2005, only $2 billion more has been added. - Bill Bonner
Further, it has to be realized that today's U.S. bond market is a house of cards. Maintaining long-term interest rates at their present level needs a steady, huge stream of carry trade creating artificial demand for assets.... If the Fed cracks this trade by inverting the yield curve, this would send long-term rates steeply up. A fire sale of unimaginable proportions could begin, with bond prices crashing. - Kurt Richebächer
When the tide goes out on the housing mania, it will reveal lots of bad debt.... for financial institutions to have to eat. In writing those bad loans, financial institutions will become progressively less interested in lending. That will further cut off credit to the housing market, thereby exacerbating the problems as they unfold. That house prices have gone up a lot is not in itself the problem. If they'd risen in an environment where folks were behaving prudently with their financing arrangements (i.e., putting 5%, 10%, 15% or 20% down and taking out 10-, 15- or 30-year mortgages), we might be set up for a dip in prices, as has occurred from time to time. But that's not what we'll witness, thanks to the complete abdication of responsibility on the part of financial institutions, where seemingly no loan was turned down. Thus, those of us who talk about a housing bubble are really referring to a credit bubble. - Bill Fleckenstein
The thing to realize, of course, is that the housing bubble is many times more dangerous than the stock market bubble, because it involves the whole banking system. Greenspan has replaced one bubble with an even bigger and more dangerous bubble. It's insane. American monetary policy is out of control. Greenspan has created a debt Colossus. This debt Colossus needs permanent new credit. In an economy that needs four dollars in credit to produce one dollar of GDP, simply reducing credit could be disastrous. Even a slight reduction of credit could create enormous negative repercussions in the asset markets and financial markets. The level of credit excess in America has reached such a level of absurdity that no return to normalcy is possible without a disastrous effect on the economy.... What I often hear is that there's so much liquidity in the US economy and US financial markets. But this liquidity is not from cash. It is credit. There is huge liquidity in the asset markets that could turn into a savage deflation tomorrow. This is an illusion, this liquidity argument. It works as long as the system of inflating asset prices functions. But when it stops, liquidity is gone. - Kurt Richebächer
The best support for my position that we will have the deflationary outcome comes from the financial markets. You.... should have healthy respect for the markets as long as the trend is sustained and long enough. It is true that markets can be irrational for one, or two, or even four years, but not much longer than that. The long-term US treasury bonds have outperformed the S&P 500, or other major stock indexes, for a period of eight years now. What do you think this is predicting, a deflationary future or an inflationary future? My clincher is: when 99%+ of average Joes and Janes and 90% of the pundits on CNBC predict an inflationary outcome what is its probability of it happening? I would say, less than 1%. - Jas Jain
I am more convinced than ever that we're heading for a financial crisis that's going to dwarf what we saw in the '30s. - Doug Casey
The Bureau of Labor Statistics has calculated that health care inflation in the last 10 years or so averaged about 4% per annum. However, from private studies we know that health care costs have risen by around 10% per annum in the last few years. Moreover, whereas the weighting of the BLS's health care expenditures within the CPI is only 6%, health care represents about 17% of consumption. - Marc Faber
Personally, I think it is weird that people who have one kid, and thus know exactly what is involved, turn around and have more! Maybe it is some sort of mental illness. I dunno. But I sure can understand why people are not having kids anymore: Inflation. Who in the hell can afford the little brats? ...Maybe in the old days, when you could put them to work in the mines, or sell excess children to gypsies and maybe make a few bucks, having kids was a good idea. Or back when your welfare check increased every time you had another kid. But those days are long gone. - Richard Daughty
The reason that a gold standard is essentially unworkable, in my opinion, is because the masses don't have what it takes to support it. Commitment to a gold standard is ultimately commitment to a moral standard. Democracy rises or falls on the integrity of the populace. And people today are too soft, too amoral, too easily manipulated, too addicted to free lunches and entitlements, to show the backbone of restraint that a gold standard would require. - Justice Litle
While in no way condoning Greenspan's policies and realizing they will result in an economic disaster eventually, I can't help being impressed with his mastery of the press, Wall Street, and the common man to perpetuate this fraud. I, for one have been amazed at how long this has gone on. It has been over five years since the stock market bubble burst, yet he has managed to float the economy on a sea of debt while not only convincing the masses that everything is all right, but also that they were getting rich on real estate. - Richard Greene
Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. - Ben S. Bernanke [Nick's note: Don't tell this to the Victorians. In the 19th century the U.S. saw gradual long-term deflation and the economy grew like crazy. Guess they weren't "modern" enough.]
While I'm not surprised at the appointment, I believe that Bernanke's appointment is going to be like pouring gasoline onto an already too-hot inflation fire. Plain and simple, I think Bernanke is possibly the worst choice that President Bush could have made and has doomed our economy for a return to the painful 1970s era of inflation. I say that because Bernanke has left a long and clear paper trail that proves that he will be inflation's best friend.... Worse yet, Bernanke has close to zero clue that inflation is even a problem.... Bernanke thinks that the government-manipulated inflation numbers are a valid measure of inflation.... Bernanke actually thinks that the function of the Federal Reserve Bank is to manage asset -- stock and real estate -- prices and that central planning works. - Tony Sagami
One day, when consumer buying has completely dried up because nobody has any money, and the few people who do have any money cannot afford to buy anything because inflation is off the charts, the government will get the bright idea to confiscate your gold; or your house; or your car; or your retirement accounts; or anything that you have that is worth something; and put dollars in your hand, hoping that you will run out and buy something. That this day is coming is foreordained, as there is no way - no freaking way, no freaking way in hell - to stop the collapse of the despicable economic system that has evolved in this country. If there was a way - any way at all - then one other country in the whole history of countries that have gotten themselves into this kind of mess, would have thought of it by now. None have, although they have tried everything, even the stuff that they already knew would not work. Then they went to war. Which merely finished them off. Welcome to fiat currency, fractional-reserve, deficit-spending hell. They call it "hell" for a reason. - Richard Daughty
There's such a broad ignorance or contempt for constitutional principles among the American people that
any politician who bore truth faith and allegiance to the Constitution would commit political suicide. - Walter
E. Williams
However, the market's underlying technical indicators tell us that we are undergoing a financial mood shift from bullish to bearish which is coincident with the currently-darkening mood of consumers. My opinion is that this shift is a result of rising short-term interest rates.... directly as a result of Fed policy.... and of more stringent credit requirements (credit card and home loan).... directly as a result of Treasury policy. Plus, the housing bubble is popping (along with other asset bubbles, I'm sure). It also does not help when a major derivatives player (commodities dealer Refco) blows up. Think of a wild party.... the punch bowl runs dry, but everybody is sloshed so they don't notice right away. As time passes the participants sober up and notice that the party's over. That's the stage we're at now. (Then comes the hangover.)
Some of this mood shift will, I think, continue to manifest itself over about the next four weeks. I had expected the Dow to be under 10,000 by now, but it hasn't happened yet. I still think it will wind up below 10,000 sometime before Thanksgiving.
Then we get a holiday break.... a bear-market rally.... to about the end of the year.
In 2006 will come the hangover after the party.... the bear market will return with a vengeance.
The risk of systemic failure is currently about 30%, what with derivatives-trading firms prone to blowing up.
After Thanksgiving, during holiday break, it will decline to about 15% until 2006.
A. "Professors' Investment Group (PIG)" - investment club portfolio.
SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $18,717.44
Increase: $ 8,018.44 [+74.96%]
COMMENT on "PIG": There is no change from the last issue.
TIAA/CREF 403(b) retirement plan; I switch between indexed stock/bond/money funds:
(No transactions since June 30, 2004 due to my retired status. Update soon, I hope!)
Values, 27Oct2005: stock, 198.82; equity-index, 77.51; MM, 22.51; bond, 75.39; inflation-indexed bond, 45.73; real estate, 234.31; TIAA current yield in
SRA, about 5.01%. Current money-market yield is 3.57%.
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993:
3.08%; 1994: 4.07%; 1995: 4.80%; 1996: 5.28%; 1997: 5.38%; 1998: 5.72%; 1999: 5.12%;
2000: 9.99%; 2001: 1.11%
Gain, January 1 through March 31, 2002: 0.97% (3.86% annual rate of return)
Total gain since January 1, 1988 (14.25 years): 223.43%
Compound annual rate of return: 8.59%
Gain shown excludes the impact of additional monthly cash contributions.
(Please note that I have not had the time to calculate my rate of return beyond March 2002, and
may not get the time until 2005)
Buying CREF stock on January 1, 1988 and holding it gained 422.38%, for a compound annual rate of
return of 11.46%.
COMMENT on NYSE "Timer's Trend": We are currently on a SELL signal of October 4, 2005.
COMMENT on NASDAQ "Timer's Trend": We're on a SELL signal given September 13, 2005.
NEXT ISSUE - will appear near the end of November.