Obama praises Collins, but remains silent on Gosnell

I commend President and Mrs Obama for publicly praising Jason Collins for being the first player of a major American sport to come out as gay. Obama even called Collins on the phone to express his support and to say that he was impressed by Collins' courage.

And yet, the President continues to refuse to condemn the atrocities committed by the serial murderer, abortionist Kermit Gosnell.

All you need to know.

(BTW, don't miss my own coming out blog post. I cannot understand why I have not yet received a phone call from the President or a tweet from "mo.")

No inflation? What if we use an alternative yardstick?

In a recent blog post, I noted that Paul Krugman continues to maintain that there is no inflation. Says Mr Krugman:

Remember how running the printing presses was going to cause runaway inflation? Since the recession began, the Fed has more than tripled the size of its balance sheet, but inflation has averaged less than 2 percent.

Well, yes, if you use the standard definition of inflation, which measures consumer prices. But, what if you use a different measure of inflation?

Wikipedia defines inflation as follows:

Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.

What happens if we replace the phrase "goods and services" with the phrase "stocks and bonds?" The definition now reads:

Inflation is a rise in the general level of prices of stocks and bonds in an economy over a period of time. When the general price level rises, each unit of currency buys fewer stocks and bonds. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.

Sounds an awful lot like exactly what is happening in the economy today. Stock and bond prices are at historic highs. If you are a young investor, your 401(K) dollars are buying fewer and fewer shares/securities. So, given this alternative definition, inflation is soaring.

So, when Mr Krugman says there is no inflation, what he really means is that consumer prices, and also wages, remain low, while the prices of various investment asset classes are rocketing to the moon. Try as the Fed may, they are unable to stimulate to any meaningful degree economic activity that has an impact on the man on the street. But the members of the 1% are seeing the prices of their assets "inflate" nicely. Unfortunately, these skyrocketing asset prices are pricing young and mom and pop investors out of the market. Even worse, when Mr Bernanke withdraws the "Bernanke put," this bubble will deflate with catastrophic effects for all investors. Perhaps the institutional investors will be able to escape, but retail investors will be left holding the bag.

TrimTabs CEO: Fed creating $4 Billion a day via keystrokes, but individuals not doing well

In an interview on Breakout, Charles Biderman, Founder and CEO of TrimTabs Investment Research, made the following comments:

The Fed is creating $4B each day via keystrokes, $85B a month. And they're using that phony money to buy financial assets. And as that $4B a day goes into the system, there's more money looking to buy assets. And so, prices of everything go up. As long as people believe that the $4B of fake money is real money. ... There's no hint that the economy is improving. We track real-time data on income tax collections and so we saw a little pickup, actually, in early March but now we're seeing a slowdown. Nominally, wages and salaries are growing less than 3 percent year over year. ... After inflation, take home pay by everybody who has a job is not growing. So, you have a record stock market because the Fed is pumping big bucks and companies are shrinking the float, but individuals are not doing well.

Mohamed El-Erian on quantitative easing

Today's WSJ published the following brief synopsis of an interview with Mohamed El-Erian on quantitative easing:

Actions by central bankers across the globe are propping up asset prices to artificial levels that are potentially putting investors at risk, Pimco CEO Mohamed El-Erian said in an interview with the Wall Street Journal.

“Investors should recognize that in virtually every single market segment, we are trading at very artificial levels,” El-Erian told WSJ’s Francesco Guerrera. “It’s true for bonds, it’s true for equities. It’s true across the board.”

El-Erian said worries of central bankers pulling their easy money policies too early are unwarranted.

“We think they will most likely stay too long and they will consciously make that mistake,” he said. “In order for central banks to achieve their ultimate economic objective — which is growth and jobs — they have to push investors into taking more risk than is justified. The way central banks are operating is through the wealth effect and the animal spirit.

“If these levels aren’t validated by the fundamentals, then investors will get hurt.”

Gargantuan tsunami of liquidity

David Rosenberg, Chief Economist and Strategist of Gluskin Sheff + Associates, and Sam Zell, Chairman of Equity Group Investments and one of the savviest real estate and vulture investors of all time, appeared recently on CNBC with Maria Bartiromo. Below are some excerpts (with emphasis added):

MB: David, you’ve been bearish, and now you say even you are bullish.

DR: I didn’t say that I was necessarily bullish. What I did say was an acknowledgement of what’s driving this market. It’s interesting that all the discussion is about how this rally has continued after the lousy ISM’s we have had, the lousy jobs number, the lousy NFIB report that we got yesterday. And, of course, the flip side, since bad news is good news, is that the Fed is going to pump more liquidity into the market for a longer period of time. And it’s not odd that Japan and the US are the leaders. They are the only two countries that are embarking on this gargantuan quantitative easing that is really the lynchpin behind what’s happening in the stock market. So, it’s not about if somebody’s bearish, or somebody’s bullish, or whether you’re agnostic. It’s really about understanding what the principal driver of this market is. It’s clearly not the economy, and it’s clearly not earnings. It is the mother of all liquidity driven rallies that I’ve seen in my lifetime. And it’s continuing.

SZ: What we’re doing is debasing our currencies around the world. … If you reduce the value of the currency, you are going to reduce its buying power and ultimately that translates into a lot of inflation. … What we’re seeing here is a giant tsunami of liquidity, but I don’t know if that necessarily means that things are better. … I think this is a very treacherous market. … In our businesses, we’re definitely not seeing overly strong conditions. We’re seeing a lot of uncertainty, leading to people deferring decisions. This feels like the housing market of 2006: everybody can’t afford to miss it. … We are suffering through another irrational exuberance.

A gargantuan tsunami of liquidity, the mother of all liquidity driven rallies, and yet things in the real economy are not getting any better. This is precisely the argument that David Stockman made in his recent book. As Stockman writes:

Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the “bottom” 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.

So the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.

So, Main Street languishes while Wall Street soars to irrational heights on the back of a Fed driven rally. This is the vindication of Keynesianism that Paul Krugman trumpets?

Fed's actions also inflating a new housing bubble

Ed Pinto writes today in WSJ:

Over the past year, the Federal Reserve has ramped up its policy of quantitative easing, with the result being new stock market highs and surging bond prices. Moreover, housing prices jumped 8%, the biggest annual gain since 2006.

The result is that more than a trillion dollars have been added to the market value of single-family homes. Homeowners are now wealthier and according to what economists call the "wealth effect," they should be willing to spend more, helping the economy.

But there is another, less sanguine view of the housing recovery. ... A comparison of FHFA's conventional home-financing data for February 2012 and February 2013 shows that borrowers bought newly built and existing homes in 2013 for 9% and 15% more respectively than in the previous year. Increases of this magnitude cannot be attributed to higher incomes, as these rose a mere 2% over the last year, just keeping up with inflation. It appears that home prices are being levitated by quantitative easing. ...

While a housing recovery of sorts has developed, it is by no means a normal one. The government continues to go to extraordinary lengths to prop up sales by guaranteeing nearly 90% of new mortgage debt, financing half of all home purchase mortgages to buyers with zero equity at closing, driving mortgage interest rates to the lowest level in 100 years, and turning the Fed into the world's largest buyer of new mortgage debt.

This is precisely the argument that David Stockman has been making of late, as I noted in a recent blog post: increases in asset prices do not reflect real growth in the economy (as reflected by, say, "higher incomes"), but are simply the result of the Fed flooding the market with money and artificially depressing interest rates.

Ed Pinto, a fellow of the American Enterprise Institute (AEI) and one time Chief Credit Officer of Fannie Mae, is the author of the famous memorandum Triggers of the Financial Crisis, in which he demonstrates "how federal policies were directly responsible for mandating a vast increase in homeowner leverage (low or no downpayments), setting extremely high leverage levels for Fannie and Freddie, and requiring flexible underwriting standards throughout virtually the entire mortgage finance industry." Peter Wallison, a member of the Financial Crisis Inquiry Commission, based much of his Dissent from the Majority Report of the Financial Crisis Inquiry Commission on Pinto's work. In my opinion, Wallison and Pinto provide the most persuasive explanation of how the financial crisis of 2008 came to be, namely, through government manipulation of housing policies. And now Pinto is warning that once again government policies, this time in the form of massive quantitative easing undertaken by the Federal Reserve, are inflating another housing bubble.

BOJ doing Bernanke's work for him

And now this today from Bill Gross:

Mr. Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said he turned positive on Treasury bonds maturing in 10-years or sooner because the BOJ's aggressive plan to buy Japanese government bonds will drive Japanese investors to seek higher returns in other markets overseas. He said this will lift prices of assets around the world, including U.S. Treasury bonds. The Bank of Japan announced its aggressive easing plan last Thursday. "This BOJ printing seeps out daily into global markets as Japanese institutions, which have sold their Japanese government bonds to the BOJ, look for higher-yielding replacements," Mr. Gross said in an email interview Tuesday afternoon with the Wall Street Journal. "Ten-year Treasurys to us look very low yielding, but to them, they yield 125 basis points more."

In other words, now we have not only the Fed, but also the BOJ working to keep US interest rates at artificial lows.

Krugman on David Stockman

Criticizing David Stockman's "screed," Paul Krugman writes in today's NYT:

Now, the fact is that these ranters have been wrong about everything, at every stage of the crisis, while the Keynesians have been mostly right. Remember how federal deficits were supposed to cause soaring interest rates? Never mind: After four years of such warnings, rates remain near historic lows — just as Keynesians predicted. Remember how running the printing presses was going to cause runaway inflation? Since the recession began, the Fed has more than tripled the size of its balance sheet, but inflation has averaged less than 2 percent.

Well, of course interest rates have remained low! That's because the Fed has been artificially depressing them by buying up the majority of Treasury issuance for a couple of years now.

And, since the market knows that the Fed will continue to buy Treasuries for as long as the economy sputters, the market buys more Treasuries, too, thereby depressing interest rates even more. What happened this morning is a great example of this latter dynamic. The unemployment report revealed that only 88,000 new jobs were created last month. This is a terrible number and it suggests that Mr Bernanke will not be willing to put an end to quantitative easing any time soon. As a result, the US 10 year is off 7 basis points, as hedge fund managers and other speculators pile into Treasuries. Who can blame them? As Stockman has pointed out in his book, their strategy is to borrow short term at near 0% interest rates and use those borrowings to buy the 10 year and shear off the approximately 1.75% yield. Since Bernanke has promised that he will not stop buying Treasuries and raise interest rates until the economy recovers, this strategy is guaranteed to be a money maker. In other words, as Stockman has argued, the Fed's policies have done nothing to stimulate the economy, but have created an environment in which the 1%, by investing in the Treasuries that Mr Bernanke is propping up, are making windfall profits.

So, the fact that interest rates have remained at near all-time lows is not, as Krugman claims, proof that the Keynesians are right. Rather, it is an indicator of how enormously the Keynesians have distorted the market, creating an enormous bubble in Treasuries that will eventually pop with catastrophic effects.

As for Mr Krugman's other point about inflation remaining under control, I can only laugh. The whole purpose of Mr Bernanke's policy is to create inflation. Just yesterday, BOJ chairman Kuroda described the purpose of his quantitative easing as follows: "We took all available steps we can think of. I'm confident that all necessary measures to achieve 2 percent inflation in two years were taken today." The Fed itself has announced that it won't end quantitative easing until inflation reaches 2.5%:

In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

[4/17/2013: If you are not convinced that the purpose of QE is to increase inflation, consider this recent news story from Forbes: "St. Louis Fed President James Bullard spoke in New York on Wednesday, warning that inflation remains too low and suggesting he’d be ready to increase the rate of asset purchases, or QE, to defend their target “from below.”]

In other words, the Fed is trying its damnedest to goose the economy and create inflation, but, even after all Mr Bernanke's stimulus, the economy continues to sputter and inflation remains low, likely because all these monetary manipulations do not represent any real economic activity. How this represents the triumph of Keynesianism is beyond me.

Bernanke and BOJ: All consumption units report to your posts and inflate aggregate demand!

In last Sunday's NYT, David Stockman published an op-ed summarizing the basic theses of his new book, The Great Deformation: The Corruption of Capitalism in America:

The Dow Jones and Standard & Poor’s 500 indexes reached record highs on Thursday, having completely erased the losses since the stock market’s last peak, in 2007. But instead of cheering, we should be very afraid. ... Sooner or later — within a few years, I predict — this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too. Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); ... With only brief interruptions, we’ve had eight decades of increasingly frenetic fiscal and monetary policy activism intended to counter the cyclical bumps and grinds of the free market and its purported tendency to underproduce jobs and economic output. The toll has been heavy. As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another — smoothing out the business cycle, minimizing inflation and unemployment at the same time, rolling out a giant social insurance blanket, promoting homeownership, subsidizing medical care, propping up old industries (agriculture, automobiles) and fostering new ones (“clean” energy, biotechnology) and, above all, bailing out Wall Street — they have now succumbed to overload, overreach and outside capture by powerful interests. The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating “demand,” even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls.

As if on cue, we were informed today of massive new quantitative easing by the Bank of Japan:

"The Bank of Japan unleashed the world's most intense burst of monetary stimulus on Thursday, promising to inject about $1.4 trillion into the economy in less than two years, a radical gamble that sent the yen reeling and bond yields to record lows. New Governor Haruhiko Kuroda committed the BOJ to open-ended asset buying and said the monetary base would nearly double to 270 trillion yen ($2.9 trillion) by the end of 2014 in a shock therapy to end two decades of stagnation. ... Kuroda said the BOJ wanted to push down bond yields enough so that investors will start buying riskier assets, such as property and stocks, and to prompt households and companies to spend now rather than later on expectations of rising prices."

In sum, we now live in a world where the only economic fact that matters is central bank policy. There is no such thing anymore as an inherently good or bad investment. Good or bad investments are now defined as investments that are either aligned or not aligned with current central bank policy. Our central bankers operate on the premise that a single bureaucrat (the central bank governor) can know what is good or bad for the economy and can use this knowledge to press down or let up on the monetary accelerator, thereby stimulating or discouraging all of us "consumption units" (humans) to increase or decrease "aggregate demand." It is Keynesianism run amok. It is yet another example of Hayek's "synoptic delusion ..., the fiction that all relevant facts are known to some one mind, and that it is possible to construct from this knowledge of the particulars a desirable social [in this case, economic] order." We are asked to believe that control of our economies should be entrusted to a handful of individuals who could not even recognize the oncoming subprime disaster of 2008. All common sense seems to have been lost. Officials at the highest levels of government do not seem to be able to understand that flooding markets with money only distorts (in Stockman's words, "deforms") genuine economic activity. A kind of Keynesian Ate has infected their minds and clouded their thinking. They are like old King Oedipus, who thought he was the most intelligent man in Thebes and that he was the only person who could save the city (remember Alan Greenspan, Bob Rubin, and Larry Summers on the cover of Time magazine as "The Committee to Save the World?"), when in reality he was the very fons et origo of the plague that was destroying it.

The wild, and, in the end, futile machinations of our central bankers cannot end well. As Stockman writes:

The future is bleak. ... These policies have brought America [and presumably will bring Japan] to an end-stage metastasis. The way out would be so radical it can’t happen. ... It would require, finally, benching the Fed’s central planners, and restoring the central bank’s original mission: to provide liquidity in times of crisis but never to buy government debt or try to micromanage the economy. Getting the Fed out of the financial markets is the only way to put free markets and genuine wealth creation back into capitalism. That, of course, will never happen because there are trillions of dollars of assets, from Shanghai skyscrapers to Fortune 1000 stocks to the latest housing market “recovery,” artificially propped up by the Fed’s interest-rate repression. The United States is broke — fiscally, morally, intellectually — and the Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse.

Additional note: This evening on CNBC Mohammed El-Erian, the Co-CIO of PIMCO, described the BOJ's action as follows:

It puts us deeper in unprecedented and highly experimental territory. … This is the most experimental that we've ever seen central banking. They are venturing deeper and deeper, using imperfect tools. And they are not getting the response they expect. … But rather than step back and ask why, they just go deeper and deeper. So the question is: Will they finally succeed in transitioning from assisted growth to real growth or will it end in tears? And I think that this is a major uncertainty that the market doesn't quite understand, how binary this outcome is. … The ECB will become even more like a fiscal agency, just like our Fed and the BOJ are becoming fiscal agencies.

By saying that the the Fed is becoming a fiscal agency, El-Erian means that the Fed is acting more and more like a central planner micromanaging the economy and less and less is fulfilling its original role of being the lender of last resort. This drift is a direct result of the impossible bipolar, dual mandate given to the Fed by the Humphrey Hawkins Act, which instructs the Fed not only to strive to ensure stable prices, but at the same time to promote full employment. Never were two more diametrically opposed goals given to a government agency. It was through the Humphrey Hawkins Act that liberal Keynesian Democrats (Hubert Humphrey, Augustus Hawkins, and Jimmy Carter) captured the Federal Reserve and redirected it towards fulfilling their social planning purposes. This is precisely the kind of deformation/perversion of public institutions that Stockman describes in his book.