How Much Is This Recovery Going To Cost?
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Its crazy how many different things can be traded these days. There are futures contracts for just about everything, even the weather. In my days as a commodity broker, many moons ago, we even used to joke about putting on a tiger shrimp/powdered milk spread. (You could actually do this, were you so inclined. Or at least you could back then.)
But you know what would be really great to see? A futures contract that rises or falls with the reputation of central bankers.
Someone smart (like Robert Shiller) should create the Federal Reserve Good Will Index, to measure popular sentiment toward the Chairman of the Fed. Then the Chicago Mercantile Exchange could set up a contract that traded off it.
I wish they had done this years ago. If they had, I would have shorted the daylights out of Alan Greenspan futures contracts, right about the time Vice Chairman Alan Blinder referred to him as The greatest central banker who ever lived.
Talk about an unsustainable high! Since that day in 2005, Greenspan has gone from Maestro to Master of Disaster in the eyes of the world (for anyone keeping score that is).
And as for today, your editor would happily short the monetary witch doctor du jour, Federal Reserve Chairman Ben Bernanke, in large size too. What an excellent speculation that would be.
Bernanke 5,000
Like the Nasdaq of old in the days of the dot-com bubble, the Federal Reserves reputation has soared high in recent months. As the global financial crisis fades from investor memory, belief has been widespread that Ben Bernanke saved the day that both America and the world were saved from disaster by the Feds decisive action and generous intervention.
Well. Well see how kindly history treats that judgment.
Remember Nasdaq 5,000? That was the magic number (5,408.62 if you want to be precise). When the Naz kissed that magical 5K level in March of 2000, soaring ever higher on gossamer dot-com wings, it turned out to be the kiss of death. A brutal 75% decline followed.
Your editor predicts that, were the Fed Chairmans reputation linked to an index, we would soon be approaching Bernanke 5,000, in keeping with the Nasdaq of old. And also in due time, we will see a similar bone-crushing decline.
Bernankes reputation will take a brutal dive downward and never fully recover when it becomes clear, to even the most deaf, dumb and blind observer, that this recovery was purchased, via the Federal Reserves funny money trillions, at far, far too high a cost.
Cost? What Cost?
Of course, right now we have a situation that could be considered amusing or tragic or both. Many market investors and commentators arent even aware so far that this recovery even HAS a hidden cost.
All they see are the pretty economic data points creating an oh so pleasing medium uptrend. Rampant stimulus? Out-of-control fiat money creation? Pshaw. They think all this came about for free!
Take Maria Money Honey Bartiromo for example. Ms. Bartiromo has been a CNBC financial reporter since 1993. She has written books, hosted World Economic Forums, reported live on the scene in countless exchange floor experiences, and ridden in private jets with the Wall Street glitterati.
And yet, for all that, she seems absolutely clueless as to what is actually happening.
Sound too harsh? The evidence is caught on videotape. In a Yahoo Tech Ticker interview, which you can watch here, Bartiromo said the following:
Theres nothing wrong with a boom bust economy. Whats wrong with a boom bust economy? Things are booming and then you get a bust and that opens the door for wealth creation.
Nothing wrong with a the mind boggles. Nothing wrong with trillions of dollars in wealth and savings, vaporized overnight by a bunch of greedy banksters? Nothing wrong with America in financial turmoil? Nothing wrong with 20% unemployment and underemployment? Nothing wrong with American small business the backbone of the country gasping for air like caught fish flopping around in the bottom of the boat, while the main perpetrators of the crisis are rewarded with risk-free billions in new profits? Nothing wrong with trashing the rule of law and descending into financial oligarchy?
Pardon my French, but Ms. Bartiromo has no idea none what the hell is actually going on. As Bill Bonner once quipped in Financial Reckoning Day, she is like a squirrel watching a bank robbery. She and legions like her who represent the financial establishment! have zero grasp of Austrian economics, which warns very plainly that these harmless booms and busts, brought on by government massaging of the credit cycle, lead to outright fiscal disaster. Wealth creation? Try wealth DESTRUCTION, on a vast and epic scale.
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The CAT Example
The problem with the financial establishment and it is only one of many is a sort of willful myopia. These people put on their blinders and green eye shades and fixate with intensity on earnings and indicators and managed data points all the things that they want to see. Anything that they dont want to see or hear, they ignore. A man hears what he wants to hear and disregards the rest, as Simon & Garfunkel once sang.
Take the recent earnings report from Caterpillar (CAT:NYSE), a well-known maker of earth-moving equipment and other machinery. CAT reported an improved outlook, to much praise and good cheer from investors along with a sharp price gap higher even as its revenue declined 11% year on year.
(And somehow an 11% top-line decline, off the miserable crisis conditions of Q1 09 no less, counts as improved? Hmm.) Worse still:
CATs machinery sales were down 1%
North American machinery sales were down 15%
Dealer inventories were half the previous years levels
Engine sales were down 28%
Gee, that all sounds terrible. So why were investors cheering and buying? Because Asia profits were up 40%, leading to a modest profit where last year saw a loss. That happy circumstance drove everything. The bad news on overall revenue decline machinery and engine sales decline utter North American malaise all ignored.
It gets even more amusing. Those save-the-day profits CAT picked up in Asia? For a company that sells earth-moving equipment, how much of that strength might be linked to the fact that China is in the midst of a white-hot real estate and construction bubble? (Hmm, you think?)
Not only did CAT look awful everywhere except in Asia where China has been bankrolling nutty construction projects like mad the company actually conditioned its positive outlook on the presence of continued stimulus!
As the WSJ reported, [CAT] raised it[s] outlook for 2010, though revenue declined on continued weakness in developed economies, especially the U.S. and Europe. It cited concerns about central banks withdrawing stimulus too soon.
A Cost We Cannot Bear
So there you have it. Caterpillar, one of the worlds premier industrial companies, shoots the moon on positive investor sentiment even as its business model clearly hinges on the kindness of central bankers.
Please Mr. Bernanke, dont stop the flood of free money its all thats keeping our USA lines from collapsing. Please Beijing, dont stop building deserted shopping malls and empty skyscrapers and highways that no one will drive on. Its the only thing making us look good. Yet our outlook has improved as long as you keep it coming.
The thing is, the torrential gusher of free money that has so buoyed us isnt actually free, any more than the low-cost funds once happily borrowed by Greece were free.
The unprecedented stimulus a great macro liquidity experiment the likes of which the world has never seen comes with a horrible embedded cost a potential price so high that the crisis cure could ultimately prove far worse than the disease.
The true cost may only be known, in fact, once the Federal Reserve has managed to inflate yet another money and credit bubble (to compliment the decades previous two). And once this third bubble pops, we could be left with an even bigger financial crisis to clean up and no room on the balance sheet to spare.
A country without reasonable means of paying off its debts is only as solvent as the market judges it to be. At some point in future, thanks to the Greece precedent, the market may judge the USA technically insolvent i.e. unable to pay its debts except by way of printing press, which is a form of default in disguise.
That is the frightening reality that the Maria Bartiromos of the world miss, even as the overlooked danger signs mount.
For all that we have sacrificed, there will not be nearly enough bang for our buck in the end, when expensively purchased recovery on the whole runs headlong into the brick wall of sovereign debt crisis. The looming costs of the stimulative printing press solution could prove too much for the West to bear.
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by: J. Litle
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