Friday, August 28, 2009

Read Between the Decimals; Bill Bonner with a look at the 'Bernanke Put'

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The Daily Reckoning
Friday, August 28, 2009

Big Ben's "'Dummies' Guide to Avoiding a Japan-style Deflation"... Don't believe the numbers - whatever they say, it's a lie... An ingenious scam in Bristol...the summer is ending in Ouzilly... Bill Bonner with a look at the 'Bernanke Put'...and more!

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Read Between the Decimals
by Bill Bonner
Ouzilly, France

Our story continues...

According to the popular version, Ben Bernanke, our flawed hero, has averted a Second Great Depression. When the crisis came in '07-'08, he calmly took out the text he had written himself: "Dummies' Guide to Avoiding a Japan-style Deflation"...or something like that.

Then, he followed his own theory...coolly...confidently...cutting Fed rates down to nearly zero, pushing Congress to pass a huge 'stimulus' bill, and even forcing Bank of America to take over Merrill Lynch. In this last event, he is accused of deliberately hiding Merrill's enormous losses and then threatening the BofA board with dismissal if they refused.

Because of Bernanke's swift and assertive action, the nation's banking system held together during those critical weeks of late 2008. And because of his monetary (and fiscal) policies, all the worlds' economies are now in some stage of recovery. Stocks are rising. House sales are increasing. All the indicators point to a better world.

In recognition of the fact that he saved the world, Ben Bernanke was given the nation's highest honor; Obama picked him to continue as head of America's central bank, the Federal Reserve...even though his predecessor, a Republican, appointed him.

Everyone needs a story. It's the way we understand things. Data is just data. Numbers are just numbers. Facts are just facts. Without the framework of a good tale to hold them together, they are worthless.

That's why, here at The Daily Reckoning, we are suspicious of facts, data and numbers. As for the numbers, they are wrong before they get to us...often intentionally. Then, when they are later straightened out, they sometimes tell a completely different story. Even the 'facts' often turn out to be not facts at all...but distorted data, information has been twisted to fit into a storyline.

The more precise the data, meanwhile, the more they lie. Give us a CPI rate of 6.24% and we will give you back two numbers that are total fictions...and another one that turns out to be wrong later. As for the GDP growth rate...don't even bother to give us a number at all. Whatever the digits say, it's a lie.

This week came news that the GDP is falling at a 1% rate. This number surprised economists. They thought it was falling at a 1.5% rate. This better-than-expected number encouraged investors to buy stocks; the Dow rose 37 points yesterday. Oil and gold remained more or less where they were.

Economists are frequently surprised. In a study of GDP forecasts, a researcher found that economists did nothing more than extrapolate current trends into the future. If the GDP was growing at 2%...they projected that it would grow at 2.3% the following year. Or maybe 1.9%. These projections were mostly correct. Generally, one year is a lot like the year before. But whenever the direction changed dramatically, economists missed it completely. In other words, they're not really capable of telling us what the economy will do - unless it does nothing different.

We've discussed the emptiness of the GDP figures many times. Just because the GDP is growing doesn't mean people are really any better off. In fact, GDP growth during the Bubble Epoque was really a measure of how fast people were ruining themselves. Seventy percent of the GDP was consumer spending; as consumer spending went up so did debt. The result was a paradox and a shame - at the end of one of the longest periods of uninterrupted GDP growth in history, the typical householder was poorer than he was than when it began.

That's why we are skeptical of numbers...especially precise numbers. They lie through their decimals.

What matters is the story...and our story now centers on the role of one man: Ben Bernanke. But the story that most people hear...and false. It is like GDP growth in the Bubble may sound right on the surface, but the real story is opposite to what is commonly believed.

Bernanke 'wrote the book' on avoiding deflation, 'tis true. But he doesn't really have a clue what he is doing. He didn't really avoid a Second Great Depression. There isn't really a genuine recovery underway. And the world is not becoming a better place as a result of Ben Bernanke's exertions.

Au contraire...he's making a natural mess into an unnatural one. He's turning a depression into a Great Depression. He's making a bad situation worse.

At least, that is OUR plotline. But we'll let the story tell by day...and see where it leads us. If we are wrong about the plot...we'll find out...

[But in the meantime, we advise you to get set for the long-haul. You can make sure that the coming months - or years - aren't lean ones for you. There is a completely legal 'loophole' in these that makes sure you get extra 'bailout' income checks - equaling $17,500 or more - this year and every year that it takes America's economy to recover. Get all the information here.]

More news from The 5 Min. Forecast:

"This time last week, we began with a typical barstool question: Where's the market headed?" writes Ian Mathias in today's issue of The 5 Min. Forecast. "Since stocks have been intent on going nowhere (the S&P has piddled forward to a 0.5% gain so far this week) we'll turn that query on its head today:

"Where's the market been?

"The answer is that the market's caught up in one of the biggest bear market rallies in American history. See for yourself:

Depression-Era Bear Market Rallies

"The current bear market rally is longer in duration than any Depression Era rebound, and is second only in magnitude to the initial crash snapback in 1929.

"Bill Bonner suggested yesterday, that we are 'at the beginning of a long period of adjustment - a depression.' Hmmm... And the current stock rebound looks a lot like the rally of 1929, during the very early stages of the Great Depression. So if history is to repeat, that would put us:

On the Brink

Ian writes every day for The 5 Min Forecast, an executive series e- letter that provides a quick and dirty analysis of daily economic and financial developments - in five minutes or less. It's a free service available only to subscribers of Agora Financial's paid publications, such as the Hulbert #1 Performing Investment Letter, Outstanding Investments.
And back to Bill, with more thoughts:

The pound is in trouble. Our currency man, Bill Jenkins, sheds some light on the situation:

"Reason #1: Inflation is falling, which generally means no forecast for a rise in rates. No rising rates means no attraction for investors. Inflation has been falling since October '08: 5.2%, 4.5%, 4.1%, 3.1%, 3.0%, 3.2%, 2.9%, 2.3%, 2.2%, 1.8%.

"Reason #2: U.K. exports have hit the skids for the period going back to November. Check out these numbers year-over-year: November: $36,260 billion; December: $35,190 billion; January: $34,412 billion; February: $33,046 billion, March: $32,765 billion; April: $32,264 billion; May: $32,239 billion; June: $31,888 billion; July: $32,208 billion. In spite of the flattening out over the last couple reporting periods, there is no recovery here.

"Reason #3: Industrial production in the United Kingdom has maintained double-digit losses since January: -12.1%; February: -12.7%; March: - 12.6%; April: -12.4%; May: -11.9%; June: -11.1%. Without production, nothing sells. No sales.. no income. No income... no jobs.

"Reason #4: Thus the unemployment rate has been rising every month since January: 6.3%, 6.5%, 6.7%, 7.1%, 7.2%, 7.6% and 7.8%. Unemployment is still on the rise. Nearly one in five households are living on government benefits, with nearly 2 million children living in homes where no adult is working.

"Finally, in the oddity column...

"Reason #5: Business confidence and consumer confidence have been on the rise (although I am not sure why). I have mentioned to you before that sentiment figures are not really fundamental indicators. However, you can view them in a contrarian light when the real numbers are falling and the sentiment numbers are rising. Everybody wants things to be better but, as St. Paul writes, 'He that deceiveth himself is not wise.' And when we do ignore the 'facts,' they always come back to bite us!

"This is the foundation of a sucker's rally. People are drawn out of the woods and back into the mainstream, only to be blindsided by another whack from the recession paddle."

[To learn how you can use this information to your advantage, see the rest of Bill's report here.]

"Forget properties or shares," writes a dear reader. Here's how to make real money:

From the Bristol Evening Post:

"Outside Bristol Zoo is the car park, with spaces for 150 cars and 8 coaches. It has been manned 6 days a week for 23 years by the same charming and very polite car park attendant with the ticket machine. The charges are £1. per car and £5. per coach.

"On Monday 1 June, he did not turn up for work. Bristol Zoo management phoned Bristol City Council to ask them to send a replacement parking attendant.

"The Council said, 'That car park is your responsibility.' The Zoo said, 'The attendant was employed by the City Council...wasn't he?' The Council said, 'What attendant?'

"Gone missing from his home is a man who has been taking daily the car park fees amounting to about £400. per day for the last 23 years...!

"Total sum just short £2.9 million."

What a summer.

Last night we invited our neighbors over for a barbecue. Damien, our gardener, manned the fire. Jules took care of drinks.

Along with the farmers, their wives and their children, came the girls from across the road. You'll recall THAT storyline, dear reader. This has been a summer of awakening for the teenagers. For the first time since we've been here - 14 years - our boys have noticed our neighbors' girls. Every summer before, we would only see them in church, lined up in pretty dresses...quiet...polite... We exchanged kisses, in the French manner, after the mass, but that was it. Otherwise, we never saw them.

"This is a summer the boys aren't likely to forget," began their older brother at breakfast this morning. "They all went down to the pond after dinner last night. I went down to say hello, but after a few minutes, I felt out of place. It was pretty hot down there."

Yes, the girls have grown up. And so have the boys. Back and forth, all the month of August. Playing tennis and swimming in the daytime. Having dinner and hanging out at the pond at night.

"It's a lot of fun," our youngest boy, 15, reported earlier in the week. "But it's complicated. We all seem to like someone else...but not the one who likes us. Eloise likes Henry, but Henry likes Claire. Claire likes me, I think, but I like Sylvie. I don't know who Jules likes, but I think all the girls like him."

Last night, however, it looked as though the iron filings were finally lining up. Your editor went down to the pond at 2AM; it was time to take the girls home, he told them.

"I don't care if the girls want to stay or not. Take them home."

The boys obeyed. But it was obvious that none of them wanted to leave. Edward had one of the girls by the arm. Henry and another were deep in conversation on the other side of the fire. Jules was nowhere to be seen.

It was the last time they would see each other until next summer. The girls would go back to their lives in Paris or elsewhere. Our boys would go back to school or on to their careers. Tonight was their last night together. The goodbyes were long...and, probably, tender.

"C'mon...get going," their father told them, heartlessly. "Wrap it up."

Keep reading for today's essay, below...

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The Daily Reckoning PRESENTS: Ben Bernanke has saved the world from a Second Great Depression - or has he? In the essay below, Bill Bonner argues that Bernanke does what his predecessors at the Fed did in the '30s...and what the Japanese did in the '90s. Read on...

Bernanke to Stays Put
by Bill Bonner
Ouzilly, France

Damned if he does; damned if he doesn't

This week, Ben Bernanke got the nod for another stint as head of the world's most important central bank. Yes, he completely misunderstood the implications of the hugely negative US trade balance, believing that America did the world a favor by spending its "global saving glut." And, yes, he missed the approach of the biggest financial disaster in three generations. Then, when it arrived, he mistook it for a routine recession, until finally, panicked by the collapse of Lehman Bros., he insisted that Congress pass a $750 billion spending bill - or "we may not have an economy on Monday."

But except for things that really matter, he's been a pretty good Fed chief. Besides, he has the right credentials. He was a professor of economics at Princeton and holds a Ph.D. from MIT - just like the most recent Nobel Prize winner in economics, Paul Krugman.

The United States has just averted the Second Great Depression, say the papers. "What saved us?" asks Krugman in a recent New York Times editorial. "Big government," is his answer. Specifically, the big government of Ben Bernanke.

But the ghost of Milton Friedman haunts the central bank. Bernanke borrowed a phrase from Friedman, saying he'd even "drop money from helicopters,' if necessary, to prevent deflation. This led to one of the surest trades of the Bubble Era was the so-called on the 'Bernanke Put.' Investors thought they could count on him. Buy stocks. If they went down, Ben Bernanke would make sure you didn't lose. He'd add liquidity until the market bounced back. But the Bernanke Put trade went bad in '07. The market fell. Ben Bernanke added liquidity. But so far, stocks have yet to regain 50% of what they lost. Meanwhile, consumer prices are falling. And yet, he does not drop money from helicopters. Why not?

Few people would have more authority on the subject than the group gathered at the Beverly Hilton in Los Angeles earlier this year. Michael Milken, the Junk Bond King, gathered them thither and picked up the tab for Gary Becker, Myron Scholes, and Roger Myerson...each of their names is preceded by 'Nobel Prize winner.' With that kind of brainpower on hand, you'd think you could come up with a good explanation. But the best they could do was a simple analogy. Gary Becker (Nobel awarded '92) took the Friedman line; he argued that by putting out the little forest fires, the recessions of the '90s and the early '00s, the feds inadvertently created the conditions for an even greater conflagration. Instead of burning off the underbrush, the tinder built up until a huge blaze was inevitable. And in a speech honoring Friedman, Bernanke accepted Friedman's criticism of the Fed in the '30s. Yes, Bernanke admitted, the Fed made mistakes; but we won't do it again, he said. The burden of today's rumination is that he was wrong; he will do it again.

"Inflation is always and everywhere a monetary phenomenon," said Friedman. But deflation doesn't seem to be a monetary phenomenon at all. Despite huge inputs of new money from the Fed, prices are still going down. The Fed's balance sheet more than doubled in the last 18 months. It will probably double again - to $4 trillion - before Bernanke's next term is over.
"...investors are buying the Bernanke Put again, confident that the Fed chief will keep pushing money into the system and stocks will continue rising. But Ben Bernanke, for all his bluster, is a victim of the trade. Everyone knows what he is up to."

Friedman won a Nobel Prize for his work. And he drew around him a community of scholars that won so many Nobel Prizes they ran out of room in the University of Chicago trophy cabinet. But it only makes you wonder about the Nobel committee. Friedman's acolytes won their prizes for elaborating a series of mathematical proofs for things that were either self-evident or self-evidently absurd. Most of them were later shown to be wrong, irrelevant or misleading. Modern Portfolio Theory, Black-Scholes Option Pricing Model, Dynamic Hedging - the farther afield the scholars went, the more they lost touch with home. The more scientific their work became, the more it resembled alchemy or phrenology.

Friedman's work itself was flawed in the same way. The general principle was correct - that the government that governs the markets least governs best. But when he got into the mechanics of 'monetarism,' he got lost. He believed that if the Fed kept its eye on the money supply; the free market would take care of everything else. But the free market didn't take of everything, at least not as people hoped. Economist Murray Rothbard explained why in 1971. You cannot expect the free market to function perfectly if you leave in the hands of the government the power to control money. Either markets are free or they aren't, was Rothbard's point. If they're not free, you can't blame freedom when they fail.

But free market economists are now blamed for everything. The free- market Chicago boys are out. The MIT crowd is in. And investors are buying the Bernanke Put again, confident that the Fed chief will keep pushing money into the system and stocks will continue rising. But Ben Bernanke, for all his bluster, is a victim of the trade. Everyone knows what he is up to. They can't help but look ahead and see where it leads.

As soon as Bernanke starts his helicopter engines, bond buyers get out their missiles; the Chinese - the biggest single customer for US debt - have warned that they will shoot him down. What can Bernanke do? He is damned if he doesn't. But even more damned if he does. He can't guarantee increases in either CPI or stocks. All he guarantees is that Big Government will play a larger role in the economy...and that Milton Friedman's history of the Great Depression will turn out to be prophecy:

"The Fed was largely responsible for converting what might have been a garden-variety recession... into a major catastrophe..."

Ultimately, Bernanke does what his predecessors at the Fed did in the '30s...and what the Japanese did in the '90s. He hesitates. He makes mistakes.

And he wonders why he took the damned job in the first place.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis. He is also the author of, along with Lila Rajiva, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics.

Bill's latest book, an update of Financial Reckoning Day, co-authored with Addison Wiggin, is now available for purchase by clicking here:

Financial Reckoning Day Fallout: Surviving Todays Global Depression

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