Bernanke's Incantation
Today's Edition
By David Galland
Dear Reader,
As I sit down to write this early morning, Mr. Market is teetering on the edge of his seat, waiting breathlessly for Fed Chairman Ben to open his bearded maw in order to issue a proclamation of such divine import as to determine the very fate of the global economy.
Finally, the world hopes, the Bernanke will step up to a microphone and intone words such as "stimulus," "intervention" and "liquidity" in the correct order - an order known only to those who have attained the highest levels of academic mysticism - to form an incantation of sufficient power to bring Harry Potter himself to his knees in awe.
So powerful, in fact, that once uttered, the Bernanke's incantation will sweep the globe, chasing away the gloom and opening the skies to a new era of global peace and prosperity.
As we aren't in Jackson Hollow where the Fed is meeting, we can't know what words the Bernanke will mumble later today, but we can paw through the entrails of his past incantations in the hopes of uncovering clues.
For instance, back in July 2005, when my dear friend and colleague Doug Casey was writing in Casey's International Speculator...
"... based on my review of various data, trends and anecdotal evidence, I am increasingly concerned that the wheels are about to come off the US economy. And maybe China. Elsewhere in the world, we have near total mayhem in the Middle East and confidence in the EU is (correctly) crumbling. If all the stuff that is, or could be, soon hitting the fan actually does so, we could witness an economic debacle on a global scale."
...the Bernanke was saying...
"We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don't think it's going drive the economy too far from its full employment path, though."
And in February of 2006, which, as you can see from the chart here, was within spitting distance of the very peak of the housing bubble, the Bernanke spoke as thus:
"Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise."
And in March 2007, the very month that Doug Casey wrote in Casey International Speculator...
"As in 1970, 1974, 1980, 1987 and 2000, the economy is at a turning point. But this time there is no good direction for it to go. The gentlest we can expect is a monetary crisis as bad as any in living memory...
"Ordinarily a country threatened with currency collapse would lean toward tight money, perhaps contracting its domestic money supply. That would push interest rates upward and compensate foreigners for holding on to the currency despite the depreciation risk. And it would soften that risk.
"But this time things aren't ordinary... there is a difference that turns what might otherwise be a disturbance into the makings of disaster: the US economy's inability to endure high interest rates. As we'll discuss here, because of the grossly distorted US housing market, raising interest rates to protect the dollar would prove as calamitous as not raising interest rates."
...the Bernanke went on record as thus...
"At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."
(For the record, roughly a year and a half later, the subprime princelings Fannie Mae and Freddie Mac blew up and were taken over by the government.)
Undaunted, in May 2007, the Bernanke reinforced his positive outlook with these fine words:
"All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable."
Then, in June 2008, almost to the day that Casey Research Chief Economist Bud Conrad was summing up our economic outlook for the inaugural edition of The Casey Report as follows...
"Finally, it is important to recognize that the world remains in the throes of a deep and serious crisis. While many analysts will express the view that the worst is over or that, after a modest downturn, things will bounce back just like they always have, our view is that what we will actually witness going forward is a fairly steady occurrence of crisis and panic. The crisis will accelerate, moving faster, even, than in previous major shifts such as that witnessed in the 1970s.
"While history may find we are too pessimistic at this point in time, in our view it is far better to prepare for a worsening crisis and hope that it does not materialize, than to expect business as usual."
...the Bernanke was intoning...
"The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so."
And even as recently as August 2010, the Bernanke stated confidently...
"The financial crisis appears to be mostly behind us, and the economy seems to have stabilized and is expanding again."
Hey, hold the phone!
Looking over those pronouncements and many, many more along the same lines, one can only come to the conclusion that the Bernanke is either a fool or a liar.
Strong words, I know. But seriously, can one draw any other conclusion?
I mean, he missed every possible sign of the impending economic train wreck... and, even with boxcars landing in burning heaps on both sides of the tracks, continued to insist the train of the economy was proceeding at a steady pace toward Happyville Station.
If he actually believed any of that, he is obviously a fool.
But if he didn't believe in his rosy prognostications, then it can only mean that he is a calculating caitiff, to use the archaic phrase for "no-good, lying skunk."
Glancing over the Bernanke's academic achievements, we confirm that he didn't leave school early in order to pursue a promising career wringing chicken necks down at the local poultry house. So we can only surmise the man is not a fool; therefore he has to be a knave.
Yet Mr. Market still awaits his words with great anticipation. Becauuuusssse???
Well, on that point, we can only further conclude that Mr. Market doesn't know his hindquarters from a (Jackson) hole in the ground.
In fact, the record is stunningly clear that any time the Bernanke proffers an economic prediction, you should rush out and bet that exactly the opposite will come true - it's a sure-fire way to make a killing in the markets.
And with that, we turn our attention to the Bernanke's latest incantation, which has just now found its way out of the Hole in Jackson. Just minutes ago, he rose to the microphone and said...
"With respect to longer-run prospects, however, my own view is more optimistic. As I will discuss, although important problems certainly exist, the growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years." The Bernanke, Jackson Hole, August 26, 2011
So, with our newfound understanding of the inverse relationship between Bernanke's stated views and how things ultimately work out, how should we act?
I think this graphic pretty well sums it up. (For those dinosaurs among you still using devices unable to view graphics, the caption is "WE'RE ALL DOOMED!")
Well, technically, not everyone is doomed. Just those who actually still assign even a scintilla of credibility to Bernanke's words versus, say, listening to Doug Casey, Bud Conrad and others who, based on the record, actually understand what's going on and aren't afraid to say so.
But the truth of the matter should be apparent to anyone willing to have faith in their own powers of observation. The social fabric of this nation, and many others as well, is currently being held together (barely) by the weak glue of government deficit spending. As that glue is strained to the breaking point by fundamental economic realities... as the checks for the long-term unemployed stop... as municipalities around the nation follow Jefferson County, Alabama toward bankruptcy... as the banks are ultimately forced to eat their own toxic cooking... as the wealth of the nation's elderly is decimated by a combination of falling housing prices and the Fed's low interest rate policy... as it dawns on the youth of the nation, especially those of minority populations, just how the state education has let them down, and how poor their prospects are... we will begin to see signs of systematic failures in the monetary system and, in time, the status quo that has allowed the stulti fied government to continue to operate even though its negatives now outweigh any benefits.
Despite the Bernanke's fine words to the contrary, the outlook for the short term, the medium term, and unfortunately, even the longer term, is anything but good.
I know that is a strong statement, but based on the track record, I believe that it is a far more realistic assessment than anything that is likely to emanate from the Bernanke's mouth.
A dim view is called for considering the reality that the US, in parallel with many of the world's biggest governments, has built bureaucratic castles out of cards and placed them on towering piles of the dry tinder of unpayable debt.
The collapsing housing bubble - a bubble in no small part encouraged by the Fed's own loose money policies - provided the spark that set that bonfire alight. But then, rather than isolating the burning embers and letting the fire run its course, quickly burning away the bad debt and misallocated capital, the Fed stepped in and attempted to smother the licking flames with helicopter loads of newly created dollars, only making matters much worse.
With each passing day, the conflagration worsens. By the time it has singed Bernanke's beard and he retires in disgrace, it will have immolated the wealth of much of the populace.
At the risk of sounding like a broken record, tangible assets, ideally diversified internationally, remain the best bet for protecting your wealth against what's coming.
And holding those assets in tax-advantaged structures, as much as possible, will be seen in hindsight as a really good idea.
Whatever you do, don't believe the Bernanke, and don't give a minute's thought to the latest gyrations of Mr. Market. The first is a proven knave and the latter an unstable fool.
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