The Great Maestro On Tax Cuts

There's nothing more humorous than to hear The Great Maestro continue to tell us what the problems are...... that he orchestrated over 18 years.

"'I'm in favor of tax cuts, but not with borrowed money,' Mr. Greenspan, 84, said Friday in a telephone interview. 'Our choices right now are not between good and better; they're between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about.'"
Alan Greenspan

Source: NY Times

The Quasi Maestro

The Great Maestro speaks again.  He might have coined another new economic term, "quasi recession".

"The dollar traded near its weakest since November against the yen on signs the U.S. recovery is losing momentum and after Former Federal Reserve Chairman Alan Greenspan said the slowdown feels like a 'quasi recession.' The U.S. economy might contract again if home prices decline, Greenspan said in an interview on NBC’s 'Meet the Press' yesterday. 'We’re in a pause in a recovery, a modest recovery, but a pause in the modest recovery feels like a quasi- recession,' he said."

Source: Bloomberg

The Great Maestro On Derivatives

This one will be a "keeper" for a long time:

“The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions …. Derivatives have permitted the unbundling of financial risks.”
Alan Greenspan, May 2005

The Maestro's Canary

I love when Greenspan sends his warning signals.  A little late, Mr. Maestro!

"Former Federal Reserve Chairman Alan Greenspan said the recent rise in Treasury yields represents a 'canary in the mine' that may signal further gains in interest rates.  Higher yields reflect investor concerns over 'this huge overhang of federal debt which we have never seen before,' Greenspan said in an interview today on Bloomberg Television’s 'Political Capital With Al Hunt.'  'I’m very much concerned about the fiscal situation,' said Greenspan, 84, who headed the central bank from 1987 to 2006. An increase in long-term interest rates 'will make the housing recovery very difficult to implement and put a dampening on capital investment as well.'"
Business Week

"Alan Greenspan told a panel investigating the causes of the financial crisis Wednesday that steps can be taken to limit the impact of another shock, but the former Federal Reserve chairman warned that regulators can't fully prevent another crisis from happening.  In written testimony presented to the Financial Crisis Inquiry Commission, Greenspan said the recent crisis highlights the limitations of government oversight in the financial markets. 'Regulators cannot successfully use the bully pulpit to manage asset prices, and they cannot calibrate regulation and supervision in response to movements in asset prices," he said. "Nor can they fully eliminate the possibility of future crises.'"
Source: CNN

Yes, Maestro Greenspan, but they can stop printing money.

"Greenspan was a big cheerleader for adjustable-rate mortgages in 2004. He dismissed the idea that record levels of household debt were a problem as long as people could service it, courtesy of his super-low interest rates. He repeatedly rejected the notion of a housing bubble, admitting belatedly that there might be some “froth” in the residential real estate market. He gave political support to the Bush tax cut in 2001 because -- get this -- unless the government reduced taxes, there would be no more Treasuries for the Fed to buy to conduct monetary policy! He refused to raise margin requirements in the late 1990s to defuse the technology stock bubble, arguing publicly it would have no effect. (Privately, he acknowledged it would curtail the bubble but might nail the economy in the process.) He advocated a “risk-management” approach to monetary policy and failed to exercise even a modicum of risk- management during two asset bubbles on his watch. Could anyone have been more wrong about so many things than Alan Greenspan? And now he has the chutzpah to rewrite history? He will certainly give it another whirl at today’s hearing of the Financial Inquiry Crisis Commission."
Caroline Baum, Bloomberg

Greenspan Has Left The Building

I believe that the score of the Superbowl will be as close as the Bernanke vote yesterday. Bernanke by 10.

"The Senate confirmed Ben Bernanke for another four-year term as Federal Reserve chairman Thursday afternoon, ending speculation that anger over Wall Street bailouts could cost Bernanke his job. New Mexico's two democratic senators Jeff Bingaman and Tom Udall voted for confirmation. Bernanke was confirmed by a 70-30 margin. The Senate earlier voted 77-23 to end debate on Bernanke’s nomination, easily clearing the 60-vote hurdle needed to move to a confirmation vote. Bernanke’s confirmation came only three days before his current term is scheduled to expire. Opponents of Bernanke blame him for not preventing the financial crisis of 2008. “Chairman Bernanke was asleep at the switch while Wall Street became the largest gambling casino in the history of the world and hurtled into insolvency,” said Sen. Bernard Sanders, I-Vt. “His failure to adequately regulate financial institutions should not be rewarded with a reappointment.”
Source: New Mexico Business Weekly

The tide has definitely shifted for Mr. Bernanke. I predict that he won't finish his term. The Great Maestro, Greenspan, exited the building just in time.

"I will predict that this will be the "last high point" in Mr. Bernanke's career."
Random Roving - December 17, 2009

"today he’s probably best described as the 'fall guy'"
Random Roving - September 30, 2008"

"And how about Fed Chairman Bernanke. He’s holding Greenspan’s bag and trying to figure out what to do. He’s standing at the podium trying to explain Greenspan’s sins. Isn’t it ironic that he’s a student of The Great Depression?"
Random Roving - September 30, 2008

"The “mob” has emerged and they’re seeking someone to lynch (ask Martha Stewart, George Bush, Jeff Emmelt, Ben Bernanke, and Brittany Spears)."
Random Roving - March 24, 2009

"This, my friends, illustrates the power of the Federal Reserve and aggressive "money printing". The patient is dying on the table, and doctors Greenspan and Bernanke keep it alive for a little bit longer. How long do we really want the patient on life support? If death is inevitable, lets make peace with the patient and let nature takes its course."
Random Roving - March 27, 2009

Person of The Year

It wasn't surprising to see Time Magazine name Federal Reserve Chairman, Ben Bernanke, to be their "Person of The Year". The award was bestoyed on him "Because of his monumental influence on the world’s most important economy". I do agree that he has monumental influence on the entire world economy. I will predict that this will be the "last high point" in Mr. Bernanke's career. As I stated in my post September 30, 2008, Mr. Bernanke will ultimately be everyone's "fall guy". When hyperinflation kicks into high gear, he will be the man that takes the blame. The great maestro, Alan Greenspan, will be long gone when the implosion occurs.

My vote for Person of The Year is Elin Nordegren, the now famous wife of Tiger Woods. In my Snake Charmers post back in May, I stated then "I have to ask today, when are one of these political wives going to stand up for women and rip the eyeballs out of one of these snakes at the press conference?". Well, Ms. Nordegren didn't need to be a politicians wife to stand up for all women across the world. She didn't go for the eyeballs with her fingernails either, she chose a 3 iron and opened a can of "whoopass" on Tiger's face. I applaud her actions. I'm not supporting domestic violence, but she did what so many women should have done before....take a strong stand against abuse and immoral behavior. I believe that her statement will standout for years to come. Rumors state that she plans to divorce Tiger. I hope that she does for the same reasons. You don't deserve a good wife when you don't respect her. Good luck to Ms. Nordegren and hopefully many women will be inspired to take back control of their life.

My runnerup nomination goes to Jenny Sanford, South Carolina's first lady, for telling her husband Governer Sanford to enjoy your life with your "soulmate". She filed for divorce this week.

The Grand Experiment

"None of the experimenters saw this crisis coming, but all of them claim to know the remedy! And a lot of talk about a market failure is being presented as the alleged root of this crisis. Sure, hedge funds, bankers, and regulators certainly played a role. But their reckless behavior is but a symptom of what had been going wrong and was not the cause. This crisis is not a market failure. It's a monumental policy failure! So we have to look into what causes a speculative bubble to understand the real culprits of the current predicament. The answer is fairly straight forward: Expanding money supply and credit growth. Since the central bank controls the money supply and credit growth, it's obvious that the central bank is accountable for the evolution of bubbles and the consequences of their inescapable bursting. Unfortunately we're not hearing or reading much about this obvious truth. Instead, fairytales about market failure are dominating the media. And an old and cynical policy joke comes immediately to mind: 'When the day of reckoning arrives there is but one policy solution: Lying, lying, lying.'. This seems to be the conclusion, the current credo of our politicians and the vast majority of economists. Many of whom are in the business of consulting politicians."
Claus Vogt - Weiss Research Inc.

The Maestro Of Exhuberance Now Warns of Danger

The wolf now warns of trouble in the hen house:

From Bloomberg:

"Former Federal Reserve Chairman Alan Greenspan said Sept. 16 that U.S. debt, already about 84 percent of GDP, is “very dangerous” and threatens both Treasuries and the dollar. Greenspan said that if there was a significant issuance of Treasury securities that increased the debt, “there would be of necessity downward pressure on the dollar.” “We’ve got to confront that issue immediately,” he said."

This chart should alarm everyone. This is an unsustainable trend my friends.

Source: Casey Research http://www.caseyresearch.com/images/46580568NetUSDebtasAPercofGDP.jpg

The Rising Tide

The rise in credit drove the rise in the financial markets, home sizes, debt levels, confidence, waistlines, car sizes, and childhood obesity. It’s all intertwined and some might say it was all artificially created. The “supersize me” era has ended. History will show that 2000 was the beginning of the end of this massive credit orgy. While everyone is blaming the mortgage market, I believe that this situation or cycle dates back to 1982 with Reagan/Voelker. That’s when the credit and greenback printing presses started warming up. Bush Sr./Greenspan participated. Clinton/Greenspan accelerated to a higher level and Dubyah/Bernanke continued the process. ALL were participants. Both political parties. To hear Greenspan interviewed last week and state that he knew this was coming is outrageous. He was the mastermind behind the majority of the credit cycle. The Fed continues to destroy the U.S. dollar. At some point, the printing presses will run out. Two years ago the Fed quit reporting M3 figures. They said that it was too expensive to track!!! Zimbabwe did the same thing with their inflation rate. Don’t worry, we got ya covered!

Puplava's Prediction at The Inflection Point

from financialsense.com
We are now at an historic inflection point in history—with no turning back the clocks. Had our political leaders from Reagan and Clinton to Bush I and II been more fiscally responsible, we wouldn’t be facing the largest monetary storm in history. That monetary storm lies directly in front of us. Bernanke and Greenspan may summarily dismiss high oil prices, but for most of us who live in the real world, higher energy costs are going to be inflationary. Investors need to start preparing for $100 oil. Higher oil prices will eventually permeate all aspects of economic life, driving the costs of basic necessities higher. In the future you may be able to buy a flat screen TV, DVD player or personal computer at a cheaper price, but the cost of everything else will be rising. The things that you need in everyday life will all be going up: your grocery bill, your utilities, the gasoline that powers your car, visits to your doctor or dentists, tuition, and lastly, taxes.

The economy will vacillate between periods of deflation and inflation, with each recession bringing forth a temporary reprieve from what will be an inexorable rise in the general rate of inflation. Eventually wars, deficit spending, a rising mountain of debt, and peak oil will lead towards hyperinflation in the United States.

Already, the U.S. is exhibiting many of the pre-hyperinflationary conditions that are so prevalent in many South American and Eurasian economies. Evidence points to several factors that will lead us there:
Large budget deficits
Deteriorating international trade balances
An eroding international currency
Eroding financial confidence
Growing protectionism
An expanding war on terrorism and the need for security
Growing entitlements

Whether the U.S. experiences hyperinflation or simply higher inflation rates will be dependent on the political will of its leaders to rein in spending and bring its fiscal imbalances into order. At this point, it appears hopeless with over $51 trillion in unfunded Social Security, Medicare, and pension liabilities now growing at over $2 trillion a year. History teaches us that debt imbalances of this magnitude are always inflated away.

An expanding money supply, abundant credit, and negative interest rates are inherently inflationary. When investors realize that they can borrow money at next to nothing rates and invest that money in hard assets and get an immediate return, the demand for such assets rises. This leads to higher prices, asset bubbles or inflation. This is what is going on now in the financial markets, the real estate market, and in the commodity markets. A flood of money and credit throughout the world is driving asset bubbles and inflation. Central banks can create money and credit, but they are unable to direct where that money flows. One of the chief characteristics of inflationary cycles is asset bubbles. First, it was stocks in the 1990s. Then, it was real estate and mortgages in this new century. It is now working its way through to the commodity markets. The new bull market in commodities will dominate the financial markets the balance of this decade and the next.

As debt levels rise in the U.S. at unprecedented levels, the Fed will increasingly become impotent. Unlike Volcker in 1979, today’s U.S. economy is far more debt laden. Because of this huge debt overhang and the huge asset bubbles that support it, the Fed’s options are limited. The Fed simply can’t afford to raise rates in the same decisive and single-minded way that Volcker did during 1979-1982. The Fed’s new mantra is "measured." This means that real interest rates will remain negative for a long period of time.

No matter how high inflation finally gets, it is abundantly clear that the financial markets are undergoing a paradigm shift from a bull market in paper to a bull market in commodities or "things" as I like to call them. Investors will need to focus on a different class of assets. Real assets are going to be the big winners in this new emerging bull market. Commodities are becoming "The Next Big Thing." Precious metals, base metals, energy, water, and food are where the next fortunes are going to be made. Precious metals have, will, and are going to lead this new bull market. It is in regard to precious metals that I devote the remainder of this essay.