Tuesday, December 16, 2008

DOW 30,000! It's Not What You Think

Thanks to all for checking in. The power came back online this morning around 10am. I went to work and got the news from the wife. I am not going to go all into how "we are all to dependant on electricity" speech, instead I will do what any red blooded power addicted American would do: This Spring I will have an exterior generator installed! HA! Take that ice storm!

FED Admits Defeat and Open Season on the Dollar
Today we saw a true inflection point in real time: the FED moved interest rates down to all time low levels and set a "target" rate of 0-.25% for the first time ever. The rate cut bullets are all gone and now Ben Bernanke gets to implement all the creative tools he detailed in a speech from 2002 at the National Economists Club (that sounds like the most boring club ever!). You can read the text here. Note the title is:
"Deflation: Making Sure "It" Doesn't Happen Here"

Now it has been obvious to all that the FED had lost control of interest rates, and that the real rate was zero anyway. A favorite hobby here at Economic Disconnect is to scan over the mainstream media reports of events to see what the commentary is. If you had read Bernanke's speech, and noted the real FED funds rate at zero for some time, would you be surprised by today's announcement? Well it seems plenty of people were shocked!
Stocks surge as Fed pledges broad economic support
Tuesday December 16, 5:13 pm ET
Stocks surge as Fed slashes interest rates to record lows, pledges broad support for economy
NEW YORK (AP) -- A surprised Wall Street bolted higher Tuesday after the Federal Reserve's historic decision to further slash interest rates and pledge broad support to revive the troubled economy.
The Dow Jones industrials surged 360 points, or 4.2 percent, and broader indexes jumped more than 5 percent after the central bank said it will use "all available tools" to jump-start the economy. It also set its target for the rate at which banks lend to each other to a range of zero to 0.25 percent, the lowest level on record.
The idea that the Fed will likely proceed with plans to snap up government and mortgage debt made it easier for investors to place bets that the central bank will do what is necessary to help bring an end to the longest recession in a quarter-century.
"Today was a reminder that the Fed was on the case," said Jim McDonald, director of equity research at Northern Trust in Chicago. "It was a reaffirmation of their willingness to be very aggressive."
Many analysts had expected the Fed would cut its fed funds rate to 0.5 percent from 1 percent.
"In some senses the whole point of this meeting was to say quit watching interest rates, watch the other things that we can and will do," said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

Jim McDonald sees today's decision as proof positive the FED is on the case. As they have been on it since last summer with no results I am not so sure Mr. McDonald's confidence is well placed. The FED admitting they have lost control of the economy is hardly some great thing. Bruce McCain thinks that interest rates are old news, and we should all be watching for new tricks. Perhaps Mr. McCain could host a show called "Stupid FED Tricks" where Bernanke and company trot out new financial engineering ideas and callers across America vote on the phone for the best idea! If the FED charges $1.99 a call we might just get somewhere.

The market surging on today's decision just shows that there is still a deep well of confidence that the government will fix things. The feeling out there is one of "The US cannot go bust, so trade accordingly!". Hope is not a good long term investment strategy.

DOW 30,000! It's Not What You Think
Deflation is here. Evidence from all corners says so. Even deflation haters have come around to accept it as here and now. Now even the FED is of the firm belief that deflation has stormed the beaches and begun its invasion. The defense of the homeland has already been planned, just read the Bernanke speech listed above. So what does this mean?

The FED will now begin in earnest "quantitative easing" which is a rare animal last seen in Japan, though never captured on film. The FED will do whatever, and I mean whatever, it can to stop deflation. Troubled mortgage paper buying? Yes. Direct injection of capital to banks without collateral swap? Yes. Expansion of the FED balance sheet, perhaps explosively so? yes. Some of these things have already been happening, and now will accelerate.

There will be a lag for all this stimulus to take hold. I would venture a guess of 8-15 months before the end result begins to be seen. The end result is of course re-inflation on a massive scale. The FED, along with the Treasury and with the clear backing of Congress, will make money rain down from the skies just like in the "helicopter Ben" speech. While I believe this action will not work out anywhere near how the FED would want it to, there will be consequences that bear positioning oneself for ahead of time.

First off, the dollar is going to get bombed. I have read that other countries being worse off than America will keep the dollar strong. Ask yourself what real impact the Indonesian currency debasement will have when scaled against the US dollar equivalent. Try India, Singapore, Arab states, etc and I think you can appreciate that the magnitude of printing the US is going to do will dwarf any on earth.

Hard assets will be king. Gold and to a lesser extent Silver will become stores of value immune to currency issues. Physical delivery and well known storage firms will do well. Miners should get a great run, until the government outlaws owning mining shares that is (I am not kidding). Real estate, while never approaching old price highs, will be in high demand but only available to buyers with the cash or cash equivalents to buy it outright (no loans).

Food will be an issue I think. With shipping becoming a mess, delays and shortages will become commonplace. This poses a real problem for those of us on the coasts who have no real way to produce our own food. I do not have a reasonable idea to combat this, other than hoarding. Hoarding will only get you so far as space becomes an issue.

Tobacco and alcohol should do extremely well, as they always do in tough times. I may caution you that medical insurance is going to skyrocket and the insurance companies may well refuse to insure anyone that smokes, chews, or snorts tobacco. Any arrest for drinking may well render you excluded as well from health coverage.

There are more areas to cover but I wanted to impress upon you how dangerous a move the FED made today. Faced with the decision to let bad debts be defaulted on and destroyed or trying to put some kind of floor under that debt the FED went all in for re-inflation. This sad decision will prolong the agony and keep any real recovery far off into the future.

With dollars all over the place expect to see DOW 30,0000 just like in that year 2000 book. Soaring stock markets will have no positive effect as the currency debasement will make old market highs meaningless. Google at $3000 a share sounds great until you buy a loaf of bread for $2200. Like the title of this piece says;
DOW 30,000! It's Not What You Think

This may sound a bit gloom an doom. I hope I am wrong. Even if I am wrong on the degree and breadth of things, there will be some truth to what I have written. If I am wrong, the US will be in the perfect position: We can print whatever we want and nobody can do anything about it but accept it. Then we are all going to be billionaires and I will not have time to blog anyway!

Full Disclosure: I own gold mining shares Goldcorp (GG) and Kinross Gold (KGC).

Have a good night.


Lisa said...

I'm glad you are OK and are going to get that generator. Great post, too, but wish it wasn't true.

watchtower said...

This...post...was...AWESOME! (not that I want a currency collapse or any other kind of collapse for that matter) but I believe you are right, some of the things you mention could be a possibility and your "explainification" (hat tip "W") of it was easily understood.

Anonymous said...


Where are the jobs going to come from?

Are the wages going to go parabolic to propel goggle to 3000 if there isn't any bread to eat at the store let alone beer? Will I sit at my screen starving and surf over to Economic disconet?

Won't the dollar falling like a rock cause capital flight out of the US just like it did in Japan via a carry trade?

Will anyone save any money at pitiful low intrest rates?

If I can only by a house with cash where is the inflation going to come from?

Are the American people going to fall for this crap again?

Did Japan's market ever get back to it's old high when they did the same damn thing?

Just asking.
Personaly I think the market has a few more days and that sucker is coming down like a ton of crap.

Anonymous said...



Anonymous said...

Bank of America and Mr. Higgins missing $millions, it can happen to you my, fellows Americans

More info at: http://maxhiggins.com/blog/