Why the Fed is Compelled to Lie to Congress

I had an interesting conversation yesterday about Ben Bernanke’s testimony with a person upset over the obvious understatements, spin, and happy talk — even as the Fed Chair quite soberly discussed the US slowdown.

If the Fed were to come clean about the present circumstances, it would cause a market panic. That’s why we get this very gradual shift in assessments, all designed to be somewhat reassuring as it slowly feeds measured dollops of reality into the marketplace.

Yesterday’s dovish congressional testimony from Bernanke (and in Vice Chair Don Kohn‘s speech the day prior) will be continued today. It is, as it has always been and always will be.

Why? Imagine if the Fed Chair told the unvarnished truth: The Dow would see a 1,000 point intra-day drop, and that won’t help the Fed steer the ship.

Imagine if the Fed fessed up to what we know to be true, and what we suspect the future might bring:
   

Opening statement of the FOMC Chair, Senate Testimony
February 27, 2008:

Senators, we find ourselves in a very challenging situation. 

Following the dot com implosion, my predecessor at the Fed slashed rates to a generational low of 1%; the FOMC then kept rates at 1% for over a year.

While that re-inflated the economy, it also set off a shock wave of inflation unseen since the 1970s. Houses doubled in price, Oil is up 5 fold, food stuffs have tripled, and the dollar has collapsed. Gold is at multi-decade highs.

As always happens, these price increases in hard assets attracted speculators, and that made the situation — especially in housing — much more complex. Even worse, the housing speculation contributed to a debacle, while  these other assets are actually accelerating in price.

Further, as was the political fashion, deregulation and a lack of interest in the oversight role of the banking system allowed an unprecedented expansion of credit, including to the least credit worthy consumers. Additionally, derivative selling — at is heart, an unregulated form of insurance — expanded from a few billion dollars to $46 trillion dollars.

The credit crunch is unprecedented, far worse than the S&L collapse and Long Term Capital Management  — combined.

All of these factors have combined to create our present situation. Inflation remains very elevated and worse, quite sticky. Growth continues to slide towards zero — and possibly beyond.

Like many others, our forecasts in these areas have been wrong. We expected the slowing economy to moderate inflation, and so far, that has not happened. Demand for commodities from China and India is keeping prices elevated. The weakening dollar — now at levels last seen in the 1960s — is forcing all dollar denominated commodities higher. I don’t necessarily believe in "Peak Oil," but the fact that the Saudis are one of the world’s biggest investors in alternative energy research might tell you something.

The last time a slowing economy failed to moderate prices was the 1970s. Even as the economy slid into recession, we had major spikes in the prices of energy, food, clothing.

What is particularly worrisome to me is that as we have slashed interest rates 225 basis points, consumer loans — mortgages and revolving credit — have actually moved higher.

Gentleman, this is a major problem. And our internal, non-public projections forecast it is only going to get worse for the next 4 quarters . . . 

Now you understand why the Fed fibs. If they told the full and unvarnished truth, it would be beyond fugly.

>

Sources:
Semiannual Monetary Policy Report
to the Congress by Chairman Ben S. Bernanke
Before the Committee on Financial Services, U.S. House of Representatives
Federal Reserve, February 27, 2008
http://www.federalreserve.gov/newsevents/testimony/bernanke20080227a.htm

The U.S. Economy and Monetary Policy
Vice Chairman Donald L. Kohn at the University of North Carolina at Wilmington, Cameron School of Business’ Business Week Program, Wilmington, North Carolina
Federal Reserve, February 26, 2008
http://www.federalreserve.gov/newsevents/speech/kohn20080226a.htm

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What's been said:

Discussions found on the web:
  1. Shane commented on Feb 28

    “And ye shall know the truth, and the truth shall make you free.”

  2. Stop Loss commented on Feb 28

    “… we carry an unprecedented burden of debt both public and private and our collaterals are devaluating fast (house and soon equities)…”

  3. JustinTheSkeptic commented on Feb 28

    Ditto all the pundits, (mostly self-interested company excutives), that CNBC has on…

  4. cinefoz commented on Feb 28

    You don’t really mean that. If the Fed were to write such things, this blog would not need to exist. There goes the web site upgrade and the swimming pools full of green filthy cash. People come here for their daily dose of pessimism. You would have to become ‘Barry the Happy Guy ‘ in order to differentiate yourself. That shoe doesn’t fit.

    Or maybe you would have to analyze whether or not is a coincidence that oil prices rose at the same time as the credit bubble. You know, using supply and demand theory.

    Granted, oil is a terrible investment as a commodity at this moment. Why? If Speculators are actually driving demand and price at the margin, and if supply is artificially being held low by OPEC at the margin, and if demand at the consumer level is actually falling a tad, then oil prices at this moment are only the reflection of a world wide circle jerk.

    Only an idiot would put huge money into contracts for a commodity that is being priced using substantially artificial supply and demand. It’s one thing to use peak oil theory as a justification for supply constrictions. It’s totally different if consumer demand is falling and OPEC is responding by openly stating that supply is being withheld.

    Rising prices, in the form of speculative demand by idiotic oil traders, is the next bubble waiting to pop. All it will take is one cheater to bust the cartel for a few months.

  5. PropAg commented on Feb 28

    Unless the Fed knows something about Govt. statistics that we don’t, shouldn’t the market be informing the Fed and not the other way around?

    If the Fed is having to lie to the market then the market has become nothing more than a discarded totem marking the spot where free-market capitalism used to reside.

  6. Vermont Trader.. commented on Feb 28

    And after the 1,000 point intra-day drop the market would close flat because the people who control the big money know all this already and they realize that the sky won’t fall in the end.

  7. Gary commented on Feb 28

    I don’t know why this is a surprise to anyone. I’ve read often here and elsewhere about behavior and perceptions and their effect on the market and the economy. Inflationary expectations are a feedback loop that increase inflation. Bernanke’s utterances are part and parcel of the conundrum he faces. You can only really depend on his actions for information. I think you want the banker to be relatively calm and let folks like Walker (too bad he has resigned) try to talk some sense into the idiots spending money like drunken sailors.

  8. cinefoz commented on Feb 28

    I suspect Natural Gas is another idiot magnet at this time. It’s abundant, easy to get, and cheap to recover. a $2 increase over a few weeks, to me, looks like newby gas investors are about to get an unexpected buzz cut.

    Don’t tell me there is a credit crunch. The dumb money has moved from real estate to oil and gas. By dumb, I mean these people are working at the sub half-wit level. Instead of taking candy from strangers as babies, they are buying energy contract from their new friends … smiling commodity sales people who are just enthralled to hang on their every word and who promise to make them rich beyond avarice.

    I suspect many of these idiots are just buying and selling contracts among themselves, thinking that the profits are real, and not an objective measure of stupid. I wonder if any are named Ponzi?

  9. Finblogger commented on Feb 28

    The problem comes when they start believing their own happy talk, and don’t do what they should be doing – Working towards recovery. But since they’re still stating they can prevent, they have to focus on prevention, rather than recovery. Not facing reality has its advantages, but so does facing it.

  10. SPECTRE of Deflation commented on Feb 28

    Lie? Who needs to lie when a member of congress thought Bernanke was Paulson. They are clueless, save Ron Paul. Some of the CONgress still believe we are on the Gold Standard. We always get the government we deserve.

  11. Winston Munn commented on Feb 28

    It appears that bullshit has reached a permanent high plateau.

  12. David Price commented on Feb 28

    Hi Barry, I do not disagree with a single word of your analysis. You do not however mention any political reasons for the market being proped up. In Greenspan’s book he clearly expresses concern about social security, medicare and new populist programs. This combined with tax increases on the ultra wealthy and the lust for power is plenty of justification for the republicans and their supporters to manipulate the market.

  13. Karl K commented on Feb 28

    Well, Barry, if Ben Bernanke gave that testimony before Congress, MIT would recall Ben’s Ph.D.

    Oil price increases have not been caused by the Fed’s monetary policy: OPECs supply machinations and demand from a billion Chinamen have seen to that.

    Food price increases have not been caused by the Fed’s monetary policy: market distorting governmental subsidies (price supports and ethanol) along with higher energy prices (see above) have driven that.

    Dollar decreases have not been exclusively caused by the Fed’s monetary policy: failure of the EU and Asia economies to grow their own consumer demand has been a significant contributor there.

    Unlike most folks on here, Ben Bernanke has studied depressions and understands them. He will not let one happen on his watch, and if that means a bit of inflation/stagflation to see us through this crisis, so be it.

    It’s a good thing you write this blog, and not his testimony. Then again, it would be an impossible thing.

  14. JustinTheSkeptic commented on Feb 28

    cinefoz, you have it all wrong we come here to get our daily dose of reality. Just wait, my friend; would you like to lay a thousand on what the economy is going to look like a year from now? Your clueless.

  15. D. commented on Feb 28

    I don’t see the inflation bit the same way. I think inflation IS their ultimate goal.

    “We Americans have enjoyed the party while it lasted and now the time has come to deflate the debt and inflation is the way to go. To generate inflation where we want it, we had 2 choices. We could create it internally or we could simply let the dollar drop making imports more expensive and letting foreginers taking the hits on our debt.

    We chose the second option for many reasons. Firstly, it would make it easier to blame foreigners for our wies and increase protectionist policies. Secondly, it would make our exports more attractive and that would stimulate many of our exporting industries. Thirdly, it would slow down imports but that doesn’t really matter anymore because US households are maxed out.

    And lastly, when we say we are keeping our eyes wide open for inflation, we really mean hyperinflation.”

  16. Winston Munn commented on Feb 28

    Rutters
    Washington D.C.

    Feb 28, 2008

    In order to address a slumping consumer sentiment rating, Congress today passed legislation to mail 300,000,000 copies of Bobby McFerrin’s “Don’t Worry – Be Happy” in CD format to every U.S. household, along with a yellow stick-on smiley face.

    Heated debate raged between the Republicans, who supported using Alfred E. Newman and his famous slogan, “What, me worry?”, and Democrats, who supported McFerrin. In the end, a compromise was reached to add smiley faces to the McFerrin song.

    President Bush is expected to sign the new bill.

  17. D. commented on Feb 28

    I forgot an important part:

    The reason why we, the Fed, chose option 2 is because Government will do a great job at creating inflation internally.

  18. viamede commented on Feb 28

    “at is hearty, an unregulated form of insurance”…hearty?

    Arrrggghhhh that’s pirate talk!!! Pirate Ben! Captain Ben?
    *frantically looking for spot to post picture of Captain Jack Blacknanke*

  19. tim commented on Feb 28

    so basically the economy asks the fed if it is fat. afraid the economy will get depressed and eat more, the fed says no.

  20. Hal commented on Feb 28

    PTC: preaching to the choir here.

    we all know it–but if you say it in public, you get treated like Peter Schiff. While is style is suspect, his message was and has been right on. Not only bad for economy to say it, bad for business and if you are negative you get dissed.

    Ben Stein and others say outrageous things and get away with it. How many guests are perma bulls and thats ok, but even being a temp bear makes you a whacko, forget being a LT bear (vs perma bear).

    The people do not want to hear bad news and they get what they want. The minority, who put in the effort to understand IT, gets it.

  21. E commented on Feb 28

    The economy is a secondary concern for the Fed at this point. The immediate problem is the banking system, which is dancing with insolvency due to all of the mortgage-related junk on bank balance sheets.

    You guys can talk about inflation and the economy til you’re blue in the face, it isn’t going to change the Fed’s perspective or actions one iota. They are dealing with a crisis that has far worse implications for the economy than monetary policy.

  22. Shane commented on Feb 28

    cine . . .
    actually your dumb investors are the smart ones . . . wait till regular J6P start putting commodity funds in their stock portfolios.

    You’re just pissed off b/c the lower interest rates of the fed won’t take the stock market up to 13000. All that excess money is going to commodities. As they say don’t fight the fed. Ride the commodities bull!

  23. zao commented on Feb 28

    Karl K,
    Your assertion that Fed’s reckless rate cutting (and pumping money growth in the process) and central banks in general have nothing to do with commodity inflation is only partially correct. Some of it was demand related. However, look at commodities after the Fed started easing and tell me that the 30%+ rise in the CRB, for example happening starting in August, 07 was just coincidental. Fed is easing and the money created is not going into the real economy (or stocks) yet. They are creating commodity inflation and lots of it.

  24. Marcus Aurelius commented on Feb 28

    David Price,

    How is it that those who tear-down social programs as being a drag on the economy and the country – typically preaching the mantra of ‘personal responsibility’, never look to the other side of the equation?

    There used to be a conservative concept known as husbandry (there also used to be a quaint and admirable traits called ‘patriotism’ and ‘selflessness’ – but I’ll leave those for another post). Husbandry is something that farmers (a very conservative, yet not obscenely wealthy, group of people) understand well, because if they don’t, they starve.

    Without husbandry, yields go down, resources are depleted, and eventually, core assets lose all of their ability to produce income.

    Husbandry is what stops farmers from killing the milk cow because they’d rather have a steak tonight than cream for their coffee and milk for their cereal for the foreseeable future.

    The huge and growing disparity between the highest and next-highest (and lower) income brackets is an indicator of the state of husbandry of the economy by business nowadays.

    Social security, medicare and new populist programs are examples of society’s previous and current attempts to guarantee that the economy – as well as the populace – will be properly husbanded (and, in being so treated, will continue to serve a mutually beneficial function in a healthy enterprise).

    The conservative notion of the husbandry of one’s own economic system has been replaced by the ultra-liberal notion of entitlement to wealth, even if obtaining that wealth means destroying the underlying system. The rich don’t want to pay taxes? High taxes will look like a good value when the working class (the cow) is no longer there to provide the cream they (the ‘conservative’ business class) took for granted.

    The ‘free market’ crowd and those believing that ‘the market’ is inherently more competent than the government have foolishly thrown the concept of husbandry onto the rubbish heap as so much bunk. (it didn’t help that the cow was such a willing participant in its own demise – but I guess that’s the nature of cows).

    We are paying the price for that foolishness.

    Nice barn.

    Where’s your cow?

  25. michael schumcaher commented on Feb 28

    OT:

    Check out the short squeeze action in NFLX….
    I am…..;-)

    Ciao
    MS

  26. MB commented on Feb 28

    I still cannot grasp how people think the Fed will “save us”. I distinctly remember talking to a few people this fall about how the Fed cuts will do nothing. They looked at me cross-eyed and thought I was crazy.

    It’s great (well, not great in real terms. How about self-satisfying???) to see that loan, mortgage and any other rate outside the Fed to borrow money has gone up since the summer/fall, not down.

    The worst part for me is that 95% of the sell side still has margin UPSIDE for 08 and 09!!!! How can this be? Retailers are LOADING earnings to 4Q. How?? How are people going to get money? Someone splain this please.

  27. Mark commented on Feb 28

    Why should the Fed care what the market does? While we are taught that the market is supposed to be efficient, judging companies on performance, instead (it appears to this outsider) that instead it is nothing more than speculators. I have no sympathy for opportunists who have put money in the market and see it go up and down like a yo-yo. Maybe 40 years ago there was more thought placed in investments (ok, maybe not), but right now the momentum is downright scary, with no long term thought. The selling because a company did not “greatly exceed expectations” is mind boggling.

    Personally, I think the fed should say exactly what Barry wrote, but even stronger – “we’re really f***ed folks, thanks to everybody wanting a quick buck now”. Raise rates and upper income taxes to reduce the deficit and debt and strengthen the dollar. Emphasize investment in simple (nonderivative) bonds instead of in equities or fancy debt mechanisms. Heck, even bring back basic cash accounting for transparency.

  28. DonKei commented on Feb 28

    Anyone that thinks commodities are more expensive because of their increased demand is an utter fool.

    Even given China’s voraciously growing appetite for oil, worldwide demand for oil has not increased by more than 3% a year in the last decade, and is in fact now stagnant and poised to decline as developed economies (still far and away the largest oil customers) enter slow or no growth in their economies.

    Oil, and other commodities priced in dollars, are inflating because the dollar is deflating (losing value, both at home and abroad). Put another way, if the dollar declines by 10% against its trading partners, and oil, priced in dollars increases by 10%, the only economies experiencing an oil price inflation are the ones tied to the dollar (see China, e.g.,– the yuan is still only allowed a narrow range of trading from the dollar).

    Inflation is everywhere and always a monetary phenomenon. But especially when the inflation is in commodities, i.e., fungible goods that really know no borders.

    There are simply too many dollars, and have been since about ’01 or ’02. Thinking otherwise might get you a federal reserve governorship, but hardly constitutes a realistic look at the situation we face.

  29. Francois commented on Feb 28

    “Why? Imagine if the Fed Chair told the unvarnished truth: The Dow would see a 1,000 point intra-day drop, and that won’t help the Fed steer the ship.”

    Barry,

    I’m kerflummoxed: Normally, when puzzled by market action, we ask ourselves if the Market knows something we don’t.

    Do you mean to tell us that the market doesn’t know this stuff? That, we, the readers of this blog, know something the market doesn’t??

    Hmmmm! That, or the market is intoxicated with hope, a word that rhymes with dope.

    BTW, I would love to see Bernanke deliver a statement like the one you posted. It would send the message that he works for the country, not for the go-vermin we have now.

    Finally, what would be wrong with a 1000 points intra-day drop? It’d do wonders to shake the stuporous complacency and sharpen the focus of the cretins populating the hallways of power in DC. As a starter, it would obliterate any attempt to dismiss talks of recession.

  30. E commented on Feb 28

    Michael Schumacher complaint about market manipulation in 3….2….1….

  31. ECONOMISTA NON GRATA commented on Feb 28

    Isn’t BB just another swindler… ? Just like Hillary, McCain, Bush, Kourick, Williams, Kudlow, etc. etc.

    I mean really. isn’t that what we have been witnessing all along?

    There’s no way out of this one, unfortunately for them.

    That’s what Obama is all about. All our mainstream institutions have lost their credibility. The Fed is no exception.

    We are getting exactly what we deserve, no more, no less.

    Best regards,

    Econolicious

  32. VJ commented on Feb 28

    Speaking of lies, just moments ago:

    We have a strong dollar policy
    .

  33. Joe Klein’s conscience commented on Feb 28

    Is anyone watching “B-52” before the Senate banking committee right now? He sounds like an 8 year old that was caught red handed by his parents. He sounds very unsure of himself. Not speaking with any kind of confidence.

  34. damondidit commented on Feb 28

    It struck me at the gas pump last night that the natives may start getting restless soon.

  35. The Financial Philosopher commented on Feb 28

    Arguably the greatest thinker in history, Plato, rejected a career in politics because of the limitations in serving “the greater good” and because the “truth” is not essential to success.

    In his perfect world, Plato invisioned leaders would all be philosophers and would make himself “The Philosopher King.”

    Since the greatest thinkers have avoided politics for the past 2500 years or more, it is highly unlikely we will ever see a Philosopher King so we may as well accept the reality…

  36. michael schumcaher commented on Feb 28

    stupid assumption by “E” in 3…2….wait

    Oh it’s already there…

    pretty obvious it’s not under regular circumstances……not that hard to see or ascertain.

    keep dreaming that it’s not

    Ciao
    MS

  37. TERENCE HUNT commented on Feb 28

    Bush: US is not headed into recession

    President Bush said Thursday that the country is not headed into a recession and, despite expressing concern about slowing economic growth, rejected for now any additional stimulus efforts. “We’ve acted robustly,” he said.

    “We’ll see the effects of this pro-growth package,” Bush told reporters at a White House news conference. “I know there’s a lot of, here in Washington people are trying to — stimulus package two — and all that stuff. Why don’t we let stimulus package one, which seemed like a good idea at the time, have a chance to kick in?”

    Bush’s view of the economy was decidedly rosier than that of many economists, who say the country is nearing recession territory or may already be there.

    The centerpiece of government efforts to brace the wobbly economy is a package Congress passed and Bush signed last month. It will rush rebates ranging from $300 to $1,200 to millions of people and give tax incentives to businesses.

    On one issue particularly worrisome to American consumers, there are indications that paying $4 for a gallon of gasoline is not out of the question once the summer driving season arrives. Asked about that, Bush said “That’s interesting. I hadn’t heard that. … I know it’s high now.”

  38. David commented on Feb 28

    You left out the part about how the Bush adminstration is pressuring Bernanke to provide monetary stimulus in order to give McCain a chance of winning the election.

  39. Al Greenspan commented on Feb 28

    If you have noticed, I have been increasing my “chances of a recession” almost weekly. But I still say the groundwork for this recession was not laid on my watch….

    Big Al

  40. cinefoz commented on Feb 28

    Shane said that commodities are on a bull run now, thanks to the Fed.

    reply …

    I would say that oil and gas commodities, and probably silver, are on a fool’s run at this moment. Supply is artificial for oil and demand is a circle jerk. Silver is probably in a gullible speculator bubble.

    The only thing missing from this charade are interesting words such as tranches, mark to model, and sub-prime.

    When peak oil becomes the dominant theory again for oil, then high prices at this level will be natural. Now oil speculators are idiots who sell to each other, and then buy back what they just unloaded for even more money. This is a definition of stupid.

    Idiots must be making Natural Gas trades using the same circular logic. Remember Amaranth?

    If I owned any oil or oil support equities, I would dump them and buy back when the eventual price collapse happens this year, and probably within the next couple of months.

  41. Pat G. commented on Feb 28

    I’d like to see Bernanke testify before Congress everyday if possible. I love watching the prices of precious metals soar. This guy is making me alot of money.

  42. Camille commented on Feb 28

    Terence’s post is no joke! It’s an interesting compilation of denial and delusions from our leader today. The whole article can be read here:

    http://tinyurl.com/2l49bo

  43. AGG commented on Feb 28

    The big con is working just fine from the government’s fiscal point of view. All those treasury bonds sold to all those people inside and outside the U.S. to fund our debt will return cents on the dollar. Our U.S.debt will be paid with in hyperinflated funny money until the “well” is dry. Then a new currency with more “full faith and credit” will replace the old.
    I’m with the poster above who spoke of our destructive husbandry. The problem is that this was deliberate destruction based on the fact that people outside the U.S. work cheaper. Our workers are being deliberately impoverished into a competitive position by hyperinflation. I think it’s explosive and won’t work in the long run but the elite don’t give a fuck about the long run for the U.S.

  44. bluestatedon commented on Feb 28

    “I know there’s a lot of, here in Washington people are trying to — stimulus package two — and all that stuff….”

    Historians in the distant future are going to have nervous breakdowns trying to decipher the inane gibberish coming out of this guy’s pie hole.

    Reading that he’s surprised about the prospect of $4/gallon gasoline brings to mind his father’s surprise at checkout scanners at the supermarket.

  45. Pat G. commented on Feb 28

    “Silver is probably in a gullible speculator bubble.”

    Which according to my sources will last at least another 5 years. Don’t you traders call that “momentum buying”? Silver is up 8% in the last week (doesn’t include today). How many stocks do you own that have posted those types of gain?

  46. mhm commented on Feb 28

    Mark said: ‘The selling because a company did not “greatly exceed expectations” is mind boggling.’

    The news on German TV about BMW cutting 8000+ jobs while posting record profits is a reflection of the above. A market commentator said something to the tune of “We don’t need record profits every time. We need a healthy market and healthy work environment.”

  47. Francois commented on Feb 28

    cinefoz,

    “I would say that oil and gas commodities, and probably silver, are on a fool’s run at this moment. Supply is artificial for oil and demand is a circle jerk. Silver is probably in a gullible speculator bubble.”

    I can’t help to note the absence of any word about gold in your post. The barbarous relic is trading at 966.00 USD right now, up > 30% from last year, up 15% from 2 months ago.

    Also, note that the gold/XAU ratio is above 5.0, a rarity that has occurred 4 times (IIRC) in the last 40 years when one look at the monthly price action.

    So, if investors are not madly rushing into the gold miners shares while gold is rising and rising, what does that tell us?

  48. Francois commented on Feb 28

    “”Silver is probably in a gullible speculator bubble.”

    Which according to my sources will last at least another 5 years.”

    Forecasting is a difficult business, especially when applied to the future.

  49. cinefoz commented on Feb 28

    Francois,

    Gold is a lot of noise about nothing. It has many meanings and follows it’s own path. The price will rise as long as the quantity of people with money rises. Economically, it is a red herring. As a forecasting tool, it smells like a pile of old red herrings left out at room temperature for too long. It is history and it is fantasy. As a monetary base, it is the stuff of dreams.

    Silver is a working metal that appears to have speculative attributes. Copper is essentially a working metal.

    The dumb money has moved to oil, gas, and probably silver. This will be the next economic bust up, although many will consider it to be a good thing … except for the idiot speculators.

  50. Pat G. commented on Feb 28

    “The dumb money has moved to oil, gas, and probably silver.”

    Then just call me real stupid. I’m LOL all the way to the bank. And you didn’t answer the question about what stocks you own which have seen an 8% increase during the last five trading days. I suspect that’s because there hasn’t been any. Silver is up 25%+ this year far outpacing gold and we’re only in February.

  51. cinefoz commented on Feb 28

    Pat G,

    If you sell at a top, you beat the game. If you’re waiting for a 50% gain, then you’re not as smart as you think you are.

  52. BG commented on Feb 28

    Well….. for what it’s worth, I am now wondering if the dollar doesn’t plateau out down here somewhere soon and at that point all the commodities will stop going up, stall and then start their downward dive like a fre#king roller coaster (including oil). Limit down for days due to the global softness in the economy.

    It doesn’t make sense for oil to be over $100 when we may be going into a global slow down. I think adequate supply and weaker demand will eventually trump the weak dollar and the speculators. Another possibility is that corn will lead in the fall of commodities once the price of oil drops; which will only exacerbate the downward action of the commodities.

    I also would not be surprised if we weren’t talking just as much about deflation in 18 months as we are currently talking about inflation now. The commodities are being driven primarily by speculators and a weak dollar at the moment. I think they will head down extremely quick once the crops get closer to harvest time and the dollar settles out somewhere.

    I’m afraid a lot of farmers will find themselves in bankruptcy in 18 months because of the expenses (fuel, seed, fertilizer & labor costs) they will incur in getting crops planted this Spring. This will be the biggest planting season since who knows when looking at these attractive prices (that nobody is going to get in the end).

    I just keep thinking that with the credit markets seized up, interest rates aren’t making as much difference this time as they have in the past. Could BB take the fed funds to 0%? In my mind that possibility definitely exists. I don’t think the Banks believe anything they hear either, since they won’t even lend money to each other! What does that tell you? As BR says….WTF?

    I just think that the credit seize up has sucked all of the oxygen out of the economy and everybody is holding their breath until the economy comes out the other side. People betting on commodities to continue going upward from here will be destroyed sometime between now and Labor Day.

    Sorry for the run on. That’s my 2 cents worth.

  53. Shane commented on Feb 28

    cinefoz said “Silver is a working metal that appears to have speculative attributes. Copper is essentially a working metal.”

    gosh cine . . . you’re not too bright read up on history. Back over 100 years ago there were major debates over silver/gold currency .. . in fact for a large portion of the US history (almost as long as gold) silver has been money. The big prob. came as the US government fixed the price of silver relative to gold at a fixed ratio (say 15.8) and consequently silver and gold fought for over 100 years. Because of the price fixing at certain time silver was more valuable than gold and went out of circulation and at other times vice versa.
    Why the 15.8 ratio b/c silver is mined at ~16/1 ratio to gold. Guess what foz . .. it still is mined at the same rate today ~16-1.

    Silver is the small denomination money. Let’s see the current ratio stands at 50-1. As gold becomes more expensive more and more people will seek silver b/c it is cheap compared to gold. I expect the silver bull to end when silver is ~20/1 ratio. Which would mean silver would need to be ~50. Silver is definitely more speculative . . . which is why there is WAAAYYYY more upside than gold. I believe before it’s over you’ll see silver at $100-not now but give it about 4 years.

    Don’t worry foz . . . you’ll get your correction-(sometime from late-March-May) and then you’ll yell and scream and tell me how the commodities bull is dead-and how stocks are great. Sorry you’re fighting the last war. I’ll just back up the truck even more. You don’t study history . . . The last commodity bull market lasted ~20 years (there were ups and downs but overall ~20 years), the last stock bull (long term bull) lasted about 20 years. Move over stocks, you’re dead-especially that on long term charts adjusted for inflation stocks last year hit a major double top.

    There will be a hard correction . . . but it isn’t over, not by a long shot. Silver will break 20 . . . maybe to 25 and then it will correct hard and fast. Expect a 6-7 dollar drop in a matter of days (got to shake out the weak hands). But then it will be back on it’s way up.

  54. Shane commented on Feb 28

    Oh yeah one other interesting note . . .
    the name of our currency, the dollar came from a coin used at the beginning of the country from another country-Spain- called the thaler.

    The coin . . . a Silver coin weighing approx. 1 once.

  55. Darkness commented on Feb 28

    >Cinefoz: It’s totally different if consumer demand is falling and OPEC is responding by openly stating that supply is being withheld.

    I get what you are saying about trading in a different kind of transparency than we actually have. So, to fork the topic: What if OPEC is not holding back? Or they’ve gotten smart enough to realize that have to. Frankly, having them hold back is the only thing that is going to save us. The back side of the oil supply peak is like a shark fin for past oil peaks and that was before the technology for extraction became so efficient. If they hold back it will blunt the fall giving everyone much needed time to adjust.

    And to your natural gas topic. Natural gas gets clumped with crude/gasoline on the liquids chart, but it is a totally different beast, that’s for sure. Low margins are the primary limiter of supply and have been for a long time, but despite that its trading fortunes get linked to other fuels, which is bogus. I agree with what you are saying about the wisdom of investing in it, maybe it’s the way you are saying it? Or, maybe I need lots more coffee this morning.

    >Gary: Inflationary expectations are a feedback loop that increase inflation.

    What would those be? Beyond hording of necessities, that is, which in the past represented a larger % of all spending than they do now. Because this inflation is cost-push driven by energy, it is sucking the perception of prosperity out of the American consumer, which in turn makes them cut back on spending. I’m very curious what you think these mechanisms are, as this is an interesting topic. I’m not denying they are there; I just don’t see them.

    But, yes to the rest of what you said. The Fed Chairman is a sorcerer, whose words are incantations that change reality.

  56. JustinTheSkeptic commented on Feb 28

    My I quote Ludwig von Mises: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of furhter credit expansion, or later as a final and total catastrophe of the currency system involved.”

  57. Empire commented on Feb 28

    “seemed like a good idea at the time”

    Someone should start an endowment to build the Bush Monument. The above phrase should be prominently emblazoned on said monument.

  58. Empire commented on Feb 28

    “I think adequate supply and weaker demand will eventually trump the weak dollar and the speculators.”

    That’s bad news. The savvier members of the ever-lower-middle class are just starting to hear from the personal finance magazines and blogs that commodities ETFs are the safe place to put their money until the real estate and equities markets stabilize.

  59. Eclectic commented on Feb 28

    I have to observe that, very sad to say, until I’d recognized that the fictionalized remarks of Bernanke were just to much hyperbole to have been his remarks, they rang so true to me as to be acceptable of what he might have said.

    I only regret that Greenspan wasn’t in his chair today attempting to obfuscate in the manner that he raised to an art form.

    Failure!… Failure!… Failure in almost every way the Fed could fail!

    FAILURE!

  60. E commented on Feb 28

    I was thinking about shorting oil and gas, but now that I read cinefoz’ comments, I’m not so sure.

  61. Caleb Mardini commented on Feb 28

    Thanks for putting it so succinctly!

  62. philip commented on Feb 28

    Cinefoz has another string of good posts. I agree strongly that the comodities are getting blown out in another bubble, and BG’s comments echo my thinking: the farmers are going to have one strange season. And not “strange good”, definitely “strange bad”. The best thing the farmers can hope for is that some sort of disaster causes and ACTUAL shortage of agri-commodities and half the farmers get their money from the market and the other half from insurance/disaster relief. Oil, silver, and natural gas are NOT looking like a good forward investment. If you were lucky enough to get in low, get out now and book your profits. I feel the same way about the Euro. Take your profits before they take themselves.

  63. Karl K commented on Feb 28

    Again, I say it once again, there are folks on here who I would call “money fundamentalists.”

    Like religious fundamentalists, these folks believe in “original sin” — in this case, the “original sin” of cheap money– and believe there will be — indeed, should be — a expiation of that original sin by an apocalypse.

    In this case, the apocalypse of a credit market meltdown.

    And both the religious and money fundamentalists would be in a rapture if apocalypse came to pass. (This is why Mike Huckabee and Ron Paul are two peas in the same deranged mental pod).

    Of course, in the case of religious fundamentalism, all of this is just mindless superstition. It won’t affect me in the slightest.

    But the apocalypse for the economic fundamentalist is all too real, and would have dire consequences to me, and all of you, if it came to pass.

  64. David Wrixon commented on Feb 28

    What Bernanke fails to understand is that in a World of Global Financial Markets, is that if you drop interest rates then your ability to provide credit actually evaporates. Dropping interest rates won’t help. It will throw the US into depression. How do you persuade the Arabs, Chinese and others to provide the investment you need to expand your economy when you expect to pay them bugger all return in a depreciating currency? This started off as a Credit Crunch and the Fed is misguidedly making it much worse. Unfortunately, the US public has to accept that if you have financial expansion that exceed your actual increases in productivity rather than some fanciful number that the Bush administration have creatively made up, then cyclical downturns are inevitable. These efforts to stave off the inevitable only ultimately make matters far worse.

  65. Paul Jones commented on Feb 28

    Missing word from your otherwise spot on post?

    Manufacturing.

  66. Pat G. commented on Feb 28

    I’m back now. What Shane said..and I would like it to double from the average of my buy prices, then I’ll take 50% off the table and have no skin in the game. But noone knows where I bought cinefoz. I’m not stupid but I’m also not infallible.

  67. philip commented on Feb 28

    Karl K,
    You actually stand out on this site as a fundamentalist who will not listen to reason. To say Ben Bernanke sees the forest in spite of all the trees doesn’t really seem to hold water when you see he knows that cutting the interest rate isn’t working, knows that inflation (as he cares to measure it) is getting worse, and yet he will cut anyway to prevent the Great Depression on 1930. Which is over. He needs to look at the facts as they are now and prevent the Great Depression of 2010. He is a WWII vet fighting the war he remembers and has studied in his head, while losing the current war because the world has changed. Bernanke may kill us all. But at least he will have his fundamentalist Karl K to give him his back rub and water bottle days end and tell he “done good”.

  68. wunsacon commented on Feb 28

    I don’t know why my purchasing power should be eroded to benefit the purchasing power of someone else who acted recklessly and another someone else who acted fraudulently. I guess that makes me a “fundamentalist” and an “extremist”. Well then, shame on me, huh?

    New technologies await discovery and exploitation by pools of capital and labor that will be released from older, imploding industries — if we let them go. We can try to prop up real estate agent commissions and the drive-to-the-mall industry. But, there’s something else we could all be doing. Just what? Many will never know as long as the past is there to cling to.

  69. wunsacon commented on Feb 28

    Hmm…I suppose that’s like saying “we have nothing to fear but fear itself”.

  70. EndoftheWorld commented on Feb 29

    I finally found people that think like me. What is suposed to happen is gpoing to happen. The wages of sin, greed, lies. pride leads to death. The ruling class care only for those that are like them. They work some job where they are extremely overpaid. The have a disconect from the truth and live life for the purpose of deceiving the masses leading them to their demise.QUESTION EVERYTHING. PRAY. Look. See

  71. Loren Steffy commented on Feb 29

    BizLinks | 2.29.08

    Texas retail gasoline prices approach record high Dollar’s Dive Deepens as Oil Soars ($) Why Surprises Still Lurk After Enron Renewable tax credits likely to run out, leaving investment at home hanging Why The Fed is Compelled to Lie…

  72. The Hedonistic Pleasureseeker commented on Feb 29

    If the US government makes a public statement on anything controversial you can be certain it’s a bald face lie. And I work for the US Government!

    It just hit me last night? Fascism isn’t coming. It’s already here.

  73. rangelife commented on Feb 29

    Friday Praise

    Praise to the Onion for finally putting my second-favorite picture caption teaser on a t-shirt. Somehow my favorite just won’t fit… *** Praise to Barry at The Big Picture for his explanation of why Bernanke must lie his ass off

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