Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched
Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The
Coming Collapse of the Municipal Bond Market" (Aucontrarian.com, 2009)
There are many reasons to fear unhedged exposure in
the U.S. stock market. Recent corporate conference calls have explored weak or
falling revenues. Drooping trade among Asian countries has forewarned of
weakness. In the U.S, Europe and Asia, reports describe slumping sales of
necessities that may need to be reclassified as luxuries. To rub it in,
investment by companies has been scaled back and large layoffs have not
slackened.
There are also reasons to leverage one's position in the stock market. The
stated "pro" arguments seem to imply support from central banking.
The buy recommendations spring from either a belief in the genius of M.I.T
economists, or, in a less ethereal realm, the central banks' announcement of
unlimited currency production. Federal Reserve Chairman Ben S. Bernanke is fan
of lifting stock prices to grow an economy. The inclination to leverage stocks
has at least one stock jockey in high places.
Following is an excursion that should satisfy the stock-market bulls. The logic
has wider application. To wit, one need give no thought to "whether or
not" the Fed will continue along the same expansive course. It will. Until
it collapses.
This has been stated often here. It was enough to read
Bernanke's Essays of the Great Depression (no link - you don't want to
read it) years ago, along with the author's cross-referenced essays to Mishkin,
et al. A first-time visitor to Paris will note characteristics the life-long
resident will miss. In the case of Bernanke & Co., this non-economist was
struck by the lack of mental activity, the absence of curiosity, the flight to
abstraction, the child-like belief in professorial divine guidance, and the
factual mistakes. The latter were generally inconsequential, but the essays are
read by contemporaries before publication. This outsider concluded these are
not well-read men or women. (We can discuss their mathematical weaknesses
another time.)
A chronology of untrammeled Federal
Reserve power expansion begins with the September 12, 1961, FOMC meeting.
Federal Reserve Chairman William McChesney Martin asked the 12-member committee
to vote in favor of currency swaps (dollars-for-sterling). Dallas Federal
Reserve President Watrous Irons demanded specific legal authorization via an
amendment to the Federal Reserve Act. Governor James Robertson stated the
proposal "involves very sensitive international diplomatic
operations," so is a job for Treasury. Governor Abbot Mills: "I have
no great faith that operations of this kind can be conducted successfully or
without serious danger to the independent status of the system." Only
three of the 12 voting members (including Martin) expressed verbal approval. It
was tabled and finally voted through about six months later. Even after the
vote, some FOMC members continued to voice their opposition.
We move to 2008. The Federal Reserve took
several actions that, at the very least, demanded "specific legal
authorization via an amendment to the Federal Reserve Act." The uneasiness
of operating outside the law in 1961 was no more. The Fed and many other
government-protected fiefdoms act arbitrarily. The action itself defines new
law.
On Friday, March 14, 2008, the Federal
Reserve (New York branch) made a $30 billion non-recourse loan to J.P. Morgan
to stem the Bear Stearns failure. This was illegal (See John Hussman: "Why is
Bear Stearns trading at $6 instead of $2")
Of course, Hussman did not know that such a loan was illegal until the moment
it was announced. We have learned since that whatever the Federal Reserve does,
is.
(Unrelated but possibly
interesting: March 14, 2008, 2:32 P.M, MarketWatch: "Bear Stearns bailed
out by Fed, J.P. Morgan." Bloomberg, March 14, 2008: "Bear Stearns
Credit Rating Cut Three Levels by S&P." S&P was "concerned about Bear's ability to generate sustainable
revenues in an ongoing volatile market environment.")
At such moments, the Fed silences
dissidents with a solid wall of noise. Its P.R. coordinates celebrity voices
who write in the New York Times, Financial Times, Wall Street Journal, and
Washington Post. (The Economist publishes anonymously, but it too is
an excellent source for understanding current establishment priorities.)
Presumably the equivalent appears on TV.
A recent example: Over the first two or
three weeks of October, the Wall of Noise wrote ardent love letters to the
residential real estate market in the U.S. The reason is not immediately
evident. This twisting of public opinion often becomes clear in hindsight.
Hussman was not the only dissenter; there
were others who saw government lawlessness cloaked as national emergency. On
Monday, March 17, 2008, Bloomberg interviewed Bank of Israel Governor
(equivalent to "Chairman" in the U.S.), Stanley Fischer (see: "Bernanke
to Get on Top of Credit Squeeze, Says Israel's Fischer.")
The article opened: "Federal Reserve
Chairman Ben S. Bernanke has the skills to guide the
U.S. economy through a credit squeeze, now in its eighth month, said Bank of
Israel Governor Stanley Fischer: 'You can inject liquidity in
the economy and it happens that Ben Bernanke is an expert on this issue,'
Fischer, 64, who advised the Fed chief on his doctoral thesis at the
Massachusetts Institute of Technology in the 1970s.... That the Fed will
get on top of this, I don't doubt.'" [Italics mine - FJS]
From the annual, Jackson Hole, central-banking carnival, you may have seen
pictures of Ben Bernanke strolling with an older man. The older man seems to do
the talking. That man is Stanley Fischer.
Fischer is a long-time advocate of
unlimited currency production. As discussed in "The 8%
Solution" Stanley Fischer, when he was First Deputy
Managing Director of the International Monetary Fund, wrote a paper:
"Maintaining Price Stability." In the very first sentence, he
pledged: "The fundamental task of a central bank is to preserve the value
of the currency." Only five paragraphs later, Fischer wrote: "Barro
(1995) and Sarel (1996) do not find a clear negative relationship below 8
percent inflation..." That is, as long as the negative interest rate
remains at eight percent or below, inflation is not a burden to economic
growth.
That the populace would suffer not a twit
if prices were rising by 8% per annum while earning nothing on its savings is
an affront to common sense. But Fischer was writing neither to the populace nor
to common sense. Returning to "Barro (1995) and Sarel (1996)," how
did the combo unearth such path-breaking news? Their authority was
"Fischer (1993)." Along with Bernanke's Essays of the Great
Depression, here is more junk that economists call scholarship, or, when
they really want to intimidate the unwashed: "the literature."
(Chairman Bernanke, on August 31, 2012: "Some have taken the lack of
progress [blah, blah, blah - FJS].... The literature on this issue is
extensive, and I cannot fully review it today." Of course, Bernanke
neither reviewed the Literature fully nor did he mention a single word from the
sacred texts.
One more peek at the Wall of Noise was
August 25, 2009. That was the day President Obama announced his reappointment
of Bernanke to the Fed chairmanship. (Senate confirmation would come later.)
Among the cheerleaders, Roger Altman, former Treasury official under Bill
Clinton and rainmaker in the General Motors bankruptcy (Evercore Partners),
wrote in the August 24, 2009, Financial Times: "The Federal Reserve
has come under unprecedented attack in recent weeks, largely triggered by its
proposed designation as America's primary financial regulator.... [T]here are
populists and others who just dislike a strong central bank. They want to
curtail its independence and/or derail the reappointment of Ben Bernanke, Fed
chairman, to a new term....Last year's disaster made clear that system-wide
regulation is mandatory. The Fed is the only qualified party." Why would a
financial newspaper, widely trusted, so bearing a duty to trustworthiness,
publish pure propaganda? We'll come to that. (On October 11, 2012, the Financial
Times editorial page published Roger Altman's "A Housing Boom Will
Lift the U.S. Economy." We'll come to that, too, in about 80 years.)
On August 26, 2009, Bloomberg was handed the
P.R. script and published an announcement that Bernanke could roll the dice.
In "Bernanke
May Redefine Fed Mission in Financial Market Stability," Bloomberg
opened: "Ben S. Bernanke's renomination allows him to
redefine the Federal Reserve's mission as he expands its power over financial
markets and pulls back on a credit surge the central bank used to keep the
economy from collapse, economists say. Bernanke's agenda during the next four
years will include elevating the Fed's role in reducing excessive risk in major
financial institutions, figuring out how to curtail asset bubbles, and scaling
back $1.2 trillion of monetary stimulus. 'He will have the opportunity to
permanently change the structure of the Federal Reserve system,' said Vincent Reinhart, a former director of the
Fed's Monetary Affairs Division who's now a resident scholar at the American Enterprise
Institute, a Washington-based research group."
Reinhart is now chief United States economist at
Morgan Stanley. Oh, for the days of Barton Biggs, Byron Wien, Andy Xie, and
Stephen Roach!
Ben Bernanke has touted appreciating assets to trigger
the economy. On appearance, the stock market is outside the Fed's purview. A
paper penned by the Dallas Federal Reserve in May 2003: "Monetary Policy
in a Zero-Interest-Rate Economy," included a table on page seven of domestic
securities the Fed could, by law, purchase. There is (though the paper is
apparently no longer on the Dallas Fed's website) also a list of "not
allowed." Included are corporate bonds, mortgages, and equities. Whether
by amendment or ignorance, the Fed is now buying $40 billion of mortgages a
month. There must be corporate bonds among the Maiden Lane residue and assorted
bric-a-brac hiding on the Fed's balance sheet.
As to equities, the Bank of Israel announced, on March
1, 2012 (via Reuters), it "has begun to invest
about $1.5 billion of its foreign exchange reserves in U.S. stocks to diversify
its risk." That was 2% of the Bank's
assets. Israel is not alone. Several central banks are now buying stocks.
The Swiss National Bank stock allocation rose to 9% of assets earlier this
year.
This trend, by the way, is an almost infallible
indicator of a sunset market. Western central banks started to sell their gold
in the late-1990s from around $250 to maybe $500 an ounce. A favorite is the
declaration of Alaska's state treasurer, at the exact moment gold peaked at
$850 an ounce in January 1980: "Alaska finds itself in the unenviable
position of selling today's most valuable commodity--oil--in exchange for a
wasting asset: cash. As state treasurer it is my job to reinvest the money and,
ladies and gentlemen, I have not been able to find anything that will
consistently maintain the appreciable rate of oil except for one
thing--gold." If only he had bought stocks.
As we all know, the U.S. stock markets have not cottoned
to Bernanke's September 2012 QEEEEEEE. It is tempting to think the lack of
enthusiasm might disturb the Fed chairman but his testimony and press
conferences leave one wondering if he thinks the stock market is a
cattle-trading scene from Bonanza.
But bulls have more worldly central-banking resources.
Stanley Fischer, once Vice Chairman of Citicorp, has now upped the target for
the Bank of Israel's purchases of U.S. stocks to 10% of assets. According to an
October 9, 2012, report from Reuters "Central
Banks, Faced With Paltry Bond Returns Buy More Stocks" this
will reach a total of $8 billion. That may not seem like much, but Fischer is
well-acquainted with the expansion of central-bank balance sheets.
If an endorsement to exponentially expand and buy up
the global, stock market was needed, the Financial Times published an
unsigned editorial on October 13, 2012. The title was "Helicopter Money:
Extreme Money-Printing Should Be Openly Discussed." The anonymity betrays
the muddy, boot prints of bon vivant and the "staggeringly well
connected" Martin Wolf, the FT's genius-in-residence. This CBE recipient
(Order of the British Empire, an honor bestowed on the staggeringly
well-connected Alan Greenspan, CBE) did not have the courtesy to warn his Sovereign
that Her Commonwealth was about to come a cropper in 2008, or, in 2003, when
the reckoning was already obvious to non-geniuses. Wolf had a valid excuse. The
Financial Times' genius admitted to not having anticipated the financial
collapse. Not having done so, and apparently not having learned even now that
central bank money-printing was the direct cause, he wants to drop currency
from helicopters.
Maybe this is good for the stock market but even
geniuses miscalculate.
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