I’ve been railing against the Federal Reserve’s reckless monetary policies for a while now. QE2 and ultra-low interest rates are fostering new asset bubbles, distorting the markets, driving the price of commodities higher, and sending the dollar into the drink. At the same time, they’re doing little to revive the very markets that they’re supposed to help, like housing.
But there’s one flaw to the Fed’s methodology that stands out above all others: It’s self-destructive!
Yes, the Fed can create asset inflation in the FINANCIAL markets for things like commodities. But those of us who live in the REAL WORLD have to pay for those things. And because the Fed can’t print jobs or boost all of our wages, eventually those resources hit a level we can’t afford any more — an economic “tipping point.” When that happens, the economy tumbles into recession!
That brings me to one of the most important questions I’m wrestling with right now: “Are we at yet another tipping point?”
2008: A Fed-Fueled Commodity Odyssey
To answer that question, I want to rewind the tape to 2007-2008. The Fed played fast and loose with monetary policy back then because the housing boom was collapsing. Yet even though the real economy was weakening, commodities were going ballistic as financial market players took that easy money and dogpiled into resources.
Oil exploded from around $51 a barrel to a high of $147. Wheat surged to more than $13 a bushel from around $4, while soybeans vaulted to $16.50 a bushel from around $5-and-change. Copper shot up to $4.27 a pound (despite the meltdown in housing, an important end user market for the metal).
But eventually it all came crashing down …
The Fed’s easy money bubble collapsed when people worldwide literally could no longer afford to fill their gas tanks or put food on their tables. That was the “tipping point” — the point at which the fantasy-land financial market collided with the real world.
Is 2011 Going to
Feature a Replay?
Fast-forward a couple of years and we’ve been seeing the same dynamic playing out again. Up until very recently, everything from crude to corn to cattle to copper was exploding in price again.
Some of that run up stems from traditional economic factors: Tight supply, rising demand, strong growth in emerging markets, and so on. But a huge, heaping chunk of it is just easy money-fueled speculation — both longer-term investors seeking protection from the Fed’s dollar debasement and shorter-term day-trading types just chasing the latest, greatest bubble.
Just think about this: Mutual funds and exchange traded funds that track the commodities markets have seen record inflows of almost $49 billion since the Fed hinted that QE2 was coming last August.
And commodity funds held a massive $412 billion in assets as of late March, according to Barclays Capital. That was almost a 50 percent surge from a year ago.
This just underscores the point I’ve made repeatedly over the last several years: The Fed can print all the easy money it wants, but it can’t control where that money will go. First it was dot-bombs. Then housing. Now it has been commodities — twice!
But the latest economic data is starting to suggest we may be hitting a wall (again) …
* House prices are rolling over again as foreclosures pick up, setting new lows in many markets.
* The ISM Services index slumped to 52.8 in April from 57.3 in March, missing estimates by a country mile.
* Initial jobless claims shot up to 474,000 two weeks ago. That was the highest level since last August. Meanwhile, the unemployment rate climbed to 9 percent in April from 8.8 percent a month earlier.
On top of that, a couple of key commodities that I follow as leading economic indicators — lumber, copper, and so on — are starting to roll over. I’m not quite ready to hoist the recession flag again, like I did a few years back. But if these trends continue, and the economic numbers continue to soften, you can be darn sure I will.
Of course, you don’t have to wait until the economy is rolling over and it’s too late to do much about it …
You can start protecting yourself and profiting from the latest crises right now with ETFs designed to soar when the dollar dives, when treasuries plunge and when interest rates rise!
Until next time,
Mike
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
{ 21 comments }
Mike:
You continually complain about the Fed, If you had to deal with the terrible problems that arise from government overspending, what would you do? It seems to me that the Fed has a choice, easing is one way, back to another recession (or worse) is the other.
What would you do? Let’s make believe you were Bernanke. what would you do?
Mike… I do not have time to research the market for all things great and small to protect myself. That is why I subscribe to Weiss elite. In this mornings note you say “You can start protecting yourself and profiting from the latest crises right now with ETFs designed to soar when the dollar dives, when treasuries plunge and when interest rates rise!” Great advice. How about a hint (or even some direction?) about where to get the details about your advice? Or are you just trying to get us subscribers agitated?
You did not answer Robert J or Gary J Mallast. Please answer so we will have some direction
Dr. Benanke is slatted to end QE2 in June. You would have to be a truly awful economist and/or a truly awful historian to not realize that when QE2 ends, the bubble will burst.
Once fiat money inflation is embarked upon, there is no good way out.
Inflate and then stop and the bubble bursts.
Keep on inflating at an accelerating rate to keep the bubble inflated and the boom going and you get a hyperinflation and destruction of the monetary unit and the economy like Germany in 1922.
Keep fiddling around with relatively low but constant rates of inflation and you get stagflation like the 1970s.
Inflationists have been creating crisis after crisis over and over again going all the way back to John Law’s Mississippi scheme which blew up in the late summer of 172 and farther, time after time, in every nation from Argentina to Zimbabwe.
Are our political and banking leaders a bunch of fools who can’t learn from history? Or are they a bunch of power and money hungry scoundrels out to steal as much real assets as they can and enslave ordinary people as much as they can?
With quantitative easing ending it is easy to predict the bubble will burst. Unless quantitative easing three is implemented, then we will have a run on the dollar. Those are the alternatives. They aren’t pretty. I myself am particularly vulnerable. I am fed up.
Dr. Bernanke needs to be fired. He is either a crank or a crook. But the Federal Reserve itself needs to be abolished. A committee of five people simply cannot micromanage an economy of 300 million people. The knowledge to make the economy go is dispersed over the entire population and can only be coordinated by the laws of supply and demand. As F. A. Hayek and Ludwig von Mises pointed out, the knowledge necessary to manage the economy cannot be concentrated in one place. It is systemically distributed amongst the whole population. There is, as Mises pointed out, in the absence of money prices arrived at through free exchanges no basis on which to allocate scarce resources. Corrupting the money system corrupts the entire economic process. A money system controlled by the market, which can only be a commodity money like gold or
If the fed got out of the way, wouldn’t normal buying and selling, plus individual initiative fix all of this mess, EVENTUALLY? Is the problem really that simple or does a king/leader HAVE TO control these issues? Historically, kings/leaders pass or fail in this area. The king that got out of the way was applauded by the common man. The king that controlled matters for the few wealthy, was constantly in the peoples wishes for assassination/sickness. Most people just want to be left alone with minimal controls.
In the article above its author sites the cause of speculators piling into commodities as one big reason for the latest greatest bubble, which he goes on to paint as an ominous event. As I recall, dozens of articles have issued from the pens of Weiss analysts and advisers urging us all to buy commodities as a contrarian hedge against rising inflation.
Larry said go long on food, grain, metals, etc. Sean cried, buy silver, silver, and more silver! Commodity ETFs were pushed by two or three others. We were urged, urged, and urged again to “pile into comodoties” as the Weiss team assured us they would skyrocket as the price of basic human needs skyrocketed.
Now Mike is complaining that “we, the people” have to pay for that spike in wholesale commodity prices at the market and the pump! He is one who helped build that bubble and inflate those prices by leading minions of speculators like us into commodities.
You can’t have it both ways Mike. Either you are part of the solution or part of the problem. Which is it?
Would that not logically make Mike Larson and his cohorts part of the cause of the commodities bubble?
ABE, I noticed that too! And once again I am replying to one of your posts as I think we’re on the same page. Weiss seems to tell us what to do REACTiVELLY, not proactively. There seems to be this vast amount of space between that buy buy buy of commodities and now the you-should-have-sold-them-by-now columns. I’m seeing vague vague and more vague. These inverse ETF’s…that’s what they’re selling and I’m beginning to think that’s about it. BTW, I “friended” Weiss on Facebook and had my comments twice removed within 2 minutes. It ain’t him on it. He’s got a social network tech working for him posting a few pics now and then to make it real. Does he realize the following he COULD have?
Abe,
You make some vallid points, however:
We are all part of the whole mess, including bubbles of all kinds. This is true whether we have voted with our money as speculators or just stood on the side lines and watch it all go buy.
Its really tough to get timing right in the market. While you can be right in the long run, you can look pretty stupid in the short run. I can count on a Wiess major announcements to be out of phase from whats happening at the moment. As Weiss ratings on the US comes out and all this talk about the dollar falling off the cliff, the dollar rallies and all the commodities and contra dollar hedges drop like rocks. Or launching the contrarian portfolio at about the time the market bottoms in the spring of 2009.
Although commodities may be in a short term bubble, I do not believe that we seeing a long term top in them. Paper curriencies always end up the same………worthless. We can hope it happens slowly over time so we can adjust. But we need to insure ourselves against a crash.
Well done Mike
The issues you have raised are crucial to people like me, the ordinary investor. The lack of control through effective government policy to help main street invest with structured certainty is why I’m out of this market. Too much volume chasing too little liquidity is going to cause people like me real pain at some point. There is NO procedural certainty in financial markets unless you understand poorly regulated financial instruments. It’s a casino.
Mike
If there is to be widely accepted, serious long term growth investment in the U.S. then the following needs to happen.
1. There needs to be accountability on Wall St.
2. The Fed (the banks) cannot just stick middle America with it’s real estate and casino losses.
3. Real manufacturing and local job creation needs to be directed to your domestic unemployed.
4. Liberty deprivation through falsely construed over bearing legislation needs to be reversed.
5. Proven, successful, motivated political leadership, not endless B.S. speeches has to be found
6. The reality of the initial dream, a dream for the masses has to be in sight
7. Oppressive foreign policy, supporting the defense manufacturing industry needs to have a limit
I have to agree with Howard on each point he makes. I am not an investor, I would like to educate myself and become one. However, in markets that make hundreds of thousands of trades in fractions of a nano-second – I don’t see how I stand a chance at this investing stuff. I am still waiting on an explanation of the infamous “Flash Crash”. Did they ever explain what happened? It all seems such an elaborate shell game to me, despite all the rules, regulations, ratings, and audits, there seems to be no assurance that a worthwhile relatively safe return is assured. Another thing as I read a bit I keep seeing the term “moral hazard” come up, especially in appearances at congressional hearings. As near as I can tell the term moral hazard can be defined as lying, cheating, and stealing . The whole investing business just doesn’t seem to be regulated as it should be, or else all the regulators are asleep at the wheel. I am content to sit on the sidelines as an observer, as opposed to an investor – for I feel, it will never make sense to me. In the end it seems to get down to how greedy one is and if he / she believes they can benefit from greedier folk. Puzzling really.
Many “experts” now are jumping on the bandwagon and predicting increasing inflation and hyperinflation. The analysts at Weiss generally agree with this assumption. It seems reasonable, judging by past history and the set of circumstances with which we are now faced.
So, if and when dramatic hyperinflation sets in, we are told that assets will inflate dramatically in value. Now, a house is an asset, is it not? Even if the jobless rate remains sky high, even if mortgage rates go up, even if foreclosures continue to pile in, will the asset called a house buck the trend of all other assets and remain at its current value or lower?
How could that be? A $100,000 home is valued in dollars should be logically automatically worth more when all assets inflate, should it not? If the dollar continues to be debased, would not ANYTHING that is an asset valued in dollars suddenly have a higher price tag?
Anyone have any thoughts on this matter?
Abe,
It would be nice if every asset inflated equally, but they don’t. Each follows its own supply and demand situation. Since people are losing jobs (or unable to pay for food, fuel, + a mortgage), there is a glut of foreclosed homes on the market. With the supply of so many cheap homes for sale and the decrease in the number of buyers, prices go down. This has a ‘multiplier effect’ on this market because a foreclosure in a neighborhood lowers the price of all the other houses nearby. Moreover, many of these properties are abandoned for short or long time periods and subject to physical degradation. Secondarily, the decline in a city’s total property occupancy leads to departure of local retail businesses and reduced tax revenues for public works, making area less attractive to new buyers. This actually puts pressure on commercial real estate companies who lease buildings, so they also get into the red and may even raise rates for their few remaining customers to make up for those that were lost.
iPads on the other hand follow a completely different dynamic. They are also decreasing in price despite fuel inflation, but in this case it is likely because its not as expensive to make an ‘iPad2’ as it is to invent an iPad in the first place. Or possibly because the QE1 and QE2 helped the stock market so much that Apple could lower its prices…
Problem, almost everyone missunderstands that this nation has been for over a hundred years inching toward socialism and what we have had for the last 4 administration is a even faster rush into anti-capitalist pro-socialist agendas. Only the supper rich and supper poor will exist very shortly. It is 1984 in 2012 or not much later than that.
Create a mass majority in poverty who are ignorant and as willing as the Egyptians to sell themselves, their children and all of what is left of what they own for bread to someone like Joseph in scripture and you will see the beginning or is it the end of our future.
Have we reached, using the new phrase, tiping point or can we stop this facist, big government, global business train?
I’m gonna get a metal die set and use a 3/16 ball punch to make my silver bars into dominoes. Then I’ll run an illegal gambling domino operation ‘mongst the Puerto Ricans in my area, make some money, sell out, and buy an island somewhere in the Caribbean. Then I can run around in sandals and a beaten out inner bark loincloth. The big challenge in life will be to beat back raiding fleets of cannibal Tainos.
ok the FIX is NOT easy and it will be PAINFUL, the gov. needs to STOP wasting money we do not have, STOP raiding our social security funds, and STOP those BIG TAX BREAKS to the wealthy and big MULTIBILLION dollar companies, close many military bases all over the world, how come 45% of Americans do not pay any tax at all, GE and many others made billions overseas in profits and pay ZERO TAXES this has to STOP we need to change the course this country is going , we need good people that want to STOP WASTE and want this great nation BACK ON TRACK !
Mike,
I have news for you. The US Dollar is getting ready to rebound strong and commodity bubbles will break like nothing you have seen in many years. Rumors of the dollars demise are flat out wrong headed. At least not yet. We are many years away from anything resembling hyper-inflation. You will see over the next few months a surging dollar and a total collapse of commodities as well as the stock markets. It is unavoidable. Deflation is going to take its toll on all those making the mistake of thinking inflation is our problem. They are dead wrong. Deflation will grow expodentionally as jobs crash, real estate double dips, and the commodity bubbles pop with manipulators running to cash. The DOW will crash below 6000 as Fed manipulation stops.
So, am I to believe that an electronic device purchased in 2011 will inevitably be much cheaper in 2016, despite overall hyperinflation?
In the past electronics cost more. Now they cost less. But in an era of hyperinflation, I cannot believe that the overall upward pressure on prices will not affect some items at all. If that is the case, then persons in the Weimar Republic during their era of hyperinflation could have had access to numerous items that did not succumb to the hyperinflation trend, and the Republic could have rolled on unperturbed, with enough to sustain it.
When hyperinflation hit Brazil and Argentina in recent decades the same could have let them slide on through unharmed. But, such was not the case. One nation dumped its currency for another. The other defaulted.
If houses in some markets will remain “bargains” as Brian suggests above (and I thank him for his response to my query) then, in an era of hyperinflation who would want to buy a house that kept its old 2010 low appraisal, except to use it as a personal residence? No investor would want something that was “stuck” in a low valuation, and which he believed would remain at “bargain” prices. Everyone wants to buy assets which they believe will appreciate, otherwise you are throwing money down a rat hole.
Yet, if those same “investors” believed that the rampant hyperinflation would eventually affect the valuation of those “bargain” homes, they would grab them with both fists! That very belief, if dispersed widely enough among investors, would itself lead to hyperinflation in the valuation of those “bargain” homes. Hence—back to square one 2001-2006 before the bust. And, the cycle repeats itself again.
There is no coincidence in the cycles of inflation and deflation. They are clearly and precisely orcherstrated by the “elite” to cherry pick properties at rock bottom prices, defraud the common people, then reinflate assets, thereby enriching themselves after they wiped out the plebians.
Think about it.
Mike, Now I know that with all your expertise you have to understand that the feds are on a mission to implode the US dollar, the Euro etc so that they can install a one world currency of some type. You should be honest with yourself and your readers and just lay it out there for everyone. Your verbal fight should be to end the fed not hope they will do the right thing. History and headlines proves that they are hell bent on destroying the USD and EUR. The Banksters have always been about finding new ways to control and capitalize on their funny money schemes. Greed at that level knows no limits. Please join the crusade to end the Fed and get us back to printing our own money. Default on all this phoney debt and put America back in the drivers seat and reverse the 96% devaluation of the American dollar. Why play around this bunch of criminals. They all should be in Prison for life like ole Bernie. Even if it turns out to be a country club of sorts at least they can’t keep stealing trillions from our children.
go to infowars.com and join the fight!
Mike
The overwhelming problem of investing in US real estate is the apparent acceptance of unprincipled FRAUD. To invest serious money in real estate where the original paperwork is mishandled and was not processed securely is just unacceptable. WHERE IS THE REGULATORY PROTECTION FOR US ALL with rampant fraud in bundled securities. This is one reason why some banks can’t be trusted, real estate is flat and main street is depressed.