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Mark's Market Blog

9-16-12: Inflation Causes Price Stability!

By Mark Lawrence

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Markets shot up again on the last two days of this week, hitting new five-year highs. The Federal Reserve Bank announced they are going to purchase an unlimited number of mortgage backed securities with an unlimited amount of money for an unlimited period of time, until they decide by standards not yet announced that employment and the economy are doing good enough. Immediately gold and 30 year treasury bond rates shot up in anticipation of inflation, and the stock market shot up in anticipation of money moving out of bonds and into stocks. All those old women who live on the interest from their bonds, well, good luck granny. Those who live on a fixed income and can't afford food, energy or medical inflation, good luck to you too. But remember, this is very good for you. Because Bernanke says so. Repeat that 100 times like it's your economic Hail Mary: "This is very good for me."

S&P 500 March 21 2012 to September 14 2012

Bernanke announced QE3 - unlimited in both time and money, he says he'll keep it up until the economy has recovered. Initially this program will consist of the Fed buying about $40b in mortgage backed securities per month. The stated purpose is to improve employment figures and make the economy grow. Also, Bernanke says it is "to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, maximum employment and price stability." Apparently we are now to believe that we need inflation in order for businessmen to hire people, and inflation causes price stability. George Orwell couldn't have said it better. Clearly what's going on here is Bernanke is trying to rekindle inflation because by cutting your savings in half he will also cut the national debt in half - the government gets to pay back its creditors in half-sized dollar bills. And you? Tough cookies. Will this new cheap money cause businessmen to hire more people? What did QE1 and QE2 do? Below is our favorite unemployment graph with the times of QE1 and QE2 shown. I allow that an argument can be made the QE1 stopped the employment free fall and turned it around - I don't believe it, but I allow that such an argument can be made. I can't find even a tiny blip in the employment curve that corresponds to either the start or the end of QE2. Will QE3 cause more companies to hire more people? I sure wish I could buy a short on that proposition.

Unemployment with QE1 and QE2 shown.

The theory of QE is that by destroying the interest rates on government bonds, people will have no choice but to sell the bonds and move their money into more risky investments, like stocks and corporate bonds. Of course, meanwhile we read almost every day about how companies are sitting on huge piles of cash, unwilling to make major investments in the current environment. Apple, for example, is sitting on nearly $200b in cash. Cheap loans will change Apple how? Intel, IBM, Cisco, Microsoft, Oracle, Google, Johnson & Johnson are each sitting on $20b or more in cash. This is a liquidity trap taken to extremes: not only is there no one the banks want to loan to, but the companies who might qualify for such loans have more cash than they know what to do with. For the last two decades inflation has been running at about 25% per decade in the US. But apparently that's not enough, it's not enough that 25% of your savings melt away every decade, the Fed says we need more inflation to guarantee price stability and employment. (I'm sorry, I'm typing "inflation guarantees price stability" and I feel just sick, but that's what Bernanke says.) So how much inflation is enough? 30%? 50%? 100%? I guess we'll find out.

She's stabilizing prices. Thanks little girl, you're saving the country.

Will it work? Will it raise prices on stocks? That's an interesting question, and not everyone thinks it will. The Japanese have been printing money non-stop since their stock market crash 20 years ago, and their stock market has gone nowhere. Or perhaps the point is something else, like to rekindle inflation. But in the end inflation is too many dollars chasing too few goods, and the dollars are mostly sitting in bank vaults, they're not chasing anything. Will it improve bank profits? Borrow at zero percent, make student loans that can't be avoided even in bankruptcy at 7% - what do you think? Total educational loans passed up total credit card debt a couple months ago. Or perhaps the point was to give Obama a last-minute economic boost. That worked according to, where you can buy and sell future events like they were stocks. The odds of Obama's reelection went up 2.5% immediately after QE3 was announced. Remember, the Federal Reserve Bank is not a part of the government. It's a private company, owned by its shareholders, which are the member banks. It's immune from any government audits. Its primary reason for existence is to try to make sure no bank ever goes bankrupt. And it currently holds about $3T in debt, about $20,000 for each American taxpayer. Maybe that debt will prove good and get paid back, and taxpayers won't ever have to bail out the fed. You can repeat that 100 times like it's an "Our Father." I bet you feel better already.

There is protesting all over the Arab world over the film made of Mohammed. "Death to America," "Death to Israel," "Death to England," and "Obama, Obama, we are all Osamas" are popular slogans. Obama's policy of conciliation towards Arabs doesn't seem to be working very well. Muslim moms are still proudly taking pictures of their seven-year-old sons standing next to their infants, holding up signs that say "Behead all those who insult the prophet." There's a cultural motif that's completely absent in the west - teaching your seven year old son to hate and kill. Protestors are active in Australia, India, Jordan, Malaysia, Indonesia, Libya, Egypt, Yemen, Israel, Iran, Iraq, Lebanon, Tunisia, Sudan. This over a movie that has reportedly been shown precisely once, to an audience reported as "about nine." A 13 minute excerpt is available on Youtube (or was, Youtube is censoring left and right); to call this film low- budget is a gross understatement. This excerpt was recently translated into Arabic, and now some unknown number are dead including the American ambassador to Libya. The Ambassador was gang raped and tortured before being killed, but we're not supposed to know that - all references to the original report in the Lebanese newspaper seem to have disappeared. Youtube has already censored reports of this incident as "a violation of their policy against spams, scams, and commercially deceptive content." Spam? Scam? Commercially deceptive? No one asked me for any money. Freedom of the press in this country is dead, dead, dead.

Arctic ice is setting new records for melting. Following the new record low for Arctic ice recorded on August 26 of this year, Arctic sea ice extent continued to drop and is now below 4.00 million square kilometers (1.54 million square miles). Compared to September conditions in the 1980s and 1990s, this represents a 45% reduction in the area of the Arctic covered by sea ice. Extent was unusually low for all sectors of the Arctic except the East Greenland Sea where the ice edge remained near its normal position. Typically, the melt season ends around the second week in September. The age of the ice is an important indicator of the health of the ice cover. Old ice, also called multiyear ice, tends to be thicker ice and less prone to melting out in summer. Between mid-March and the third week of August, the total amount of multiyear ice within the Arctic Ocean declined by 33%, and the oldest ice, ice older than five years, declined by 51%. What does this mean for us? Arctic water is darker than Arctic ice and absorbs more sunlight; obviously the water is also warmer than the ice. All this extra heat up north changes evaporation and wind patterns. Plus, as extra water evaporates, more warm water flows in to replace it from the north Atlantic, adding to the heat in the Arctic. Last year we had a cold spell over Europe that shut down the continent a few times and lead to snow in Turkey (think Los Angeles); this year could be worse. And to add an extremist view, the geological record shows that during ice ages the Arctic is substantially ice free - all that water to make glaciers has to come from somewhere.

Retraction: A couple of my Jewish readers have informed me that US Jews are far less monolithic and far more ambivalent in their views of Israeli politics than I understand. I must defer to them on this. I stand by my statement that there is a growing rift between blacks and Jews, but that's about as much as I can say with any certainty.

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