His Mouth is Moving
Research for Online Investors

by John Dalt

11/05/10

Sometimes when we do something stupid, we admit it and correct the error. Other times, we double down and try to verify our first action by committing to doing the same thing again. If we are lucky, we will stop after two errs, but the real hard headed will continue to beat their head against the wall with another push to prove they were correct.  This is no where more prevalent than in government.  'If it doesn't work, spend more money to make it work' is the normal operation.  Witness the "War on Poverty."

What happens when you take a college professor and make him head of the Fed?  There is no doubt that Ben Bernanke is bright, he scored 1590 out of 1600 on the SAT out of high school.  But intelligence does not convey flexibility.

We wrote an article on the market a couple of weeks ago using a popular phrase, “To a carpenter with a hammer, everything looks like a nail.”  We wasted that saying; we should have saved it for the Federal Reserve.  Everything they see calls for more money.  No matter the “problem” they want to push the button and print more.

Bernanke tried to reassure the world that the Fed had a plan in place to reduce the money supply at the appropriate time.  We don’t believe him.  There will always be arguments to print more money.  Have they ever meaningfully reduced the amount of money?  NO.

You probably think, “John is on a rant, and can’t stop.”  It is not just me.  Paul Volker, former Fed Chairman said, “The thought you can create a prosperous economy by inflating is an illusion…It's not the kind of action that's likely to change the general picture that I've described as a slow and labored recovery over a period of time…In theory, bond prices go higher and interest rates move lower, but if people sniff out possible inflation the opposite effect could happen.”

Wolfgang Schaeuble, the German Finance Minister, said "With all due respect, U.S. policy is clueless. (The problem) is not a shortage of liquidity. It's not that the Americans haven't pumped enough liquidity into the market and now to say let's pump more into the market is not going to solve their problems." Chinese Vice-Foreign Minister Cui Tiankai is worried about ‘a flood of money pouring into global markets.' He said, "They owe us some explanation. I've seen much concern about the impact of this policy on financial stability in other countries.”

The effects of QE2 will be the same as the first $1.7 trillion dollar quantitative easing gave us.  Commodities like oil, copper, gold, and food are more expensive.  Citizens that save money (elderly) will see their fixed income go down.

That sounds like a way to “rescue” the economy.  Punish the poor that spend a disproportionate share of their income on food and energy and reduce income for the elderly.

In Bernanke’s article to the Washington Post, he said, “Today, most measures of underlying inflation are running somewhat below 2 percent, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run.”

On the DAY his article was published, GLD was up 3.4%, USO (crude oil) was up 1.1%, copper (CU) was up 5.7%. Like a friend used to say about politicians, “You can tell when they are lyin’, their mouths move.” How can Bernanke make statements like the above with a straight face? Energy and food are excluded from “core” inflation numbers. This is a neat trick.

We have been on a nice run in the market for the last two months.  The rally actually began nearly 20 months ago in March of 2009.  The chart below has all the major market rallies of the last 110 years. Each dot represents a major stock market rally as measured by the Dow. The Dow has begun a major rally 27 times over the past 110 years. Most major rallies (73%) resulted in a gain of between 30% and 150% and lasted between 200 and 800 trading days -- highlighted in today's chart with a light blue shaded box. As it stands right now, the current Dow rally (hollow blue dot labeled you are here) is still somewhat short in duration and below average in magnitude when compared to all the stock market rallies that occurred since 1900. The current rally is in line with the more typical rallies (see light blue shaded box) of the past 110 years.

To the mailbox:
I got up early.  How close are we to the brink of chaos?---paid up subscriber T.M.

John’s reply:  I am losing enough sleep for all of us.  Enjoy the weekend.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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