Going up on escalator, and going down on elevator

Thanks to Goldman Sachs for upping their price target on gold yesterday. They always manage to raise the price target before the selloff (remember $200 oil?). Will they disclose their own prop desk trades on gold around the "higher" price target announcement?

This is what happens to a crowded trend-following trade. The question now is: how many floors does the elevator stop at?


I am still bullish on gold. Closed some shorts today.

Je ne regrette rien

Liquidate Saves to Save the World, Part Deux

An open letter

by

Ben Bernanke

(A parody)

Very well, on the day of my confirmation hearing on the Senate floor, the WSJ editorial page called me the Edith Piaf of central banking. Indeed, Non, Je Ne Regrette Rien. My job as a central banker is not to worry about any particular constituency, but to live up to the Federal Reserve's dual mandate. In the past two years, the best course of action for me and my colleagues to carry out that mandate has been to liquidate savers to save the world. Most pundits don't realize that savers don't have any lobbyist working for them. Nor are they represented by any congressman or senator. Some of them might be retirees (my apologies to them). More likely, they are people who have done well in the booming years. Most likely, they are foreign nations that have accumulated large foeign exchange reserves against the US. Going after them to clean up our mess in the financial market is my strategy. Let me explain.

People, thanks to the press, remember me too well for my "helicopter" remark (hence the moniker "Helicopter Ben"). But, rather than the image of helicopter dropping dollar bills over this nation, the one intellectual concept I am truly proud of myself for coining is "the global savings glut". Too bad, the press (other than the WSJ) fails to understand the significance of this concept. To understand modern finance and central banking, you need to understand the paradox of thrift. It may be sensible for an individual to favor saving over spending. But one man's savings is another man's lost earnings. If we all save more, collectively as a nation, our economy can't achieve its potential for full employment and our living standards go down (just look at Japan and where it has got with its high savings rate). Read slowly and digest every word I write, thanks to the Fed, Americans have found the holy grail of wealth creation. Contrary to what most people only follow (again, thanks to the press, think Lou Dobbs), i.e., the outsourcing of American manufacturing jobs, we have outsourced savings and concentrated on borrowing and spending for our own prosperity. This is a very important point, so allow me to elaborate further.

The Chinese (for whatever innate propensity to save due to their cultural background, plus the Japanese and the Korean, etc.) have chosen to save for their future. They have invested their savings in creating massive manufacturing capacity. Naturally, as a nation, we have picked up the baton to consume. Without Americans being the consumer of the last resort, the Chinese can't find a sizable market to export whatever they manufacture. The workers there will be out of a job, and revolution might ensue. By consuming, American citizens are not only living the American Dream, we are actually promoting peace in the world. Naturally, one would ask, how do we pay the Chinese for everything we buy? Even though we export to the Chinese (think hamburgers and Hollywood productions, plus frequently bootlegged software and intellectual properties we don't get paid for), we often come up short. That's where the Federal Reserve comes in. As the world's most important reserve currency issuer, I have a magic machine at work. That is the printing press of the United States. We keep printing dollar bills and send it to the Chinese, the Japanese, the Korean, the Middle East oil exporters, and whoever wants to take dollar as payment. Bear in mind, when other nations earn more than they can spend, they have to save. In what form do they save? Dollar bills! If you read the fine prints on your dollar bills, you will know it is the "legal tender for all debts, public and private". To make it sound sincere, we have also added the wording "In God We Trust". There was a time when people can tender the dollar bills for gold. President Nixon smartly reneged on the promise of exchanging gold for paper we print, and the world has accepted it for the past thirty-plus years.

As long as I keep the printing press fired up, the world is going to have a "savings glut". The "global savings glut" is going to keep the interest rates low. Yield-hungry investors will keep reaching for a few more basis points and finance economic activities. Everybody can live happily for some time. Clearly, this is unsustainable. I have tried to point out for the Chinese to save less and spend more. They politely declined to follow my advice. That means they are determined to keep the US as the target market of their exports.

In the aftermath of the credit crisis, people have been searching for the mastermind of such a disaster. Some has unfairly blamed the Fed, our former Chairman Greenspan and myself. A certain congressman from Texas even introduced a bill to start auditing the Fed's decision making process. I would like to remind them to look to the East for an answer. It is the "global savings glut" that caused the massive risk-taking in the financial markets, not the Fed's policy to keep interest rates excessively low. To deal with the crisis, we have introduced ZIRP (zero interest rate policy). Guess what, ZIRP is specifically designed to get to the root of the problems. We are going after the savers of the world. Following the 1929 crash, Andrew Mellon, then treasury secretary, famously said: "liquidate labour, liquidate stocks, liquidate the farmers, and liquidate real estate... It will purge the rottenness out of the system." I would like to be remembered by future generations as the one who said: "liquidate the savers."

In today's America, the savers are predominantly people who are already rich. Have you followed the confirmation hearing of Sonia Sotomayor, President Obama's nominee for the Supreme Court? She represents the new America. Her financial disclosure shows that despite having served as a federal court judge for years and being handsomely compensated, she has no savings under her name. In the new America President Obama wants to lead us to, nobody should have to save. If they have any needs, the federal government will provide. Healthcare, education, you name it. The president has indicated he will raise taxes on the rich. Supply-side conservatives argue that higher taxes will lead to lower growth and higher unemployment. In an environment with constant money supply, I might agree. But as I have indicated so many times, under my leadership, the Fed will keep the printing press running around the clock. In the end, only the savers will be liquidated. That refers to the Chinese. If you are a patriotic American, don't save. If you have any cash lying around, buy real estate and stocks. The price will come back. The sky is the limit.

Gold - the mug's game

If central bankers are such a brilliant bunch, they shouldn't have sold gold in the 300s or 400s. But they did, for over a decade. Now they are either hoarding (the Europeans didn't meet their selling quota for two years in a row) or buying gold outright (Indians, Mauritiusians, Sri Lankans, what a smart collection!), I am getting uncomfortable with my long gold position. Having never enjoyed walking or running in the company of crowd (or I would have attended the annual Pomplona bull run), I think now is the time to play the mug's game -- fully hedge the long position with a small short bias. I know, I know, this trade may be too cute to execute profitably. But nothing goes up in a straight line without a pause. Not even gold, I bet.

Stock Market Confidence Indexes

Aside from die-hard 401(k) plan participants who didn't change their asset allocation choices following last two years' drubbing (believe me, that was a hard thing to convince my mother-in-law to do), most individual investors didn't participate in the 60%-plus rally since March 2009. Historically, the retail investors usually make the wrong move in stock market at the exact wrong time when they make the move, either shifting into or out of equities/fixed income or any assets you can name. If you believe mass behavior is hard to change, here's something worth watching: Yale School of Management Stock Market Confidence Indexes.


This particular index prepared by the International Center for Finance at the Yale School of Management tracks the confidence level among institutional and individual investors about the stock market's ability to go up in the year ahead.

In the last couple of months, interestingly, individual investors started to feel more confident that the stock market will continue to go higher while institutional investors became less confident. It's worth pointing out that at the trough in March 2009, more institutional investors were confident that the stock market would go higher in the next 12 months. They have been proven right.

What this may imply is that, following a historical 60% plus rally and relentless media coverage, the retail investors (who traditionally worship at the altar of price momentum) are about to be suckered into embracing the rally. Don't forget to send Mr. Bernanke a Thank-You note when that happens.

Maybe it's time to revisit my mother-in-law's asset allocation.

Put your trust in Bernanke, really?

With the benefit of hindsight, one can't help but notice how intellectually bankrupt the current Federal Reserve Chairman has been in recent history.

Reluctantly holding on to my gold position

At the beginning of 2009, an investor asked me for my best investment ideas given the environment. This was back at a time when the equity market was still free falling. I told him there were two: TIPS and Gold. He was skeptical, to be polite. Gold? The barbaric relic! And TIPS, yielding nearly nothing above Treasuries. I am sure he thought I was a fool a couple months later when gold proceeded to have a technical correction down into the mid-800s.

How things have changed! Circa October 2009, equity markets around the world have rallied, relentlessly. Gold also rallied, relentlessly. Despite its impressive move 60-plus% above the March lows, S&P 500, when priced in gold, is up just 2% YTD. Gold, on the contrary, is up about 20% YTD.

Vindicated? No! I don't feel good at all about holding onto my gold, knowing it will go higher still because of the free printing of fiat money here and abroad. What troubles me is the uncertain future of the Fed policy, with one certainty that dollar debasement will continue. Coupled with the soon-to-be permanent damage done by the Obama Administration's wrong-headed (but widely lauded) policies to the American economic system as we knew, our future (and our children's future, for that matter) doesn't look rosy at all.

I'd rather take my money out of gold and put into a productive business. But there are only so many Apples and Googles around. Life in the Age of Free Money is not a title I hope to read in retirement. It is not a life to be remembered with fondness.

Old lesson for newly fashionable idea of redistribution

On Communists
by Ebenezer Elliott (1781 – 1849)

What is a Communist? One who hath yearnings
For equal division of unequal earnings;
Idler or bungler, or both, he is willing
To fork out his penny and pocket your shilling