One of the non-profits I tirelessly support is the Scleroderma Research Foundation (SRF) (www.sfcure.org). Scleroderma is a chronic debilitating disease that affects many people, about 1 in 1,000 Americans, and women are 4 times more likely to develop the disease than men. My family has been personally touched by this incurable disease and as a longtime supporter I would like to announce an upcoming fundraiser being held by the Scleroderma Research Foundation. Cool Comedy- Hot Cuisine is an annual event for SRF and this year it is being held in San Francisco on Wednesday May 4, 2011. The event is hosted by Bob Saget and features appearances by Bill Bellamy and Dana Carvey with musical guest Counting Crows. I hope that you will consider supporting this amazing organization and attend the event on May 4th. Additional information for donating or purchasing tables can be found here: http://www.srfcure.org/get-involved/store?page=shop.browse&category_id=8&vmcchk=1. Hope to see you there! Now we’ll move on to “Just Say No to Quantitative Easing.”
Federal Reserve Chairman Ben Bernanke has begun holding quarterly news conferences to answer questions about the Federal Reserve’s policy decisions. This represents a significant shift in strategy for the Fed which will give it a chance to defend its current monetary policy given the harsh criticism over the past couple of years. While the introduction of regular press briefings and a more transparent Fed is a positive development, many traders believe that the Fed Chairman is getting the markets ready for another round of Quantitative Easing. In fact, almost 30% of the respondents to a poll conducted by UBS a few weeks ago said they anticipate a third round of QE, and we are also in that camp. Given that the Chairman has, on more than one occasion, taken credit for the post-2008 bull market, we simply do not believe that Bernanke will allow the markets to truly correct on their own. In our opinion, as soon as we get the first sign of a bear market, which incidentally has happened almost every four years like clockwork, Bernanke will be forced to intervene as he will have a tough time explaining why the stock market is falling with continuing weakness in real estate and the labor markets given we are two rounds into Quantitative Easing. As we have learned over the past decade, the Fed’s only answer to combat economic weakness is to devalue the dollar by essentially printing more greenbacks. In our opinion, another round of Quantitative Easing will be a disaster for the dollar, causing even higher inflation in an economy that is already having problems digesting higher prices.
The main reasons why we have come to this conclusion are below:
1) First, if you take away the temporary gains in the stock market, there is no evidence that any of the QE’s have helped the economy. QE1 and 2 certainly haven’t helped the housing market, as evidenced by the Case- Schiller Housing Model which clearly shows that the housing market is double dipping:
http://www.ritholtz.com/blog/wp-content/uploads/2011/04/Case-shiller-indices.png
2) And, jobs are still hard to come by. This “recovery” has been the weakest in terms of jobs since the 2001-2005 recovery, which was also accompanied by a massive dollar decline in the dollar.
http://static.seekingalpha.com/uploads/2011/2/6/saupload_us_employment_declines_jan11.png
3) Since the start of the millennium, Federal Reserve and Treasury officials have always echoed their support a “strong dollar policy” while in reality the dollar lost over half its value since that time. Please see the recent comments from Treasury Secretary Geithner:
"Our policy has been and will always be, as long as I will be in office, that a strong dollar is in the interest of the country," Geithner said at a New York conference organized by the Council of Foreign Relations.
"We will never embrace a strategy to weaken the dollar”
But, is there anything “strong” about this chart of the USD?
http://www.shtfplan.com/wp-content/uploads/2010/11/dollar_index_since2002.gif
4) And finally, on the subject of inflation, the Fed believes it can withdraw stimulus just in time so that inflation doesn’t get out of hand but for many, inflation is already here and is getting worse. Wal-Mart CEO Bill Simon was recently quoted that “we’re seeing cost increases starting to come through at a rapid rate”. And he continued by saying that US consumers face “serious inflation” in the months ahead for clothing, food, and other products.
The Fed on the other hand has blamed strong demand in emerging economies to droughts in Russia in its attempt to explain why the price of pretty much everything we use is increasing.
The truth, however, can be seen in the chart below which clearly shows the correlation between the dollar and commodities. When the dollar loses value commodity prices, which are priced in dollars, go higher and vice versa.
At the end of the day, the only question that really matters, is why is our monetary policy over the past decade has resulted in such a decline in the dollar when it is clear that the official government policy is to promote a strong currency? The answer may or may not be that easy to come up with, but the bottom line is that if the Fed and Treasury are trying to keep the dollar from falling, they either haven’t been successful at achieving their goals, or they aren’t telling the truth.
As we have written many times before, if we really want to fix our economy we need the Fed to stop manipulating markets. Our economy is not fully recovering because the Fed is not letting capital flow to where the demand truly is. By injecting liquidity into one sector of the economy, in this case the financial industry, the Fed is effectively taking it away from another, hampering innovation and productivity. People have become complacent now that the stock market is temporarily higher, which is a direct result of the Fed’s monetary policy. However, as we have seen many times before, markets tend to overcorrect to the downside as soon as the Fed exits a market. In this case, it will be very interesting to see just who, if anyone, is going to step up and buy Treasury bonds after the Fed stops doing so in June.
