Sympathy for Ben Bernanke

This was up over at Calculated Risk a short time ago - a really nice piece of work.

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The week's economic reports

Disappointing retail sales and a report on new home construction showing even further declines in homebuilding highlighted the week's economic reports. Stocks and bonds ended with the S&P 500 Index down 5.4 percent to 1,325, now down 9.8 percent for the year, and the yield of the 10-year U.S. Treasury note fell 16 basis points to 3.66 percent.
Retail Sales: Slowing consumer spending is now a significant concern for the U.S. economy as overall retail sales declined 0.4 percent in December after a downwardly revised gain of 1.0 percent in November. Note that the November-December data was influenced by a relatively early Thanksgiving holiday and heavy retailer discounting that came earlier than usual during the Christmas holiday shopping season.

Even the combined November-December increase of 0.6 percent, however, failed to keep pace with rising consumer prices which gained 1.1 percent over the same period. Gains in retail sales driven by higher prices (and not by a higher quantity of goods) sold was the story for all of 2007 as retail sales gained 4.1 percent for the year and the consumer price index rose by the same amount.

When considering that the government's measure of inflation understates price increases (perhaps by a wide margin), 2007 was more likely a year of declining retail sales in real (inflation adjusted) terms.
Gasoline station sales actually declined in December, down 0.2 percent following a 0.4 percent increase in November, as prices at the pump moderated somewhat. Building material sales fell 2.9 percent, clothing and sporting good sales dropped 2.0 percent, and consumer electronics fell 1.9 percent. For a look at how purchases at home improvement stores such as Lowes and Home Depot were supportive of retail sales in recent years, see last Tuesday's A subprime reading on retail sales.

Overall, this is just one more piece of evidence that consumer spending is slowing. With prices now plunging for both real estate and equity markets along with increasing talk of recession by the mainstream media, where, more than three-quarters of respondents in a recent survey believed the U.S. economy is either already in a recession or about to experience one in the next 12 months, the slowdown in retail sales may be about to intensify.

Consumer Prices: With a slight easing of energy prices during the December reporting period, headline inflation moderated somewhat, up 0.3 percent after the 0.8 percent surge in November.

For the entire year of 2007, overall inflation rose at a rate of 4.1 percent, the biggest increase in 17 years, though this development was not nearly the issue that many in the mainstream media made of it.
Higher annual inflation rates were seen as recently as late-2005 in the aftermath of Hurricanes Katrina and Rita as well as in mid-2006, but it just so happens that the current 4.1 percent year-over-year reading comes during the month of December when everyone can look at the year-over-year rate and easily answer the question, "What was the rate of inflation during 2007?"

Recall that in late-2006, energy prices plunged and many other consumer prices fell back as well, leading many to think that rising consumer prices were just a hurricane induced anomaly that began in 2005 and was exacerbated when the Israel-Lebanon war broke out during the summer of 2006. More recent evidence, however, points to not only higher energy prices for the foreseeable future, but also higher food prices.

Excluding food and energy, the core rate of inflation rose 0.2 percent in December after a 0.3 percent increase in November. For the entire year of 2007, core inflation registered 2.4 percent and even Fed economists are beginning to see the diminishing value of this measure of inflation now that it has diverged from overall inflation for such a long period of time amid increasing complaints that it has little to do with rising prices in the real world.

Housing Starts: The news continues to get worse for homebuilders as housing starts dropped 14.2 percent in December and permits for new construction fell 8.1 percent.

On a year-over-year basis, housing starts were down 38.2 percent and permits declined 34.4 percent as the doldrums in home construction dragged on for a second full year as shown in the chart below. From early 2006 levels, housing starts and permits for new construction have declined by 56 percent and 52 percent, respectively.
During the month of December, declines were led by a 30.8 percent plunge in the Midwest followed by a 25.8 percent drop in the Northeast and a 19.6 percent drop in the West.

The National Association of Homebuilders Housing Market Index showed no signs of improvement in January remaining at all-time lows (below the levels seen in the early-1990s), so, there is little reason to think that things might improve from this point.

While the outlook could indeed darken further, there is some level of homebuilding that is required to keep pace with demand arising from population growth and the renewal of the housing stock, but, with inventory that remains bloated and with prices continuing to plunge, there's no telling where that level might be.

Philadelphia Fed Survey: While regional manufacturing reports generally don't merit much attention, last week's survey of the Philadelphia area manufacturing sector was notable in that the index plunged some 19 points to what is clearly an area associated with recessions, as shown in the chart below courtesy of the always-excellent blog Calculated Risk.
Prior to the reading of -20.9 in January that came on the heels of an already weak -1.6 in December, this index had not been more than a few tenths of a point into negative territory (indicating overall contraction) since the last recession in 2001. New orders plunged to -15.2, its first negative reading in 15 months, and current shipments fell 17 points, from +15.0 to -2.3. Weakness was also seen in inventories that fell to -11.7 and delivery times that dropped to -3.1 while prices continued to rise, from 36.5 in December to 49.8 in January.

Remember that this is a fairly volatile series that is subject to heavy revisions, however, the implications of the January data are clear and will not likely be revised away - there are signs of a major manufacturing slowdown in the mid-Atlantic area.

Summary: While moderating energy prices caused both consumer prices and producer prices to fall within the expected range, there were many other surprises last week, notably, an even worse outlook for homebuilders and more evidence of an American consumer in the process of pulling back.

The Philadelphia Fed Survey was probably the most shocking of all the new economic data, however, it is important to note that the sharp decline in Philadelphia area manufacturing was not confirmed in the New York area report released earlier in the week. The much broader ISM Manufacturing Index, which plunged in December, will now be even more anxiously awaited when it is released during the last week of January along with a raft of other important economic data.

The Conference Board's Leading Economic Indicators fell for the third consecutive month which, despite its dubious construction and the limited respect it gets from financial market analysts, does not bode well for future economic growth.

There were, however, three bright spots last week - solid Treasury International Data Flows, declining weekly jobless claims, and a small rebound in consumer sentiment.

A strong $90.9 billion inflow of capital in November still shows that the U.S. can attract foreign investors, however, there remain serious questions as to how long this will continue. As for the sharp decline in weekly jobless claims to just 301,000 after recent months where 340,000 has been the norm, it appears that an odd side-effect of 2008 seasonal adjustments during the most heavily adjusted month of the year will reveal this to be nothing but false hope for the labor market. Weekly claims in the weeks ahead and the labor report on February 1st will likely prove last week's drop to be a one-off event.

Finally, the small rebound in consumer sentiment was due to a small decline in gasoline prices - consumer sentiment and prices at the pump track each other very closely.

The Week Ahead: The holiday-shortened week ahead will be extremely light on economic data with Thursday's report on existing home sales from the National Association of Realtors' the only significant news.

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More recession talk from the mainstream media

Americans are a bit pessimistic on the near-term outlook for the U.S. economy if the data from this CNN/Money story is anywhere close to being accurate.
The report details how more than three-quarters of those polled believe that a recession is either near or already here and how many respondents indicated they are cutting back on their spending.

That can't be good.

As you'll recall, spending is not only the life-blood of the American economy, but it is the very foundation of life as we know it in these United States.

Unfortunately, a rapidly growing amount of spending has been financed by skyrocketing debt in recent years and debt service is becoming increasingly difficult for many. The fact that home values, the collateral for much of that spending money, are now plunging, well, that doesn't help either.

You kind of knew things would probably turn out this way.

"Those are pretty striking results, a pretty stark assessment," said Dean Baker, who is the co-director of the Center for Economic and Policy Research, and one of the economists who believes that the nation may have slipped into a recession in December. He said that if Americans are this worried about the economy, it could cause an even sharper downturn than many economists expect.

"[Consumer] consumption has been what's holding up the economy," Baker said. "I've been surprised by how well it has held up as the housing market plummeted. But it looks like we're coming to the end of that."

Even some economists who don't think economic fundamentals justify the current talk of a recession worry that a change in consumer sentiment by itself could increase the risk of recession.

"If consumers who were only worried [about a recession] actually pull back on their spending reigns, then it becomes a self-fulfilling prophesy," said Rich Yamarone, director of economic research at Argus Research.

Yes, it's called momentum.

And right now "Big Mo" is on the side of a real doozy of a downturn for the economy.

How many times have you heard the phrase "We may not be in a recession, but it sure feels like one" in recent weeks?

How many times has the dour outlook for the economy been the lead story on the evening news so far in 2008?

A lot.

An increasing amount of recession talk from the mainstream media is sure to make things worse than they would otherwise be and you'll probably start hearing complaints like, "The mainstream media is making things worse by talking incessantly about a recession".

All they are really doing is reporting the news - that's their job.

You heard very few complaints about the media when they talked incessantly about how we were all getting rich during the housing boom.

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A possible addition to Greenspan's client list

Caroline Baum's commentary at Bloomberg today is quite amusing. The column is reproduced in its entirety below (emphasis mine):

Greenspan's Client List Needs Someone Like Me

Dear Mr. Greenspan:

I was somewhat surprised to read that you had been hired as an adviser to John Paulson, the hedge fund manager who made a killing last year betting against the mess you made. The irony is really rich: Paying someone whose policy mistakes and missteps were the source of your success! I'm sure it will be a productive working relationship for everyone involved.

What got my wheels turning, though, was re-reading your comments about your ``Rule of One,'' as I call it. You have said that you would consult with only one client in each industry.

So far, your roster includes one bank (Deutsche Bank AG), one bond-fund manager (Pimco), and now one hedge fund. I'm sure there's some overlap in what these firms do, but my intent here isn't to quibble about details.

If I understand you correctly -- you speak much more clearly than you did when you were Fed chairman, now that you're getting paid a bundle per word -- you still have an opening for a media company. So I'd like to propose what I think could be a mutually beneficial relationship between you and, yes, me.

The benefits to you should be immediately apparent.

1. Buying Access
With each announcement of your exclusive consulting relationship with a client, the chatter is that these firms are buying ``access'': access to your institutional knowledge of the Fed; access to your Rolodex; access to any inside information you might get from policy makers in the U.S. and overseas.

The way I see it, it wouldn't be a bad idea for you to buy access -- from me. Lots of politicians see my column; maybe even a few who are running for president. I might be able to put in a good word for you that would give you a shot at Treasury secretary, an opportunity lost when Jimmy Carter defeated Jerry Ford in 1976.

Running the mint isn't nearly as glamorous as controlling the printing press, but at least it keeps you in the public eye (not that you ever left it).

2. Keep Your Friends Close, And Your Enemies Closer
Let's face it: No one has been a bigger thorn in your side than yours truly. I started my journalism career a few months before you landed at the Fed, and we've been joined at the hip ever since.

If I were on your payroll, you can be pretty sure I'd be talking you up rather than putting you down. I mean, it wasn't until Bill Gross hired you that he stopped trashing you. And you didn't even have to pay him to change his tune!

If you put me on retainer, you'll be surprised how easily I can be persuaded to see economic history in a different light.

Remember how you denied there could be a housing bubble, only belatedly acknowledging some ``froth'' in certain local markets? I've already forgotten you said that, along with your lament on how homeowners would have done better with adjustable- rate mortgages.

Or how about that ridiculously low federal funds rate that overstayed its usefulness for years, not months? I think I could make an argument, based on a ``risk-management'' approach, that it was necessary to ward off deflation.

In other words, Mr. Greenspan, money talks -- or in this case, money would encourage me to talk less, if you know what I mean.

3. Playing Cyrano to Your Christian
Just as Christian de Neuvillette used Cyrano de Bergerac's words to woo Roxane, you, sir, could use a bit more dash when it comes to preserving or, at this point, resuscitating your legacy.

No one ever accused me of being dull or uninspired. And I've always had a hankering to play Cyrano, sucker that I am for that swashbuckling, romantic stuff.

``I draw my sword and raise it high.'' ``Let me choose my rhymes.'' ``Then, as I end the refrain, thrust home!'' Oh, it will be grand. Together we can win their hearts!

4. A Better Crystal Ball
This may be a sore subject with you, but your forecasting acumen hasn't been the best. Your visibility on bubbles has been close to zero. You were late to see recession in both 1990 and 2001. Your rationalizations for your forecasts have been pretty lame as well.

Money manager Bill Fleckenstein sets your record straight in a just-published book, which isn't likely to be a coffee-table fixture in your household.

If you saddle up with me, you can get rid of all those arcane manufacturing ratios and obscure indicators you used to pull out of a hat to justify a policy action. You can do better watching two rates -- the overnight rate that the Fed sets and the long-term rate determined by the market -- than you can with the 18,500 indicators you reportedly track in the bathtub.

I'd like to thank you in advance for considering my offer. I'm ready to proceed with negotiations as soon as I hear back from you.

Very truly yours,

Caroline A. Baum

Funny. Has anyone read Fleckenstein's new book yet?

--- BONUS ---

Here's an excerpt from a Q&A session with Greg Ip at the Wall Street Journal from last September around the time that The Maestro's book came out:

Ip: At the Fed you said housing was in a froth, but you avoided calling it a bubble. From the vantage point of 2007, can you say now that it was in a bubble?

Greenspan: Oh yeah. Lots of froths are equal to a bubble… What was driving prices higher was essentially the aftermath of the decline of the Soviet Union and the fall in real long term interest rates which drove up residential prices all over the world.

Individuals whose home purchase decisions in 2005 and 2006 may have been influenced by the constant housing bubble-denials of the former Fed chairman must have been thrilled to hear this.

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A Fed full-court press

Geez, it looks like the Federal Reserve will continue to play some pretty tough defense against the stock market through the rest of the week. It's a virtual full-court press, or so it seems, where they appear to be saying anything and everything short of what equity investors want to hear - that they'll be slashing interest rates soon.

Not that slashing interest rates will help what ails the nation's economy, but, in the short-term it probably couldn't hurt.

Cleveland Fed President Sandra Pianalto led-off earlier today (yes, the sports metaphor just changed) and Fed Chief Ben Bernanke just wrapped up his House testimony with the rest of the line-up as shown below courtesy of Econoday.
Interestingly, loose-cannon William Poole has to wait until everyone goes home for the week before he gets to speak.

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Changing the scale again for new home construction

It's a good thing that Microsoft Excel has a handy feature that automatically changes the scale on charts after you add new data - it's sure coming in handy lately.
Such was the case this morning when the Commerce Department reported a 14.2 percent plunge in housing starts during December and an 8.1 percent drop in permits for new construction. These two important housing statistics are now at 16-year and 14-year lows, respectively.

For all of 2007, housing starts fell 38.2 percent and permits declined 34.4 percent.

Just when you think things can't get any worse for homebuilders, they do.

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The future of Folsom

In Caroline Baum's commentary at Bloomberg this morning, the following observation is offered regarding the outlook for commercial real estate now that we are well into the residential real estate bust.

The even worse news is that commercial real estate, where strong growth has been offsetting the collapse in the housing market, may be the next shoe to drop. The old maxim that retail development follows new housing is about to be tested in a case of new supply meets slack demand.

The Wall Street Journal reported last week that since 2005, ``developers in the U.S. have produced more retail space than office space, rental apartments, warehouse space or any other commercial real estate category.''

Projected retail demand ``will justify only 43 percent of the new space delivered this year and last,'' the Journal said, citing market-research firm Property & Portfolio Research Inc.

If lending standards to business were anything like those used to evaluate potential homeowners, there's going to be a lot of empty mall space across the country.

Nowhere is the continuing build-out of retail outlets more apparent than in Folsom, California, a little over an hour north of here, as seen yesterday during a day-long visit to the area. It is a virtual smorgasbord of places to spend money and they all look brand-spanking new.

There appear to be a lot of brand-spanking new houses as well and, if Folsom is anything like the rest of the state, a lot of them are probably looking for buyers.

The Costsco shown below sits atop a hill near the freeway where we exited as if it were a king overseeing all that it rules. To the north is a seemingly endless outdoor mall with well-known retailers in gargantuan sized units and east on the 50 freeway is what looks like a "destination" retail center with a Mercedez dealer and a few hotels to tempt upscale shoppers and provide comfort to those who literally shopped until they dropped, respectively.
Each time we venture toward major population centers here in Northern California we see the same thing - row after row and division after division of recently built homes and even newer retail centers of mind-boggling proportions.

More than anything else in recent years, residential housing and retail spending have made the California economy seem unstoppable. With the former now in clear distress and the latter about to follow, the downward spiral might seem unstoppable too.

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Remember this?

The photo below is from "Home sales, prices are down sharply" in today's LA Times - a reminder of a bygone era when all you had to do in order to get rich in California real estate was to pitch a tent, pick out a house, and sign on the dotted line.

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Inflation rate at highest in 17 years

Poor Ben Bernanke has just about every conceivable economic statistic working against him at the moment as he attempts to engineer a "soft landing" for an economy that continues to reel from seriously ill housing and credit markets, two important areas that just don't seem to want to heal themselves.

While the boys at the Federal Reserve weigh the impact of a possible inter-meeting cut to short-term interest rates and they debate the magnitude of the overall stimulus to be provided before month-end - a half-point cut or, preferably, three-quarters of a point appear to be the only options acceptable to markets - newspaper headlines blare, "Inflation rate at highest in 17 years".
What is really needed here is a good, old fashioned (circa 2006) energy sell-off that would push oil prices back toward $50 a barrel. That development did a fine job of removing inflation as a hot dinner table discussion topic a little over a year ago as gasoline prices plunged (one of the very few easily measurable consumer prices) and American consumers resumed their normal patterns of excessive consumption, a key element of support for the finely tuned U.S. economy.

Come to think of it, maybe that's what the Fed is hoping to instigate as it keeps dragging its feet on lowering rates - that the economic outlook will dim so much that traders, investors, and anyone who has ever considered the purchase of an oil futures contract will figure that nobody's going to want $100 $90 oil if things keep going where they appear to be headed.

Of course, since these sort of trends have a nasty habit of quickly snowballing out of control (which some argue is happening right now), the old axiom of cutting off your nose to spite your face may come into play as well.

While the monthly data was inline with expectations - a 0.3 percent increase for the overall Consumer Price Index and a 0.2 percent increase when food and energy are excluded - each and every year, the December data is special because nearly everyone seems to look at the annual change during this month in an attempt to judge how well the government did in preserving the value of its currency for the year just concluded.

Not too good, apparently.

While the overall rate of 4.1 percent hit a 17 year high, the price increases that really hurt were in food and energy. Lower prices for mini-Cruzers and iPhones did little to help many Americans who continue to struggle with energy costs that rose by 17.4 percent and with food prices that gained 4.9 percent in 2007, the largest increases for both of these important categories since 1990.

Senior citizens are likely none-too-pleased to hear of the 4.1 percent number for overall inflation as it matches up poorly with their cost-of-living increase of about half that amount just a few months ago.

Making ends meet is getting harder.

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They're all double-digit declines now

DataQuick reported on Southern California real estates sales for the month of December and the news wasn't good - it was the slowest December on record, going back 20 years, and prices are now "officially" plunging in Los Angeles County.
Remember how gigantic LA County somehow remained miraculously immune to declining prices up until just a few months ago, posting a new all-time high median sales price of $550,000 as recently as August of 2007?

Angelinos (and a paucity of jumbo loans) have made up for lost time as the median price has fallen 15 percent to $470,000 in just four months.

On a year-over-year basis, all Southern California Counties are now in negative territory by double-digits with Riverside looking like it might force another scale adjustment on the chart below as soon as next month.
Marshall "almost all if not all of those gains are here to stay" Prentice, President of DataQuick, had these comments:

It looks like anybody who can, is waiting this thing out. Which of course means that the activity we are seeing right now is largely stressed and atypical. Today's numbers form a lousy basis for trending and forecasting. We're in the midst of turbulence and we won't know what really has been going on until things have settled down and we can look back.

Oh please, "turbulence"?

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Messed up nation

I don't know. Sometimes I think Jim Kunstler went too far with the name of his blog and other times it seems just about right. Today it's the latter.
CEOs who run their company into the ground and walk away with $100 million and now the Alan Greenspan retirement extravaganza where he's basically giving the entire world the finger as everything comes tumbling down...

If I were twenty years younger, I'd really be pissed.

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A subprime reading on retail sales

The Census Bureau released the December retail sales report a short time ago and it wasn't pretty - down 0.4 percent for the month and up just 4.2 percent for all of 2007.
Consumer prices for December will be reported tomorrow, but, as of last month, the year-over-year rate of inflation was 4.3 percent, meaning that it's quite possible inflation adjusted spending at retailers declined last year even using the government's dubious measure of consumer prices.

A more realistic measure of inflation - somewhere between five and ten percent - would put real retail sales well into negative territory.

Last month was the weakest December reading since 2002 and, while an early Thanksgiving holiday and falling gasoline prices contributed to the decline, it is likely that the softness will continue as the incessant recession talk permeates the airwaves and consumers pull back amid rising credit card delinquencies and falling home prices.

Look at what a boom the housing boom had been for spending at Home Depot and Lowes - that area circled in gray below will forever be known as the "home improvement spending boom", starting back in 2004 when nearly everyone became convinced that home prices went in only one direction.
The case for a consumer-led recession was strengthened somewhat by this latest report on retail spending, however, the American consumer has been counted out many times before and never failed to come through in the end.

Will this be the year that the consumer finally caves?

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Gun the printing presses and hope for the best

It occurred to me after a few minutes of watching Ben Stein on Larry Kudlow's show this afternoon that, unless there is another asset class out there that can be inflated in order to once again temporarily delay the inevitable "easy money sobering up" process that has been due for many years, it is going to be a rather hard slog for the U.S. economy for some time to come.

What's most disturbing about our collective long-term prospects is that all anyone really talks about today is how much and how quickly the Fed needs to cut interest rates, how much and how soon fiscal stimulus should be applied, and whether we'll avoid a recession completely or just have a mild one as we've been trained to expect.

Aside from Ron Paul and what the mainstream media characterize as a quixotic bid for the presidency, you hear very little about the fundamental problems of our current monetary system and what appears to be the end of an era of financial bubbles where, time and time again, millions of Americans thought they were becoming wealthy as one asset class or another rose faster than the new debt and easy money that fueled its rise.

In its simplest terms, from Wall Street to Washington and on Main Streets all across the country, cries are heard for more easy money to help cushion the blow that was caused by too much easy money.

You'd think that, by now, more smart people would start figuring out that there are serious problems with life as we've known it over the last twenty some years - after all, the real Reagan Revolution was more a story of credit expansion than it was a tale of lower taxes - but hope still springs eternal that some new asset class can be inflated.

Three recent news items help to frame the discussion.

In yesterday's Larry, Curly, Moe, and the Economy piece in the New York Times, Ben Stein likens Ben Bernanke to Moe of The Three Stooges fame for punishing the wrong guy. He seems to think that higher inflation due to rising energy prices is beyond the control of the Federal Reserve so the Fed should slash rates early and often to help right the economic ship as quickly as possible.

"We have a situation that calls for highly stimulative measures from the Federal Reserve. These will involve lowering interest rates charged to the banks for loans, and creating money to improve liquidity," Mr Stein writes. "This might even take the form of legislation allowing the Fed to buy stock in large banks on a temporary basis."

To some, there are apparently no limits to what can be done when a monetary authority can create money and credit with the tap of a computer key. It seems to have worked well since the 1980s - why not assume that we should forever be able to solve problems caused by easy money with more easy money?

In The new bubble-prone economy, Peter Gosselin of the LA Times has a much better sense of what might be going on in the world today but still doesn't quite grasp the magnitude of it all.

He notes "some are beginning to worry about a disturbing possibility: This may not be your traditional downturn. And the tools that helped restore prosperity in the past may prove less effective this time around."

After a series of financial bubbles that began in the mid-1980s with the advent of credit cards for the masses and all sorts of "innovations" on Wall Street that finally led to the explosion of credit over the last half decade, it seems the U.S. economy "has become increasingly prone to financial bubbles -- huge, seemingly irreversible rises in the value of one sort of asset or another, followed by sudden and largely unforeseen plunges."

His thinking?

In the future, bubbles should be identified early on and "pricked" so that the bursting process is either avoided completely or made less painful.

While this revelation will do nothing to help the current situation, it also requires another bubble candidate to be identified in order for the approach to be put into practice. Where might the next financial bubble in the U.S. be found?

Bill Fleckenstein has been a voice of reason for many, many years and is now fresh back from his holiday break at MSN Money, ready for the release of his new book on former Fed Chief Alan Greenspan.

In a column today, he gets quickly to the heart of the current dilemma in We've run out of bubbles, noting, "Booms and busts are natural to capitalism, but for years now an irresponsible Fed has interfered with the down cycle. The only choice now may be to let nature take its course."

But don't we now live in a world of serial financial bubbles? It is as if the citizenry just need to be pointed in the direction of the next bubble and we can all get on with it.

No, says Bill, "I do not believe there is a potential bubble left that could bail us out, nor do I believe a bailout should be attempted. Likewise, I do not believe any quick fix exists. What I do see as the real solution is to let the creative destruction of capitalism finally run its course, after having been held back for a couple of decades."

Alas, this course would seem the wisest of them all - finally stopping the easy money from flowing and stopping the series of financial bubbles in its tracks - but, hasn't harsh medicine like this been tried once before?

About 75 years ago?

More importantly, during an election year will any right-minded politician want to be accused of standing idly by, just watching another financial bubble burst?

There seems to be little hope left but to gun the printing presses once again, let the easy money rain over the country, and hope for the best.

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Last week's gold commentary

Below are excerpts from last week's commentary in the Precious Metals section at the subscription site. After a long weekend involving some major changes to the model portfolio, little motivation can be found at the moment to write for the blog, however, that will change soon enough.

It looks like we are now a few dollars clear of the $900 level that, just six months ago, would have seemed pretty preposterous - what you see below was written two days ago on Saturday.

There were new all-time highs for gold last week as the heavily traded February futures contract saw prices go as high as $900.10 before ending the week slightly lower. The spot price reached a new inter-day high of $898. The 15-month long price weakness in the yellow metal, after making highs near $725 in the spring of 2006, now seem like an ancient memory as more and more analysts talk about $1,000 gold, at which point the nascent gold fever may really begin to catch on with retail investors.

The usual reasons are being offered for the recent strength in the gold price and, while some are starting to talk about a "gold bubble" and Dennis Gartman announced that he was selling half his gold position, I don't think there is any reason to even think about selling anything unless you are a much better trader than I have ever been. Mr. Gartman's reasoning is that there is likely to be a major correction down toward $800 before prices go appreciably higher and he remains very bullish in the longer-term.

It's hard to argue with that thinking, however, I wouldn't count on a correction.

As mentioned in this section late last year (see Volume II, Issue 49) and as shown in the chart below, there is a precedent for the sort of movement that we are now seeing where a big price move follows another big price move after a period of a few months of consolidation.

This is one of the reasons why I continue to advocate taking initial positions at any time and then either averaging in over time or buying on weakness - you don't want to be completely left behind, but at the same time you don't want to be stuck with a losing position for 15 months (as was the case between May of 2006 and August of 2007) because many investors simply can't deal with holding onto a losing position for that period of time, opting instead to exit positions at a loss.

Silver too has posted strong gains in recent weeks, rising 10 percent as compared to just six percent for gold. As discussed previously (see Volume II, Issue 52), in conjunction with the sale of equity positions in the model portfolio this week ...

To read the rest of this commentary and/or to visit the links above, you may sign up for a no obligation, FREE 30-DAY TRIAL.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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Yeah, more gold than China

The latest development in the reporting on the enormous (and still rapidly growing) gold holdings of the streetTRACKS Gold Shares ETF (NYSE:GLD) comes from John Spence at MarketWatch with this story.

Surging gold prices and ravenous investor demand have unleashed massive inflows at ETFs such as StreetTracks, whose booming holdings now surpass those owned by China and other sovereign nations. The stunning rally in precious metals appears to know no boundaries as gold futures continued an inexorable rise, with prices touching the vaunted mark of $900 an ounce on Friday for the first time.
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Indeed, the total amount of gold held in the StreetTracks trust stood this week at 642 metric tons, according to the fund. (One metric ton is equivalent to 1,000 kilograms or about 2,205 pounds.) That's more than the gold reserves held by many national governments, including China, Russia, the European Central Bank and the Netherlands, according to data compiled by the World Gold Council, the trade group that sponsors StreetTracks Gold Shares.

To put that figure into perspective, about 3,400 metric tons of gold is sold each year for commercial production, mostly jewelry, and industrial uses.

As opposed to last week's Wall Street Journal story, at least The Netherlands (is the "The" really necessary) got a mention.

And, by the way, it's much more fun to cross off the countries each time they fall down a position in the rankings, something that has been done here for some time now. The gold ETF has added 13 tonnes in just the last few weeks but it won't be updated here at least until it gets a little closer to Japan.

Full Disclosure: Long GLD at time of writing.

To learn more about investing in natural resources using commonly traded ETFs, stocks, and mutual funds, see this description at Iacono Research. Or, sign up for a free trial.

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A 92-year old finger pointed squarely at the Fed

Geez, the next thing you know, Milton Friedman is going to rise from the grave to condemn former Fed Chairman Alan Greenspan. In this report from the Telegraph U.K., Ambrose Evans Pritchards explains:

As rebukes go in the close-knit world of central banking, few hurt as much as the scathing indictment of US Federal Reserve policy by Professor Anna Schwartz.

The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.

"They need to speak frankly to the market and acknowledge how bad the problems are, and acknowledge their own failures in letting this happen. This is what is needed to restore confidence," she told The Sunday Telegraph. "There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for," she says.
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According to Schwartz the original sin of the Bernanke-Greenspan Fed was to hold rates at 1 per cent from 2003 to June 2004, long after the dotcom bubble was over. "It is clear that monetary policy was too accommodative. Rates of 1 per cent were bound to encourage all kinds of risky behaviour," says Schwartz.

She is scornful of Greenspan's campaign to clear his name by blaming the bubble on an Asian saving glut, which purportedly created stimulus beyond the control of the Fed by driving down global bond rates. "This attempt to exculpate himself is not convincing. The Fed failed to confront something that was evident. It can't be blamed on global events," she says.

"We were powerless ... powerless I tell you, in the face of a savings glut as millions and millions of low cost laborers entered the work force after the fall of Communism".

ooo

This week's cartoon from The Economist:

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