The S&P500 gained 1.7% last week after quickly brushing off the Dubai debt crisis. The fear (or VIX) index dropped, but did not revert to levels reached before the crisis hit. The Fed induced liquidity rally is continuing to feed on itself, despite the fact that fundamental analysis is pointing to full if not over valued price levels. As long as prices do not collapse, rational trading strategy suggests that you should not sell in anticipation of a reversal; instead, stick with the trend and protect yourself with downside insurance (put options) or tight stop-loss orders.
The economic data were mixed, with several signs that the government’s fiscal and monetary policies are ensuring that the economy maintains a pulse. Chicago PMI was slightly stronger than expected, while ISM Manufacturing was weaker. Chain store sales were weak, throwing into question the ability of the consumer to rebound in the face of double-digit unemployment. Initial jobless claims we slightly better than expected, but this occurred in a holiday shortened week. ISM non-manufacturing (services) came in decidedly worse than forecast; the 48.7 reading implies contraction, when expansion was forecast. The big number, non-farm payrolls, was much better than expected; still November showed that thousands of jobs were lost. The headline (U-3) unemployment rate dipped to 10.0%. But since 100,000 unemployed people left the workforce (presumably because jobs are so hard to find), the unemployment rate can FALL even as jobs are LOST.
Technically, the uptrend in the daily charts is intact. The weekly uptrend is still forming a gradual rolling top pattern. The 1,100 range on the S&P was initially reached in September; today, over two months later, the S&P is still in the same general price range. The monthly, two-year, downtrend is still in effect.
In the fall of 2008, the Treasury Secretary (along with the Chairman of the Federal Reserve) came to Congress to demand that a $700 billion emergency intervention bill (TARP) be passed. They warned that if Congress did not pass such a bill, then the economy would seize up, plunging the country into another depression. Congress passed the emergency bill and Mr. Paulson promptly invested hundreds of billions of dollars into financial entities that he deemed to big to fail.
But the American people understood, roughly, the deal. The government would provide the funds and the Treasury department would invest it with the understanding that it would eventually be paid back. And since the government was already running budget deficits, it was clear that these funds would need to be borrowed (by selling Treasury securities) from domestic and foreign investors.
At the same time, the Fed ballooned its balance sheet from about $800 billion to $2.3 trillion and pumped this money into, well, it’s not quite clear exactly where, but Ben Bernanke insists that wherever the money went, it was money well invested. He refuses to disclose the destination of these funds because, he argues, if the public knew where the money went, it could destabilize the financial system–again.
Setting aside the debate over whether this is a valid and acceptable excuse for opacity, a natural question might be–where did this extra $1.5 trillion come from? Like the TARP, which was openly funded by the taxpayers, was this massive amount of funds also coming out of the taxpayers’ pockets? And if so, why didn’t the taxpayers have a vote–through their representatives–on the matter?
In 2004, in The American Economic Review, Ben Bernanke co-authored a paper on conducting monetary policy when interest rates are near zero. The financial blog ZeroHedge excerpted a revealing snippet from this paper, where Mr. Bernanke talks about the impact of quantitative easing:
“So long as market participants expect a positive short-term interest rate at some date in the future, the existence of government debt implies a current or future tax liability for the public. In expanding its balance sheet by open-market purchases, the central bank replaces public holdings of interest-bearing government debt with non-interest-bearing currency or reserves. If the increase in the monetary base is expected to persist, then the expected interest costs of the government and, hence, the public’s expected tax burden decline. (Effectively, this process replaces a direct tax, say on labor, with the inflation tax.)”
So there you have it. Ben Bernanke admitted that, as an explicit policy, the magical creation of $1.5 trillion of additional dollars will be paid for by all citizens, as an “inflation tax”. But since citizens (though Congress) had absolutely no vote in the passage of this tax burden, it is taxation without representation.
Is it any wonder that Mr. Bernanke is furiously opposed to the Ron Paul bill to audit the Fed? How will the public react when it finally understands that the Fed, without consent, is TAXING every member of this country (who uses the dollar as a store of value) and funneling the proceeds to the elite managers and owners of the global financial institutions?
Here’s one opinion–No, and not well.