The stimulus ship sets sail

The pressure is building on central banks worldwide to do the one thing they think works: print money. Expect to see QE3 bond-buying from the Fed, and similar moves in Europe, very soon.

By Bill_Fleckenstein Jun 8, 2012 2:29PM

By now everyone reading this knows that this week's nonfarm payroll report was a huge bust, with just 69,000 jobs created, versus expectations of 150,000. In addition, the report's innards were all weak. That extended the string of weak data that we have been seeing, and there is more to come.

 

As I have been saying for some time now, the seasonal adjustments didn't adequately capture the warm weather this winter, and therefore made the data appear better than they actually were. (There's no point in going into a lot of detail here, as I went on an extended rant on this topic, and others closely related to it, about a month ago in "Investors, it's time to face the truth.")

 

Caught red-handed

 

So many people have so little understanding of the economy, and even less so of this post-bubble period, that expectations of economic strength have gotten way out of hand, including those regarding what the Fed might do, and what that would mean to the dollar and everything else. Now, in the wake of the payroll report, positions have to change in many markets.

 

To complicate matters, China is slowing rather rapidly. When you add that to the slowdown in Europe and the U.S., as well as knock-on effects and a dash of financial crises, one of investors' first kneejerk reactions is to buy bonds. And in fact, increased demand saw our 10-year bond trade a week ago to a yield of around 1.45%.

 

When you consider that at the height of the financial crisis in 2008, the rate touched only 2.1%, you can see that such a low yield is complete lunacy. Still, I don't want to be short bonds until I see what the bond market looks like after Europe weakens and people realize how weak our economy is as well. I never dreamed that bonds could get to this level, but once they get stupid, they can pretty much trade anywhere, as we have seen in so many other markets.

 

The dog days of reckoning

 

Turning to the money-printing department, here's where we stand so far this week: The likely easers, namely the European Central Bank and the Bank of England, chose to do nothing. Australia, which is actually doing relatively well, cut rates two days ago. On Wednesday night, the People's Bank of China cut rates for the first time since 2008. That move was not really a surprise, but it nonetheless revealed a change in character.

 

As for the masters of the world's greatest money-printing machine (i.e., the U.S. Federal Reserve, although the ECB is no slouch in this department despite all its tough talk), we now have several signs of more printing ahead. There's a Jon Hilsenrath Wall Street Journal story from Wednesday; Fed vice chair Janet Yellen's dovish remarks to the Boston Economic Club Wednesday night; and Fed chairman Ben Bernanke's Congressional testimony Thursday, in which he basically said Fed governors would be discussing the next round of quantitative easing (i.e., QE3) at the upcoming meeting of the Federal Open Market Committee -- although no decision on that has been made, including what form it might take.

 

Obviously, the ECB needs to do more. Anyone who has paid any attention understands that there are bank runs as well as illiquidity and insolvency issues in the European banking system, with Spain being the country people are most focused on at the moment. And of course, governments there are swimming in debt, and folks actually care about that. (I make that distinction because Japan, the United Kimgdom and the United States are all awash in debt as well, but for the moment, the world is not upset about those countries' debt levels.)

 

In any case, I believe that before June is over, the ECB will have found a way to come up with more stimulus, the Fed will begin QE3, and I would imagine the Bank of England will find some way to get into the mix as well.

 

If so, I would expect the usual kneejerk reactions in various markets, with stocks moving up, and I will be particularly interested to see if bonds finally start to show some post-stimulus weakness. If we don't get said stimulus, equity markets here and in Europe will have a heart attack, and then we will soon get some emergency stimulus. Given how the world's central bankers play the game, as long as they are allowed to use the printing press, I just don't see that there is any reason to believe that they will stop.

 

Return on investment beats the return on ignorance

 

Turning to my favorite money-printing antidote, gold, I would like to discuss a related topic, namely mining shares. It has become the object of almost weekly scorn in most major newspapers, particularly The Wall Street Journal, which of course was so bullish during the stock bubble of the late 1990s that it referred to the "New Economy" as a proper noun. Recently one of its (presumably young) authors, Liam Denning, has written a couple of negative articles on miners, and one of his favorite themes (as outlined in his latest article) appears to be that the big miners have "outspent their cash flow over the past decade in efforts to expand." That leads him to conclude that it makes perfect sense that the miners "all lag behind the gold price in that period."

 

This just goes to show you how little anyone has to know to be a financial writer. In the early parts of that period, there wasn't much cash flow, since companies were losing money. As prices rose, miners decided to increase production and, in the case of Goldcorp (GG) (one of the companies he notes, whose stock I own), its production will have doubled in the next couple of years. It takes a lot of money (and time) to bring on so many mines, which then have long lives. The litmus test is therefore not taking some arbitrary period and measuring cash flow during that time. It is to evaluate whether the cash will have been spent wisely in the coming years as production doubles (in the case of Goldcorp). It may turn out that the money was spent incredibly wisely or not. We will have to see.

 

That is not to say that mining companies have not made mistakes. A lot of them have made plenty. But if you are going to write an article, it might be worthwhile to get the facts right. The slipshod manner in which all things negative seem to be passed off as knowledge in the metals sector reminds me, on the flipside, of how all things were spun positively for stocks during the tech bubble, and for real estate during its bubble. Sloppy journalism oftentimes equates with the mood of the day, even though it is usually wrong.

 

At the time of publication, Bill Fleckenstein owned gold and stock in the following copmpany: Goldcorp.
124Comments
Jun 11, 2012 9:19AM
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Do you know how many $50K per year private sector jobs it takes to fund ONE $50K per year Gov't job? Over 40. It takes an average of 42 private sector workers making $50K per year to keep ONE gov't employee working for the same amount. 

The Gov't. both Federal and States, need to be slashed to a fraction of the their current levels. 
Jun 11, 2012 11:24AM
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Many of the jobs lost were in manufacturing and they are not coming back as long as it is less expensive to produce overseas. Maybe I am missing something but it seems obvious that the greater our national debt becomes the higher our taxes we have to be to cover the interest and the end result is manufacturing in the US becomes even more expensive. Slash spending, start paying down our debt and jobs will eventually return.

The USA is still the largest economy in the world but our government is not acting in the best interest of the country. We need a financially sound long term plan and all we get are under qualified politicians who do only what is best for their fellow political hacks. To bad we couldn't put something into our laws that would automatically eliminate the free health care and large retirement plans our elected politicians receive if they failed to produce a balanced budget. Anybody doubt they would suddenly find a way to get it done?

Jun 11, 2012 11:11AM
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Instead of printing more free money, how about Europe, Japan, and the USA instead start actually reducing national debt by spending MUCH less? 
Jun 11, 2012 11:49AM
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Gov't does not create REAL, sustainable demand. They threw trillions at the economy and it responded with a whimper. Gov't does not create anything without first taking it away from someone else. It's like taking water from the deep end of the pool and pouring into the shallow end and expecting the water level to rise.  
Jun 9, 2012 5:07AM
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 It's simple. STOP PRINTING FUNNY MONEY. Ben stated "it's time for Congress to do something". Well thats what should have been happening all along!! Time to fire all the idiots on the hill. Abolish the rouge bank called "The Federal Reserve" Get away from global banks like the IMF and take care of our OWN problems in this country. No more limitless budgets for wars. No more limitless pensions for former presidents. Take REAL inventory of our country's finances. Solve the problem. Stop playing with our future.
Jun 9, 2012 1:39PM
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STOP QE3!  Stop giving the money to the banks to sit on or buying bonds.  Instead, take that money and divide it up among every single working taxpayer.  And don't give us a meager $600.  Divide the 400 billion or whatever it is by the 160 million working people or recently unemployed.  Works out to be about $3750 each.   We will spend it on downpayments, cars, food for our families etc.  It's called trickle up economics and it will work better than letting the money that you were going to spend anyway sit in a vault.
Jun 11, 2012 10:48AM
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All you have to do is look at how little the GSA employees do in their government jobs by wathcing the videos they created while being paid with tax money in which they make fun of getting paid for doing basically little to nothing!!! IT goes on in all the agencies!! THe amount of money our government wastes is staggering becuase their is no reason for agencies to become more efficient. So, they spend everything allocated to them and put in bidget requests to hire and hire and spend more and more. IT's the exact opposite of a the normal business mantra in the real private business world. IT's really insane that we have allowed it to go on.
Jun 11, 2012 10:11AM
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I just contacted my bank and want to find out how to get a Stimulus loan form !! I just want to help fix the economy by going to best buy and purchase a couple of big screen TVs and head over to GM and pick up one of them fancy new Volts and finally get some Solar Panels and cut my power bill down and you know keep it green I can also Throw in a vasectomy for myself to help keep the Population down and stop using those job killing ATMs and see a teller at the bank so the Unemployment rate will go down and yes I have no Assets,upside down on my Mortgage,But I will give you my personal word and the full faith of my word. Signed, Mickey Mouse 
Jun 10, 2012 10:30PM
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So here come QE3. What is the definition of insanity? Doing the same thing over and over and expecting different results!
Jun 11, 2012 11:26AM
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The Stimulus Ship has set sail? That ship set sail before its cargo was loaded and the ships name is The Great Ripoff.
Jun 11, 2012 9:01AM
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"So many people have so little understanding of the economy, and even less so of this post-bubble period, that expectations of economic strength have gotten way out of hand,"

 

You are sooo correct.  I teach high school seniors and you will not believe the number of times my students tell me thier parents say the government can print money if they really want us out of this mess.  Sadly, most college majors only require a basic economics course.

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Reason #17,000,000,000 why we need to completely remove the entire federal government through a 35+ govenor vote of "NO CONFIDENCE"!
Jun 11, 2012 9:02AM
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What's the name of this stimulus ship? The LOOP M? Live Off Other People's Money? Money should be earned and not devalued by over printing. The ship of fools sets sail again to destroy the financial world. The easy way out will not have a happy sinking for the ship of fools skippered by idiots.
Jun 11, 2012 10:38AM
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The problem is not that "...only 69,000 jobs were created versus expectations of 150,000". The real problem is that we can only expect 150,000! We NEED at least twice that to sustain even a modest recovery. 150,000 doesn't even keep up with population growth. 69,000 is simply pathetic and unacceptable. Even if the 4 million jobs created is accurate (it likely isn't) it represents about $200,000 per job for the $800 billion stimulus alone. Our elected leaders on BOTH SIDES are playing economic russian roulette in a competition for our votes. Stimulus pending has been a failure. Cutting taxes is nearly as absurd as raising them. Sadly nobody seems to have the answer though there is no shortage of people claiming the opposite.
Jun 9, 2012 12:54AM
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What a great idea. Print more play money for the players to play with. Oh yeah, and we get to pay for it.
Jun 11, 2012 12:13PM
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American is engine of the world economy, and Obama and his agenda is holding America back!!!!
Jun 11, 2012 2:02PM
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You can never spend your way to prosperity. If you don't believe me, try it with your own budget. All you do is go belly up.

Balance the federal budget. All a QE does is allow the big investers to feed.

Jun 11, 2012 11:51AM
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The BIGGEST problem with the economy is the fact that every day people do not know the half of what is going on the worlds economy. maybe a certain percentage of people know but the majority think "build in america, drill in america, buy american" all good things by all means but its going to take a whole lot more to get this economy back on track. The world economy is so tied together that if our economy was strong, but Chinas and Europes economy became horrible, as they are now, it will drag ours down as well.

Jun 11, 2012 8:22AM
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But no worries!
"The private sector's doing just fine"
Epic Ignorance..................................
Jun 9, 2012 1:12PM
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They are all on the take ......VOTE THEM ALL OUT!
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ABOUT BILL FLECKENSTEIN

Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.

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