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 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.")
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.
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?
while i am sure Bill is a very smart guy and knows economics it would be nice if he could just once say anything other than the glass is 3/4 empty (not just 1/2 empty) perpetual pesimism is easy to spew but balance and true insight is wisdom
Nothing against the one writing this article, but sometimes when your trying to solve a problem, its better to concentrate on one problem at a time, when you throw in ten more problems into it it could become confusing!
the main problem is the unemployment! jobs for people to be able to earn a living!
when a crisis gets to the point of causing everything to cra**** time to fix the problem.
LEAVE THE TAX CUTS IN PLACE FOR ANOTHER YEAR OR TWO do not cut spending as much as planned this next year, only cut spending a little, and try to eliminate waste, then require everyone to pay cash money on the budget deficit, millionaires, banks, oil companies, insurance companies drug companies, etc, everyone on a sliding scale, to raise two trillion dollars, really fast, and pay the budget deficit off in full, use the money left over, to do infrastructure, in the country, then pay all the unemployed around 17 million of them 600.00 dollars per week tax free for two years, and let them find work, but tax the work they find, then take 28% from the top of the 600.00 dollars, and give that to the states every week for two years, this will stabilize the states, and create jobs, and bring in tax revenues, cut these 17 million off of any subsidies for two years, do this even if the debt ceiling needs to be raised to do it the economy will take off like a rocket, the debt will come down, because of the millions of people working, and paying taxes, the country will save on everything, food stamps, etc. and lower crime, it would help to fund medicare, and SS, the soldiers returning could all find work, the ones paying the cash could get tax breaks to get a lot of their money back but they should be proud to refuse those tax cuts, as part of doing their patriotic duty, they would not suffer any hardship for doing it, [example if a millionaire paid fifty thousand dollars, or a billionaire paid a million dollars, a bank, , the country is facing a crisis the congress, and the President should do this and worry about elections later!!! It would probably help the real estate markets to, I know small business would recover, manufacturing would go through the roof, what are we waiting for we have the means to fix this problem overnight???
Right Lend Spain $125,000,000,000.00 when they cant pay for anything. Does that make you feel all warm inside? Hey just like the U.S. now borrow more money so we can spend more
obame and the lib dems must go NOW
"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.
So Bill. Does this mean hyperinflation. Again. Oh wait. I missed it last time.
By the end of this year, with 5.5 trillion in deficit spending in the past 4 years, and QE1 and QE2, it all adds up to over 8 trillion in 4 years, and here comes QE3. Thats why I am voting for Obama. He is bringing down the federal gov't faster and with a more sure result than the people could ever hope to do thru war or elections. We all live in 50 sovern States, we will be just fine once we no longer are forced to fund that self-serving, corrupt thing back in DC. End the Fed banks and govt. Vote Obama. Course, they could get ugly wanting our wealth (personal and State) towards the end when it comes, so you may also still want to be prepared for it. But whether you prepare for it or not, it's still comming, one way or another, they simply can't stop the problem much less fix it.
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ABOUT BILL FLECKENSTEIN
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.
[BRIEFING.COM] Equities ended on their lows with the S&P 500 down 1.4%.
The S&P entered today's session with a week-to-date gain of 1.5% as investors expected reassuring words from today's Federal Open Market Committee Statement.
Stocks traded with slim losses until this afternoon's FOMC Statement and subsequent comments from Chairman Bernanke sent equities and Treasuries to their lows while also providing a significant boost to the dollar.
Today's Statement was ... More
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