Last Wednesday, Federal Reserve Chairman Ben Bernanke delivered his scheduled testimony before Congress, and to my mind a Bloomberg headline reporting the story said it all: "Bernanke says Fed 'prepared to respond' if stimulus needed."
In his prepared remarks, "Helicopter Ben" said: "The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support. . . . The Federal Reserve remains prepared to respond should economic developments indicate that an adjustment of monetary policy would be appropriate."
With friends like these, who needs capitalism?
It's no surprise Bernanke feels that way, but the fact that he believed he needed to say so shows he is feeling pressure over the high unemployment rate (and he didn't want to get pistol-whipped by Congress).
I had thought that at least a decent amount of weakness in the stock market would be required before the Fed would start hinting at QE3, but clearly that is not the case. That doesn't negate the fact that weaker stock prices, combined with the employment data we have seen, would most likely produce QE3 in a heartbeat.
Thus the markets, I am sure, have now concluded (as Bernanke wanted them to) that we are only a few weak data points from more quantitative easing. The bottom line to speculators is that Bernanke has your back in an even more blatant way than then-Fed Chairman Alan Greenspan did during the days of the "Greenspan put."
Bill Fleckenstein
Are we there yet?
On Thursday, however, a morning surge was met with a sell-off that appeared to be precipitated by Bernanke telling the Senate that the Fed wasn't proposing a new round of quantitative easing right now. Thus bulls may have realized that the difference between hinting about QE3 and doing it is more bad news.
It is remarkable how far we have devolved from monetary policy that seemed insane at the time, that being the late 1990s. It shows that, when it comes to central bankers who print money, the rule is Gresham's law on steroids: Not only does bad money drive out good, but bad monetary policy feeds on itself exponentially.
As if to illustrate that latter point, during the Q&A part of his testimony, Bernanke made some remarkable statements about money printing and gold. In particular, he said he views the former as "creating bank reserves" and not conjuring money out of thin air. As for the latter, Rep. Ron Paul, R-Texas, asked him directly, "Do you think gold is money?" to which Bernanke replied, "No."
In case there was any doubt, Bernanke clearly does not understand the difference between an asset (which often isn't a store of value) and a store of value (which is also an asset). But there is a lot he does not understand.
The Lord sayeth: Worry about the elephant
Although Wall Street has trouble focusing on more than one thing at a time, certain people I know outside Wall Street do not. On the subject of the drama playing out in Europe with the PIIGS, for example, recently (a few days before Italy became headline news) my oft-cited friend the Lord of the Dark Matter noted: "I'm done worrying about Greece, Ireland, Portugal and even Spain. It is time to worry about the elephant in the room, Italy."
In addition, he succinctly described the conundrum that is the European monetary union, which I thought I would share because it is so well-stated:
". . . This is no way to run a currency union: what, if any, incentives does any outsider looking at this debacle have to increase their exposure to peripheral EMU credits?
"It is pathetic that EMU has come down to a choice between the ECB continuing to fudge, and the Greek, Irish and Portuguese banking systems falling down, due to ratings applied by one or more foreign ratings agencies that the guardians of EMU still blame for most things that went wrong in 2007 and 2008.
"I cannot imagine the ECB would allow EMU to implode, not after Europe has worked for sixty years to get this far, simply because one or more of S&P, Moody's, Fitch & (ridiculously) DBRS belatedly decide a piece of peripheral confetti is junk.
"Bet on more fudges. In fact, bet on a fudge every time on any decision in which the alternative is losing one or more banking systems. . . .
"I actually sympathise with the ECB in their struggle with the ratings agencies, but they have nobody to blame but themselves.
"Yet as long as the ECB, and others, continue to think you can fix a solvency crisis by applying more liquidity, without doing anything for the actual debtor, then expect this crisis of EMU -- and it is a crisis of EMU, whatever the attempted spin -- to metastasise and become less rather than more manageable."
The same side of 2 coins
I continue to marvel at the illustration of the power of the printing press in the form of the euro. By that I mean Europe's plight stems from the fact that individual countries there don't have their own printing presses. (Its real problems, of course, have to do with having lived beyond its means for so long, as we have.)
The Europeans are broke, and we are broke, though we have different underlying economies. (If we were to face our problems, we would have a better chance of solving them than do some of the PIIGS nations, although I don't know if we have the political will to do it.)
But the European nations would not be in this predicament had they been able to print more euros and kick the can a little farther down the road. I imagine at some point they will figure this out and print money like mad before the euro ultimately is restructured.
Last Monday the Lord of the Dark Matter had this to say about the European monetary union: "How about we cut straight to the chase. If they do NOT soon come up with something along the lines of euro bonds (a euphemism for printing money the way the Fed does), or permanent fiscal transfers, then I don't see how the EMU gets through 2011. It is now that serious."
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.
Sincerely, Robert
