| December 23, 2014 | Archives | Unsubscribe | | | | |  | | | With A Little Help From Their Friends | | | - Traders on Wall Street get a little help from their friends in Washington…
- New storm clouds over Russia and China leave some of our editors not feeling too good themselves…
- Then, Ralph Benko takes us behind the scenes of a political battle being waged at the Fed...
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| | | | | | | Something I never thought I'd show you…
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December 23, 2014  Dear Reader, The Dow cracked 18,000 for the first time this morning. As of this writing, it's still rising at 18,046. One catalyst? A revision of third-quarter GDP in the U.S., now pegged at 5%. The fastest growth rate since Alan Greenspan had his foot on the pedal in the third quarter of 2003. Round numbers, like 18,000, have a way of getting everyday Americans fired up about the stock market. Wall Street traders' mouths couldn't be watering any more if they were sitting in togas before a fatted goat. The psychological barrier of Dow 18,000 "gives people who have been out of the market since 2009 or have only dabbled around the edges just another reminder that they're missing something," John Canally, an economist with LPL Financial, baited mom and pop investors on CNBC this morning. "Each time you get a round number, it gets a lot of play in the financial media and regular water coolers." "Weehoo!" he forgot to add, revealing deep thoughts about his own Christmas bonus. With a little help from their friends at 20th and Constitution Avenue NW, juicy round numbers on the stock exchange are coming ever more quickly. According to CNBC, the Dow has historically taken on average 32 months to jump from one thousand-point mark to the next. They produced a chart this morning depicting how long, in months, it took the Dow to make each 1,000-point jump:  It has only taken six months for the Dow to jump from 17,000 to 18,000. You'll be forgiven if you've lost track of dates. It has taken less than two years for Dow to jump from 15,000 to 18,000. Caveat emptor, we continue to urge. We include our skepticism over the GDP numbers in that warning. During a live event for Strategic Intelligence readers on Nov. 13, 2014, the GDP in the third quarter was reported to be 3.5%. "Very strong," Jim Rickards commented, knowing as we did that it'd be revised before year-end. "But you have to always go behind the numbers," Jim advised, "and break it down. A big slug of that growth was government spending. A lot of that was military spending": "I hate to be a cynic. It's strong data. There's no denying that. But the government is on a Sept. 30 fiscal year. They're not on a Dec. 31 year like the rest of us. They end their year Sept. 30.
"In government, there's a use-it-or-lose-it mentality. So if you have budget authority, or budget allocation, or a contract, and you don't actually spend the money by Sept. 30, they'll take it away the following year. So you can rest assured that no agency ever gives money back to the Treasury. They always find a way to spend it. So it has the look of something that got goosed a little bit. If you look at the fourth quarter of 2011 and the first quarter of 2012 back to back -- there was a 4.6% growth in the fourth quarter of 2011 with only 2.3% growth in the first quarter of 2012.
"It's more than a little suspicious that the government spending was a big part of it just days before the election. Fundamentally, my outlook hasn't changed at all. We certainly don't see inflation. We certainly don't see increase in labor force participation. And we don't see real wages going up." "Those are the things that are on Janet Yellen's dashboard." More about what's on Yellen's dashboard below… Across the ocean, we see the Russian collapse is already causing losses for U.S. investors. A lot of the Russian debt is buried inside Americans' 401(k)s in the form of emerging-markets funds and ETFs. "We couldn't imagine what's happening in our worst nightmare even a year ago," Sergey Shvetsov, a Russian central banker, tried to apologize to Bloomberg on Monday. "He said the surprise interest rate increase in the middle of the night, a 6.5% move that failed to stem the run on the ruble, was a choice between a 'very bad' option and a 'very, very bad' option." The Russian collapse is going to have implications reaching far into 2015. One PIMCO fund has already blown up. Stay tuned… We've also had a few more dire warnings from the "global power elites." You'll recall through Strategic Intelligence we've been monitoring potential crisis arising from imbalances in the global financial system. | "Offshore lending in U.S. dollars has soared to $9 trillion and poses a growing risk to both emerging markets and the world's financial stability." | "Offshore lending in U.S. dollars has soared to $9 trillion," writes The Telegraph's Ambrose Evans-Pritchard, "and poses a growing risk to both emerging markets and the world's financial stability." The Bank for International Settlements (BIS) is "worried that tightening by the U.S. Federal Reserve will transmit a credit shock through East Asia and the emerging world, both by raising the cost of borrowing and by pushing up the dollar."
In the meantime, the International Monetary Fund (IMF) appears ready to head off global dollar instability by backing the Chinese yuan as an official international reserve currency. Late in 2015, the IMF will review of the basket of currencies its members can count toward their official reserves. Leading up to the review, we expect China will also reveal how much gold they've been accumulating…
Gold as a percentage of official reserves is one of the stipulations the IMF has set for including the yuan in the basket making up their proposed Special Drawing Rights (SDRs). If they have the gold, they can help make the rules. Including China in the mix "would allow the IMF to recognize the ascent of the world's second-biggest economy," Bloomberg reports, "while aiding China's attempts to diminish the dollar's dominance in global trade and finance."
Likewise, if the yuan gained wider reserve status, the dollar would begin to lose some of its own market share. How much gold does China have? How much do they need? These questions will be among the most important asked in 2015.
It will be important for you to pay attention. Once the dollar gains a global rival, its demise becomes a real concern. Inflation will return in earnest.
Paul Volcker, having been the last Fed chairman to battle runaway inflation, warned as much when we interviewed him for I.O.U.S.A. "It's the greatest challenge we face as a democracy," Volcker said. "Can we recognize a crisis in the future and get together to do something about it?"
Happy Holidays!
Addison Wiggin
The Daily Reckoning
p.s. For now, as we've been exploring in these pages, the battle against deflation is the order of the day at the Fed. Below, in today's guest essay, Ralph Benko takes us behind the scenes of the political battle for the control of Fed policy.
[Ed. note: Over the next week, we'll be taking a look at the best -- and worst -- of 2014. Enjoy your holidays. We'll see you again on Jan. 5.] | | | | | | | | | At any moment, the U.S. government could make a critical mistake that sends us into a depression like we've never seen before. We could have only weeks... even days, to prepare. | | | | | | | | The Daily Reckoning Presents... We haven't heard from our friend and Forbes columnist Ralph Benko in a while. Not because he isn't around, but because his beat is politics. Ours is money. Often, the two intersect in mysterious ways. Ralph's been on a campaign to get "left" and 'right" -- a dichotomy he knows we disdain -- to agree on the Brady-Cornyn monetary commission introduced in the 113th Congress, which would effectively bring transparency to the Fed. Mr. Benko is back today… with an update.
****************************** | | | | Secret Battles in the Temple: Yellen vs. Volcker | | | | By Ralph Benko | | |  The financial markets are on a hair trigger as to when, and how quickly, the Fed will tighten and raise interest rates. Billions of dollars will be won or lost by investors on this wager.
For the rest of us, getting it right -- as did Chairman Volcker and (during his first two terms), Greenspan is crucial to the creation of a climate of equitable prosperity in which jobs are created in abundance. 39 million jobs were created during the "Great Moderation." We haven't seen anything remotely like that since.
Getting it right is crucial to economic mobility -- raises, bonuses, and promotions -- to let us workers climb the ladder to decent affluence. Thus, just when to raise rates is much less important than the bedrock issue.
For over a decade now job creation has been poor. Poor, too, has been economic mobility. The left is very much on record as calling for extended ease -- keeping interest rates down. The right has been critical over the Fed's "zero interest rate policy." Yet the real tug of war is over whether the Fed should follow a monetary rule or exercise discretion; and, if a rule is preferable, what rule?
Yellen has been on a campaign to demonstrate her empathy with workers. Less well known: this empathy is shared by many conservatives and libertarians. I, among others, find Yellen's new openness to rank and file workers and activists a refreshing change of tone from that of the formerly hermetically sealed "Temple." There are few matters on which I agree on with Sen. Sherrod Brown. This is one of them. As Sen. Brown told Politico: "I love that Chair Yellen and three Fed governors actually had public meetings," said Sen. Sherrod Brown of Ohio, an outspoken member of the Senate Democrats' liberal wing, commending Yellen and her colleagues for recently meeting with progressive activists. "She wants to set a different tone there where they're listening to the public and listening to people who have lost jobs, listening to people who have seen their life savings evaporate… Yellen's descent from Temple Mount to we plain people of the plane is a notable shift. It well accords, at least in style and possibly in substance, with the new populist spirit abroad in the land. It is imperative, however, that it prove substantive and not merely cosmetic. And substantive means an intellectual openness to a diversity of views.
The right is not the party of Ebenezer Scrooge. The right is all for job creation and a rising tide lifting all boats. Yet Yellen has been connecting, so far exclusively, with the left. In her first year, Yellen visited a trade school and donned a welding mask (a terrific photo op, truly); toured a low income neighborhood before speaking, to wide note, at a Boston Fed conference where she advocated for the social safety net and social services (notably, mysteriously, not speaking about monetary policy); met with President Obama on the eve of the 2014 election; and recently took an unprecedented meeting with what Bloomberg.com called "labor and community organizers."
It is my guess that Janet Yellen reaches out to the social-democratic left because it represents her native intellectual milieu. They speak her language. Many progressives simply find the right foreign, our language alien. (Memo to Yellen: If all I knew about my team was what I read from Paul Krugman I, too, would disdain me. The mainstream media portrayal of the right is a grotesque caricature. We're not the way we are portrayed. We are, however, skeptical of the efficacy of central planning. For good reason. And, Dr. Yellen? America is a center right nation.) | "If all I knew about my team was what I read from Paul Krugman I, too, would disdain me." | Soon we shall stop guessing and find out if Janet Yellen truly is open to hearing a diversity of views … or whether this really is merely a "charm campaign." One of the leading monetary integrity advocacy groups (and the lead gold standard advocacy group) on the center right, American Principles in Action, which I professionally advise, recently hand-delivered to the Fed a request to Madam Yellen that she meet with representatives of the right.
The letter, signed by 20 high profile figures on the right, stated:
This is to endorse the pending request by American Principles in Action's Steve Lonegan for a meeting with you, Vice Chair Fischer, and others of your selection, to gather and exchange views with a delegation of monetary policy thought leaders from the center-right.
The left by no means has a monopoly on concern for unemployment and wage stagnation. To balance a meeting with a group composed of, as described by Bloomberg News, "labor and community organizers" with one of the leading representatives of the center right experts would honor that principle of "a diversity of views". An evenhanded insight on achieving our shared goal of job creation and economic mobility would facilitate steps toward realization of this mutual objective.
The letter is noteworthy and may portend a significant shift in the discourse. The "money quote:" "The left by no means has a monopoly on concern for unemployment and wage stagnation." This is a thematic development that Yellen would do well to encourage. The difference between members of the humanitarian left and humanitarian right is one of means, not ends. | | | | | | |
| What this man has on his finger... ...could soon change your entire life. It could make your Internet run faster. It could help slash your gas and grocery bills. It could soon even protect you from cancer. By our calculations, it could also show you up to 8-to-1 returns on every dollar. | | | | | | | | | All agree that money matters, and that the Fed is the fulcrum of the world's monetary system. The left believes that discretion is the recipe for more equitable prosperity. The right believes that a monetary rule will yield greater equitable prosperity. Both cannot be right. Yet this is, and should be treated as, an empirical, not doctrinal, matter. It is not, at heart, a "left vs. right" issue.
In a way, it's "Yellen vs. Volcker." Contrast a statement by Madam Yellen with one made by former (and iconic author of the Great Moderation) Fed Chairman Paul Volcker, reprised in an earlier column:
Madame Yellen [at hearing of the House Financial Services Committee chaired by Chairman Jeb Hensarling earlier this year] stated that "It would be a grave mistake for the Fed to commit to conduct monetary policy according to a mathematical rule." Contrast Madame Yellen's protest with a recent speech by Paul Volcker in which he forthrightly stated: "By now I think we can agree that the absence of an official, rules-based cooperatively managed, monetary system has not been a great success. In fact, international financial crises seem at least as frequent and more destructive in impeding economic stability and growth. … Not a pretty picture."
Not all rules are mathematical. There may be room for agreement implicit in Yellen's statement.
There is no generic rule. And a bad rule, or a rule badly implemented, could be worse than no rule at all. If a rule is to be preferred, which rule?
There are contending schools of thought. These prominently include the Taylor Rule, NGDP targeting, inflation targeting, commodity price targeting, and the gold standard. Of the latter, Paul Volcker, not himself a proponent of the gold standard, once had this to say in his Foreword to Marjorie Deane and Robert Pringle's The Central Banks (Hamish Hamilton, 1994): | It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. | It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. By and large, if the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with 'free banking.' Which rule would most likely be optimal for fomenting equitable prosperity as well as price stability? Each regime has eloquent advocates. It is, in fact, an open question. Thus the safest path forward out of the uncharted territory in which we find ourselves appears to be the proposed Brady-Cornyn monetary commission introduced in the 113th Congress. It reportedly is certain to be re-introduced in the 114th. The proposed commission, widely praised in the financial media, is designed to be strictly bipartisan and meticulously empirical. It is chartered to make an objective assessment of the real outcomes of the various rules now being propounded. While many commissions are designed to derail an issue, a monetary commission would be very much in order. Monetary policy is intricate and potent, not amenable to political towel-snapping-as-usual. This proposed commission is not in at all inimical to the Fed. The Fed Chair gets an appointment of an ex-officio Commissioner to ensure that the monetary authorities have a dignified voice in the review process. The Treasury Secretary gets to appoint an ex-officio commissioner as well. Politico has termed Yellen's the "Toughest job in Washington." This surely is apt. In taking a step away from her crystal ball and connecting with the rank and file Janet Yellen may have unleashed a healthy dynamic that could prove beneficial to making progress. But only if she listens to all sides. Moreover, the Commission would provide a civil buffer from the sobering reality that, as Politico reported, "Republican leaders and staff said in interviews that they plan to use their new dominance on both sides of Capitol Hill next year to target the Fed for much greater scrutiny, including aggressive hearings…" On the surface it's a tug of war between raising and lowering interest rates. At root, it's an argument about whether the Fed should be following a rule or making one up as it goes along. Regards, Ralph Benko for The Daily Reckoning [Ed. note: A version of Ralph's essay originally appeared on Forbes.com] | | | | | | | | |  Ralph Benko, a member of the bar of the State of New York, Editor of the Lehrman Institute's thegoldstandardnow.org and senior advisor to American Principles in Action. | | | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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