Banking on Bernanke and bubble magic?

Publicly available data concerning companies and macro-economic information counters Bernake's Photo: Ben Bernanke

NEW YORK, March 11, 2013- Smart people sometimes say the stupidest things.

On February 26, 2013, Chairman Ben Bernanke testified before the Senate Banking Committee: “there is no equity bubble”.

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Call me crazy, but did Muhammad Saeed al-Sahhaf, the infamous “Baghdad Bob” steal Chairman Bernanke’s identity?

No doubt, Chairman Bernanke has access to data I will never see.

That said, publicly available data concerning companies and macro-economic information his own institution regularly publishes online crushes his brazen, erroneous testimony.

Pick almost any large capitalization company you want.

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Take a close look at important measures such as recurring net income available for common shareholders and “free cash flow” —you will see that the common equity shares of many household names are valued at stratospheric multiples.

If you do not get the picture clearly, you are not doing the kind of homework expert professional investors used to perform as a matter of course. Some of these “pros” and too many of the untrained, wider public are, in my opinion, being led like pigs to slaughter.

Since 1981. the Federal Reserve System has managed benchmark interest rates downward from annual average peak levels on the 10 Year Treasury Note of 13.92% set in 1981 to the 2012 average of 1.80%. This cold, hard fact does prop up the value, expressed in nominal terms, of most traditional assets (real estate, bonds, and equities to pick just three important groups).

One reason the Fed has been able to do so is that qualified financial institutions can capture a spread between the low overnight borrowing rate and the suppressed 10 Year Note yield. If these investors “lever up” and remain lucky, they can earn “high” returns, considered in nominal terms, by holding onto leveraged portfolios of U.S. sovereign debt.

Moreover, because so much of the “advanced” world is engaged in destructive, economic malpractice, the Fed and Chairman Bernanke can meanwhile putter and mutter along, hoping the system will eventually invent a solution to a timeless problem. You see, politicians and populists are serial currency debasement artists while educated, global investors are not actually tethered inside one nation to any particular fiat currency.

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The sad truth is that since September 12, 2008, the Fed and the rest of the world have been struggling in financial purgatory, hoping against hope to manufacture heaven and avoid hell.

More than four years later, under a President who neither recognizes basic rules of supply and demand nor respects the enormous power of markets, we do exist in “bubble-land”. Now we must finally face a resolution that was easy to see in 2008 and will, in fact, prove enormously painful for all of us who live in America, Europe, Japan  and other nations that have borrowed too much and wasted too much.

We who should know much better are addicted to too much debt, punishing ourselves by practicing Keynesian “economic futilism”, and waging a war on the youngest members of society in “service” to the supposed interests of our seniors.

What tell-tale signs should Chairman Bernanke be watching?

For starters, the Chairman should steel his ears against the profane language uttered by the colorful comedian cum politician, Beppe Grillo in this prescient tirade that got quite a few things right way back in 1998:

Another thing to watch is the screaming canary in the coal mine that is the traded price of gold. On December 31, 1999 it took just $ 290.20 to purchase an ounce of gold. By September 12, 2008, the cost of one ounce of gold had risen to $ 748.77. On March 11, 2013 the cost of gold had risen to $ 1,578.15  per ounce: 5.4 times the level posted on the fateful end of the last millennium.

Why does the price of gold matter?

Rising economies and new members of the global wealthy class have been signaling for some time that they are past being tired of suffering from debasement in the U.S. dollar, the Euro and the British Pound. 

Sovereign Wealth Funds are likely to get more militant and ultimately embrace alternatives to securities issued by the U.S. and other advanced nations that are denominated in fiat currencies. These entities follow people such as Dylan Grice and others who are gravely alarmed by Central Bank competitive devaluation.

Another threat waits in Russia—a resource rich nation that is charting an increasingly aggressive stance against the United States and our allies.

If Russia were to propose a “prosperity sphere” in the Middle East and in resource rich states previously within and allied to the former Soviet Union, this could have damaging consequences.

Russia might offer military support and suggest establishing a resource-backed regional currency in states that would actually be helped by having a strong currency, because they do not currently produce much in the way of manufactured goods.

In either of the above-mentioned scenarios, investors now trapped in sovereign debt of the U.S., Europe and the U.K. would see a realistic alternative to holding “bubblicious” bonds, backed it would seem solely by empty promises.

In 1992, George Soros broke the Bank of England—will a single investor or some shadowy group soon attempt to break the Fed?

If the financial statements put forth by the Fed truly represent underlying reality, I understand why Fed Chairmen such as Bernanke and Greenspan often sound like the character Chauncey Gardner in the movie starring Peter Sellers Being There. Soft, vague optimistic theories sound much better than the hard economic truths that are too inconvenient for public consumption.

When I look at the most recent “audit” of the Federal Reserve Banks Combined,

I see a “pro forma” financial institution that had $ 53,798 million of stated equity capital and $ 2,918,870 million in total assets—or a 1.84% ratio of equity to assets and that is quite light indeed.

Moreover, I see assets and liabilities that are not marked to market as of December 31, 2011—the most recent available audited date.

I also see a realistic, near-term possibility that nominal interest rates on dollar-denominated 10 Year U.S. Treasury debt will have to rise—after all, in the halcyon Clinton years, these rates averaged 6.16%.

Chairman Bernanke, instead of performing stress tests on beleaguered small firms like Ally Financial, you need a Plan B for the Fed itself.

In a realistic downside scenario I see coming soon, you may have some painful words for Treasury Secretary Jack Lew: “brother can you spare as much as one trillion dollars”.

That will be when you fully appreciate how dangerous this “Year of the Snake” may become.

You have thrown your “sops to Cerberus” and they were not nourishing enough. Stimulus, by the admission of GE Chairman Jeff Immelt and President Obama did not work.


Because stimulus can never work on a state like our Federal Government that is already too bloated and cannot recover any meaningful self-discipline as all available evidence plainly reveals.

Monetary easing also did not work—re-calibrate economic “progress” iin gold or commodity terms since 1999 and you will see clearly enough what I mean.

George Carlin observed in 1998:

“People like to say that no matter how bad off your life is there is always someone worse off thanyou.”

Mr. Chairman, please end the War on Wealth inside America so that we can cease sharing misery. You must know better. A sound dollar, a simplified tax system, and a stream-lined Federal government are the correct path.

Leave bubble-land behind Chairman Bernanke.



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Charles Ortel

Charles Ortel became a lapsed member of the silent majority in August 2007 when he began alerting the public to dangers posed by structural changes in the global economy. Since then, Charles has appeared in the print, radio and television media with increasing frequency. Brass Tacks will attempt to offer non-partisan perspective on factors contributing to the unresolved, burgeoning crisis and discuss potential solutions. Graduated from Horace Mann School, Yale College and Harvard Business School, Charles tries to learn each day.  

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