QE 3: Gold Bugs, Stockholders Celebrate While American Workers Starve

Joe, a retired, Kingston, NY commodities trader and Brooklyn College alum, is a drinking buddy. He predicted $1750 gold on Labor Day while he, Mike and Mark Marnell, a left wing attorney, and I were imbibing a 1.75 liter bottle of four-year-old single malt scotch called McClelland's.  I picked it up at JK's Wine and Liquor in the Kingston Plaza mall. For only $43 for a jumbo bottle, McClelland's is a good buy.

On that fateful Labor Day Joe predicted $1750 gold this month.  It just about hit $1750 the other day, but today it soared to a bid of $1769 (at 2:26 P.M.).  The reason is the Fed's announcement of quantitative easing.  My brokerage accounts, because of the recent moves in the general stock market coupled with the recovery in metals prices and real estate,  are at or near all-time highs.  According to Kitco: " Spot gold was last quoted up $37.50 an ounce at $1,769.50.  December Comex silver last traded up $1.298 at $34.60 an ounce."  The stock market is also buoyant: The Dow is up 224 points, or 1.68 percent, and the S&P 500 is up 1.76% at 1461.

Quantitative easing or QE3 is one more round of money printing. Monetary expansion boosts the stock market because increasing the quantity of money reduces the price of money, the interest rate. A lower interest rate increases the discounted future value of profits. That increases the stock market because stock prices discount future earnings. It is a mechanical relationship.  As a result, the Fed has played the Nixon card with Obama: in 1972 Nixon encouraged then-Fed Chairman Arthur Burns to ease so that the stock market would go up; now, Ben Bernanke's Fed is easing and Obama will win the election. Likewise, the Europeans are accommodating Obama.  A recent German court decision held that Germany can participate in a bailout of profligate Greece and other southern rim nations. Hardworking Germans can now sacrifice their savings to fund pensions of Greek public sector retirees who have produced little and demand much.

Joe does not have much faith in the stock market.  He is right in a fundamental sense: there is no reason to have faith in the structural reality of the underlying economy. The excesses of the Clinton and Bush years are still around, and Obama has done nothing to correct them.  Americans, for an unfathomable reason, tend to reelect presidents when the stock market is high. The monetary expansion that increases the stock market harms most of them; in other words, most Americans vote for politicians who directly harm them.

The reason is that the monetary expansion that boosts the stock market devalues wages.  As the money supply has expanded since the Reagan and Clinton years, the link between real wages and productivity has been eliminated for the first 40-year period in American history.  American workers are no better off today than they were in the early 1970s, but stockholders are much better off. In other words, the income inequality that liberals grieve over is directly due to the policies of Paul Krugman, Woodrow Wilson, Franklin Roosevelt, Richard Nixon, Ronald Reagan, Bill Clinton, George Bush, and Barack Obama. Obama has done nothing to clean up this mess.  Historically, he has contributed more to it than anyone else.

The stock market may continue up through the fall and possibly into 2013.  Eventually monetary bubbles implode as bondholders realize that their bonds are going to become worthless.  As real interest rates start to rise, Fed policy becomes irrelevant.  If the Fed continues to print money thereafter, there will be a monetary collapse.  Otherwise, there will be rising interest rates and stagflation as the expansion of the monetary base is transformed into cash money.

If real interest rates start to rise, the stock market will not do well, but commodities will because of the inflation.  If the dollar remains stable, the increasing money supply will continue to boost the stock market. 

I am easing out of the stock market.  I had sold the stocks in my pension fund (I still have real estate), which were about five percent of my total stock holdings.  I have low-beta (low-risk, high dividend) stocks like Philip Morris, Kimberly Clark, and Heniz in one brokerage account, and higher risk stocks in the other. I will sell the higher-risk stocks over the coming months, except for the gold mine stocks.  I hold both the gold index and the Van Eck juniors index.  I would like to be able to pick gold mining stocks, but I lack the expertise.

The stock market is likely to continue up into the coming year; thereafter, all bets are off.  If you look at a picture of the S&P 500 since 1950 there are two massive peaks in 2000 and 2007; we are approaching the height of those two peaks now.  Because of the massive monetary stimulus, the peak could get higher in nominal terms.  As the monetary expansion translates into a depreciating dollar the reverse can and will occur.

   

Stock Market Spells Boomer Trouble

A double top is a bearish signal. The above is the 23-year S&P 500 chart.

 

I am not a technical analyst. In fact, I do not know the first thing about it. But I do know that a double top spells trouble.  The above chart looks suspiciously like a double top. There is a struggle for a triple top, but if you've been following the stock market over the past six weeks, the Democratic stock market of '08-'11 seems to have followed the same pattern of the Democratic stock market of 1932-40: Keynesian policies and more government regulation have done nothing.  Like many stripes of ideologue, Keynesian economists say that their ideas are right, but reality is wrong. They say that nearly a trillion dollars in borrowed money is insufficient.  If Keynesian economists were physicians they would be in jail.

Keynesian economists do not mind their failure because they have tenured jobs in universities and so do not suffer from their own incompetent economic advice, which is helpful to big bankers and the Ochs Sulzbergers, the owners of The New York Times, but harmful to the average American.


I was just reading Murray N. Rothbard's Case Against the Fed.  The book was written in 1994, and Rothbard mentions (p. 23) Milton Friedman's use of the "helicopter" metaphor for printing money. Thus, "Helicopter Ben" simply talks as a good Friedmanite monetarist. Rothbard writes:

Milton Friedman's more modern though equally magical version is that of his 'helicopter effect,' in which he postulates that the annual increase of money created by the Federal Reserve is showered on each person proportionately to his current money stock by magical governmental helicopters.

The helicopter analogy is superstition. There is no uniform distribution of printed money.  The printed money is handed to hedge fund managers and Wall Street stock jobbers. The distribution of wealth, according to policies of both the Democrats (Paul Krugman) and Republicans (Milton Friedman, Ben Bernanke) is to print money, give it to banks, who give it to Wall Street and the Ochs Sulzbergers, and to Princeton's endowment.

That said, until now I have been optimistic about the stock market because new money boosts it. That is the only reason for long run secular stock market increases (and flattening real hourly wages) that we have seen since 1932 (in the case of wages, 1970). But eventually the inflation from the money printing awakens the public to their having been made poorer by the money printing's not having been distributed by a helicopter but by money center banks who have given it to wealthy Wall Street, real estate and corporate interests and stockholders.

A double top might be signaling that the market expects an inflation. That would force the Fed into tightening, with a resulting stock market collapse. The stagflation of the 1970s required a massive downturn, somewhat larger than the '08-'09 one in terms of unemployment and with much higher inflation. This time, though, after eight decades of economic mismanagement by Washington, by the followers of Keynes and Friedman, the downturn may be worse than the 1970s. 

The downturn will be enhanced by the medical system's failure. This will occur on two fronts. First, medical innovation has faltered because of misallocation of investment. Large pharmaceutical firms invest in drugs that have short run return, such as anti-erectile dysfunction drugs. New antibiotics are more difficult. Innovative scientists have much more trouble obtaining capital under Progressivism than under a free market system. Thus, innovation in new directions is squashed by the current monetary system and by Keynesian and monetarist monetary polices and by taxes and regulation.  The result is that the past 80 years' vacation from the worst results of infection is coming to an end. Thanks to Democrats and Republicans, thanks to Progressivism and big government, no innovation with respect to anti-infection drugs is on the near term horizon.  I hope you enjoyed voting for Democrats and Republicans because having done so will help cause you to die.  The baby boomers are the first American generation not to be wealthier than their parents. They will also be the first generation to die younger than their parents.

Second, the medical system has become mismanaged due to government intervention, which has accelerated since 1965.  The result is a system that rewards waste.  Additional federal intervention in the micro-management of hospitals and physicians' practices will add to the waste. 

The situation is as bad with respect to retirement. The boomers have not saved because of the federal income tax, high state property taxes, inflation, especially in areas like education and health care, and low wages.  Wages have been artificially low for the past 40 years because of the money printing in which both parties have engaged. The claim that deficit spending stimulates the economy has turned out to be pap. There has been deficit spending for the past 80 years, and the economy is crap.  The economics profession, a pack of frauds, and both parties are to blame.

Prior to the abolition of the gold standard real hourly wages went up two percent per year. Since 1970 they have not gone up.  But Wall Street has grown exponentially.  New York was a manufacturing center until the 1960s. After the abolition of the gold standard in 1970 it became, over 20 years or so, a playground for the super-rich.

So the stock market now shows a double top and the massive monetary expansion which monetarist Bernanke and his Keynesian colleagues believe will provide new antibiotics and an innovative economy has failed. The gold market has reacted predictably.  Gold has gone up six-fold in the past 11 years. Silver has gone up more than 10-fold.  They are not cheap and seem to be at a rational price given what has been done so far. There is a risk of a commodity market collapse, but there is also a risk of a dollar collapse. Take your pick.  Not that I am an advocate of increasing the stock market. The stock market is a measure of profitability, not of human welfare. Firms can be profitable for good reasons, such as innovation, but such reasons are fleeting in a free economy.  In general, the stock market goes up because of monetary inflation, that is, money printing.

How can boomers think about retirement when the Democratic and Republican Parties have screwed them financially? Putting your money into risky gold and silver or risky dollar equivalents is hardly an encouraging prospect. The stock market may not do much and may collapse altogether. Thanks to monetarists and Keynesians, the dollar is crap.   I hope you've enjoyed the Department of Education and the sub-prime mortgages, because they are ruining your life financially.