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Once again, it has become fashionable to blame Dr. Ben Bernanke, the Fed Chairman, for pumping too much money into the American Financial System and for creating the danger of future rampant inflation. This criticism is not new. Ben Bernanke has been criticized by the inflation-phobes ever since he became the Fed Chairman in 2006.
Jim Cramer criticized Ben Bernanke in August 2008 for the opposite reason. He blamed Bernanke for not being aggressive enough in cutting interest rates. We thought this was unfair and said so in our article “Jim Cramer on Ben Bernanke – Fair in August 2007 and Unfair in August 2008”.
As we said in that article, “Bernanke has had to face a great force that has driven global financial markets for the past few years, a force greater than the Fed and all the Central Banks in the world put together“. We described that force as “the enormous, gigantic pool of capital that has been given to short-term, performance-oriented investors or commonly called the force of momentum money (Mo-Force in short).”
We described how Mo-Force punished Bernanke every time he lowered interest rates or tried to help America’s financial system, such as arranging the acquisition of Bear Stearns by JP Morgan. As we wrote then, “Mo-Force exploded the price of Oil upwards, shot up the price of Gold, crashed the value of the US Dollar and poured money in to Emerging Markets”. The favorite weapons of Mo- Force are shorting the US Dollar and shorting long-maturity US Treasuries.
2007 & 2008 Redux
The Mo-Force actions are being repeated in 2009. The price of Oil has exploded from $30/barrel to over $65/barrel; the price of Gold has risen and now threatens to get to $1,000; Emerging Markets have exploded upwards to an all time high relative to developed markets.
Like all killer species, Mo-Force gets very aggressive when it smells blood and did they get aggressive in May! The price of Oil rose 29% in May and the broad commodities index rose over 14% in May, its best monthly performance since July 1974. Look at what was done to the assets Mo-Force does not like. The US Dollar was sold off aggressively to the lowest level of 2009 and the long Treasuries were sold violently to the point of creating panic in bond markets.
This is the exactly what Mo-Force achieved during the April-June period in 2007 and 2008. The message to Bernanke Fed was also same as in 2007 and 2008. Stop adding liquidity and stimulus into the American system because that will create Inflation.
Change in China’s Role in 2009
China and Chinese growth have been the altar at which Mo-Force prays. In 2009, China moved from being an idol of Mo-Force to being an active partner of Mo-Force. This year, China has put a great deal of pressure on the American Treasury to stop providing so much stimulus to the American economy. They have demanded that America put the job of fighting future inflation (inflation that has not even been born yet) above the job of resuscitating the American economy.
These are exactly the demands that Mo-Force has made for the past three years. That is why we say that China is now an active partner of Mo-Force and why 80% of large financial institutions or money managers are now Overweight Chinese Stocks.
Impact on America & the American Economy
Just look at the impact of last two weeks. The US Dollar has been sold off to new 2009 lows and US Treasuries have been shorted with abandon, thereby raising market interest rates in America. As of last week, Large Speculators are short 118,273 contracts of the 30-year Treasury Bond and short 179,409 contracts of the 10-Year Treasury (each contract is sized at $100,000). With such massive anti-Treasury positions, you have to wonder whether the Bernanke Fed is beginning to question its decisions to help the American economy.
When market interest rates rise, that rise translates into higher borrowing costs for every American individual and business. This ends up slowing the debt-ridden American economy. If you don’t believe us, look at the what happened to the American economy in the second half of 2007 and 2008 after the steep sell-offs in Treasuries in May-June of 2007 & 2008. It was pretty awful.
We are deeply concerned that the steep rise in market interest rates last month will end up damaging the American economy that is just beginning to stabilize. If you think we are being dramatic, look what happened to the mortgage market last week. The rise in treasury market rates finally forced a violent and steep sell-of in the massive mortgage market thereby raising mortgage rates for every American who wants to buy a home or to refinance an existing mortgage.
So the actions of Mo-Force directly damage the American economy and the financial well-being of all Americans, except of course, the Mo-Force crowd and their media friends.
Impact on American Individual Investors
The impact on markets of Mo-Force actions is so great and the price rise is so dramatic that the average American Individual Investor gets drawn into owning commodities, emerging market stocks and into selling or under-owning bonds. This is what happened in 2007 and in 2008.
Then, by July-August, Mo-Force begins to get out of these trades leaving American Individual Investors holding the bag. Then the prices of commodities and emerging markets fall steeply and interest rates come down sharply. So the average American investor sits with loss-ridden portfolios stuffed with commodity stocks and emerging market stocks. Because of the drop in market interest rates, bonds are no longer an attractive option for them at that time.
This seems to be happening again in 2009. According to a research report last week, American investors have grown increasingly bullish on stocks, especially Emerging Market Stocks, and increasingly bearish on Bonds.
Role of CNBC and CNBC Fast Money
Some anchors at CNBC have begun blaming Ben Bernanke for creating of future inflation just as Mo-Force does. So far, they have done so softly and diffidently.
But not Fast Money, the wild west of CNBC. The Fast Money traders make regular CNBC anchors look like sissies. For the past couple of months, the Fast Money Traders have repeatedly and consistently raised the scepter of future hyperinflation on their show. In addition, they have publicly suggested that
the Bernanke Fed should follow what China does and recommends.
That does not surprise us. Since the inception of the show, CNBC Fast Money Traders have demonstrated their allegiance to Mo-Force by cheerleading the same trades that Mo-Force puts on. They always exhort their viewers to buy the things Mo-Force likes such as Commodities, Oil, Gold and Emerging Markets. They also exhort their viewers to sell or short whatever Mo-Force does not like, such as US Treasuries and the US Dollar.
This would be fine if the Fast Money Trader got their viewers out of these trades before the trades crash. But, as we recall, the Fast Money Traders did not do so in 2007 or in 2008. They left their viewers holding the proverbial bag, in our opinion.
This is why, in 2009, we have asked Fast Money Traders in print to close their recommended trades on their show so that their viewers can get out with a profit.
We believe that today Jim Cramer is as much a fan of Ben Bernanke as we are and that he does not believe in the dire prophecies of inflation that the Fast Money team propounds.
If we are correct in our belief, then Jim Cramer should go on a 2009 version of his “They Know Nothing” rant, but this time against CNBC Fast Money Traders. That would be consistent with his prior actions and it would serve the best interests of CNBC’s viewers.
Is Jim Cramer brave enough to do that?
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China, Mo-Force & CNBC’s Fast Money vs. USA, Bernanke Fed & American Individual Investors
