Editor’s Note: In this series of articles, we include important or interesting videoclips with our comments. Our Web Software does not permit embedding of the clips into our articles. So we shall have to be content to include the links to the actual videoclips. We are very happy with the tremendous response from readers to this series of articles. We thank them sincerely and profusely.
This is an article that expresses our personal opinions about comments made on Television and in Print. It is NOT intended to provide any investment advice of any type whatsoever. No one should base any investing decisions or conclusions based on anything written in or inferred from this article. Investing is a serious matter and all investment decisions should only be taken after a detailed discussion with your investment advisor and should be subject to your objectives,suitability requirements and risk tolerances.
Bernanke, America’s Financial President, Declares Currency War on China?
Sometimes we make points that might appear outlandish to some readers and certainly so to CNBC’s Steve Liesman. For example, we wrote a section titled Bernanke for America’s Financial President in our Videoclips article for October 9 – October 15 week. On October 14, Jim Bianco of Bianco Research, had used the phrase “a rumored deal between China and the Fed”. We described this term as insightful in that article. China is a sovereign entity and a “China-Fed” deal seemed to suggest that the Fed is acting as a sovereign entity.
The Bernanke Fed has demonstrated that it is indeed acting like a Sovereign entity when it comes to America’s Financial interests and Economic policy. Has anybody heard from Treasury Secretary Geithner? Has President Obama told us the people or the Congress about his economic strategy either in the domestic context or vs. China, our largest economic partner?
On Wednesday, November 5, in his Fed statement, Dr. Bernanke launched Quantitative Easing II based on his own personal convictions. Then on Thursday, November 6, he wrote an public opinion defending his action and arguing that his actions will create a virtuous cycle by raising stock prices among other assets. Both with his statement and with his action, Dr. Bernanke committed the US Federal Reserve and the American Financial-Economic System to an unprecedented and bold experiment. He did so without explicit consent from either the US Congress, figuratively his superior, or the duly elected President & Head of the Executive Branch of the United States of America.
We wondered whether this was a case of Absolute Power Corrupting Absolutely? in our Videoclips Article for October 30 – November 5 .
This Friday, Dr. Bernanke went farther than any of his predecessors and essentially declared Financial War on China. This is not just our expression, but of Steve Liesman, that outspoken CNBC journalist who always speaks the Fed’s mind. It is “Bernanke vs, Beijing “, Steve Liesman said in his opening remarks in his conversation with CNBC’s Trish Regan on Friday morning. Liesman showed Dr. Bernanke’s comments in a clip appropriately titled A New Cold War :
- Bernanke – The current international monetary system is not working as well as it should. Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals.
- Zervos – There is no subtle innuendo in his Frankfurt speech, just brazen and downright aggressive warnings to major emerging market trading partners of the U.S.
Is Bernanke the Best Commander & Is Currency War the Best Tactic?
Recall the missile crisis of 1962. President Kennedy used America’s strongest weapon, the US Navy, against the weakest Soviet weapon, their Navy. He imposed a naval blockade and declared the right of the US Navy to examine Soviet Naval Ships. It was a winning strategy.
In a financial war against China, America’s strongest weapon is access to America’s consumer market and the flow of cheap capital (thanks to Bernanke) to China. The Chinese economy is addicted to both. If America has to go to financial war against China, why not impose either tariffs against Chinese goods into America or declare a unilateral currency adjustment for all financial transactions with China?
This would make the action China-specific and not against the entire world. Secondly, this would not subject the US Dollar to debasement or subject the American people to the unintended consequences in the treasury market.
But, these actions would require the President, the Treasury Secretary and the US Congress to wage this financial war against China. But, none of these three want to have anything to do with any such action. They have willingly abdicated their responsibilities to the willing warrior Ben Bernanke.
This is why Bernanke has become the only and absolute commander of this war against China. The only weapon his Fed has is monetary policy and the infamous Quantitative Easing with all its side effects. This is a weapon that, Eurasia’s Ian Bremmer says, is like the US punching itself in the face to punish China (see clip 1 below).
So here we are off to another war, under the most dubious of reasons, with a strategy with hosts of unintended consequences for the American people & the world, and without any realistic chances of success. No wonder, CNBC’s Rick Santelli said on Friday that Bernanke’s speech almost made him cry (see clip 3 below).
Good luck to us all. As a democracy, we deserve our government or the lack of it.
Fundamental Sovereign Interests in Stark Conflict
Jim Rickards of Omnis analyzed this Bernanke-China battle in the simplest and starkest of terms. He said that Bernanke is haunted by Deflation and the Chinese leaders are haunted by Political Instability (see clip 1 below). Rickards said that Bernanke’s primary objective is higher inflation in the US but China keeps exporting its deflation to the USA. China wants a weaker currency because their primary objective is to keep their jobs machine running to provide jobs to their millions of workers.
These objectives are in direct conflict with each other. The solution is to get a real substantive deal with hard negotiations or to go to financial war. With Bernanke as the commanding general, we get neither. What we get is the financial equivalent of the long running quagmire in Af-Pak.
In that theater, the fundamental strategic objectives of America and Pakistan are in direct and stark conflict.This is why after 9 years of a low intensity conflict, after sacrificing precious lives and spending billions & billions of dollars, we remain where we were in 2001 with no solution is sight.
We are deeply worried that the Bernanke low intensity war against China through his Quantitative Easing will be like the low intensity war in Afghanistan. We won’t win, we won’t lose, we will just get stuck in a quagmire.
The Bipolarity of the world’s economy – Courtesy of Cinematic Talent
The stupidity of Bernanke’s Quantitative Easing was beautifully and hilariously explained by the video below. It is simply too good to not put in.
A day or so after this video went viral on the Internet, “the Ben Bernank” scolded people for using the word “quantitative easing”. He said “Incidentally, in my view, the use of the term “quantitative easing” to refer to the Federal Reserve’s policies is inappropriate.” Ouch! We feel so sorry. But CNBC’s John Carney was not sorry at all. He wondered in print “if Bernanke is actually responding to the” above video “that everyone has been watching.”
While Bernanke is worried about Deflation in the USA, the emerging markets are getting burned by vicious food Inflation. Why use words when we can show the clip below. Caution, the images are disturbing.
A brief explanation. Amir Khan, one of Bollywood’s stars, is releasing a movie named Peepli Live in the near future. But in classic Bollywood style, the music has already been released. The song in the video above is a song about Inflation. Yes, about how inflation is eating people alive. The original clip shows day workers sitting together under a tree and singing the song. The clip above is a visual remix with the original song but with different visuals. The words go like this:
- My friend, o my friend! What a stage have we come to? The Inflation Demoness is eating us alive.
- Every month, petrol prices goes up and diesel follows, forget about Sugar and rice; the Inflation Demoness is eating us alive……..
- We earn a lot, we earn a lot; we are nearly dead after earning so much but it is no use, the Inflation Demoness is eating us alive..Earlier we were strong and fit, now we are weak and decrepit, the Inflation Demoness is eating us alive..
You will not see this side of India, the emerging market success story, from any of the CNBC Contributors on India. But our contacts suggest that the anger reflected in this video is real and viral. The middle class in India is being squeezed as never before by inflation and eroding value of their income.
What, if any, are the investment implication of these two videos?
Why are 30-Year Yields going down?
Michelle Caruso Carbera of CNBC Power Lunch asked this question of Rick Santelli. Frankly, we were stunned. Power Lunch, as we have said often, has been almost jihadi in its dislike of 30-year Treasuries. So it was a surprise to hear a Power Lunch anchor actually notice the positive performance of the 30-Year Treasury Bond. Michelle’s question was real, not sarcastic. See, this is why we believe in redemption.
“The Ben Bernank” is buying the 5-year Treasury and “the Ben Bernank” is NOT buying the 30-Year Treasury. So why is the stuff that is being bought going down in price and the stuff that is not being bought going up in price? The 5yr-30yr yield spread has come down from 304 basis points on November 4 to 273 basis points on November 19.
Is the market saying the impact of Quantitative Easing (sorry, Dr. B-Square, we mean security purchases), is already priced in? Or is it the old media indicator at work? When an issue reaches the mainstream, it reflects the top of the trend. In this context, the success of the hilarious QE Video should mean that QE2 as an investment hypothesis should be faded. Perhaps that is what we are seeing in the 30-5 year Treasury yield spread.
Bollywood songs are usually happy and rocking. To get a Bollywood song in a top flight movie discuss Inflation is unique. Does this inflation discussion in Indian mainstream media suggest that we have seen the peak in food inflation? If so, what is the ideal anti-inflation vehicle? The 30-year Treasury of course.
Two weeks ago, we termed the 30-Year Treasury Bond as the Anti-QE2 investment. So far, it has lived up to this name. Finally, the ugly “D-minus” 30-Year Treasury auction of last week continues to make money for its buyers. How would this week’s media star, the GM IPO, fare next week? So far, Michael Steinhardt has been correct in his recommendation.
- Jim Rickards, Ian Bremmer, Nouriel Roubini on CNBC Squawk Box on Friday, November 19
- Steve Liesman as the Fed’s spokesperson on CNBC Strategy Session on Friday, November 19
- Rick Santelli, Ian Bremmer, Nouriel Roubini on CNBC Squawk Box on Friday, November 19
1. Currency War Brews – Jim Rickards of Omnis on CNBC Squawk Box (07:27 minute clip) – Friday, November 19
This is one of most direct clips on the “Bernanke-Beijing” battle. Ian Bremmer of the Eurasia Group and the need-no-introduction Nouriel Roubini were guests on Squawk Box. So, for once, the Squawk Box crew did not get to speak much.
- Rickards – It is a currency war. It is going to continue….What’s going on is very simple. Bernanke is haunted by Deflation. The possibility of deflation scares him to death, it is driving everything. The Chinese are haunted by political instability, Tiananmen, Cultural Revolution..And so these two things are on a collision course because if you are China, you are going to do everything possible to maintain the job machine, getting the people who are moving from the countryside jobs. If you are the United States, the problem is China is basically exporting deflation to us. The Chairman wants inflation, not too much. He wants a little bit. But China is exporting their deflation to us, importing our deflation to them. So as hard as Bernanke tries, he is not getting the inflation he wants. This is not gonna change. This dynamic between these two principles is on a collision course.(emphasis ours)
- Quintannia – Unless what happens? Unless we truly pick a fight with them and start poking them in the chest?
- Rickards – Something will break, something will give. Now will the Chinese in fact significantly upwardly revalue the Yuan?,..I don’t think that will change anything. That’s what Bernanke says he wants. There is very scant evidence that it will really help the US exports that much. People buy Boeing aircraft because they are good planes, not because the Dollar is weak. As far as the US side, there is a danger that Bernanke will just say or he has said “whatever it takes”, just keep going and going and going, you could get what is called a phased transition, where there is a little incremental concern about the Dollar and then the Dollar collapses all at once. It is an unstable process. He is not just pushing on incrementally, he is risking a catastrophic collapse.
- Bremmer – We have seen that Obama over the course of the past 2 months has really tried hard to constrain on beating up on Chinese currency because in part he really doesn’t want Congress to go ahead with legislation, effectively saying look China if you don’t revalue strongly, we are going to punch ourselves in the mouth…There are places where the Americans have leverage with the Chinese, but that is not one of them. So what should the strategy be?
- Rickards – The United States is at a point where we are begging the Chinese to help us out…I am not a defender of Chinese, I think they are neo-mercantilists, they are playing by their own rules, I don’t think they are good partners in the global system but my point is why should the United States fight them? Why don’t we create growth here,….I was interested in the Brazilian speech, they said they have created 3 million jobs in the last 2 years and their currency is not weak, their currency is strong. So why can’t we do that? So why can’t we create jobs with a strong currency?
- Roubini – We have a reduction in domestic demand because there is deleveraging because of the debt crisis; so to maintain some modicum of economic growth, we need a nominal and real depreciation of the US Dollar so that net exports improve. And China should allow that depreciation because their economy is overheating, they should reduce their savings rate that is 50% of GDP, raise consumption so gradually the global imbalance gets reduced.
- Rickards – That analysis is in a nominal space. You are saying capacity is here and demand is here; we need to bring up demand. But there is another solution which is to bring down capacity through deflation. Deflation can be a very positive thing. The reason the Fed is fighting it is not because of the people in the United States, they are fighting it because of the problem with the Banks.
- Roubini interrupts – We have a 10% unemployment rate including discouraged and partially employed workers….there is a huge slack in labor market, in goods market, in capacity utilization, …you are saying instead of increasing demand, we should deflate the economy and contract consumption, production and employment. That is a depression solution, it is not a recovery solution of the economy.
- Rickards – We are in a depression, whether we like it or not. The question is how do we get out of it. One of the ways to get the consumer back in the game is to lower the prices.
- Roubini – That’s deflation. Any time you have falling prices, that deflation leads to people default on their debt. Deflation is what happened in the case of Japan for the last 15 years, stuck in near depression. Do we want to end up like Japan?
- Rickards – We need people to default on their debts. That’s part of the solution.
- Roubini – I am in favor of that as a part of the solution. But you don’t do it through debt deflation. That increases the real value of the debt further compared to ???.
At this point, perhaps in the interests of being “funny”, Joe Kernen chose to jump in flippantly with talk of cocktail parties. Joe, you should really know when to stay mum. Finally and thankfully, Carl Quintannia interrupted him.
- Quintannia – Jim, are you optimistic there is a way out of this, even if it takes years?
- Rickards – There is. All these currency wars can only be resolved through some version of a gold standard, that doesn’t have to be 100% gold coverage, it can be 20%. You need an anchor for all these currencies so you don’t have currency wars.
- Quintannia – So Zoellick isn’t out of his mind and is not talking out of the box?
- Rickards – He may be out of the box. But he is on exactly the right track. I applaud him for it, for putting that into the debate.
We beg to differ with Mr. Rickards and also be totally out of the box. There is another way to resolve such conflicts, a time-honored way. That is called War, real military war. That is how the 1930s got resolved.
There is a sound reason why reserve currencies were always of the country with the most globally powerful military. the military capable of causing mass destruction. No country ever went to a currency war with a country with such a powerful military. We wonder whether today’s specter of currency war is upon us because the Chinese military is now more comfortable in flexing their military muscle against us.
We totally agree with Mr. Rickards that the vital economic interests of USA & China are in direct conflict today. We differ with him about the gold-based standard. Any metal based standard will be to the unequivocal advantage of China. China has been hoarding commodities while the US has been running deficits and selling hard assets while collecting paper assets through the Fed. So a gold-based or a hard-resource based standard would be an utter disaster for America and the American people.
If we need to take action against China, we would rather do it the direct way by slapping tariffs against Chinese goods immediately. That would drain hot capital from China and make them come face to face with their addiction to hot money from developed markets. That would be using American Strength against Chinese weakness just like President Kennedy used US naval strength against weak Russian navy in US owned waters.
2. Bernanke Bites Back – CNBC’s Steve Liesman on CNBC Strategy Session (at minute 02:20 of 07:38 minute clip) – Friday, November 19
David Faber introduced the subject by saying “at a banking conference in Germany, Fed chairman Ben Bernanke defended his policies and lashed out at China”. He then brought in CNBC’s Steve Liesman, the man with the inside track to the Fed.
- Liesman – Three-pronged attack, David. It is domestic, it is international and it is internal… You know one of the things the Fed is wondering about right now, How did we get this back-up in rates? What’s the source of it? Does it come from the three-pronged attack? What does that do? Does it essentially make a question as to whether or not the Quantitative Easing policy that is in place right now, will it last? It is an eight-month program for $600 billion, but will they actually go out and spend it? If you are out there in the market right now, you got to be wondering is this $600 billion good, money good as far as people are concerned?
- Faber – And where do they go from here? How they navigate this? The decision was made to have Bernanke speak very publicly on some things,
- Liesman interrupts – and say some very strident remarks. So the question internally at the Fed right now is – is it the message or is it a lack of message? Did they really roll this thing out in the right way? … it is sort of a weak hand they are playing. ..There are some Fed observers who look at the make up of the Fed next year which will have more hawks on it and wonder whether the QE policy was out to a vote in January would it possibly be 7-4? That’s an interesting question out there, Would it survive?
- Kaminsky – Let’s go to the dual mandate. You have spent time with Bernanke. You know what’s going on inside the Fed. What is the most frustrating thing to them right now?
- Liesman – So they think some of the critics are a little bit disingenuous. For example, the idea that China, the currency manipulator, is criticizing the US for currency manipulation is a little bit hypocritical. They also are a little bit odds with the issue that the Republicans are criticizing the Fed for doing what, creating jobs in this country? That’s a little bit weird to them.
- Liesman – Bernanke is going to do two things. He is going to stay at his job. He is going to stick with his QE policy because he believes in his bones it is the right thing to do and he went out of his way in his speech in Frankfurt today to say look this is just regular monetary policy by another name….
- First, we were stunned by the question inside the the Fed about how they got this backup in rates? – Are they kidding us? Is Steve really that dumb or is Steve feigning dumbness? Or has Steve lost his memory? Heck, Bill Gross told Steve Liesman and Erin Burnett on Fed day that Pimco would be looking to sell the Treasuries they had bought earlier in anticipation of Fed’s buying (see clip 3 of our October 30 – November 5 videoclips article).
- Forget Steve, is the Fed really that dumb about trading? Holy Whatever! (Readers can replace our “whatever” by the words of their choice). Dr. Bernanke, Investors read your message loud and clear. Because they do, they are selling what you plan to buy.
- We believe in Liesman’s conviction – We believe that Bernanke believes in his policy in his bones and he will do QE again and again because he thinks it is the right thing to do. So did General Custer, we recall.
3. Dissecting Economic Data – Santelli, Ian Bremmer & Nouriel Roubini on CNBC Squawk Box (06:56 minute clip) – Friday, November 19
Economic data? Schemeconomic data, we say. We include this clip for some clear-cut quotes from three intelligent people who speak their mind. Perhaps, Steve Liesman who prefers to speak the Fed’s mind can learn a thing or two from the quotes below:
- Santelli (at minute 00:53) – Ben Bernanke’s speech really almost made me cry. You know, listen, if China is the big problem they say it is three years after this crisis started, then why doesn’t somebody take a leadership role in Government and say, you are the problem and here is what we are going to do about it. Hinting, he didn’t even mention China’s name, all of it is just….
- Roubini (at minute 05:01) – The trouble is the Banks are insolvent, Households are insolvent, State & Local Governments are insolvent and now Sovereigns are insolvent. So we have massive problems of credit insolvency in many sectors of many different economies. The only ones that are doing good today may be the high grade corporates in the United States. Everybody else has massive balance sheet problems…..
- Bremmer (at minute 06:05) – What we have is short-termism in our multinational corporations….All of these Western corporations that for a long time have traded market access (in China) for technology , that social contract with the Chinese was fundamentally short term, unsustainable and it is now absolutely unraveling. We did it to ourselves, our multinationals did it to ourselves. The problem of course that we see across so many different sectors is that in a free market economy, even a reasonably well-regulated one and we haven’t necessarily have had that in the United States, that you tend to maximize your short term profits at the expense of long term sustainability. And if we thought that we got in trouble with CDOs on CDOs, wait until you see the kind of trouble we are going to have with exporting all of our technology to China.
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