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Fed Up: Bernanke Declares War On The Poor

September 14, 2012

This week, we saw both the European Central Bank and the Federal Reserve deliver massive amounts of stimulus to the markets.

The ECB is now backed by the 500 billion euro European Stability Mechanism facility, which has been ratified by the German parliament. This is a game-changer for Europe, as now it is finally moving toward a federalist system, similar to the one in the United States. This measure has been successful in bringing down the bond yields for Spain, Italy and Ireland to a very manageable level. And it is likely that those central banks might not even need to tap the ESM.

The big surprise this week, however, came from the Federal Reserve.

The Fed has decided to go all-out in fueling the next massive asset bubbles through its QE3 bazooka. The Fed announced plans to buy $40 billion worth of mortgage securities per month on an open-ended basis, while continuing to reinvest its income from the securities purchased during QE1 and QE2.

The following statement from the Fed shows its clear intent to support its mandate of full employment. But I fail to see how it will manage to do that “in the context of price stability” while creating asset price inflation through unabashed QE programs.

If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.

This new move by the Fed is unleashing massive amounts of money into the risk assets. Markets will now believe that, between the ECB and the Fed, all tail risks to the markets have gone.

In other words, this could mean that all the money that was hiding in the safety of U.S. Treasuries will now leave the Treasury markets and flow into equities and commodities.

If so, I would not be surprised to see a parabolic move into year-end in both gold and equities that could take the S&P 500 to 1,650 and gold to $2,000 per troy ounce by year-end.

Now here is the dangerous side to this equation. This rally will also lead oil and grains to new highs, which will results in higher gas prices at the pump and food prices at the grocery store. While employment and wages are still low, this will hurt the working class.

This massive and irresponsible Fed stimulus package by Ben Bernanke & Co. will make the rich richer by fueling their asset portfolios and bringing loads of misery to the poor, who will find it harder to make ends meet.

Besides the poor, this latest move also declares war on the retirees or those who subsist on fixed income returns from bonds. With the Fed’s monetary policy stuck at zero for another three years at least and more Federal money creating artificial demand for fixed income assets, yields will not rise for quite a while. This means that the coupons on newly issued government and agency bonds will be stuck at below inflation rates.

Another debilitating aspect of the latest round of QE is that by removing coupon generating bonds from the monetary system, it reduces the amount of money in the economy, thus reducing aggregate demand.

In summary, QE will reduce net savings of U.S. dollar holders and increase paper wealth in terms of higher equity market valuations.

While the initial reaction of the markets has been to sell the U.S. dollar, fewer U.S. dollars as a result of QE will result in the dollar eventually rallying hard, especially against the EUR. My target will be around 1.3500 before EUR/USD starts heading back down towards parity.

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President Obama signs Executive Order allowing for control over all US resources

imageKenneth Schortgen Jr

On March 16th, President Obama signed a new Executive Order which expands upon a prior order issued in 1950 for Disaster Preparedness, and gives the office of the President complete control over all the resources in the United States in times of war or emergency.

The National Defense Resources Preparedness order gives the Executive Branch the power to control and allocate energy, production, transportation, food, and even water resources by decree under the auspices of national defense and national security.  The order is not limited to wartime implementation, as one of the order’s functions includes the command and control of resources in peacetime determinations.

Section 101.  Purpose.  This order delegates authorities and addresses national defense resource policies and programs under the Defense Production Act of 1950, as amended (the “Act”).

(b)  assess on an ongoing basis the capability of the domestic industrial and technological base to satisfy requirements in peacetime and times of national emergency, specifically evaluating the availability of the most critical resource and production sources, including subcontractors and suppliers, materials, skilled labor, and professional and technical personnel; – White House

Additionally, each cabinet under the Executive Branch has been given specific powers when the order is executed, and include the absolute control over food, water, and other resource distributions.

Sec. 201.  Priorities and Allocations Authorities.  (a)  The authority of the President conferred by section 101 of the Act, 50 U.S.C. App. 2071, to require acceptance and priority performance of contracts or orders (other than contracts of employment) to promote the national defense over performance of any other contracts or orders, and to allocate materials, services, and facilities as deemed necessary or appropriate to promote the national defense, is delegated to the following agency heads:

(1)  the Secretary of Agriculture with respect to food resources, food resource facilities, livestock resources, veterinary resources, plant health resources, and the domestic distribution of farm equipment and commercial fertilizer;

(2)  the Secretary of Energy with respect to all forms of energy;

(3)  the Secretary of Health and Human Services with respect to health resources;

(4)  the Secretary of Transportation with respect to all forms of civil transportation;

(5)  the Secretary of Defense with respect to water resources; and

(6)  the Secretary of Commerce with respect to all other materials, services, and facilities, including construction materials.

(e)  “Food resources” means all commodities and products, (simple, mixed, or compound), or complements to such commodities or products, that are capable of being ingested by either human beings or animals, irrespective of other uses to which such commodities or products may be put, at all stages of processing from the raw commodity to the products thereof in vendible form for human or animal consumption.  “Food resources” also means potable water packaged in commercially marketable containers, all starches, sugars, vegetable and animal or marine fats and oils, seed, cotton, hemp, and flax fiber, but does not mean any such material after it loses its identity as an agricultural commodity or agricultural product.

Executive Orders created for national defense and national preparedness are not new in American history, but in each instance they brought about a Constitutional crisis that nearly led standing Presidents to hold dictatorial power over the citizenry.  During the Civil War, President Lincoln halted freedom of speech and freedom of the press, while at the same time revoking Habeas Corpus and the right to a fair trial under the sixth amendment.  During World War I, when Congress refused to grant Woodrow Wilson extended power over resources to help the war effort, he invoked an Executive Order which allowed him complete control over businesses, industry, transportation, food, and other economic policies.

In both cases, it was only after the death of each President that full Constitutional powers were restored to the citizens of the United States.

The economy of the United States is based on the free flow of resources, energy, and the rights of consumers to buy and sell as they see fit.  Any interference in this economic process quickly leads to shortages, rising prices, and civil unrest.  The purpose of President Obama signing this new Executive Order is yet unclear, however, it may coincide with information coming out of Israel yesterday that plans for a tactical or strategic strike on Iran are accelerating.  Oil prices in Europe rose over $3 a barrel for Brent crude after the Israeli actions, and US oil prices rose $2 for WTI.

The Obama administration appears to be preparing for a long drawn out war in the Middle East, or at the very least, an expected crisis that will require the need to override Constitutional authority and claim dominion over all resources in the United States under the guise of national defense.  With the rise in Disaster Preparedness growing for both individuals and states leading up to yesterday’s Executive Order, the mood of the nation points strongly towards some event or disaster that will require massive preparations on a national as well as local scale.

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OIL, CHINA, LIES, BIKE LANES: Jim Rogers Tells All To Business Insider

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China Photos/Getty Images

Mamta Badkar
Mar. 11, 2012

Years ago, Jim Rogers started the Quantum Fund with George Soros.  Now, the commodities guru works in Singapore, where he lives with his wife and two daughters.

Rogers spoke with Business Insider to discuss commodities, the global economy, his legendary career, and his life in Singapore.

What follows is the complete transcript of our interview with Jim Rogers.

Inflation, Commodities and the Consumer

What is feeding into oil prices at the moment?

Iran obviously, is one thing, but another is in the U.S. it’s the infrastructure problem. We have oil but it’s in the wrong places. On the east coast, they use imported oil, and imported oil is higher because of Iran. And it comes from Europe. North Sea production is in decline. There are supply-demand reasons that oil prices are high in many parts of the world. And known reserves of oil are in decline worldwide. And the IEA is going around telling people that known reserves are in a steady decline and we’re going to have a huge problem in a decade or two, a gigantic problem, unless somebody finds a lot of oil very quickly.  So underneath the supply-demand, shorter term it’s infrastructure and Iran probably.

At what level do you think oil prices will break the back of the American recovery?

We are going to have a slowdown. Such is the staggering debt that America has, it has caused more and more of a drag on our economy. I would also point out to you that every four to six years we’ve had an economic slowdown in the U.S., since the beginning of time, so by 2012, 2013, 2014, we are well overdue for an economic slowdown for whatever reason. Whether it’s caused by high oil or what, we’re going to have a slowdown in the foreseeable future.
How do you see oil prices impacting consumers in emerging markets, especially in Asia, when many of them are struggling to rein in inflation and drive growth?

Everybody is paying higher prices for oil and that obviously impacts consumption everywhere and its not just oil, its food and everything else that’s going up. There’s inflation everywhere, the U.S. lies about it, I mean the U.S. government lies about inflation but there’s inflation everywhere. I mean I don’t know if you go shopping, but if you do, you know prices are up. The government says they’re not, I don’t know where they shop. Everybody else’s prices are up.

If you could own / invest in just one commodity which would it be?

I guess it would have to be one of the agricultural commodities, it would depend on which is down the most but it would be agriculture I can tell you that.

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Giorgio Monteforti / Flickr

You said earlier this year that if gold moved towards $1,600 you would be interested in buying more.  Are you looking at gold now?

I’m certainly watching, if it goes below $1,600 I’m sure I’ll buy more. If it goes to $1,200 I hope I’m smart enough to buy a lot more. Gold has been up 11 years in a row now, which is extremely unusual for any asset. So it would not surprise me if gold doesn’t … continue to have a nice correction in 2012. If it does, if it does, I hope I’m smart enough to buy a lot more. I’m not selling. I’m not selling. I have not sold and will not sell until the bubble comes. There will be a bubble in gold some day but that’s ten years, I don’t know, several years from now. I hope I’m smart enough to sell when the bubble comes.

China and the emerging markets

You’re a China bull. Could you tell me the one thing that you think China bears have got wrong?

Not quite sure. If you mean the people who say China is going to explode. Those guys have been saying that for three years. I guess someday they’ll be right. So far they’ve been dead wrong, for years. There will be setbacks in China along the way. In America in the19th century we had 15 depressions with a capital “D,” we had no human rights, we had not much rule of law, (and we) had a horrible civil war, yet we became the most successful country in the 20th century.

China is going to have plenty of setbacks but what these guys are mainly missing is China has been in decline for three or four hundred years but started turning it around in 1978. And there’s a long history of entrepreneurship, capitalism, they have the brains, they have the know-how, there are many overseas Chinese who will bring back money and management ability. And the Chinese have a very, very high savings rate. They save over 35 percent of their income and so even if they start going off, they’ve got something to fall back on, as opposed to America and the rest of the world.

There was a housing bubble in urban, coastal real estate, which the government has popped purposely, I mean they knew what they were doing. But as far as, I mean Jim Chanos, says it’s going to be a thousand times worse than Dubai. Well that shows he doesn’t understand Dubai, and he doesn’t understand China. Now I’ve told him this to his face though, so I’m not talking behind his back. China is vastly different from Dubai, vastly.

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AP Images

Could you explain how Dubai and China’s real estate property problems differ?

Dubai was building its plan, its economic plan was to build an economy based on real estate speculation. It didn’t have anything else. It didn’t have oil, natural resources, it had a small population etc. and there was gigantic real estate speculation in construction. China has huge amounts of stuff. It has a growing population. It has vast natural resources, not enough, but it’s got some. And then all those natural resources in Siberia which they can tap and they’ve got huge financial reserves. Dubai does not. Dubai has a rich big brother, but that’s all Dubai has and China has it all – resources, cheap labor, discipline, educated labor and vast markets. 

China lowered their growth rate, wage inflation is worrying and it’s the year of leadership change. Do you think China is in control in terms of their property prices and economic growth…

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School students make a formation depicting the new symbol of the Indian Rupee in Chennai

I doubt the government planned to have a bubble. They got a bubble. I mean they’ve been trying to cool it off and they’ve done so. As far as the lower growth rates, I don’t pay attention to government growth figures because they’re all phony. Nobody knows how much China is growing, including China. I don’t pay attention to all of these figures. They’re not important to me. They’re irrelevant. China is certainly doing better than most countries and it will continue to do so. It will have setbacks. There’s nothing that says China should not have a recession. But China has a lot of money saved for a rainy day and when it rains they’re going to spend. America doesn’t have any money saved for a rainy day.  And when it rains we’re going to try to borrow it or print it,neither of which is good for America or for the world.

You have said previously that India is a great place to travel but not a great place for investors. What is the one thing that you do think makes a good investment opportunity in India?

Tourism. Tourism in India, partly because the Chinese can now travel and are traveling, and they’re very close and India is cheap. Indian tourism is going to be a wonderful, wonderful growth area in the next decade, or two, or three.

You have previously said those that invest in Myanmar could be rich in the next 20 – 40 years. Myanmar is beginning its process of reforms and is beginning to end its economic isolation form the West – what are your thoughts on Myanmar now?

China made the decision to open up in late ’78 but it took a while to put things in place. Myanmar has made the decision, they don’t even have their currency sorted out yet, so it’s going to take a while, but no ,everyday that goes by, I get more excited. Unfortunately I’m a citizen of the land of the free and we from the land of the free are not allowed to invest in Myanmar, it’s illegal. You could invest there, but I cannot.

Life in Singapore and career advice

What’s the one thing you miss the most about the U.S.? Conversely what’s the one thing Singapore has that the U.S. doesn’t?

Well I don’t really miss… I mean I go to the U.S., I was just there last week. My main complaint about Singapore is not a serious complaint but it’s not very bi-cycle friendly. The U.S. is much more bicycle friendly. I guess I wish Singapore were as bicycle friendly as parts of the U.S.

What’s your typical day like in Singapore?

“I take my daughters to school. We wake up at six because they have to get to school early. I take them on the bicycle, I come back, I exercise I have interviews while I’m exercising. I collect my daughters. I have lunch with them. Then in the afternoons I’ll have meetings, go on the computer or whatever. At night I’ll have dinner with my family unless we’re going out and then my wife and I will go out and do whatever the dinner is. And then I’ll go the disco. That’s a joke.

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What’s the best piece of advice you ever got?

“Buy low and sell high. When I went to wall street. Actually all the old guys used to say ‘figure out the money and you’ll figure out what’s going on’. And so I don’t know of any specific individual but that’s advice I got a lot of times.

What’s the worst job you have ever had?

“Worst job? I don’t remember. Maybe the U.S. army, but even that, I don’t ever remember having a bad job. I was a grocery store boy when I was a teenager but even that, I learned, I don’t remember being unhappy in any job I’ve ever had. In the army, I would have liked to have done other things with those two years but even those two years were not totally wasted.”

Read more: BI

The Untold Story Of How Banks Took Over The Oil Market

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Cullen Roche

Real resources are always a true constraint for any economy.  This has become an increasingly important point over the last 10 years as commodity prices have surged.  But the debate over the cause of this surge and the lack and real resources is still very much up in the air.  Some say it is due to an insatiable demand from China.  Some blame the decline of the dollar due to irresponsible government action.  Others say Wall Street is cornering the commodities markets and turning it into another profit making casino.   The truth, in all likelihood, lies somewhere inbetween.

One of the more important themes I’ve discussed over the years here has been the financialization of our economy.  Financialization has seeped into many facets of our economy in order to help the big banks maximize profits.  This has led to massive deregulation, increasing reliance on the FIRE industry, a concentration of power in this industry and an economy that is increasingly volatile and dependent on this industry which produces little, but takes much.   This financialization has been nowhere more apparent than it has been in the commodities markets.

A few weeks ago I wrote a piece about the continual imbalance in the commodities markets and a veteran of the energy market happened to be reading.  Dan Dicker reached out through the comments section and offered to send me a free copy of his book, Oil’s Endless Bid (see here to buy a copy).  I had heard of Dan’s book and had been meaning to read it for some time.   Now, I get a lot of free books from financial people.  A LOT.  They all want me to promote their books on the site.  95% of the books never get mentioned on the site.  As you’ve noticed, I don’t just crank out content for the sake of cranking out content and the “payment” of a free 300 page book is not really incentive enough for me to write about a book.  So, a lot of books end up in my fireplace (I’m an energy conservationist obviously).  This one is different because I think Dan is conquering an incredibly important subject and he does so from the position of an informed insider.

His perspective is very much in-line with the positions of Michael Masters who has been one of the more vocal proponents of this financialziation of the commodities markets.  Dan Dicker is a 20+ year veteran of the oil markets and a long-time seat holder at the NYMEX.  Dan’s book is a frighteningly eye opening perspective from someone who has been in the trenches and has witnessed the massive changes in real-time.   Dan highlights the massive changes that occurred over the years as the industry has morphed from one that was dominated by big oil into an industry that is dominated by big banks (from the book):

“In the mid-1990′s, the participants and performance of oil trading slowly started to change, and by 2003, the dominating forces in oil trader were no longer with the oil companies.  The list of NYMEX seat owners again shows just how deep the change was.  Right before going public in 2006, only 22 seats remained in the hands of the oil companies that had direct involvement in the buying and selling of oil and oil products.  But a much more significant percentage of seats were owned by companies that ostensibly had nothing to do with the buying and selling of physical oil.

That’s a total of 56 seats owned by investment banks!  (And yes, I include AIG, which was an enormous booker of bets on oil too, not just in famously bad mortgage swaps.)

Of course, the most important purpose for some of these firms to own seats was to execute orders for clients, some retail, but many commercial clients who were being sold on the importance of risk management of energy costs.  And during the years from the mid-1990′s though 2005, this made for a legitimate increase in the volume of crude.  But commercial growth of risk management programs was a happy appetizer for the quick rise of the investment banks in the trade of oil.  Oil companies that tried to maintain a presence and dominance in trading began to be overshadowed by the volume and influence of trading from these banks and their clients.”

These firms aren’t dominating the trading pits at these exchanges because they want to buy and sell commodities for real economic purposes.  They are dominating the exchanges because they know there is big money in financializing the asset class of commodities.  And they’re succeeding.  They’ve sold the asset class as an investment and the investing public has eaten it up hook, line and sinker.  Dan goes into much more detail about this destructive trend and its impact on the economy and ultimately concludes that massive change is needed.  We need to get control of our economy again and wrangle it back from these big banks who are looking out for the interest of their shareholders and not the US economy.  Dan Dicker’s book is one of the most important ones I have read in a long time.  It should be required reading for the US Congress.

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