Liberty Maven

by Peter Schiff, CEO of Euro Pacific Capital, and host of The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 6pm – 8pm Eastern time every weeknight, and streaming at www.schiffradio.com

Back in October of 2009, when Congress first announced the formation of a commission to investigate the cause of the 2008 financial crisis, I knew immediately that their ultimate conclusions would support the agendas of their respective political parties. (Watch the video blog I recorded that day) Particularly, I knew that the commission’s Democrat majority would use the crisis to justify more government involvement in the financial markets. These concerns have now been fully validated.

Given that I was one of the few people who had accurately predicted the magnitude of the housing bubble, and had laid out in my 2007 book Crash Proof the specific consequences for the banking system and the economy when it burst, I immediately contacted the commission offering my services as a witness. In particular, I assumed that the Republicans on the panel would appreciate hearing from someone who thought that the crisis resulted from too much rather too little government regulation. (see my 2008 Washington Post op-ed)

To burnish my credentials, I sent the commission a list of articles I wrote between 2004 and 2008. Much of that pre-crash critique is summarized in a speech I gave in 2006 to The Western Regional Mortgage Bankers Association.

However, despite these supporting materials, my repeated outreach to the commission bore no fruit. At that point, I realized that they had no interest in giving any visibility to the narrative that I favored, namely that the ultra-low interest rates engineered by the Greenspan-Bernanke Federal Reserve were the primary factor behind the financial crash of 2008.

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CSPAN’s show, Newsmakers, aired this weekend. Their guest was Congressman Ron Paul. Most of the questions revolved around economics and the Federal Reserve. It’s refreshing when Dr. Paul is given the proper amount of time to explain his positions without the interruptions that always occur on the mainstream media outlets.

You can watch the entire show here at CSPAN.org.

by Peter Schiff, president of Euro Pacific Capital, and host of The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 6pm – 8pm Eastern time every weeknight, and streaming at www.schiffradio.com

There is an old adage on Wall Street: no one rings a bell to signal a market top or bottom. Yet, I have found that bells do ring; it’s just that few people know exactly what sound to listen for.

Perhaps the biggest and most liquid of all markets is for US government bonds. That market has been rallying for almost thirty years. The bull can be traced back to 1981, when Treasury bond yields peaked at about 15%. At that time, high inflation and a weakening dollar had justifiably squelched demand for Treasuries. Even the ultra-high interest rates were not enough to attract buyers.

But this was also when the proverbial bell was rung. Fed Chairman Paul Volcker had signaled, by jacking up interest rates so high, that he would stop at nothing to break the back of inflation. Volcker’s iron will, and Reagan’s unflinching support, restored demand for Treasuries for the next three decades.

We have arrived today at a similar inflection point. After falling steadily for 30 years, bond yields are now heading north with a full head of steam.

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In an interview with the Wall Street Journal Ron Paul discusses his upcoming Fed oversight subcommittee chairmanship. He targets the system rather than individuals, and rightly so, as usual.

An excerpt:

Over the past year, we’ve seen a lot more information about the Fed coming to both Congress and the public. Do you think it’s made a difference?

It hasn’t changed policy. I think it’s made the difference that we understand it a little bit better. And it hasn’t gone well for the Fed. The popularity of the Fed has changed. They’re being challenged from all angles right now. … It isn’t so much what I will do. It’s going to be that these policies are doomed to fail. They always want me to attack Bernanke. It isn’t the individuals. It’s not Greenspan, it’s not Bernanke, it’s the system and it’s not viable. They cannot practice central economic planning through the Federal Reserve. They cannot have stable prices, whatever that means. They cannot prevent prices from going up when the time comes for prices to go up. The perfect example of their ineptness is their mandate to have full employment.

A number of Republicans want to change the Fed’s dual mandate to focus on inflation. What effect do you think it would have?

Probably not a whole lot. But I like the subject because it does go after the Fed. They assume too much responsibility. It brings up the subject of unemployment. Since they have totally failed on that this is a great time to talk about, what good is a mandate?

Read the rest here

by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)

Despite the fact that the S&P is up over 80% in the last 21 months, US financial firms are currently tripping over each other in their zeal to raise their S&P 500 and GDP targets for 2011. JPMorgan’s chief US equities strategist, Thomas Lee, came out on December 3^rd with a target of 1425 on the S&P for 2011, which would be a 15 percent gain. Barclays Capital last Thursday released a 1420 estimate. Not to be outdone, Goldman Sachs also recently released its forecast, and it sees a more-than-20 percent increase next year, to 1450. Meanwhile, PIMCO’s idea of a “new normal” has translated into a 2011 GDP forecast raised from 2-2.5% to 3-3.5% due to “massive” government stimulus.

In the midst of this collective ‘hurrah,’ very little attention is being paid to what is going on over in the bond market. With my due condolences to Fed Chairman Bernanke, the yield on the 10-year Treasury note has increased from 2.33% on October 8^th to 3.29% today. And, if there is any notice at all given to that recent run-up in yields, it is merely explained away as a sign of robust growth returning to the economy.

In reality, growth doesn’t cause an increase in interest rates; it is either lack of savings or inflation that is responsible. To refute the ‘robust growth’ reasoning, turn your attention to the fact that the spike in yields just happened to coincide with the news that the unemployment rate jumped to 9.8% in November.

A slightly broader explanation for the surge in borrowing costs might be the failure of the Bowles-Simpson deficit commission to implement any cost cutting measures. Or, perhaps it was the intimation from Bernanke himself that QE III may already be under construction in his infamous interview on 60 Minutes. Or, maybe it is the fact that the $150.4 billion November budget deficit was the highest total for that month… ever, and was the 26^th straight month of red ink! I often wonder to myself, where in the midst of all this good news do I summon a bearish attitude?

I think it’s pretty clear that ‘robust growth’ is going the way of ‘green shoots’ and knickers – right into the dustbin of history.

So, what will the increase in interest rates – ignored by all of Wall Street – actually mean for the economy in 2011?

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by John Browne, Senior Market Strategist at Euro Pacific Capital

Despite America’s economic problems, the US dollar has maintained its respected status the world over – and has even managed to maintain value in comparison to other currencies. It appears that the dollar will likely finish 2010 at the same levels that it started. Even today’s announcement of more tax cuts and stimulus, which will guarantee widening federal deficits for years to come, could not put a dent in the dollar. The dollar’s charmed life stands in strong contrast to the euro, which is currently suffering from its internal flaws and the Europeans’ unfortunate recognition of reality.

Given Washington’s monetary irresponsibility over the past decade and a half, many market observers have wondered if the euro could one day become the world’s top currency. In the early to mid-2000s, when the euro surged more than 60% against the dollar, this was in fact a popular view. But unlike all other currencies on the planet, the euro is not a sovereign currency managed by a single country. It is dependent on the collective political will of the leaders of the European Union (EU).

In the bust that followed the Greenspan/Bernanke dollar-based boom, the US economy started to deleverage significantly. Unwilling to accept the political cost of a possible failure of its banking system, the Federal Reserve decided to re-inflate out of deflation and devalue the US dollar. Meanwhile, the European Central Bank (ECB), heavily influenced by Germany, decided that deflation was necessary and inevitable. As painful as it was likely to prove, the Europeans had appeared until recently ready to face the music and delever their economies.

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by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)

This past Sunday on the CBS program “60 Minutes”, Americans received a massive dose of mendacity from our Fed Chairman. Mr. Bernanke’s shaky delivery, and even shakier logic may cause faith in America’s economic leadership to evaporate faster than the value of our dollar. In particular, Bernanke delivered two massive distortions:Lie #1 – The Fed isn’t printing money. Bernanke stated: “The amount of currency in circulation is not changing…the money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities.” Given that it is the Treasury Department’s Bureau of Engraving and Printing, not the Fed, that actually prints paper money, his statement is technically correct while substantively false. However, Bernanke is buying bank assets with Fed credit. With such an arrangement, printing becomes unnecessary.

According to gentle Ben, credit created to buy something should not be considered money and has no affect on asset prices? But if that’s true, why is he concentrating his buying in the middle of the Treasury yield curve. His stated purpose is to boost bond prices and lower yields in order to stimulate borrowing and aggregate demand. So pushing up bond prices is an act of inflation. Bernanke similarly contradicts himself by saying that he isn’t creating inflation, while at the same time claiming that his easing campaign is designed to boost asset prices to combat the phantom of deflation.

And by the way, the Fed is causing money supply to increase significantly. The compounded annual growth rate of M2 is over 7% in the last quarter. Apparently in the eyes of the Chairman, a 7% annualized increase in the broad money supply isn’t considered significant.

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by Jeff Clark of Casey Research

Warren Buffett recently remarked that you can’t value gold like an oil company or farmland, so we should forget gold and buy equities. But he misses the point! Gold doesn’t produce value because it is value; in other words, gold is money.

It’s sad to see Mr. Buffett go to the dark side. But, as I’m about to show, he’s losing company when it comes to his views on gold.

It’s difficult to fathom why a professional money manager – someone who looks at markets all day long and tries to make money for his clients – doesn’t see the in-your-face arguments for buying precious metals. It’s borderline irresponsible. You may think that’s a strong statement, but I ask: what would you do if you were responsible for investing other people’s money and found yourself in the following investment environment:

• The US government had printed more money in the past two years than at any other time in world history. Then, they printed more.

• Government spending exceeded revenues by obscene margins, and, in the most recent year, the US ran a budget deficit of $1.4 trillion.

• Interest rates were at 40-year lows.

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by Peter Schiff, president of Euro Pacific Capital, and host of The Peter Schiff Show, broadcasting live from WSTC Norwalk CT from 6pm – 8pm Eastern time every weeknight, and streaming at www.schiffradio.com

Given the opposing views of the potentially parsimonious new Congress and the continuously accommodative Federal Reserve, there is a movement afoot among Republicans to eliminate the Fed’s “dual mandate.” Prior to 1977, the Fed only had one job: maintaining price stability. However, the stagflation of the 1970s inspired politicians to assign another task: promoting maximum employment. This “mission creep” has transformed the Fed from a monetary watchdog into an instrument of social policy. We would do well to give them back their original job.

The imposition of the “dual mandate” was informed by the Keynesian belief that inflation and unemployment don’t mix. An economic concept known as the ”Phillips curve” postulates that low levels of one cause high levels of the other. But, like many things in modern economics, the curve is a fiction. There is no real reason why low inflation would produce unemployment or full employment would create inflation.

On paper, at least, the Fed has appeared to strike the balance that Congress demands. But this is a fool’s errand. The Fed’s dual mandate is the equivalent of asking a corporate CEO to maximize shareholder value by giving away as many free products as possible to consumers.

The best way for the Fed to ensure maximum employment is to focus on its one true job – creating price stability. The irony of the dual mandate is that by trying to satisfy both, the Fed ensures that we will get neither.

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by Michael Pento, Senior Economist at Euro Pacific Capital (www.europac.net)

Certain deflationists have recently gone on record saying that the increase in the Fed’s balance sheet is meaningless with regard to creating inflation because our central bank can’t print money, it can only create bank reserves. The problem with their view is that it both disregards the definition of money and ignores the process of creating bank reserves.

Money is commonly defined as “a medium that can be exchanged for goods and services and is used as a measure of their values on the market, including among its forms a commodity such as gold, an officially issued coin or note, or a deposit in a checking account or other readily liquefiable account.” The Fed creates a “readily liquefiable account” when creating excess bank reserves, so it is also creating money. Since inflation is properly defined as an increase in the money supply, the Fed unquestionably creates both money and inflation when it creates reserves.

The deflationists’ error is to suppose that because the amount of currency has not grown, the money supply hasn’t grown. But the Fed never creates currency – all the printing is handled by Treasury; instead, it creates bank deposits which are held at the Fed. In ignoring this “base money,” the deflationists make no distinction between having the Fed’s balance sheet at $800 billion or $3 trillion. Doing so is a huge mistake for both making investment decisions and predicting asset price levels.

In short, for deflationists to be correct, they must contend that only money which is currently in circulation can be considered inflationary, i.e. lead to rising prices. Therefore, they must also believe that all increases in demand and time deposits should not be included in the money supply and should not be considered inflationary. This isn’t just wrong, it’s grossly wrong.

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