Below is an extract from a commentary available to subscribers at www.goldenbar.com on 1st December 2005.
30-Nov-05: The Fed's Agenda: "a steady and relentless increase in the money supply to keep the economy humming while not sparking price increases that are politically objectionable" - Lew Rockwell on the current state of monetary policy in the light of Bernanke's appointment and subsequent congressional hearings.
Stuff like that must drive Bill Murphy crazy: 'why don't they just say the word dog gone it: MANIPULATE!!!' I'm just making that up, but it's true enough. There is that blatant manipulation of interest rates which is called monetary / banking "policy" after all.
Indeed, any execution of policy calls for an explicit manipulation of specific economic variables. Central bank staff reports read like a PLAN right out of Hayek's Road to Serfdom: "Let the monetary authority decide once and for all on the inflation rate at the beginning of period t-1. Sticky nominal prices and remaining private sector variables are then set with the knowledge of the policy decision. Thus the monetary authority's decision pins down uniquely private sector inflation expectations..." and I suppose we live happily ever after - from a Federal Reserve Bank of New York Staff Report dealing with the question of discretionary (Greenspan's style) versus target oriented (Bernanke's style) monetary policy, concluding that discretionary monetary policy was the cause of the 1970's outbreak of inflation.
Monetary policy is after all a form of intervention.
You can find a PDF version of the FRB of NY Staff Report (Can US Monetary Policy Fall (Again) into an Expectation Trap?) here: http://www.newyorkfed.org/research/staff_reports/sr229.pdf
It's a real snoozer though. Incidentally, even in the context of the definition by the authors, the term "expectation trap" could easily be interpreted as a private sector dependency on continued cheap money, or of the change in sentiment that leads to a loss of confidence in the central bank, not that you will find the authors volunteering it. I've got some things to say on Inflation Targeting in the near future, but suffice it to say the report applies a general equilibrium and econometric analysis and is ground in absolutely bad theory... it also evades the question of whether any kind of monetary policy (intervention) might be responsible for those very price distortions or cycles, or whatever they want to call those bull markets in gold driven by a loss of confidence in the soundness of the "monetary authority." The difference between the words "policy" and "manipulation" is superficial: one is done out in the open in the name of the public good... the other is done clandestinely because the public would presumably not allow it. But they are both interventions. If the state could put forth a good argument for manipulating gold it would become policy. Permission to manipulate interest rates was easy - they just had to play on the public's predisposition to view interest as usury: unjustified and artificial.
Anyway, I do think that if people understood and also named what Lew says in the first line, which is basically what Rothbard wrote (the Fed is the engine of inflation), then the war against gold would come to light. Today the metal is still seen as an obsession for criminals, mercantilists and nonconformists... it is beyond my current comprehension how anyone can be blind to the larceny and mercantilism inherent in central banking, period.
"The reason the government - and here I speak of Congress and the presidency - favors a loose monetary policy, a discretionary rule at the Fed, and ongoing low-grade inflation is the most obvious one of all. It pays the bills. In other words, the reason is no different from that of private counterfeiting
They like to have money without having to work to get it. That is essentially what the Federal Reserve provides the government. It doesn't have to worry about its bond rating collapsing or its credit standing falling. It doesn't have to bother with taxing people. It can hide the costs of government in the complications associated with monetary affairs" Lew Rockwell, http://www.mises.org/story/1971
If only people understood that this method of paying bills amounted to taking something from them...
Sometimes you get the odd kid, just out of college, who tells you that the central bank is independent of politics, or state, especially in the United States where the Fed is privately chartered. Well, that's because they teach it in public school and they don't teach you enough about money to refute it on your own, absent the experience.
I swear it. But anyway, I thought that Lew conjured up the perfect (empirical) cure for these young pupils who usually go on to serve in the public sector, as evidenced by Bernanke's contradictory promise: "I assure this committee that, if I am confirmed, I will be strictly independent of all political influences and will be guided solely by the Federal Reserve's mandate from Congress and by the public interest" - from Bernanke's Testimony.
Rockwell replies:
"When ex-Fed chairman Arthur Burns arrived at the Bonn airport as ambassador to Germany, a reporter asked him how he could have agreed to Nixon's desire to inflate so massively? The Fed chairman must do as the president wants, he answered, or the Fed would lose its independence" - Lew Rockwell
Why is that? Oh, right, it's because the state is the one that grants the Fed its legal tender monopoly privilege.
On Greenspan's Exit, Gold Market Back to Where it Was on His Arrival? Unfinished Business?
Sir Alan took office on August 11th, 1987, yet to be knighted; and has basically run the country ever since.
Both Bush's worked under him. Sorry, El Presidentes, I couldn't resist the jibe. Of course, it's not true - at most there is a little dash of two way extortion binding the relationship between the President and his Central Banker, as Rothbard noted of the origins of central banking: "Fittingly, the institution began in late seventeenth century England, as a crooked deal between a near-bankrupt government and a corrupt clique of financial promoters."
There you have it. No sooner did Greenspan settle into his corrupt new surroundings than did Wall Street deliver its first real test, that October of 1987. In the space of a few days the market lost all it gained that year... the crash was so intense that what normally would take 12 months to unfold occurred in less than a week.
Two months later, in December 1987, the nearly three year old gold price rally petered out at about US$500/oz also (gold tends to continue to rise into stock market declines, presumably in the anticipation of a fresh "liquidity" injection, then starts to correct as a bottom in stock prices becomes evident; but there was more going on here).
The gold advance that started back in 1985 was the best the market had seen since the seventies (discounting the sharp but short-lived bullish rejoinder to the new bear market trend in 1982, after the market just halved, as a mere technical bounce). From a low of US$281 in February 1985, gold prices had rallied to about US$480 by the time Mr. Greenspan arrived. Naturally, the stock market ignored the reasons for the gold price advance and continued marching higher until it literally snapped... only because bond traders did listen, unlike today! Back then of course, their psychology was probably still conditioned by the previous bull market in gold which taught them to doubt the Fed, whereas today it is conditioned by the two decade long bear market in gold (1980-2000).
Either way, the eighties didn't spawn a new gold bull market. The last lowest high in the new bear market trend was at US$514 and the bulls could not penetrate it... the move fell apart shortly after the stock market bottomed the same year. For the next ten or so years gold essentially went into hibernation - hovering in the US$300-400 range. Many refused to accept it as a bear market until the lower low later in the nineties. But many analysts today contend that Greenspan added nothing special to the Federal Reserve. They claim the gold rally back in 1985-87 represented irrational market fears over a change in leadership from Volcker to Greenspan, a newby, which hindsight proved were unfounded... and that it doesn't therefore matter who operates the Fed - the job is a turnkey operation perfected by so called economists and bureaucrats, operated by politicians. It doesn't really matter who runs the ship... they're all the same. So where are all these writers that spoke so highly of him in the last years of the last millennium, attributing to him alone all the glory of the great bull market in stocks, as if he would want that credit? Aren't they worried that the next guy won't be able to pull the same feats, or were they simply wrong and exuberant in the 1990's? They've simply melted into the fold of consensus opinion.
Say what you want, but I think Greenspan is going to be a hard act to follow. I don't want to say he either prevented or headed off a budding new bull market in gold alone, nor do I want to imply that he should get all the credit for reining in the market's confidence in the Fed. He was smart enough to fool the average economist and the public because neither of them knows anything of economics; they know as much as Bernanke does.
Neither is it a personal comment. A central banker can either be a maestro or a puppet. It is important to know which if you want to assess the future of monetary policy... the Chairman usually has some influence after all.
Volcker was no puppet; Burns was. Bernanke is going to be the President's puppet. Greenspan was always the guy at the center of strategies enacted to save the USd... he was somewhat of a maestro in Fedspeak.
Consider what went on during his watch: shortly after the 1987 stock market crash, several dubious technical policies were enacted, committees created (i.e. the shadow committee) and international arrangements made in response that were designed to "prevent" just such crashes in the future, and the Greenspan Put was born.
Quickly recovering from his fumble on currency policy he leaned on interest rates in the name of providing the market with "liquidity," something which he apparently learned from studying the mistakes of the 1929 Fed.
The financial machinations, aimed at saving the greenback, extended to banking and currency policy through 1998 (see Lawrence Lindsey's Economic Puppet Masters for a relatively positive spin on some of these strategies that nevertheless proves the veracity of my statement). This is not to say that financial alchemy did not exist before Greenspan, but only that he brought a certain pizzazz and creativity to the table which is not generally acknowledged, save by the Queen of England, but which nevertheless existed. Don't get the wrong idea though. I don't mean to imply that any acknowledgement by the ruling elite is either scarce, or good.
Like Rockwell said, central banks exist to pay their bills. The Queen probably just wanted to thank Alan for figuring out how to tax those ungrateful colonies without their knowledge or full consent. At any rate, the strategies worked so well that they even produced currency crises abroad, ultimately, which only served to further boost the US dollar's short term appeal. Whether it was deliberate or accidental, the fact is that Wall Street's confidence in the Fed would grow. Over the course of his tenure he showed them that he was on side (wink-wink) by inflating as needed, but that he wouldn't let things get out of hand by tightening as needed.
To put the "Greenspan Put" in historical perspective: whereas federal deposit insurance subsidized confidence in the banking system, and where central banking cured the problem of money shortages that apparently arise from growth, what the Fed accomplished under Greenspan's tenure was to guarantee equity investments against crashes. They targeted the stock market every way that counts except on paper, and accountability.
Indeed, following on the successes by the Fed in handling the mini-panics of 1987, 1990, 1994, 1996 and 1997 the equity risk premium fell below 1 for the first time in history - this meant that investors were willing to forgo the higher near-certain returns offered by bonds for the likely lower speculative returns offered by stocks.
This was only possible for two reasons: 1) investors saw more future upside in equity earnings and dividend streams, and/or 2) they saw less downside in equities than in times past thanks to the Fed's response to stock market crises, which was a departure from the old Fed, and despite the fact that the crises were the result of depending on those very policies that could not ultimately be sustained. Caution was thrown into the wind.
I know, I was there.
So that's what Greenspan did - he facilitated the progression of central banking into the stock business. In trying to ascertain the causes for the greatest overvaluation in history, there is none better than this.
Naturally, the Fed would deny that it ever targets stock prices, even if right under its nose is the very printing press that exerts the greatest influence on stock prices of all economic variables, whether directed or not.
But since when do we need a confession to bet right?
Notwithstanding his charm, in fact, gold bugs never were entirely convinced that he was cut from the same cloth that Volcker was. Indeed, a lower low in the new gold bear market sequence wouldn't occur until 1999, and that only because a major central bank (UK) announced that it would liquidate every last bit of the metal that it still held as reserves on account that it wasn't doing anything. It was a bad bluff; gold prices sustained the new low just long enough to invite anyone aboard that knew a bluff when they saw one. The central bank only revealed what many observers of the tech stock mania already suspected: things did in fact ultimately get out of hand.
So Greenspan has had a good go of it; but he's leaving office now, some 18 years later, with gold prices (and bullish momentum) just about where they were when he came into office - poised to launch past US$500 as the things that he himself put together unravel, and with the President rubbing his hands with glee about all those things "his" new appointment at the Fed is going to finance for him. History alone will decide what it all means.
But one difference is that today, gold bulls have technically reversed the bear market trend - they took out the last lowest high in the long term sequence (the 1996 high) briefly last year, and confirmed it this year by leaving it far enough behind to count on any technician's watch. Some bears continue to argue that the last lowest high was the 1987 high at US$502. But either way, here we are, in the midst of the best overall gold rally that the market has seen since the 1977-80 advance, and the question to ask is whether this gold advance is simply a matter of irrational market fears about the newby, Helicopter Ben, or is grounded in the unraveling of all of those financial machinations orchestrated by Greenspan and Rubin (lest we forget his management of the currency)?
The answer my friend, is crying in the wind... we all live in a yellow submarine.
The point is that this leg in gold is not finished until we have reached the point where no one can claim that it is just a bear market rally without looking the fool... we're getting there... BUT, we aren't there yet.
The market should be supported above US$480 now in my short term outlook, but the bears are going to fight hard to keep it below US$500. An event that may be significant in light of this is that on November 18th, JP Morgan received approval from the Federal Reserve allowing it to circumvent the Bank Holding Company Act in order to take delivery of, and trade, physical commodities (analysis further below). The implications are gray.
It could just be that the company wants exposure to the physical commodity business, but maybe it's a red flag of sorts signaling a coming bear raid, which could only be true if they are sitting on piles of physical gold... since they don't need this kind of approval to trade paper gold. I'm not making any changes to our gold position at the moment because I do happen to be more bullish than my US$525 target suggests. However, if I were trading the short term moves, I would always sell something into strength just so that some of my powder is dry for those bearish raids which shake this market on occasion and present a buying opportunity. It doesn't make sense to leverage a bullish position in gold after a sharp 40 point move like the one that just occurred.
Indeed, the current correction probably reflects just such profit-taking.
I am now looking for a runaway move beyond the expected volatility around this level. The buying climax that I have been waiting on to herald an end to the first wave still has not arrived. Indeed, the leg that started in 2001 is more bullish than the 1985-87 move in every respect except for one: upside volatility. In the chart below of the year over year gold price returns back to 1972, note that gold's best years so far in the current cycle were 2002 and 2003 where it returned between 25 and 27 percent (year over year). By the time that the market was greeting Alan Greenspan in the summer of 1987, however, gold was already up 31 percent year over year.
So what we've got is a bull market missing the final piece - bull market momentum. Its absence alone, of course, is not why I'm bullish for the big leg. There are other reasons, some of which I'll also cover today.
Nevertheless, it is a big reason. A serious correction cannot occur in my outlook until we see the kind of upside momentum that makes all the other rallies since 2001 look like baby steps in comparison.
The gold stocks have acted much as I expected on this move to U$500. I expect the HUI to break out when gold prices are ready to move past US$505 though, and I think it should lead that move from this point forward, but that's just my gut talking. It doesn't have any brains. When it comes to deciding on what to do now that the market is nearing the neighborhood of my objectively (technically) derived medium term target price, whether we should reduce our gold sector exposure or not (adding to it doesn't make sense for us any longer - we're fully invested - the only approvable choices in my mind are to reduce exposure, acquire insurance, or to change my weightings between gold bullion and gold equity - selling and shorting are out of the question... I'm too bullish), I am inclined to raise my intermediate term target to US$600, pending confirmation by way of a break out in the HUI (AMEX Gold Bugs Index) and gold (past the 1987 high). If a break out does not materialize, then while my runaway hypothesis will be out for the moment, the downside would not likely be greater than any so far.
The downside parameters keeping the runaway scenario in play are as follows: gold prices will have to stay above the US$475 level that they had trouble with in October, and the HUI should hold the 230 level.
The better they hold these levels in the short term the better shape our runaway hypothesis is still in. If the bulls fail to hold these levels, then we could see another intermediate correction. But I believe it is still too early for a primary correction. What I'm looking for is the kind of realization - a point of recognition of sorts about this bull market - which could only come in reaction to the very kind of momentum that has been absent. The gold bull market has been stealth for years. It is time for it to come out of the closet... before a top is in.
Why US$600? It's not entirely arbitrary. And it is the subject of some limited further analysis lower.
