Stocks and Butter

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market"(Aucontrarian.com, 2009)

"We are poised for progress. Two years after the worst recession most of us have ever known, the stock market has come roaring back. Corporate profits are up. The economy is growing again."

-President Barack Obama, State of the Union speech, January 25, 2011

Maybe President Obama was at a loss to validate the rousing economy in his State of the Union address. Whatever the reason, this was a strange appeal to the American people. An even stranger validation of Wall Street’s prowess was expressed last week by Federal Reserve Chairman Ben S. Bernanke.

On January 20, 2011, the Fed chairman was asked by Steve Liesman if his QE2 chalkboard exercise had failed, given that interest rates have risen rather than fallen. (Bernanke claimed, at the outset, that QE2 would drive interest rates down. The 10-year Treasury yield has risen from 2.62% on November 3, 2010, to 3.43% on January 26, 2011.) Not knowing anything about markets, but pretending to be an expert, Bernanke replied: "The S&P 500 is up about 20%-plus and the Russell 2000, which is about small cap stocks, is up 30%-plus. So I think a stronger economy actually helps small businesses even more than it helps larger businesses."

This is bizarre: The Fed chairman touting small-cap stocks on CNBC. And why is he on a TV talk show that makes a habit of bad advice? The only point to be made here, though, is his belief that a healthy stock market is synonymous with a strong economy. This is always a contestable claim, but particularly now. Americans, that is, retail investors, have largely abandoned the stock market. Studies show that up to 85% of trading is by institutions.

If Bernanke was implying the stock market lifts all boats, that is false. Yacht sales are booming but the withering middle class is lucky to find an abandoned house boat. Richard Fisher, President of the Federal Reserve Bank of Dallas, told the Association for Financial Professionals on November 8, 2010 (five days after Bernanke launched QE2):

"As to the proposition that higher prices of financial assets will liberate those most in need, I wondered aloud if that were indeed true. We are already seeing the beginnings of speculative activity in stocks, bonds, buyouts and commodity markets. The rich and the quick are certainly able to exploit these circumstances to get richer. I have no problem with market operators making money; I did so myself in my previous life as a funds manager (before I took the vow of financial chastity and joined the Fed!). But I take no comfort, and see considerable risk, in conducting monetary policy that has the consequence of transferring income from the poor and the worker and the saver to the rich. Senior citizens and others who saved and played by the rules are earning nothing on their savings, while big debtors and too-big-to-fail oligopoly banks benefit from their subsidy. I know of no presidential administration or Congress, Republican or Democrat, that will tolerate, let alone advocate for, that dynamic for long, and I expressed my worry that this could come back to bite us and possibly threaten our independence." [My underlining – FJS]

It is rare for someone inside the central banking cabal to acknowledge how the Federal Reserve subsidizes the rich and makes them richer. Another case was in 1993 when the International Monetary Fund (IMF) published a paper. This was when Fed Chairman Alan Greenspan created the carry trade. (His claim of authorship: "We created the carry trade." See:"The 2004 Fed Transcripts: A Methodical, Diabolical Destruction of America’s "Wealth"). This whirlwind of unnecessary finance, other than to bail out Greenspan’s previous mistakes, was a vital stimulant to concentrating money-making into the hands of the few.

The IMF paper (World Economic Outlook, April, 1993) discussed the consequences of "a credit expansion in excess of the expansion of the real economy." "Excess" credit distorts the economy. When credit does not serve a proper function, it is borrowed to speculate. The claims of Obama and Bernanke could not be further from the truth.

The IMF observed: "Financial liberalization, innovation and other structural changes of the 1980s created an environment in which excess liquidity and credit were channeled to specific groups in the markets. These include large institutions, high-income earners and wealthy individuals, who responded to the incentives associated with the changes. These groups borrowed to accumulate assets in global markets – such as real estate, corporate equities, art and commodities such as gold and silver – where the excess credit apparently was recycled several times over." [My italics – FJS]

It is particularly irksome for leaders (the wrong word, but so be it) to root for the stock market when, by doing so, they sink the houseboats of the dispossessed. Wages and salaries in the United States have fallen from $6.6 trillion in the fourth quarter of 2008 to $6.4 trillion in the third quarter of 2010. (This is a much better measure of economic health than GDP, which may be why it is buried in the deluge of government data.) These numbers underestimate the agony since the working-age population has risen.

In addition, the Politburo (Bernanke and the Bureau of Labor Statistics) claim there is no inflation. Yesterday, January 26, 2011, the Federal Reserve released the minutes of its December, 2010, FOMC meeting, at which the Federal Reserve Open Market Committee apparently decided that "measures of underlying inflation have been trending downward." At the same time: "Among the broad budget categories, employee benefits was expected show the steepest price increase; respondents foresaw a 10.1 percent rise in the cost of benefits, up from 8.9 percent in 2010." – The Federal Reserve Bank of New York, December, 2010. One can only hope that someday the gang of swindlers will be held to account.

Most domestic prices are inflating, with the exception of income and houses: "[B]ank-owned properties (REO’s) and short sales, where the home is sold for less than the value of the mortgage, made up 47 percent of all home sales in December. That’s up from 44.5 percent in November." – Diana Olick, CNBC, January 24, 2011. "Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance." – Simple Ben (Bernanke), November 4, 2010. All readers are enjoined to buy anti-Bernankes: gold, silver, and premium scotch.

Instances of inflation, over the past few days: "World Moves closer to Food Price Shock" – Headline, top of front page,Financial Times, January 12, 2011. At Supervalu and Safeway [supermarkets], "profits had already been declining because of rising food prices…" – The King Report, January 18, 2011. Rising Gasoline Prices Sour American Mood" –Reuters, January 18, 2011. At the semi-annual Canton [China] Fair, prices of apparel, shoes, and luggage rose 20% between fairs held in the spring and autumn of 2010. – The King Report, January 24, 2011. "As market prices go up, Roswell-area growers report increase in pecan thefts" – The King Report, January 24, 2011. "McDonald’s said…that it may have to raise prices at its restaurants this year as it braces for rising costs of commodities." – Financial Times, January 24, 2011. "The price of the BK Whopper Junior has risen from $1.00 to $1.49 over the past year or so." -Frederick J. Sheehan, upon deciding to skip lunch, January 24, 2011. "Starbucks Sees Higher 2011 Coffee Costs" – The King Report, January 27, 2011. A pound of butter rose from $1.53 a pound on December 1, 2010 to $2.10 a pound on January 25, 2011 – Chicago Mercantile Exchange.

President Lyndon Johnson waged a big war on Vietnam and on poverty (guns and butter) at the same time. Almost everyone lost. President Obama is inflating Wall Street, a strategy that is, in turn, inflating the cost of butter. This will end badly.