Spain to ECB: Inflate or Die

Posted on April 10, 2012 by MN Gordon

The Bane of Europe

“Thou hast seen nothing yet.” – Miguel de Cervantes, Don Quixote

In the late 15th century, the gods look down from the heavens above and smiled upon Spain.  With the capture of the Emirate of Granada in 1492, Spain completed the Reconquista of the Iberian Peninsula…ending the last remnant of a 781-year presence of Islamic rule.  That same year, in a voyage funded by Queen Isabella, Christopher Columbus discovered the new world.

Soon after, Spain emerged as the first world power.

For the next 200-years Spanish treasure fleets transported vast riches of gold, silver, spices, tobacco, and agricultural goods, from the Spanish Empire in the Americas to the homeland.  Spanish rulers just knew their good fortune was limitless and without end.  But alas, the bounty was not without consequences.

Overtime the flow of wealth to Spain became an expected entitlement.  The influx of riches proved not to be a blessing, but a curse.  Like spoiled heirs of a family fortune, or an unprepared lottery winner, Spain squandered its wealth through a succession of misadventures. Continue reading →

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Monetary Policy, Explained

Posted on April 6, 2012 by MN Gordon

Minutes from the March 13 Federal Open Market Committee meeting were released Tuesday afternoon.  Upon perusing the record of proceedings, Wall Street was shocked to discover there was no discussion of monetary easing options.  Traders promptly sold.  Then, on Wednesday, they sold again.

“The major support for the economy and for the financial markets over the past two years has been stimulus, and without it, it’s still a question whether these economies can make it on their own,” said Bruce Bittles, chief investment strategist at Robert W. Baird & Co in Nashville.  Based on the market’s sell off, clearly, investors don’t believe the economy can stand on its own two feet.

Nonetheless, with $4 dollar per gallon gas already here, well in advance of the summer driving season, additional monetary inflation is not politically expedient at the moment.  In several months’ time that will likely change.  But first the twisted mix of money and politics will have to get from here to there.

What’s become vastly apparent since the 2008 credit crisis and economic contraction is how enormously dependent both the economy and financial markets are on Fed money creation.  Following each monetary experiment, like QE and QE2, when the Fed concludes its bond buying operation the stock market nosedives and economic growth reverses. Continue reading →

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The Time Is Nigh to Walk Away from the Table

Posted on April 3, 2012 by MN Gordon

Hardly a Soul Noticed

“Great things are not accomplished by those who yield to trends and fads and popular opinion,” once remarked Jack Kerouac.  Perhaps Kerouac had the stock market in mind when he made this observation…we don’t know.  But if he did, he would’ve likely perceived a stern warning from recent volatility index readings and investor complacency.

The volatility index measures investor expectations of stock market volatility over the next 30 days.  Generally, a volatility index reading below 15 has been a good time to sell.  For example, in April 2011 the volatility index dropped below 15…presaging a swift 20 percent decline in the S&P 500.

The first quarter of 2012 concluded last week.  If you can believe it, the stock market, as represented by the S&P 500, is off to its best start in 14 years.  Year-to-date it’s up 12 percent.

But while everyone was yielding to the popular opinion that a new bull market is underway, the volatility index did something it rarely does.  Not only did it drop below 15, on March 16th it dropped all the way to 13.66 – the lowest reading in nearly 5 years. Continue reading →

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Japan Will Take the World’s Breath Away, Part II

Posted on March 30, 2012 by MN Gordon

The National Bureau of Economic Research marks June 2009 as the end of the Great Recession.  That means the United States economy has been in recovery for nearly three years.  Semantically this is accurate…all the stimulus and monetary easing has successfully pushed GDP into positive over this time.  But just what type of recovery is this?

According to the latest CNBC All-American Survey, 36 percent of the American public believes the economy will improve over the next year.  Apparently, this is a 9 percent increase over the survey results from November 2011.  Yet, despite the marked improvement, what this means is, 64 percent of Americans still believe the economy will not improve over the next year.

Clearly, the populace has become aware that something has gone seriously wrong with the economy.  Across the republic, people are coming to grips with the fact that it’s not possible for an economy to borrow and spend its way to prosperity indefinitely.  Eventually the debts must be reckoned…either by default or inflation.

Earlier this week we scribbled some thoughts on the current pickle Japan finds itself in; namely, a debt to GDP level of 200 percent, its first annual trade deficit in over 30-years, and the likely propensity to cover the budget gap through debt monetization.  Continue reading →

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