This note was originally published at 8am on April 12, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Indeed, policies such as competitive currency devaluations risk unleashing a wave of destructive protectionism.”
-Dennis C. Blair, US Director of National Intelligence (February 2009)
On my flight back to New York last night I was reviewing my institutional client meetings in Denver and Kansas City and thought to myself, God help us all if Ben Bernanke continues to engage in this currency war against US Consumers and Savers.
Since the word war is not one you want to bark out loud on a US flight, I decided to keep it to myself and keep thinking. Jim Rickards’ recent book, Currency Wars, provides an excellent historical perspective on why using that word didn’t come out of thin air.
In addition to the aforementioned quote from the US Director of National Intelligence, Rickards starts Chapter 3 “Reflections on a Golden Age” (page 37) with the following quotes:
- “We’re in the midst of an international currency war.” –Guido Mantega, Finance Minister of Brazil (2010)
- “I don’t like the expression currency war.” –Dominique Strauss-Khan, Managing Director IMF (2010)
Well, I don’t like DSK and I couldn’t care less what he, or any of his conflicted and compromised cronies of the Keynesian Kingdom, think about our expressions. American Patriots, Unite. We are fighting for the credibility of our currency.
Back to the Global Macro Grind…
If there’s ever been a morning where the currency war is on the tape, it is this morning:
1. FED – in a central planning speech in NYC last night, Bernanke’s pandering Fed Head from San Francisco, Janet Yellen, said “I consider a highly accommodative policy stance to be appropriate in present circumstances.” (must be hard times at Facebook – great depressions perhaps in Southern California too?)
2. BOJ – mincing zero words on currency war, the Bank of Japan’s equivalent of Bernanke, Masaaki Shirakawa, stated plainly that “The BOJ will pursue powerful easing.”
Powerful words from un-elected, but very powerful and politicized people.
The Japanese Yen, of course, went down on that – but the US Dollar didn’t. Why? That’s simple – this is war. As I am sure Einstein would agree, Credibility’s Currency War amidst the 3 major fiat currencies of the world (USD, EURO, YEN) is relative. For politicians at least, it’s a short-term race to the bottom.
Plenty of the Fed’s excuse makers say “there’s a difference between correlation and causality.” That must be a one-liner they are teaching at Western business schools or something because it certainly doesn’t apply to what’s actually going on in markets right now. We have plenty of causality (monetary policy) and plenty of correlation risk – ask anyone who trades in real-time.
A simple illustration of long-term causality is in our Chart of The Day. This is The Policy To Inflate Mechanism of Keynesians:
- 10-year chart of the Federal Reserve’s Balance Sheet (Total Assets/GDP)
- 10-year chart of the ECB’s Balance Sheet (Total Assets/GDP)
- 10-year chart of the Bank of Japan’s Balance Sheet (Total Assets/GDP)
What you’ll quickly notice in this chart is that one of these lines (Japan’s red line) is not like the others. That’s because Japan, under the un-qualified academic advice of Paul Krugman in 1997 to “Print Lots of Money”, actually listened to the Keynesian and went on, and on, and on with “Quantitative Easing” until 2006.
Why did the BOJ stop printing money in 2006?
Take a wild guess. Because the said elixir of Quantitative Easing did not work.
Subsequent to 2006, both the ECB and Fed (the blue lines in the chart) decided to start acting Japanese, printing moneys in 2007 and 2008, respectively. Since then, the currency war between Europe and the United States of America has gone on, and on, and on.
The only people that I know that think this Keynesian experiment (with other people’s money) gone bad is going to ultimately end well are people who are paid to be willfully blind to its economic gravity.
To suggest that this 10-year chart of money printing and explicit Policies To Inflate has nothing to do with all-time record highs in food and energy prices (2008-2012) is a professional embarrassment.
If you want a solution to this Global Economic mess, it’s the Monetary Policy, Stupid. There has never been a country, in world history, that has debauched their currency’s credibility and achieved long-term economic prosperity.
So, next time you hear someone like Janet Yellen, Ben Bernanke, or some other conflicted and compromised European or Japanese politician tell you that this time is going to be different – please remind them, for the sake of our kids, that never is a long time.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (vs USD), Euro/USD, and the SP500 are now $1618-1666, $119.04-122.64, $79.61-80.26, $80.03-83.12, $1.29-1.32, and 1355-1391, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer