Monday, November 1, 2010

Upcoming FED Action, WAAAAYYYY TOO Much, and Three Years Too Late

11/1/2010 Portland, Oregon – Pop in your mints…

During Halloween, Portland definitely lives up to the mantra "Keep Portland Weird".  Having managed to avoid much of the direct impact of the weirdness by taking refuge over the mighty Columbia on the Washington side, your author, along with anyone managing a large money market or bond fund, now turn their weary eyes to the upcoming FED meeting.  While we watch and wait, we can't shake this sinking feeling that the FED is fighting an enemy (deflation) that no longer exists with a weapon that is so powerful that it will cause a large amount of collateral damage.  If this sounds familiar (America's war on terror comes to mind) it is probably because both operations are run top down by a large government bureaucracy.

For those of you unfamiliar with the dynamic, you must know from the start that there are two imperatives.  One, that, presented with a problem, the government will do something, the complaints of the people leave them no choice.  Two, and more importantly, the government CANNOT react in a coherent manner in time to solve the problem.  Largely because it is impossible for a government to gather the proper information and act quickly and coherently.  You see, contradictory as it sounds, the government's role is not to solve large scale problems.  It is to give its constituents an environment where the constituents themselves can act within reliable limits.

Now that we understand this, please look at this chart.  This chart is The Mint's "Crystal Ball" if you will.  We are smart enough to know that you can't know what will happen in the future, so please take our predictions for what they are worth.  You see, in August of 2007, the FED began to lower its Federal Funds rate towards 0%.  It currently stands at or around that point.  However, the premise of The Mint's chart is that it takes roughly 3 years for this cheap money to make it too the market, hence the stagger between the peaks and valleys in the chart.

According to The Mint's calculations, the FED theoretically should have solved its current "problem", known as the Credit Crisis in January of 2008 when it lowered its rate to around 2%.  However, the FED forgot to bring a fire extinguisher to the inflationary bonfire it was creating (it kept lowering rates) and now finds itself watching what it thinks is a smoldering economy.  Its reaction, at least its supposed reaction this coming Wednesday, will be to throw bucket after bucket of lighter fluid on this fire until it regains its warm glow.

Our prediction at The Mint is that the FED, which hopes to eventually bring the fire up to a healthy roar, will catch the whole forest on fire.  In other words, we believe that high levels of inflation are on the horizon, possibly hyperinflation.

Why?  The same reason we are still taking our shoes and belts off at airports and fighting invisible enemies halfway across the world.  The government, as a rule, always comes in with the wrong solution way too late and end up causing problems much larger than the ones they are trying to solve in the first place!  You see, the FED was done "saving" its friends in the financial world in January of 2008 .  But they couldn't let well enough alone.   Instead, they set in motion a seemingly endless stream of bailouts and boondoggles, entitlements and "liquidity facilities" which now threaten to blow to smithereens they very economy they are supposedly charged with managing.  Of course you and I know that this business of managing an economy is a fatal conceit, but someone needs to get the memo to Bernanke and Co before the forest goes up in smoke!
Be Careful Ben! Only You Can Prevent (Hyper)inflation!!!
Stay tuned and hold on to your hats!

David Mint

Key Indicators for Monday, November 1, 2010

Copper Price per Lb: $3.77
Oil Price per Barrel:  $81.85
10 Yr US Treasury Bond:  2.61%
FED Target Rate :  0.19%
Gold Price per Oz:  $1,363
Unemployment Rate:  9.6%
Inflation Rate (CPI):  0.1%
Dow Jones Industrial Average:  11,118
M1 Monetary Base:  $1,460,900,000,000
M2 Monetary Base:  $7,960,300,000,000