The following transcript is for the Off the Cuff Podcast presented on 1/25/12.
Chris Martenson: Welcome to ‘Off The Cuff’ with Mish and Chris where we talk about the events of the week that caught our attention, informally and without a script. I am, of course, Chris Martenson, proprietor of Chris Martenson.com and Mike or Mish Shedlock is founder of the blog Mish’s Global Economic Trend Analysis, as well as partner at Sitka Pacific Capital. Welcome, Mish. I hardly know where to begin today, there is just so much going on.
So I guess I would like to start with Federal Reserve. They have a nice announcement. It looks like they are dialing back their growth expectations a little. But most importantly, they do not see any growth before 2015. Was that it? Oh, no, I know what the most important thing here is. They are going to keep zero interest rate policy in effect forever, it looks like, or at least through 2015, whichever comes first. I see gold and silver going crazy, I see the stock market doing some things. What are you seeing?
Mish Shedlock: Well, that is what I am seeing, too. I looked at my screen today, saw the big jump of the HUI which was actually red earlier today. Gold and silver got off to a good start. It is like, well, you know, they are telling the banks what they are going to do. I am sure that banks and hedge funds and everyone else front-ran the bond trade today, so bonds rallied today. The dollar dropped quite a bit from the high, actually, but then recovered quite a bit of it back. HUI kept on to all of its gains, gold kept on to most of its gains. But here we are. Bernanke is acknowledging that economic conditions are not what he wants them to be. And since he did not downgrade them by that much, I am looking for more and more and more downgrades. We did not get the QE that everyone was expecting (I did not). I think gasoline prices are still too high for that. And today’s announcement ain’t going to do much to help gasoline prices come back down.
This is all counterproductive, in my opinion. I wrote a post on this yesterday or a couple days ago. He is screwing those on fixed income; he is screwing the middle class. What is he doing here? Bailing out the banks. He is bailing out the 1% at the expense of everyone else. He expects this to work. I do not see how it can.
Chris Martenson: You know he is doing something else here. I note that they are making a lot in the Federal Reserve policy statement about how inflation is just a little low for them, they are targeting a rate. And perversely, maybe I am just a different kind of a person but when I see a 0% interest rate forever kind of a policy, that actually puts me in kind of a deflationary mood, not an inflationary mood. I think it is counterproductive, to a person like me. I do not know how else to read this.
Mish Shedlock: Well, that is exactly what Fekete said in a series of two really good articles. The first one was in December and the other one just a few days ago. I commented on those articles on my blog. And he sees that lowering his interest rates lower and lower and lower and having a policy that says that he is going to do this now until 2014, what is he doing? He is giving banks a sure opportunity for sure gains to plow into Treasuries front-running this trade every step of the way. He actually wants inflation. He wants prices to go up. His policies are aimed at doing that. But his policies are not aimed at getting banks to lend. If he wants prices to go up. If he wants recovery in the job market; he needs to get banks to lend. Instead, he is giving banks a risk-free trade to plow into Treasuries. And some people might disagree with that, they think that is the biggest bubble in the entire world. But we can see what the market has done; we can see what the market did today. I can tell you we can see, based off of economic projections and the global slowdown, that we are going to expect more of the same. He keeps doing the same policies expecting a different result.
Chris Martenson: You know, I keep saying that we are all speculators now. I really wish I had called this gold and silver pop in advance or seen this sort of stuff in advance. But I cannot figure out with the Fed is really going to do. Within some parameters, obviously, they are not going to surprise us with an interest rate hike, which might actually be a responsible thing to do. But I think under Greenspan, they abdicated the element of surprise as a tool from their toolbox, that’s gone.
So what are they left with? Well, they are just trying to juggle far too many balls or trying to keep too many things going at once. And really, you know, you have been writing about this for a long time, I have been writing about it, as well. And I could almost say I have been complaining about it. But this is really just another extension of the ‘punish the savers, bail out the banks’ mentality that I do not know when that got so entrenched in the mindset down there at the Mariners Equities building but man, it seems to be the case. And it is hard not to get cynical when you have the president coming out and saying “well, no more bailouts. That is it, we are all done. Well, except for maybe homeowners. Well, not all homeowners; maybe just those that are in a little bit of trouble.” And then you combine that with Bernanke’s recent stuff here – not just Bernanke’s, the whole Federal Reserve – and really, what we are seeing here is a mindset that says forget about hard work, go for speculation, see if you can get free risk-free money. You know, we are really in the era of just leveraging yourself up and then your hope is for a bailout. Leverage and hope, leverage and hope. I do not know how else to read this right now.
Mish Shedlock: I know. The Obama speech last night was particularly exasperating. I did not even read it, actually, until it was like 2:00 in the morning or something. I finally said you know what? I could not find anything to write about. I mean, I am tired of writing about the same old, same old about Europe. Well, let me look around. So I go read his speech and I am sitting there thinking ‘My God’. You know, I am scrounging around on the Internet and no one else has commented. You know, how could you not see this thing? And it was so funny. I was just reading this thing through, his speech, State of the Union speech. And I just stopped at this one point even before I got to what I am calling the punch line. And I am saying my gosh, you know, right after he says “no more bailouts, no more handouts, no more copouts.” And the very next paragraph, he says “more bailouts, more handouts, and more copouts.” It was actually quite strange – not strange – it was Orwellian is the right word.
You know, I am just looking at this and he is saying that he is doing this for responsible homeowners. Yet the targeted groups are those that are underwater. Now, maybe there are a few that were relatively responsible in that group, but my gosh, most of these people bought houses they could not afford, took out equity withdrawals, spent it on boats and cars and vacations. The people that are screwed are the truly responsible ones.
And then in the next paragraph after that – this is when it really got overwhelming – he said “well, let’s not forget the millions of Americans who work hard and play by the rules. They deserve a government break.” You know, oh my gosh. And just looking around, I was surprised that Zero Hedge and some of the other people had not picked up on this same angle. And what it is, it is a back door way not at helping consumers. If most of them cannot afford their homes, they cannot afford any mortgage. They are going to default anyway. But he is going to take all of these mortgages and dump them on the FHA. And I do not know if people understand, but the FHA is a truly guaranteed government loan. Fannie and Freddie were not supposed to be.
And I think this policy proposal came because Fannie and Freddie were arguing that bailouts, reductions in mortgages would hurt them. So now, they are looking to bail out Fannie and Freddie. We are already $200 billion dollars in the hole to Fannie and Freddie. Now we are looking to take that, dump that on the FHA, and more on top of it.
Chris Martenson: Well, it is just money. We just print it anyway. What is the big deal?
Mish Shedlock: (laughter) That is the reaction of gold today.
Chris Martenson: I know.
Mish Shedlock: And where did gold close?
Chris Martenson: Last I checked, it was about $1,710, so it blasted right through the seventeen mark and went about ten bucks higher than that. So last I checked, it was up a good $40-something on the day.
Mish Shedlock: That is a pretty good move, wouldn’t you say?
Chris Martenson: Yes, that is a pretty good move. And not to wander too far over to the other side of the pond, but there is just some very interesting stuff there.
I noted that the ECB came out and said you know, we really think it is okay for some people to take losses on their Greek bonds, but not us. We are not doing it. And the hedge funds are saying well, we do not want to take losses. And the banks are saying well, we do not want to take losses. Of course nobody wants to take losses. The idea that we could be proposing – like you would say Orwellian – I think we fell down the rabbit hole, we went through a looking glass, and we are reading an Orwellian book, which goes something like this. We are going to take everything we thought we knew about bonds and how they are structured and how they are legally constructed and we are going to just turn them all on their head and just make up new rules on the fly and expect, somehow, markets to be sane, rational, and stable through that process.
Mish Shedlock: It is absolutely incredible. And I am guessing that you did not know this, but the ECB came out yesterday and not only are they refusing to take losses, they are expecting gains on those Greek bonds – seriously.
Chris Martenson: I did not know that.
Mish Shedlock: They bought these bonds at about a twenty-five percent discount and they are expecting gains. And so not only are their private bondholders upset that the ECB does not want to take losses, the ECB wants gains out of this. It was an article in the Financial Times. I have not had a chance to write that up yet. There have just been too many things going on. My God, you know, I looked at this, it is absolutely incredible over there.
I do not know whether… I really think the best thing for everyone to do is they are going to throw another hundred and thirteen – I forget the number – a hundred and X billion more at Greece and it is not going to work. I think this is why the banks are resisting this because the ECB has put itself first. They know that if they go out there and buy more bonds, more anything with the ECB putting itself first, making the ECB and the IMF – if I am not mistaken – as senior bondholders, they do not want to fund any more money to Greece under these terms. Who can blame them? The best thing is if this deal collapses, in my opinion. We will see if it does. Maybe they get another six months before they determine, you know what? Greece is still not back on the schedule they want them to be.
Chris Martenson: Well, put your finger on the globe: it is on Greece. Rotate the globe 180 degrees. Oh, there is Japan. Let’s talk about Japan for a second because I think Japan is a place we can actually see the future if we look at it. Japan has been following essentially these exact same policies. And of course, people like Bernanke and other critics, you know, they just did not do enough of whatever it was they were doing. But trust me, Japan did a lot. When you look at how much monetization they actually did and their zero interest rate policy and you look at the set of conditions they had – which were slightly different, including the fact they had savers. They were net export positive, they were a creditor nation still, But official level, at the government level, they were running massive, massive deficits in an attempt to deal with their own deflationary problems.
So let’s take a snapshot today of Japan. We note that they just ran their first annual trade deficit since when? Oh, that would be 1980. That news was actually a bit of a bombshell. I know you wrote something about that. Talk to me about Japan for a second.
Mish Shedlock: Well, the question right now, is this a new trend or is this simply the tsunami effect? I think it is a new trend. Perhaps they just roll around the breakeven point for a while here. But here is the way I see it. This is the reason why I think it is a new trend. GM is now producing better cars and you can argue about that. But even if that is not true, there is now this sort of stigma that Toyotas have as a result of these brake failures. And so you have got the reduced auto sales. You have Europe, which is entering a massive, massive recession, in my opinion. I think people are way underestimating how strong this recession in Europe is going to be. So that is going to cut exports down to United States, it is going to cut Japanese exports down to Europe.
Meanwhile, Bernanke is doing everything he can trying to pump liquidity in the market. Right now, the main place it seems to be going – it has held up, in my opinion, oil prices. So China is slowing and Japan exports a lot to China, as well. So Japan’s exports collapse and import prices, high oil stays relatively high.
Japan is in a huge squeeze here. The Bank of Japan came out yesterday and said oh, do not worry about this. We expect more growth in Japan, blah, blah, blah. But actually, listen to what the prime minister is doing and how he is reacting. He is trying to push through massive, massive tax hikes. Currently, the sales tax rate in Japan is something like 5%. There are talks that it might go all the way up to 25%. But officially, they are talking 15%. That is quite a jump. That is a 200% increase in sales taxes, actually. And is the Japanese economy prepared for that? What will that do for them? If they do not do these tax hikes, Japan – with a collapse in trade – is going to be struggling to fund all the pensioners that are retiring here now.
You have got a big, big squeeze. One of two things is going to happen. Interest rates are going to rise in Japan, which would crucify them, or the yen sinks. So Japan’s worry right now is how high the yen is. Well, you know, maybe their worry is going to be something a little bit different not too long from now.
Chris Martenson: You know, the yen is very high because we are still unwinding the carry trade. And a lot of people thought oh, well, the carry trade maybe was going to unwind relatively quickly. Forget about it. That was a decade-long, maybe decade and a half-long carry trade that takes a while to unwind those sorts of things. And so yes, that has been providing a boost to the yen’s value. I see that ending at some point. So there’s always a chance up there that we see Japan face a number of difficulties all at once, which would include rising interest rates. You know, carry trade has helped keep the interest rates low. It has also, unfortunately for them, helped boost the value of the yen internationally, but that will all stop. And at that point, they will find themselves suddenly getting a weaker yen than they ever wished for or hoped for. And they are going to find that along with that, they are going to have to have very high interest rates in order to attract any external investment.
So let’s play that game. I know you did in your blog. Interest rates at what percent would then consume all of Japan’s tax revenue? So this is interest rates on their official sovereign debt. How high would those have to go in order for 100% of their tax revenue to be consumed by interest payments?
Mish Shedlock: About 3%. And again, that points to why the prime minister here is pushing exceptionally hard for these tax hikes. Not only is he pushing hard for that, he reshuffled his entire cabinet, firing anyone, essentially, who would not go along. That is how desperate they are. So the Bank of Japan is saying one thing – oh, everything is fine. Meanwhile, their prime minister is in panic mode here trying to hike taxes. However, the politicians and the people do not want them. This prime minister’s popularity is in the gutter. He is unlikely to get re-elected, so if he cannot cram this thing through, you know, they are going to kick the can down the road until Japan blows up.
Chris Martenson: 3%. 3% – historically, have interest rates ever been that high? (laughter)
Mish Shedlock: It seems that way for Japan, but we will see. Japan is our future. And the amazing thing here is all of the Krugmans, all of the Keynesians like that and so oh, see? The US is following in Japan but how bad is that? And I have people tell me that all the time. There is a comment on my blog. Oh, you know, Japan has been quite fine here, haven’t they? And I keep saying well, Japan has not blown up yet. And you know and I know they are going to. Do not know the timeframe here yet, but we are certainly closer to it than we were a few years ago.
Chris Martenson: Oh, that old logical fallacy – because something has not happened before, it will not happen in the future.
Mish Shedlock: Yes.
Chris Martenson: That is also a possibility. In the meantime, we will ignore the fact that Japan took a 20% savings rate and ran it down pretty much to 0% over that timeframe. Their demographics have gotten relentlessly worse, of course. And now, they are battling at least a flat trade balance and possibly one that is going to tip into the negative, especially if the scenario you outlined goes forward and if Peak Oil comes forward and maintains elevated oil prices, which is a huge source of revenue flow out for them.
So at any rate, wow, it looks like we found some stuff to talk about this week. I do not know how we dug that stuff up. Maybe there will be something to talk about next week.
Mish Shedlock: Yes, this was a plateful. We will catch you in seven.
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