Monday, October 19, 2009

Banana Ben Bernanke Blows More Smoke, More Bubbles...

Question:  How do you know when Bernanke is lying?   A:  His lips are moving.

Bernanke gave a speech today in which he blames global imbalances on Asian exports and a low U.S. savings rate.  How about blaming the level of exports on a high rate of U.S borrowing-based consumption, fueled by Bernanke's monetary policies?  If Bernanke REALLY believes that the U.S. needs to increase its rate of savings to a much higher level, then he would, first and foremost, raise short term interest rates to a level which would encourage savings and discourage borrowing/consumption.  If Bernanke REALLY wanted to address the global imbalances, he would reduce the amount of U.S. dollar-based liquidity in the system by raising capital ratios in the banking system and he would stop printing money to monetize Treasury debt.   Not only would this address his "global imbalances" concern properly, it would create a stronger banking system and support the dollar.  Here's a summary of his comments:  LINK

On another note, dollar weakness and stock market ebullience - no, rather stock market irrational exuberance - is being attribute to a statement made by the Fed that it is testing its "reverse repo system," which will be used to drain liquidity from the system when the Fed good and ready LINK.  Here's the problem:   1)  It will be close to impossible for the Fed to remove most of the money it put into the system for many reasons, not the least of which is that it would require the Fed to unload trillions in toxic assets back onto bank balance sheets and the banks would have to send cash back to the Fed in exchange.  The banks don't have that kind of cash on hand;  2)  If the Fed removes even a very small "sliver" of printed money from the system, our entire eonomic system will collapse.   Before you believe anything Banana Ben has to say about this, please revisit the Q&A at the introduction of this post.

Finally, the money manager, Steve Einhorn,  who grabbed headlines a year ago with his massive bet on the collapse of Lehman, is now making news with his massive bet on the collapse of the dollar:  LINK. He's actually making this bet in two ways.  First, he has accumulated a big position in physical gold and mining stocks.  Please note that Einhorn is the guy who announced in July that he dumped his big position in GLD and bought physical gold that he safekeeps (I'd like to claim an assist in this decision of his, because I sent him my research piece on why GLD is a fraud, once in early March and once in early June - his announcement was made in July).  Second, he has placed cheap, long-dated options bets on a rise in interest rates in Japan (I'm sure he has other plays but this is the one he disclosed in public).   Interest rates in Japan vs. the U.S. have only one way to go, and that's dramatically higher, as the zero interest rate policy in Japan which fueled the yen-carry trade is unwound and the zero interest rate dynamic shifts into the new dollar-carry trade.   I expect Einhorn to do very well on this trade, although not as well myself and the fund I co-manage will do in junior mining stocks.


  1. Dave,
    The Einhorn comments really jumped out at me today as well. Maybe your letter did influence him! Do you a subscription service? I ahd not seen anything noted on the site.

  2. gyc, things are going to get dicey in the land of physical gold and silver.

    I do not have subscription service. I had written a research piece back in late Feb that I emailed to Greenlight Capital.

    One of these days when I get motivated I'm going to post it on here using that software that lets you link pdf files.

  3. Dave,
    would love to read it and anything else you have. "Dicey" in gold and silver? Stop scaring me!

    Unrelated, but Denver will have to be on the lookout for the long ball tonight. It is all San Diego really does well, so no need to give away freebies. Champ Bailey should tie his shoes tight, he will be in on the action I think.

  4. gyc, email me at and I'll send you a copy of my GLD report.

    When I say "dicey" in reference to gold and silver, I mean the physical supply. There's clearly a paper short interest of all varieties -Comex, LME, GLD, OTC derivatives - which is many multiples of the actual physical supply. Why else would ABX take a $5.6 billion charge, issue stock which diluted shareholder equity, and do a huge bond deal in order to buy back its hedge?

    We haven't even begun to see the public in this country get interested in buying gold. The hoi polloi is busy selling all of their gold jewelry. Just wait until the public here turns around and wants to buy gold. This bull market is still in its early stages.

  5. The public may be less interested in gold than in silver as gold prices much over $1000 dollars an ounce will seem (and be) a tad prohibitive.
    In the meantime, silver is at least as suppressed as gold, and as per the work of Ted Butler, quite possibly more.