Ben, the Great and Powerful

“Bernanke said, in essence, that he wasn’t a magician.”

                                                    Heidi Moore, The Guardian

The number one movie in America today, “Oz, the Great and Powerful,” could be a metaphor about The Federal Reserve Board and its role in the American economy.

Oz, a likable scoundrel, is a master of illusion.  There is no substance behind his tricks, but they give the illusion of strength, and, since people believe what they want to believe, he is able to overcome the forces of evil.

Likewise, Fed Chairman Ben Bernanke’s prestidigitation relies on quantitative easing to create the illusion of strength.  All appears well when the stock market rises and the unemployment rate drops, even if there is no strength behind the market’s rise and the drop in unemployment is by only 0.2%.

Of course, the U.S. Bureau of Labor Statistics has its own illusionists, as we’ve pointed out in the past, who are able to make a 14.4% unemployment rate look like a 7.7% unemployment rate.

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Don’t Worry, Be Happy

“In your life expect some trouble 
But when you worry
You make it double
Don’t worry, be happy…”

                                              Bobby McFerrin

Higher and higher.  The stock market has gone in only one direction since our last post and that’s been up.

As of yesterday, the Dow Jones Industrial Average had risen for 10 straight days for its best performance since 1996.  The S&P 500, likewise, surged past 1,560 having gained 3.05% in the past month.

Don’t worry, be happy

And, so what if the world is going broke, if that genius Ben Bernanke continues printing money, the Dow could rise from its current 14,500 range all the way up to 18,000 by the end of the year, according to Wharton School Professor Jeremy Siegel.

Don’t worry, be happy

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The Yin-Yang Economy

Last week, with sequestration pending, President Obama and others warned of airplanes falling from the sky, tainted meat being served and schools being closed because of teacher layoffs.  The budget cut news was so bleak, tours of the White House were canceled.

This week, the stock market hit a record high.

It may be a coincidence.  The Washington Post gave sequestration no credit for the record and said the market was boosted by China’s announcement that it would put more money into the economy.  There is, it seems, a Keynesian explanation for everything.

But, as The Wall Street Journal noted, “One thing for sure, the stock market doesn’t mind the federal budget sequester.”

The only mention of sequestration in the Post story was to note that “some” are warning that it could dampen economic growth.  Of course, economic growth has been so slow, if it’s “dampened,” it’s possible that no one will notice.

Time to Invest in Stocks?

So with the record having been achieved, is it time to pile into the stock market?

Before you call your investment manager and shift your asset allocation to 100% stocks, consider the yin-yang of the current economy.  In Chinese philosophy, yin-yang describes how seemingly opposite forces are interconnected and interdependent, which seems to fit the U.S. economy quite well.

On the yang side, as the Journal noted, “stocks ar

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Flow Reversal

In another reversal of fortune, equity funds reported an outflow of more than $4 billion this week, the largest this year.  Commodity funds, meanwhile, saw an outflow of $3.2 billion, their largest weekly outflow ever.

Just when investors appeared to be headed back into the market, could it be that they’ve changed their mind?

Maybe investors were reacting to press reports that airplanes would be falling out of the sky, schools would be closing and the Four Horsemen of the Apocalypse would be visiting today because of a 2.3% nick to the federal budget caused by sequestration. read more

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Another Clunker

It’s like “Cash for Clunkers,” only for consumers.

You may remember that brilliant piece of Congressional economic planning, where an effort was made to boost auto sales by creating an incentive for consumers to trade in their old, environmentally suspect clunkers for new, higher mileage models.

“Cash for Clunkers” did, indeed, boost auto sales. Until the program stopped, at which time sales plummeted. Side effects included rising auto prices, a $3 billion cost to taxpayers and a negative impact on the environment, since many of the 690,000 vehicles traded in were shredded, not recycled.

Today’s equivalent is the tax increase that took place Jan. 1 to avoid the fiscal cliff.

Exuberance was abundant when economic data for December showed a rise in personal savings. Yet the exuberance turned out to be irrational; much like the initial glee over rising sales during “Cash for Clunkers.”

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Follow The Fed At Your Own Risk

If you think Fed Chairman Ben Bernanke has a firm grasp of the economy, you may change your mind after listening to Bain Capital co-founder Coleman Andrews quoting Chairman Bernanke in the accompanying video.

Andrews cites three quotes that show The Fed czar was out of touch with economic reality during the run up to the Great Recession.  And now, he asks, “would you trust your life-savings to an institution with that recent record of completely missing what happened in the housing sector and more broadly in the economy?” read more

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