Ben Bernanke's Loose Money

Bill Bonner - Thu 17 Dec, 2009

Ben Bernanke's extends his loose money strategy

Zurich , Switzerland

Gold rose $15 yesterday. What to make of it?

Perhaps it was because Ben Bernanke’s extended his “extended period” pledge?

He said, in effect, if this economy doesn’t come out of its slump, it won’t be his fault. He’ll keep monetary policy as loose as possible for as long as possible. Not that we had any doubt about it. He has a theory. It’s a bad theory, but it’s all he has. And it tells him that you fight a depression with loose money.

So, what do you expect? Interest rates will remain artificially low as long as Bernanke can get away with it... or until the depression ends... whichever comes sooner.

That said, he hardly has to lift a finger. Judging from the last auction of short-term Treasury debt, lenders can’t think of anything better to do with their money than to give it to the government – in return for nothing. The last auction produced a yield of zero on one-month loans.

We went to visit a pair of clever Swiss bankers yesterday. These fellows manage money for clients all over the world. What do they think? They were focused on stocks:

“This year, the people who made the most money were those who were most heavily invested in equities. And if the patterns of the past hold up, 2010 will be a good year for equities too.

“Whenever the ten-year performance goes close to zero, the next few years tend to be very good for stock market investors.

“In fact, there has never been an exception, going all the way back to 1881. Last year was one of the worst years in stock market history. This has been one of the best. And next year should be one of the best too.”

He handed us a chart to illustrate his point. It shows the 10-year performance of the stock market.

We see that very rarely are stock market returns negative over a 10-year period. In fact, there are only two worth mentioning. One was in the ‘30s, when in August ‘39 stocks had returned MINUS 4.68% for the previous ten years.

The other major losing period came in February of this year, when investors had gotten an average annual return of -3.43% since 1999.

The message seems simple enough. When the market turns down sharply... expect a sharp turn-up to follow. But studying the chart more carefully, we see two things.

First, we see sloppiness in the figures. The ‘30s pattern was not a clean break and then a clean bounce... but a series of breaks and bounces. In fact, investors endured 10 years of losses running up to ’30... and then more 10-year periods of losses in the years ’37, ’38, ’39, and ’40.

The other thing we notice is that an investor could have made a lot of money in the ‘30s... if he was lucky.

The year 1933 was one of the best years ever. Of course, the investor was well advised to take his gains off the table. Prices slipped in ’34... bounced... and then fell apart.

By the end of the ‘40s, the poor long-term, buy and hold investors had not made a penny in two decades of investing.

This pattern, by the way, is not so different from what the Japanese have suffered during the last 20 years. They’ve seen good times. They’ve seen bad times. But the general trend of the markets has been down for two decades.

We have a feeling that the worst is still ahead for this market too.

Few of the mistakes of the bubble period have been corrected. None of the challenges of the new post-bubble economy have been met. Little of the huge mountain of debt trash has been taken away and disposed of properly. The big reckoning is still to come.

Which brings us back to the price of gold. It was over $1,200 just a few days ago. It’s had a little correction. But we doubt that it has had the correction we’ve been waiting for.

There is still no sign of consumer price inflation. Nor is there any sign that consumers are returning to their old spendthrift habits. Nor is there any sign that jobs are becoming more plentiful... or that this depression is going to end any time soon. When that becomes clearer, stocks will fall again. Gold should fall too.

People will want safety. But where will they seek it? Ah, that’s another big question. In the first stage of the crisis, they sold gold and bought dollars. Will they do the same the next time? Or will they fear that the dollar may be part of the problem, rather than part of the solution? If so, won’t they flee stocks for gold?

We don’t know.

*** Last night, we went to a symposium called Zurich Minds. You can find out more about it at Zurichminds.com.

Our friend, Rolf Dobelli brings together people from all over the world to talk about what is on their minds. Last year, we went to hear another friend, Nassim Taleb, author of The Black Swan. This year, we went to see what Rolf would come up with.

The programme was fascinating, as usual. A young woman explained neutrinos.

A young man told us about his hobby. On weekends, he puts on a suit that makes him look a little like a flying squirrel, if you can imagine a flying squirrel dressed in parachute silk.

Then, he drives up to one of Switzerland’s highest cliffs and jumps off. With the help of his flight suit he is able to fall/glide down the mountainside, covering 2.5m in horizontal distance for every one metre of fall. Then, at the last minute, he pulls a small parachute to break his fall.

He was meant to make his presentation with a fellow jumper. Alas, the other fellow died two weeks ago in a tragic accident.

One of the highlights of the programme was a noted surgeon who showed us how to operate on a human brain. Some people left the room, their hands to their mouths... but we were glued to the screen. We had never seen brain surgery at all; last night we got to see it from the surgeon’s perspective.

“There is some science involved,” said Dr. Bertalanffy. “But it is mostly a skill that you learn over many, many years. It takes at least 10 years to master it... no, more like 20.

“And I’m still learning. And this is not something you can learn in school. You have to learn it by working with a real master. And that master had to learn it from another master.

“You are dealing with very small, delicate nerves, arteries and veins. But you are also dealing with a human being. Just a tiny error and the person will never be the same again. You don’t want to make a mistake...”

We watched in suspense and amazement as Dr. Bertalanffy showed a video of brain surgery. He probed into the soft tissues... exploring the folds and crevices in a brain, looking for a tumour... and then getting it out without causing further damage.

He told the story of how he once performed an emergency operation in a foreign country, with no preparation and without proper tools.

“I don’t think I would do it again. But this woman came to me. She needed this operation or she could die at any minute. But it was a very dangerous and difficult operation, deep in the brain.

“I was actually at the airport and ready to get on a plane to come back to Switzerland. But she came to see me at the airport and I agreed to do it. Something told me that it would be all right.

“And she was confident too. I don’t usually pray when I operate. Just like I don’t expect the pilot to pray when I get in a plane; I expect him to be capable of flying the plane. But this time, I prayed. And I’m happy to say, it worked out.”

The star of the show, however, was Dan Dennett, an American philosopher from Tufts University. Mr. Dennett believes the world and everything in it is an accident, in the sense it has no purpose and no designer. He says he can explain human consciousness without resort to ‘magic’.

But there was nothing very original in his approach, as near as we could see. And something a bit too smug and self-satisfied about his conclusions. Like the dotcom hustlers at the end of the ‘90s... or Wall Street in 2006... He acted as though he had it all figured out.

Dennett described the creation and development of human beings and their culture in much the same terms that Austrian economists explain the workings of an economy.

They are the result of ‘spontaneous order’, in which the pieces assemble themselves without the help of central planning. Things take shape from the bottom up... cells get together to form hands and arms... and brains. One person joins with another to form a community. Then, they develop culture, language and so forth... all of it – like successful businesses – the result of natural selection rather than divine intervention.

“The best way to understand cultural Darwinism,” said Dennett, “is to think of the Polynesian canoe. The canoe makers don’t necessarily understand why they make them the way they do. But they still make them well... and improve them over time. The rule is pretty simple: if the canoe comes back, copy it.”

We’re perfectly willing to believe that that’s the way the process appears to a 21 st century observer. We suspect, however, that professor Dennett may be leaving something out – the part he doesn’t understand.

Darwinism only describes the mechanisms... the drive chain... of the evolving world. It doesn’t really tell you much about ‘why’ things are the way they are or what they will be in the future.

Nor does it have much to do with the existence or non-existence of a grand designer – God. If God wanted to throw a monkey wrench into the gears, He could do so anytime He wanted. He could also permit people like Dan Dennett to think they know what they are talking about. God would have to build the world with something. Why not eukaryotes, quarks and evolution?

What separates man from the beasts? Put the question to some of our friends in London and they will say “the English channel”. In Paris, they say “the Mediterranean”. Dan had a different answer. Not a body of water; a body that chatters.

Even termites live in communities... build elaborate cities... and have a division of labour. But ants can’t transmit knowledge and ideas via words. This is the critical, distinguishing feature of mankind... and it is what has permitted him to be so successful, he says. He can pass ideas and information by way of ‘memes’... words are ‘memes’.

“The triumph of human kind is a very recent development. For ten thousand years we were just another animal trying to make a go of it on planet earth. Humans – and all their livestock – were barely 1% of the vertebrate biomass on the planet. Now, they are 98% of it.”

Hmmm... two to 98.What a spectacular success story. A 5,000% increase. Hey wait a minute... that’s a bubble! Yes, dear reader, humans are a sell.

Until tomorrow,

Bill Bonner
For The Daily Reckoning