Bernanke’s Bubble Lab

An above the fold story in today’s Wall Street Journal “Bernanke’s Bubble Laboratory” is about “a band of young scholars” the Federal Reserve Chairman and former Princeton professor hired to work at the university to figure out what causes stock market manias. The scholars concluded that the Fed should act to restrain bubbles, yet there’s no mention about Fed policies creating the nurturing environment needed for bubbles to grow. Perhaps these guys don’t want to bite the hand that feeds them. (Bernanke secured $10 million from a foundation to sponsor the research.)

Monetary policy is controlled by the Fed. Periods of excess liquidity and low interest rates feed bubbles as it pushes investors further out on the risk curve to obtain a decent investment return. The Fed funds rate is 2% and core inflation calculated by the government is running at 2.3% year over year. If I invest my money in a safe instrument such as an FDIC-insured Certificate of Deposit or Treasury bill, I will earn less than the rate of inflation – especially after paying tax on interest income. This economic environment pushes the investor into stocks and commodities. No offense guys, but this is not rocket science. Still, we’re curious to know what’s been brewing in the lab.

The herd/momentum mentality keeps bubbles growing. As more people tout how much money they’re making from the hot trend, more people pile in for their piece of the pie. The Shorts throw in the towel, and for a time nothing stands in the bubble’s way.

Friends and groups of people are ruled by Uranus and the sign Aquarius. From a financial perspective, the planetary energy of Uranus relates to trends and sudden and sharp price movements. It takes Uranus around 7 years to transit a sign. Other planetary energies and factors will come into play that will usually crash the trend before Uranus moves into the next sign. Uranus was in its “home” sign Aquarius from 1996-2003. Aquarius rules computers and the internet. From 2003-2011, Uranus is in Pisces. Pisces rules oil. A study by bubble lab economist Harrison Hong with Motohiro Yogo of the Wharton School has concluded that “’prices for commodities are expensive’ but not a bubble.”

The guys cite borrowed money as a factor fueling bubbles and the subsequent margin calls that force investors to sell when the market begins to turn down. Again we must look to the Fed. Alan Greenspan was consistently against raising margin requirements. A bill is currently going through Congress that would raise margin requirements only for oil futures trading.

The next bubble discussed is housing. Saturn takes a little over 2 years to transit a sign. From June 2003 to July 2005, Saturn was in Cancer, the sign that rules real estate. Numerous statistics cite the peak in house prices occurred in most areas in July 2005. The economists concluded that many people realized housing prices were unsustainable, but “betting against house prices is hard.” True, but housing bears during that time could have bought cheap long term out of the money Puts on the homebuilders and related offshoots of the real estate industrial complex.

From July 2005 to August 2007, Saturn was in Leo which rules all forms of speculation. Between mid 2006 and summer 2007, Saturn was opposing Neptune, the planetary energy relating to credit. The end of the housing bubble had morphed into excessive financial alchemy (Neptune rules magic). As Saturn approached the end of its Leo transit and had concluded its oppositions to Neptune in Aquarius, the credit crunch began. The commodity bubble began around the time Saturn entered Virgo last September.

And when do bubbles burst? When enough “skeptics are on board to bet against the bubble.” This is why the Princeton PhDs conclude that hedge funds are in the best position to profit. They jump on board the train in the early stage of the bubble, head for the exit when the train is almost full, and turn bearish.

Just like Greenspan, Bernanke has no desire to keep bubbles confined to the bathtub.

Related Post: “Stocks ‘Lost Decade” from a Planetary Perspective”

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Paul Volcker Can Save Us Again From That 70s Show

Yesterday former Federal Reserve Chairman Paul Volcker appeared before the Joint Economic Committee of Congress. In watching the video of his testimony, it was easy to imagine how our economy and financial institutions could be so much healthier if Volcker was back at the helm of the Fed.

At 6 foot 7 inches tall, Volcker is a commanding presence, yet he has a humble and unassuming demeanor. George Soros calls Volcker “the exemplary public servant – he embodies that old idea of civic virtue.”* Virgo is the sign that rules work and service. Volcker embodies this archetype as he was born with the Sun, Mercury, Venus, and Mars in Virgo. Today’s Wall Street Journal “Fed Balance Sheet Worries Volcker”, aptly describes Virgo energy. Accountants are ruled by Virgo as it is a very detailed oriented sign. People who strongly embody this energy tend to be worriers. With his Sun (self-identity) conjoined with Virgo’s ruler Mercury (communication), Volcker doesn’t masquerade his thoughts and intentions. Masquerading is a characteristic of Volcker’s successor, Alan Greenspan, who has the Sun in Pisces – the opposite sign of Virgo.

In addition to the Sun and Mercury, Volcker has Venus and Mars in Virgo. Venus rules finance, and Volcker would like to see the Federal Reserve take greater responsibility in regulating financial markets. Mars is the warrior; the planetary energy of action. Volcker’s Mars opposes Jupiter and Uranus in Aries (a sign ruled by Mars). He had the courage (Aries) to rebel (Uranus), ignoring the political (Jupiter) mandate imposed on the Fed in 1978. Greenspan and Fed Chairman Ben Bernanke have used the Full Employment & Balanced Growth Act as an excuse to ignore inflation. By raising the Fed funds rate to a record 20% in 1980, Volcker won the battle against inflation.

Virgo is an earth sign, and as such takes a common sense approach in all matters. Volcker is more concerned about how monetary policy affects real world economics than any other Fed chairman. With his Mercury favorably aspecting Pluto, Volcker has a penetrating mind that cuts through the financial engineering. He said that the Consumer Price Index’s so-called “core” inflation that excludes food and energy, “doesn’t feel quite right” because these prices have been on a consistent upward trajectory rather than “volatile” as the government describes. Volcker warned that without focusing on this and other inflationary indicators such as the weak dollar, “we are back to the inflation of the 1970s or worse.”

Volcker should know. Volcker became Fed Chairman on August 6, 1979 (until August 11, 1987). Transiting Saturn in Virgo conjoined Volcker’s Sun then, indicating his increased responsibilities and powerful government position. Now that Saturn is back in Virgo again, the world is faced with some of the same issues it faced in the late 1970s: inflation, tighter supplies of food and fuel, and stagnant wages. Yesterday Volcker described the economy as “too dependent upon consumption.” The lack of savings in America is made worse by the current Fed funds rate at 2% and “core” inflation running above that.

Pluto in Capricorn is challenging Volcker’s Jupiter in Aries, motivating him to publicly express his monetary and political positions. (Yesterday he formally endorsed Senator Obama for President.) At the Congressional hearing yesterday, Volcker suggested a “chief supervisory regulator” who “could be the Fed Vice Chairman.” This person should be confirmed by Congress to make the official more “accountable.” He believes the regulator should be part of the Fed due to its capacity as the lender of last resort and the Fed’s degree of political independence. In my opinion, how much political independence you get from the Fed depends on who’s running the show.

I wrote last year that planetary transits to the Federal Reserve and Bernanke’s charts would bring major changes and increased responsibilities for the central bank and its current Chairman. Volcker stated yesterday the Fed is “not equipped to do it now” as the central bank would need “a strong staff” and “math experts to match the other side” (Wall Street).

In September 2008, transiting Saturn will once again conjoin Volcker’s Sun and Mercury, along with natal Venus in November. Between September and the end of the year, Jupiter in Capricorn will harmonize with Volcker’s Mercury, Venus, and Mars. There’s a good chance that Volcker will be back in the limelight. While I would like nothing better than Paul Volcker replacing Bernanke as Fed Chairman, I hope at a minimum the new Administration and Congress will regularly seek his wise counsel in an official capacity to guide us through these challenging economic times.

Paul Volcker: September 5, 1927 time unknown Cape May, New Jersey

*Financial Times: “Man in the News” by Chrystia Freeland

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Will Bernanke Ignore Rising Shoe Prices Too?

Forget Iron Man and Superman. A new super hero has emerged; spawn of the creature from Jekyll Island –Fed Chairman Ben Bernanke!

How is the Fed Chairman a super hero? On the basis that he doesn’t need to eat or drive, and inflation is able to disappear in his presence, I’d say he’s got strong qualifications. The final test for our potential superhero will be if he can survive without shoes.

The Wall Street Journal “Pain at the Other Pump: Shoe Prices Rise” reports that America’s three largest footwear makers – Brown Shoe Co. (BWS), Collective Brands (PSS), and Jones Apparel Group (JNY), are increasing shoe prices between 5-15% beginning this fall. The companies cite a weak US dollar and higher costs in China for the price increases.
We understand about the weak dollar. After all, Ben’s been busy since last August with the rate cuts. As Papa Bush would say, “wouldn’t be prudent” not to help the banks and US multinational corporations.

The China part is another story. We were told if everything was made in China we would save, save, save. Greed, er globalization is good. China makes 85% of the shoes sold in the US, as well as most of the handbags, belts and other leather accessories (which will also increase). Ben doesn’t need a handbag, so that’s not an issue.

Shoes fall under the planetary energy of Neptune and the sign Pisces which rule the feet. Uranus, the planetary energy relating to sharp price movements, is currently in Pisces. This fall, Uranus in Pisces will begin forming a series of oppositions to Saturn in Virgo until mid 2010. Prices on all kinds of goods could gyrate wildly. In the case of shoes, there could be disruptions along the supply chain.

Jones Apparel CEO Wes Card must be a Bernanke groupie. The maker of Nine West brand shoes told the Journal that despite price increases, consumers will see good value, not inflation. “The gap between a Nine West shoe and a Jimmy Choo has gotten wider,” Card said. If it wasn’t for “Sex and the City,” only celebrities and fashionistas would know what a Jimmy Choo is. Pictured above is a new Nine West pump style shoe that retails for $89.00. A similar style Jimmy Choo shoe retails for about $710.00. Didn’t Mr. Card learn that you must compare apples to apples and not apples to caviar?

Another Fed fan is Mark Hood, the CFO of Brown Shoe Co. which owns the Famous Footwear chain and brands such as Naturalizer, Life Stride and Buster Brown. Hood says that they would ease feet and wallets “by adding features such as breathable linings and cushioned in-steps.” Rationalizing higher prices because of added features is known as hedonic adjustment – a fancy way of discounting inflation. The Bureau of Labor Statistics will proclaim that consumers got more for their money. Therefore, the manufacturer’s higher price is not inflationary.

People need to buy shoes to protect their feet, but they don’t need to buy as many. When it comes to the more trendy high heeled shoes, women need to calculate the cost of a podiatrist visit into their shoe budget.

Bernanke told the banks to “raise capital or be acquired.” Now he’s adjusted the message that shoe companies must “raise prices or be acquired.” After all, superheroes can always go barefoot.

Related Post: “March CPI: Desperate Housewives Want to Know Where the Government Shops”

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Satellite Searching for Saudi Oil

With crude oil up 95% year over year and touching over $120 a barrel yesterday, analysts are turning to satellite images to gauge oil supply.

Today’s Wall Street Journal cites a study by Sanford Bernstein that compared high res sat images from 2001 to 2007 of Saudi Arabia’s Ghawar field. Ghawar is 20 miles wide and 175 miles long, and began production in 1951. It comprises 60% of total Saudi production and around 7% of global supply; the equivalent to all US combined daily production.

In a report issued to clients last month, Bernstein concluded that only part of Ghawar “is suffering signs of old age” and faces “mild production declines at worst.” The northernmost part of the field called Shedgun, showed signs of being “uplifted.” This indicates that heavy water injection is being used to lift the crude to ground level, a method used to maximize fields in heavy decline.

Thanks to Google Earth, anyone can take a peek at peak oil. Satellite O’Er The Desert is a blog that examines the images and according to the WSJ, has concluded that Aramco’s “massive redrilling at Ghawar is part of a ‘constant struggle to maintain the field’s current production level.’”

Interpretations of satellite images have their critics, from investment banker Matthew R. Simmons, author of the book “Twilight in the Desert,” to Nansen Saleri, Aramco’s former head of reservoir management. Saudi Arabia and other OPEC members have never revealed data showing the state of their production holdings.

As I wrote about in “Factors Fueling Oil Prices,” the planetary energies of Uranus in Pisces and Pluto in Capricorn relate to oil becoming increasingly more difficult and expensive to extract. Today’s Journal article cites Mexico’s Cantarell and Kuwait’s Burgan fields have lost their vitality and “need help”. Alaska’s North Slope and the North Sea platform is in “serious decline.” The North Sea and Venezuelan production show “sharp subsidence rates” (surface collapse that could indicate heavy depletion rates underground). Throw in continuing geopolitical tensions in Nigeria, Iraq, and Iran that I see only escalating this summer, and you’ve got continued high crude prices. Moderate relief is possible; not through cutting the gas tax, but by the Federal Reserve raising interest rates to tame inflation.

As analysts now view crude’s next leg up to $140 a barrel, people need to realize that it is not in the Saudis and OPEC’s best interest to have the price of crude at these levels. If they could, they would increase production in an instant to bring the price down to a level that would be palatable enough to curtail a western push to converting to an alternative energy sources. This is why production specs are kept secret. The Arabs have used sovereign wealth funds to make western investments as one method to begin weaning themselves from an oil-based economy.

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The Fed Returns to Price Stability?

Today’s Wall Street Journal features an op-ed piece by Rep. Paul D. Ryan of Wisconsin (“Blame Congress for Inflation”). Ryan is referring to the Full Employment & Balanced Growth Act that Congress passed and President Carter signed on October 27, 1978. The Act, also known as Humphrey Hawkins, mandates the Federal Reserve take on the dual role of balancing price stability and maximum employment.

Rep. Ryan intends to introduce the Price Stability Act of 2008 that would rewrite the Act to return the Fed’s focus to its original purpose – price stability. I wrote about the horoscope of the Act in a post about the Fed last year, stating the only thing that would grow from the 1978 Act is consumer debt and benefits to the “ruling class.” Paul Volcker became Fed Chairman the following year, ignoring the dual mandate in order to tame inflation. Volcker was smart enough to realize you cannot have a sound economy (and therefore maximum employment), unless you have price stability. Unfortunately, Greenspan and Bernanke chose to ignore the price stability side in favor of building bubbles, concerned with deflation’s effect on growth. (There’s nothing in the Act that talks about deflation being a problem!)

The reasons Rep. Ryan cites in favor of rewriting the Act are ones very familiar to Wall Street Weather readers: stable prices to keep inflation in check, a real strong dollar policy, and encouraging people to save. Price stability prevents interest rates from being jerked all over the spectrum, and the ensuing anxiety it creates for households and Main Street businesses to make long-term plans.

As Rep. Ryan writes: “There is no sign that Congress will change its tune on fiscal affairs – but passing the Price Stability Act is a chance at a bipartisan commitment to sound money. By refocusing the Federal Reserve’s legal mandate, Congress can strengthen the economy and do so without incurring any cost to the budget or increasing the deficit.”

I have already written that the transit of Pluto in Capricorn will bring major transformation to the purpose of the Federal Reserve. The Full Employment & Balanced Growth Act will experience its first Saturn return on August 27, 2008. A Saturn return occurs about every 28.5 years of an individual or entity’s life. This can be a time of testing and learning lessons. Saturn in Virgo is conjoined with the Moon in the Act’s horoscope. It is time for government legislation (Saturn) to restructure the Act to benefit the American people (Moon).

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Bernanke Fed Lowers Rates; Indifferent to Inflation

“I want to know who fills up their gas tank.” – Rick Santelli, CNBC’s Bond Market Commentator

Bernanke and the majority of the FOMC must have thought that with the Moon in dreamy Pisces today, it was time to close their eyes to the real world and journey out of body to an another world.

Most market watchers expected the Fed to lower another 25 basis points to 2% and as usual, they accommodated. But along with the rate reduction was a growing expectation by many market watchers that inflation must be addressed to stop the dollar from falling further, and prevent food and fuel prices from escalating further out of control.

The only semi-sensible people on the Committee are Richard Fisher and Charles Plosser who wanted rates to remain unchanged. To a man lacking earth in his horoscope like Bernanke, the prominent energies of Saturn in Virgo this week is interpreted that the Fed must be cautious and fearful about a lack of growth. Bernanke refuses to relinquish being Jupiter’s poster child for growth and expansion, despite the fact that the only thing the Fed is growing is a bigger bubble in commodities and oil, further harming consumers. Today’s FOMC statement continues to reiterate that “The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices.” (I guess we're supposed to make this our mantra each time we visit the grocery store, gas station, etc.) The Committee’s only concession to inflation is “energy and other commodity prices have increased.” However, it is an insult to the American people who are struggling under these inflationary pressures, to preface that statement with “Although readings on core inflation have improved somewhat,” The FOMC should be condemned to live their lives in “core” (without food and fuel).

Which brings me to the Treasury’s idea that the Federal Reserve should be given more powers than it currently has. Today’s Financial Times quotes David Nason, assistant secretary for financial institutions, who said the Fed “could even use its authority to order banks, hedge funds and other entities to curtail strategies that put financial stability at risk.” Fine, but first the Fed would have to be trained to properly perform their current job before their duties are expanded. As I have previously written, a far better idea is to replace Bernanke with former Chairman Paul Volcker, or someone who thinks like him. I bet Bernanke is sitting in his office looking perplexed at the red numbers on his Bloomberg or Reuters terminal. Hopefully it doesn’t prompt him to have a panic attack emergency rate cut. I am more confident than ever that my prediction of the Fed’s future will come to pass.

Related Posts: “Enough With the Interest Rate Cuts”, “Factors Fueling Oil Prices”

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Our Strong Dollar Policy

One could speculate that President Bush, Treasury Secretary Paulson, and Federal Reserve Chairman Bernanke are using affirmations and mind programming to affect the movement of the US dollar. Perhaps they read or watched The Secret together and decided if they adopted the phrase strong dollar policy as their affirmation, it would become reality.

It’s obvious that the trio need a crash course in “Metaphysics 101”. In order to achieve the change you desire, you have to be 100% confident it will occur, and you have to take the appropriate actions to help manifest it.

Yet the more they repeat the strong dollar policy mantra, the lower the dollar drops. The US has “de-coupled” from the rest of the world because we are not taking action to tame inflation. This is why the Euro climbed over $1.60 yesterday. The oil exporting countries are exchanging some of their dollar reserves to buy Euros. The weak dollar increases the cost of commodities prices, creating a global food crisis and record oil prices.

On the surface their manifestation techniques appear to have failed. But maybe we are the ones who are misinterpreting what the Administration’s true economic policy is. A weak dollar boosts exports, helping to lower our huge trade deficit. More importantly, a weak dollar boosts the profits of US multinational corporations when they translate those Euros back into dollars. Corporate earnings appear stronger than they actually are, keeping the stock market indices artificially elevated. This way they can say “recession is possible” with a semi-straight face.

Just as the banks are the only ones benefiting from the Fed’s low interest rates, only the largest multinationals benefit from a debased dollar.

Related Post: “Recession: The Truth Is Out There”

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March CPI: Desperate Housewives Want to Know Where the Government Shops

You have to be a creative type to work at the Bureau of Labor Statistics. No other reason would explain how this governmental agency is able to churn out consumer price statistics that in no way correlate to the cost of living in America today.

The March Consumer Price Index (CPI) came in up 0.3%, up 4.0% year over year. Excluding food and energy costs (in real life you’d be dead), was up 0.2%. On a year over year basis, “core” inflation is up 2.4%. Despite Core being 0.4% above the Federal Reserve’s inflation “comfort” level, as CNBC’s Fed apologist Steve Liesman said, the Fed is “waiting”.

Waiting for what? For rioting over food and energy costs to break out on the streets here? If inflation is still able to leak through these manipulated numbers, you know that inflation is totally out of control. And the price of commodities reflect that as speculation increases as a hedge against runaway inflation.

With the Moon (food/domestic needs) in analytical Virgo today, let’s pick apart some of the components from the March CPI:

Food Index: up 5.3% in the first quarter of 2008 (In 2007, it was up 4.7%). Grocery store prices increased at an annual rate of 5.9%. Bread was up 2.1%, an increase of 14.7% year over year. Cereal and bakery products increased 1.3%. Produce increased 0.1%, nonalcoholic beverages up 0.3%. The numbers get totally ridiculous when the Bureau claims that the cost of meats/poultry/seafood and Eggs was “virtually unchanged”, and Milk dropped 2.2%. At this point, housewives reading this must be wondering where these people shop. As today’s Wall Street Journal points out, the lower cost of meat is a temporary phenomenon as farmers are slaughtering their livestock due to the high cost of feed.

Household Costs: The cost of shelter increased 0.1%, and Rent/OER by 0.2%. Rather than calculating the cost to purchase a home, OER (Owner’s Equivalent Rent) calculates the monthly rent you’d receive if you put your home out for rent. (But then where would you live?) The cost to sleep (bedding) increased 1.7%. For people who still had money left to decorate, it cost 0.5% more.

Utilities increased 2.0%, Electricity 0.8%, Natural Gas 4.6%, and Fuel Oil 10.1% (up 48.4% year over year). Talk wasn’t cheap, as local calls increased 0.5% and long distance calls by 0.2%. (Costs for mobile phones remained unchanged.)

Internet costs are lumped in with computers, peripherals, and software accessories, which the government claimed dropped 0.1%. Does that mean I can tell my ISP to lower my monthly charge? I guess I’m using the wrong provider.

Recreation: It costs more to dine out (0.3%), but the cost of a “liquid lunch” decreased 0.1%. It cost more to get away, with air fares increasing the most (3%). Being a couch potato increased 0.6% (TV/satellite). Pet costs increased 1.1%, so they better be doing more to earn their keep than fetching the paper or killing mice.

Apparel/Personal: CNBC’s Liesman touted that Apparel costs were lower. I guess he was only concerned about his costs. Looking at the details, women’s and girls’ apparel increased 2.6%.

Women were probably hit harder than men as personal care costs increased 0.6%. The increase was due to higher costs for haircuts and “miscellaneous personal goods. And get this: the government assumes we all smoke because: “These increases were partially offset by a 0.1 percent decline in the index for tobacco and smoking products.”

Related Posts: Mars in Cancer and Saturn in Virgo

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“Enough With the Interest Rate Cuts”

“It’s time for the Federal Reserve to stop reducing the federal funds rate, because the likely benefit is small compared to the potential damage.” So speaketh Martin Feldstein, president and CEO of the National Bureau of Economic Research. (The NBER is the organization that officially declares when the US economy is in a recession.)

In an op-ed piece in today’s Wall Street Journal (“Enough With the Interest Rate Cuts”), the Harvard professor states that lowering the fed funds rate from its current 2.25% would increase inflation. Back in December, Feldstein was on CNBC demanding the Fed continue cutting rates. Just like his organization’s recession forecasting, Feldstein has arrived late to the realization that low interest rates are hurting rather than helping consumers. I have written since last August that
Saturn in Virgo (2007-2010) would bring deflated supplies and inflated prices. I had also written long before Feldstein’s epiphany that borrowers are not benefiting from lower interest rates.

Feldstein fails to mention that the Federal Reserve is keeping rates low to create a wider yield spread to help the banks. Beyond that, we know that Bernanke is obsessed with the Great Depression, and seems determined to create another one. He believes that the Fed was too tight with monetary policy then, so taking the opposite stance now should surely prevent economic collapse. If Bernanke understood planetary cycles, he would only have to go back one Saturn cycle ago to the late 1970s to see history repeating itself. As a Jupiter ruled Sagittarian, Bernanke is obsessed with growth and expansion. He thinks he can focus on fostering growth first and worry about inflation later. With his Mercury (thoughts) and Venus (values) also in Sagittarius, he is optimistic that economic conditions will improve in the second half of the year. Bernanke blames investor speculation for high commodity prices and their resulting inflation. He forecasts that once the bubble bursts, inflation will diminish. His mind is simply incapable of correlating that low interest rates fuel inflation by decreasing the value of the dollar, pushing up the cost of food and energy worldwide. This is why you must have a Federal Reserve comprised of members who are not missing the common sense earth element in their horoscopes. It doesn’t matter what your studies and data models show that you pour over in your ivory tower when people are struggling to survive.

BREAKING NEWS! In the unfortunate honor of the March Producer Price Index up 6.9% year over year, with “core” (ex-everything) up 2.7% year over year, here’s a linkfest of Wall Street Weather posts I’ve written about relating to inflation: Wheat Goes Wild, Deadly Inflation, Inflationization, Jim Rogers Speaks His Mind, Bubbles Beyond the Bathtub, Inflation is like Dandelions, The Commodities Craze, No Core Inflation for the Post Office, Larry Kudlow, Inflation Fighter, Fund Managers Say Stagflation is Here, A Prudent Bear is Better Than an Over-Fed Bull, The Fed’s Future, The Bank vs. Bernanke, Federal Reserve lowers rates, determined to destroy U.S. economy, The Fed Under Fire.

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Lehman Could Still Follow The Bear

Stearns (BSC), that is. There’s no question that Lehman Brothers (LEH) is playing games with the market and the Federal Reserve is swallowing it. Literally.

Yesterday an SEC filing revealed that Lehman liquidated two money market and one “enhanced” cash fund, absorbing $1.8 billion onto its balance sheet. Lehman took $300 million in writedowns from the funds during its fiscal first quarter. Despite the level of detail Lehman’s CFO Erin Callan presented on their March 18 first quarter earnings call, the liquidation and writedown of the three funds were not specifically mentioned. (This is how Bear’s unraveling began.)

Today’s Wall Street Journal reports that Lehman is now using financial engineering on the Fed. Lehman created a new investment vehicle called “Freedom”. Basically, the fund gives Lehman the freedom to unload their junk at the Fed’s recently opened Primary Dealer Credit Facility for investment banks.

“Freedom” is a CLO (collateralized loan obligation) that bundled up over 60 of Lehman’s loans, with the risk divided into two groups of securities. The higher rated tranches will be used as collateral for loans from the Fed. Some of the loans in the bundle include debt issued to finance the private equity acquisitions of First Data and TXU.

According to the Journal, Lehman claims the junk dropped off at the New York Fed’s doorstep “was meant as a test of what the Fed would accept.” Other Wall Street firms are interested in getting in the game. The Fed is not commenting on Lehman’s collateral or the loan Lehman received.

It is clear that the Treasury and the Federal Reserve used Bear Stearns as their public relations offering to the god of moral hazard. The Fed is allowing Wall Street to continue its financial engineering, and the American taxpayer may end up footing the bill in the future. Investment banks taking their riskiest debt to the Fed is not something the government wants to widely broadcast.

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Greenspan: The Maestro is Mad

Former Federal Reserve Chairman Alan Greenspan has become extremely concerned that his legacy is being tarnished by the loud chorus of critics who blame him for engineering the housing bubble. After being criticized by several economists for his March 17 op-ed piece in the Financial Times, Greenspan is back this morning, defending his actions in “The fed is blameless on the property bubble.”

Here are the Maestro’s key arguments of why the Fed under his leadership did not contribute to the housing bubble:

“The US bubble was close to median world experience and the evidence that monetary policy added to the bubble is statistically very fragile.” Greenspan’s attitude is that housing bubbles occurred worldwide. Forget the world takes its cues from US economic and monetary policies, and many of the world’s currencies are tied to the US dollar.

“The problem is not the lack of regulation but unrealistic expectations about what regulators are able to prevent.” Greenspan argues that stronger Fed regulation of lending products would not have prevented the subprime mortgage crisis. Indeed, Greenspan took the opposite view. In speeches and Congressional appearances, Greenspan outright encouraged lenders to engage in financial alchemy. In 2004, Greenspan said “American consumers might benefit if lenders provided greater mortgage-product alternatives to the traditional fixed-rate mortgage."* Despite low fixed mortgage rates, Greenspan kept touting the benefits of adjustable- rate mortgages.

By keeping interest rates too low for too long, Greenspan encouraged institutional and individual investors to go further out on the risk curve for yield. Every time Congress proposed to raise FDIC insurance on bank held deposits above $100,000, Greenspan vehemently objected.

“Even with full authority to intervene, it is not credible that regulators would have been able to prevent the subprime debacle.” The Bernanke Fed has a proposed rule to amend the home mortgage provisions of Regulation Z. If these proposals had been in place, the “subprime debacle” would not have occurred. Bernanke’s proposal requires borrowers to repay the loan from sources other than the home’s value, their income/assets must be verified, and banks would be prohibited from giving “yield-spread premiums” to mortgage brokers, amongst many other important rules. Greenspan constantly talked about the home as a vehicle of “wealth extraction” (your home as an ATM machine). As long as home prices kept rising, people could profit from real estate speculation as well as tap into the increased value of their residence for a home equity loans to buy cars, vacations, BigMacs, etc.

Greenspan’s tone toward the end of the piece suggests that he doesn’t believe his policies are being treated fairly against other economic views expressed by the FT’s Economists’ Forum.

Pluto in Capricorn is challenging Greenspan’s Mercury in Aries, indicating a deep questioning by other economic experts about the root causes of the credit collapse. The April 5 Aries New Moon is challenging Greenspan’s natal Mars in Capricorn. Greenspan feels he must fight to defend his reputation. Saturn in Virgo will oppose Greenspan’s Pisces Sun in late September, increasing the criticisms against his Fed tenure. These and other upcoming challenging transits show the need for Greenspan to take steps to relax. Instead of fighting his critics, Greenspan could be enjoying life with his wife (NBC News reporter Andrea Mitchell) and the freedom of retirement.

Related Posts: “Bubbles Beyond the Bathtub”, “Dumb and Dumber by the Day”, “Headwinds Hit Wall Street”.

Alan Greenspan: March 6, 1926 time unknown New York City.

* “Understanding Household Debt Obligations” : speech given by Greenspan at the Credit Union National Association 2004 Governmental Affairs Conference, February 23, 2004.

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Fire at Fed and Treasury Burns Down Bear Stearns

The eye of the storm was missing from the Senate Banking Committee hearing yesterday, but his presence was strongly felt. People who know him refer to him as “Hurricane Hank” – an apt name for the man who told Bear Stearns they had 48 hours to be acquired before Asian markets opened on March 17. CEO Alan Schwartz testified another buyer besides JPMorgan was interested in buying Bear, but was unable to perform due diligence in such a short amount of time.

In the drama of Bear Stearns, it is the fire triplicity that commands center stage in the form of Treasury Secretary Hank Paulson (Aries), New York Federal Reserve Bank President Timothy Geithner (Leo), and Federal Reserve Chairman Ben Bernanke (Sagittarius). Fire energy is enthusiastic and always ready to spring into action. However, each of the fire signs express their energy in slightly different ways.

As the first sign of the zodiac, Aries energy needs to accomplish things quickly and aggressively, before moving on to something else. When Bear Stearns (BSC) liquidity dropped $10 billion in 24 hours due to a “run” on the investment bank, the government quickly got involved. Undersecretary of the Treasury Robert Steel testified yesterday that Paulson “was in constant communication in trying to be helpful to Bernanke and Geithner.” Steel said it was Paulson who told CEO Jamie Dimon his view that JPMorgan should offer a low price for Bear, as he “wanted moral hazard to be protected as much as possible when federal money is involved.” In the White House morality play, the sacrifice of Bear Stearns was a symbolic gesture to show America that the Administration only favors corporate interests 99.9% of the time. As the former head of Goldman Sachs, Paulson has proposed a “Blueprint” for regulatory reform where the Fed allows investment banks to bring their collateral to the discount window in times of trouble, but cannot regulate them during the good times. American taxpayers may end up footing the bill on Bear and possibly other financials, yet the Administration is against Congressman Barney Frank’s plan to trade real mortgage writedowns by lenders for government guarantees.

Bernanke, Geithner, and Steel (Paulson had went to China) kept making their sales pitch to Committee members that making a $25 billion loan to Bear as well as taking on $29 billion of its collateral after JPMorgan acquires it, was necessary to prevent a broad-based financial collapse that would have spread from Wall St. to Main St.

With the Sun, Mercury, and Uranus lined up in Leo, Geithner expressed his points forcefully and mostly in numeric fashion. A bit arrogant at times yesterday, it was clear that he was the real leader of the Fed in this deal. (Several times during Wednesday’s Joint Economic Committee hearing when asked questions about the Bear deal, Bernanke replied “ask Geithner”.) It was Geithner who hired investment advisory firm BlackRock (BLK) to help the Fed review Bear’s assets. BlackRock will manage Bear’s collateral at the Fed for a sum “to be worked out later”, according to Geithner.

Leo rules the stock market as it relates to all forms of speculation. Geithner said it was his personal view that Bear was “not a sound institution” to go directly to the discount window that the Fed opened to investment banks after Bear collapsed. But optimistic Bernanke kept emphasizing that “a god bit” of Bear’s collateral at the Fed is “very highly rated” and the “risk is not remotely close to $30 billion. “BlackRock gives us reasonable comfort that we will recover principal and interest. We have the luxury of up to 10 years to sell. If we’re fortunate, we’ll turn a profit.”

Being ruled Jupiter, the planet of growth and expansion, when Bernanke panics, he floods the market with massive amounts of liquidity. He projects a rosier forecast for the second half of 2008 (when Pluto will retrograde back into Sagittarius). When asked yesterday if he was concerned about inflation, Bernanke replied: “Inflation has been too high – 3.5% instead of 2%. The primary reason is prices of globally traded commodities.”

What the Chairman won’t admit to is that his drastic lowering of interest rates are a contributing factor in causing the commodity bubble. Bernanke fails to do the math that lower interest rates = higher food and energy costs. Lower rates don’t result in easier to obtain consumer loans as lenders have tightened their rules. Lower rates discourage saving and encourage financial alchemy. Financial companies are trying to clean up their balance sheets, but Bernanke and Paulson are pushing them to raise more capital for expansion.

The Bear Stearns saga began for Jamie Dimon while he was celebrating his birthday. With his Mercury in Pisces challenging Saturn in Sagittarius, Dimon is respected on Wall St. for making smart acquisitions at advantageous prices. He told the Committee that he wasn’t willing to assume the full risk for Bear without the Fed taking on most of it, and that the price he was willing to pay for Bear was “not based on the value of the company, but protecting the value of JPMorgan.” Transiting Saturn is challenging Dimon’s Mercury/Saturn showing the government pressure to do buy Bear, and Dimon revising the deal one week later.

Dimon told CNBC after the hearing that “I never forecast the future because no one really knows”, but Bear shareholders approving the deal is a “foregone conclusion.” I guess so when it was revealed last night that JPM bought 11.5 million BSC shares on the open market and expects to buy more until it owns as much as 49.5% of Bear Stearns.

Like Northern Rock in the UK, the early transit of Pluto in Capricorn is manifesting as the government exerting its power over private enterprises in trouble, yet refusing to reform the issues that brought us to financial crisis in the first place.

Related Posts: “Bear Stearns’ Easter Basket” and “The Fed Under Fire”

Hank Paulson: March 28, 1946 time unknown Palm Beach, Florida
Timothy Geithner: August 18, 1961 time unknown New York City
Ben Bernanke: December 13, 1953 time unknown Augusta, Georgia
Jamie Dimon: March 13, 1956 time unknown New York City

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A Prudent Bear is Better Than an OverFed Bull

I admit it. I love bears – panda bears, that is. Let’s face it; bulls are not cute to look at. And the more the Federal Reserve and the government do to feed the bull, the uglier it becomes.

Today’s Wall Street Journal features an interview with David Tice, manager of the Prudent Bear Fund. Tice believes the Fed’s financial engineering and dramatic interest rate reductions create “a huge problem for the dollar because foreigners see us continuing to debase our currency. It’s going to be a massive recession if not a depression.” Tice believes that the U.S. economy will fare even worse than Japan’s “lost decade” of the 1990s because “we have depended on foreign creditors” to support our bubble.

And now the foreigners are starting to have enough of our ridiculously low interest rates. Today’s Financial Times reports that South Korea’s National Pension Service, the world’s fifth largest pension fund ($220 billion assets), will no longer buy U.S. treasuries because the yields are too low. The fund says it will buy higher yielding European government debt in an effort to boost its returns as it faces a pension shortfall due to its aging population. The dollar dropped against the Euro to $1.5832 after ECB president Jean-Claude Trichet told the EU parliament yesterday that “rate cuts would only have encouraged risk taking”, and that he will remain “vigilant”. The ECB rate is 4%; “vigilant” has been known to be a code word for a rate increase.

Prudent Bear Tice asserts that one of the factors needed to turn him into a bull on the U.S. economy is a “massive adjustment away from consumption towards saving and investment”. The only way to grow savings is to raise interest rates to control inflation so that money saved has actual value. A decent rate of return would also encourage investing in more conservative financial instruments, such as FDIC-insured certificates of deposit. Unfortunately, government and Federal Reserve policies act as a deterrence to saving.

South Korea is not the only country facing the issue of a growing elderly population. The world has the greatest number of elderly people ever. Capricorn rules the elderly. Pluto in this sign until 2024 means that hard choices will need to be made, probably along with higher taxes, to make up for the years of out of control consumption that has left too many people and nations with a mountain of debt. Indeed, the need for the world’s population to increase their savings is more imperative than ever before.

Related Post: “America Saves Week”

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Bear Stearns' Easter Basket

It seems that the parties involved in JPMorgan’s (JPM) takeover of Bear Stearns (BSC) like to work on the deal on holidays, Sundays, and when the Moon is Void-of-Course.*

Here’s the bear facts about the “amended” deal between JPM and BSC. If The Wall Street Journal timeline is accurate, Bear’s Board of Directors couldn’t possibly have fully read the deal before agreeing to it, since CNBC announced it was approved just after the market opened this morning.

JPM raised its offer to BSC shareholders from $2 to $10 a share. (BSC shareholders will exchange 0.21753 shares of BSC stock for JPM stock.) I’m sure investor Joe Lewis, who owns 12 million shares at an average price of $104 ($1.26 billion), is overjoyed at JPM’s generous new offer.

Bear will offer 95 million newly issued shares of its common stock (39.5% of shares outstanding) for JPM to purchase at $10 a share. New York Stock Exchange rules normally require shareholder approval of shares that are convertible into more than 20% of a company’s shares. However, JPM got the NYSE to grant an exception under their rule that a delay would “seriously jeopardize the financial viability of the listed company.” The closing of the share sale is expected to be completed by April 8, 2008. These shares should not be issued with voting rights. JPM is basically buying votes FOR FREE! Once the deal goes through, Bear’s coffers become the property of JPM.

Bear’s Board of Directors is on board to approve the merger. Bear CEO Alan Schwartz said: “The share issuance to JPM was a necessary condition to obtain the full set of amended terms, which in turn, were essential to maintaining BSC’s financial stability.” But Alan, you and the other Bear executives emphatically told the world as late as the 12:30 PM March 14 conference call that with the Fed’s 28 day loan, everything would be fine. One wonders what Bear’s board was secretly promised to buy their vote. Perhaps taking $10/share is worth it to be indemnified against shareholder lawsuits.

In a statement released this morning, the New York Federal Reserve said that upon the closing of the merger it will provide $29 billion in term financing to facilitate JPM’s acquisition of Bear at the Fed’s discount rate (2.5%). Investment management firm BlackRock (BLK) will manage the portfolio. If Bear’s $30 billion valued assets (as of 3/14/08) lose value, JPM will bear the first $1 billion of losses. Any realized gains in the portfolio will accrue to the New York Fed.

The Fed statement also said that “This action is being taken by the Federal Reserve, with the support of the Treasury Department, to bolster market liquidity and promote orderly market functioning.” In the past week it has become quite clear that both the Fed and the Treasury knew on March 14 that the temporary loan was a ruse to keep the market calm so a scheme could be prepared over the weekend. Or as Treasury secretary Paulson said, “before Asia opened” on March 17.

Last week several media outlets were sounding very metaphysical in describing Bear’s situation. From Bear’s “near death experience” (Financial Times) to Bear’s “karma” (Wall Street Journal), it was all very plutonian – relating to Pluto, the planet ruling death and resurrection (reincarnation). With Pluto in Capricorn, the sign of the government and high finance, you would expect all kinds of secret shenanigans to take place to manipulate a sad situation into someone else’s gain.

This winding road leads to the Treasury secretary’s doorstep. Paulson wants to burnish Bear’s karma in front of the world, as Bear was the only investment bank who refused to bail out hedge fund Long Term Capital Management in 1998. The karma of Paulson, the White House, and the Fed is entwined in hypocrisy when other investment banks have lending facilities previously only available to the major banks, but are exempt from their rules. Now that the Fed has stretched their financial jurisdiction beyond its limits, “moral hazard” has come full swing back to its source.

*When the Moon (our emotional barometer) does not form any relationship to a planet before entering a new zodiacal sign. This time period is best suited for anything where NO ACTION OR OUTCOME is desired, as actions taken during the VOC period may not turn out as planned.

Related Posts: “JPMorgan’s Bogus Bear Deal” and “Bear Stearns: The Bare Facts”

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“Survivor’s Euphoria” Causes Stock Market Rally

Yesterday’s mega rally was described as “survivor’s euphoria” by Bill O’Donnell, a strategist at UBS. As stated in my Vernal Equinox post, “stock market volatility gyrates from hope and euphoria to massive panic, with sentiment highly influenced by rumors and ‘happy talk’ from the Federal Reserve and the Bush administration.” With the Moon in Virgo today, let’s dissect some of the key drivers of yesterday’s market.

In my Weekly Forecast for March 18, I predicted that the market was “likely to be down on reports of further write downs projected or to be taken.” My forecast was based on the alignment of Mercury and Mars. This represents news that investors sharply react to. Due to Mars retrograding in Cancer, this aspect previously occurred on November 19, 2007. Markets were sharply down that day after a Goldman Sachs (GS) report forecast the financials face $48 billion in write downs by the end of 2008. Citigroup (C) forecast a $22 billion write off split between $11 billion in the fourth quarter of 2007, and the other half taken in 2008. The difference then was Mercury (news) was in Scorpio, the sign of debt/lending. Mercury is now in Pisces. Mercury in this sign brings news of rumors, deceit, hope, and euphoria – whether real or imagined. One factor I covered up by stupidly sticking a post-it note on top of my chart, was Mercury harmonizing with the USA Jupiter in Cancer yesterday. Unless overruled by other factors, this usually creates an up market, as Jupiter creates big moves resulting from overblown reactions to market happenings.

The indices opened strong, with the DJIA up 200 points in the first three minutes of trading, after investment banks Goldman Sachs and Lehman Brothers (LEH) released first quarter earnings. Goldman lost $2 billion on mortgages and credit products, but beat expectations in commodities and asset management. It was the first decline in year over year earnings for GS in 11 quarters. GS closed up $24.57 to $175.59. Lehman announced a 57% profit drop on fixed income losses. LEH closed up $14.74 to $46.49, a record one day gain. The “survivor’s euphoria” refers to the fact that on March 16 the Federal Reserve now allows primary dealers to bring “a broad range of investment- grade debt securities” to the discount window at the Fed’s 2.50% discount rate. (If the Fed had taken this action before last Friday’s market open, the fate of primary dealer Bear Stearns might have taken a different course.) Lehman’s CFO Erin Callan described the Fed’s action as “a great opportunity to do more client business.” The market ignored her comment during the earnings call that Lehman “doesn’t anticipate market conditions to improve anytime soon.”

At 2:15 PM, the FOMC released its statement on interest rates. Indices began to weaken after the Fed announced a 75 basis point cut in fed funds to 2.25%, when many expected a full percentage point decrease. The market also didn’t like additional inflation concerns inserted into the statement, along with the fact that two members voted against the largest interest rate cut by the Committee since 1994.

I think the market began to realize that the Fed inserted the inflation remarks as an effort to revive the ailing dollar. Comforting phrases such as “downside risks to growth remain” and “the Committee will act in a timely matter as needed” was still there, indicating the helicopter engines are still running and ready for liftoff.

Yesterday’s stock market entry additionally forecast “Improving conditions around 2:30 PM.” This was because the Moon in Leo was going to exactly oppose Neptune at 2:39 PM. Lunar aspects start influencing the market a bit before they are exact. At 2:38 PM, the indices began rapidly climbing higher after President Bush said during a speech in Jacksonville that “they'll (Bernanke and Paulson) continue to closely monitor the markets and the financial sector. And the point I want to make to you is, if there needs to be further action we'll take it, in a way that does not damage the long-term health of our economy.”

As CNBC’s Bob Pisani commented after the market closed, a lot of the rally was due to short covering as well. Bear Stearns (which closed at $5.91) was a “watershed” moment for the market, which Treasury secretary Paulson used as the catalyst to inspire the market to rally on the belief that the big problems in the financial markets are over. For now.

Financial Times: “’Survivor’s euphoria’ may be only short lived”
Bloomberg: “’Big Rally’ for Stocks to Continue, Jim Rogers Says” (don’t let the title fool you)
Wall Street Journal: Editorial: “Inflation Dissent”

USA: July 4, 1776 5:10 PM LMT Philadelphia, Pennsylvania

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JP Morgan’s Bogus Bear Deal

I just finished listening to JPMorgan’s (JPM) conference call where the bank announced that it is acquiring Bear Stearns (BSC) for “$2.00 per share.” In a press release on JPM’s website as well as on the call, JPM “will exchange 0.05473 shares of JPMorgan Chase common stock per one share of Bear Stearns stock.” JPM stated that “The Federal Reserve, the Office of the Comptroller of the Currency (OCC) and other federal agencies have given all necessary approvals.”

JPM got a bit testy during the Q&A session of the call when questioned that shareholders must approve the deal. JPM emphatically stated that they have “every expectation that BSC shareholders will approve,” and that they would “be surprised” if BSC shareholders didn’t. And in the unlikely event that shareholders don’t approve on the first vote, JPM will continue voting rounds for up to a period of 12 months.

When questioned by a Merrill Lynch (MER) analyst how Bear went from a book value around $84/share to an offer of $2, JPM cited it was “their duty to protect their shareholders” with a “cushion.” Excuse me, but it is the Federal Reserve at this point that is providing a FREE CUSHION of up to $30 billion in the form of a special nonrecourse lending facility. JPM is taking on ZERO risk here, so then JPM focuses on the estimated $5-6 billion cost to complete the transaction (which they want to do in 90 days).

When asked by the MER analyst about Bear’s books, JPM said Bear has a “very, very good strong business.” JPM was “pleasantly surprised to see that it was a very well run good risk operation.” JPM mentioned several times that the deal “makes a lot of strategic sense” and is “compelling.” A Credit Suisse (CS) analyst asked if Bear owned their prime midtown Manhattan building, which JPM confirmed they did. (The building is estimated to be worth $1.2 billion.)

And JPM wants Wall Street to know that “having taken Bear out of the problem category, and the strong action of the Fed, we expect the market to behave quite differently on Monday than last Thursday and Friday.”

In my Weekly Forecast for tomorrow I stated how the opposition of Mercury and Saturn would create fear and false information and rumors, despite how “authoritative” the information being conveyed sounds. This is a bogus deal conjured up to buy time to soothe the markets. Go to
Yahoo! Finance and check out the list of top holders for Bear Stearns. Morgan Stanley (MS) owns 5.37%, Legg Mason 4.84%, Barclays 3.60%. In short, a lot of major hedgies and mutual funds have got a piece of Bear.

An individual investor on the call asked JPM how this deal benefits shareholders versus Bear going into liquidation. JPM said he would “have to ask Bear that question.” (Translation: the Fed doesn’t want that to happen; it fears a panic situation would ensue.) Executives from Bear showed their lack of enthusiasm and embarrassment by not participating in the call. JPM is stating that Bear’s Board of Directors approved the transaction. It would seem to me that Bear is just buying time to get their act together or get a foreign suitor “Bear-ing” Euros.

Related Post: “Bear Stearns: The Bare Facts”

UPDATE! The following was added at 10:02 PM on 3/16/08: In my haste to get this post out, I forgot to mention that the early evening press release along with JPM's 8:03 PM conference call, all occurred when the Moon in Cancer was VOC (Void-of-Course). This means that at a minimum, the saga of Bear Stearns will take a different course than JPM and the Fed have planned. As Weekly Forecast readers know, it can also mean that nothing will come of it.

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The Fed under Fire

Yesterday Mars, the fiery planetary energy of action, began its sojourn in emotional and security conscious Cancer until May 9, 2008. Cancer rules real estate.

Right on schedule, Mars in Cancer began to attack the Federal Reserve. Wall Street and Congress are fed up with the Fed for its failure to satisfy all of its constituencies. Congress is asking for greater oversight of the banking industry, but at the same time they’re resisting the Fed’s efforts to improve the mortgage underwriting process. Likewise, Congress is asking the Fed to control inflation, and simultaneously applauding an accommodative monetary policy to address the subprime crisis.

The days of Congress fawning over FOMC members are over. Yesterday Vice Chairman Kohn was grilled by the Senate Banking Committee for the Fed taking a relaxed stance when banks were taking on too much risk during the housing boom. The hearing marked the first time a Fed plutocrat had to acknowledge their role as bubble enabler: “I don’t know that we fully appreciated all the risks out there. I’m not sure anybody did to be perfectly honest.” Under questioning, Kohn later acknowledged that “the Fed did not perform flawlessly.” Republican Senator Richard Shelby asked Kohn if the Fed was afraid of the banks. Shelby was referring to the Fed and regulators caving into the banks’ lobbying efforts last July to prevent stronger risk guidelines on U.S. banks than European banks have under the Basel II agreement.

At a conference of the Independent Community Bankers of America in Orlando yesterday, Chairman Bernanke urged lenders to help struggling borrowers stay in their homes by reducing the principal of their mortgage as a way to reduce their monthly payments. Lowering principal alleviates homeowners being “upside down” (negative equity), as they owe more on the home than it is worth. Wall Street was not warm to the idea, with the indices lower until happy talk rumors regarding bond insurer Ambac (ABK) surfaced late in the day.

Mars was previously in Cancer from September 28 – December 31, 2007. It was during this time that banks began taking large write downs on their bad debt. As befitting of Mars in Cancer, S&P’s Sam Stovall at that time called it the “kitchen sink quarter.” With Mars back in Cancer again, the world is finding out that the corporate kitchen sink is clogged with stagnant water. The “Plunge Protection Team” (as the Fed is nicknamed), would like to unclog the drain but the lenders are not willing to take a “real” write down (actual financial loss).

Between now and May 9, Mars attacks the USA’s Venus, Jupiter, and Sun in Cancer. This means that over inflated real estate prices must come sharply down, impacting the overall American economy. Mars also challenges the USA’s Saturn in Libra located in the area of the horoscope representing Congress. Mars makes its finale with an opposition to the USA Pluto in Capricorn in the house of banking and the economy. Legislative and governmental regulation will force the financials to fix the sink. And the Fed? The public is angry (Mars) that lower interest rates have not only failed to reduce their loan payments, but the resulting higher inflation has spiked the cost of food (Cancer). Mars in Cancer is a brief preview of what the Fed faces in late 2008 to 2009 when Pluto in Capricorn impacts the Fed’s Pluto in Cancer and Sun in Capricorn. The structure and power of the Fed and the influence of its Chairman will be transformed.

Federal Reserve: December 13, 1913 6:02 PM Washington, DC
USA: July 4, 1776 5:10 PM Philadelphia, Pennsylvania

Wall Street Journal: “Fed Admits Missteps on Banks” and “Fed Chief to Lenders: Cut Mortgage Principal”

Related Posts: “Resetting the American Dream”, “The Missing Element”, and “The Fed’s Future”

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Bernanke Rejects Role in “That ‘70s Show”

Federal Reserve Chairman Ben Bernanke told the Senate Banking Committee yesterday that he rejected being cast in “That ‘70s Show.” Bernanke told Committee members that he does not believe inflation poses a threat to the economy, since the show’s producers made it clear he could not demand Ashton Kutcher’s salary.

The Fed Chairman displayed his usual nervousness in his semi-annual testimony to Congress. However, Bernanke became somewhat testy when asked by several Senators if the economy is experiencing the s-word: stagflation. Bernanke kept reiterating that “I don’t think we’re anywhere near a 1970s-type situation.” This is because “our anticipation is inflation will come down later this year.” With his Sun, Mercury, and Venus in Jupiter-ruled Sagittarius, Bernanke is only focused on economic growth and expansion.

Bernanke attributes the rise in food and energy costs (core inflation) to investor speculation. While that is partially true, commodity and energy prices have been on a tear since the FOMC began lowering rates last September. This coincides with the entrance of Saturn (contracted supply) in Virgo. Virgo rules consumer staples, and is represented by a maiden holding a shaft of wheat. Saturn was last in Virgo from 1977-1980. The FOMC’s monetary policy has resulted in the U.S. dollar at record lows, causing commodity users to spend more dollars for those materials.

Even some members of Congress along with a few Permabulls are getting angry that he refuses to acknowledge his other mandate of price stability as enacted by Congress under the Full Employment & Balanced Growth Act. Ironically, this mandate came into being in 1978, one Saturn cycle ago during the last period of stagflation.

It is clear that the only beneficiary of the Fed’s lower rates is the banks. Mortgage rates have risen since the rate cuts (and lending requirements are tighter). This morning’s release of January Personal Income and Spending shows consumers are spending more than they are earning. Even the Fed’s favorite, the Core PCE Index, was 2.2% - once again above the Fed’s so-called “comfort level.” As today’s Wall Street Journal editorial rightly points out, “The people who aren’t being fooled by all this are the American people. They don’t pay their bills with “core” dollar bills, and they know those dollars buy less with each passing month.”

Because consumers can no longer tap into their home equity to offset the higher cost of living, demands for higher wages are about to arrive. Companies will have no choice but to acquiesce to higher wage demands as the low hanging fruit of productivity and outsourcing has already been picked.

Sir John Templeton once said: “The four most expensive words in the English language are ‘this time it’s different’.” Cycles repeat themselves, but this time it is different. This time is worse than the 1970s as we have stagflation AND a housing and credit crisis like the world has never seen.

Allan Meltzer, an economics professor at Carnegie Mellon, wrote an outstanding op-ed piece* in the Wall Street Journal, which Bernanke was asked about at yesterday’s hearing. Bernanke stated he disagreed with the piece. In the piece, Meltzer warns of the repercussions of not taming the inflation beast: “A country that will not accept the possibility of a small recession will end up having a big one when the politicians at last respond to the public’s complaints about inflation. Instead of paying the relatively small cost of a possible recession, the public pays the much larger cost of sustained inflation and a deeper recession.”

If Bernanke wants to bring back “That ‘70s Show”, we need Paul Volcker in the starring role. Volcker took over as Fed Chairman in 1979 after another Chairman whose last name began with a B – Arthur Burns, fed inflation in the name of growth. With his Sun, Mercury, Venus, and Mars in no-nonsense Virgo, Volcker put inflation on a starvation diet. His tough love approach ushered in the prosperity of the 1980s.

* Professor Meltzer’s WSJ op-ed piece is entitled “That ‘70s Show”
Related Posts: “The Fed’s Future”. Also check out the Cycles section of Wall Street Weather.

Ben Bernanke: December 13, 1953 time unknown Augusta, Georgia
Paul Volcker: September 5, 1927 time unknown Cape May, New Jersey

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Larry Kudlow, Inflation Fighter

There are many indicators that all point to inflation spiraling out of control: food, energy, medical, commodity prices, and a falling dollar. But you know inflation is really a problem in America when free market capitalist Larry Kudlow is “concerned.”

Larry Kudlow is the host of CNBC’s Kudlow & Company, a show described by the host as “money, politics, stocks – that’s our beat.”

With his Sun in Leo (the stock market), conjoined with Mercury (communication) and Venus (finances), Larry Kudlow always sees the sunny side of the financial markets. Like Federal Reserve Chairman Bernanke and Vice Chairman Kohn, Kudlow lacks the earth element* in his planetary lineup. The ultimate Permabull, he views financial conditions with “the glass half full.” This reflects his Mercury/Venus squaring Jupiter, the planet of growth, expansion, and optimism.

I am an occasional watcher of Kudlow & Company. I disagree with most of his political views, and his incessant “free market” shtick gets pretty grating. However, Kudlow is not the typical conservative pundit that has no real knowledge or experience about the economy. Kudlow was an economic advisor to President Reagan, and the chief economist at Bear Stearns (BSC). He began his career as a staff economist in the open market operations division of the Federal Reserve Bank of New York.

So for Larry Kudlow to declare on his February 26, 2008 show that “I don’t know what the Fed is watching” (meaning inflation indicators), and that he is “concerned about inflation” – is a BIG deal. Just to confirm I wasn’t imaging things, I tuned into his show the following evening. Once again, Kudlow expressed his frustration with the Fed. I recommend readers check out a post from Kudlow’s blog titled, “Is the Fed in Denial About Inflation?”

Larry Kudlow may not be “Right (correct) on America”, but he’s certainly Right on Inflation.

Larry Kudlow: August 20, 1947 time unknown Englewood, NJ
Related Posts from Wall Street Weather: *“The Missing Element”, “The Fed’s Future”, “Inflationization”, “Wheat Goes Wild”

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America Saves Week: February 24 – March 2

While paging thro