Outside the Box

Out On A Limb: An Investor’s Guide to X-treme Monetary and Fiscal Conditions

March 8, 2013

I landed in Buenos Aires early this morning and have a day layover before heading off to Cafayate; but it is time to send you this weekend’s Outside the Box, and what a wonderful, powerful piece it is. I read John Hussman’s latest on the way down and had to review it several times. There is just so much meat here. And more than his usual quota of those wonderful graphs he comes up with. Did you know there is a 94% correlation between the price of beer in Iceland and the S&P 500? This is a teaching moment we must heed!

I will tease you with a few paragraphs:

Let’s be clear about what Bernanke is saying: “[A ‘deferred asset’] is an asset in the sense that it embodies a future economic benefit [to the Fed] that will be realized as a reduction of future cash outflows [to the public].

In effect, to the extent that the Fed experiences losses because it overpaid for Treasury securities that it bought from primary dealers (comprising the too-big-to-fail banks and Wall Street investment firms), the U.S. public will pay for those losses without any need for Congressional legislation. This doesn’t mean that the Fed will refrain from continued quantitative easing, but we should all understand how this policy works, and the risks and potential costs that it quietly imposes on the public.

And:

Another assertion that makes me wince is the idea that “since 2009, there has been an 85% correlation between the monetary base and the S&P 500.” This is a distressing use of statistics, because two data series will always have an extremely high correlation if both series capture an uncorrected diagonal move. For example, it is equally true that since 2009, there has been a 94% correlation between beer prices in Iceland and the S&P 500. That’s not to dismiss the enormous effect that Fed policy has had on the markets in recent years, but the implication of an “85% correlation” is that if one increases, the other is sure to increase as well. There is little basis in the data for that belief. The exception is that when stocks are down significantly from their level of 6-months prior, monetary easing is often eventually capable of boosting confidence and reversing recent spikes in risk premiums.”

Hussman also leads us through four economic policy choices and outlines the outcome for each choice. You can make your own decision about what your country is likely to do.

I will be with John in about a month (April 5) in Sonoma, where we will both speak at Mike Shedlock’s fundraising event. John is graciously matching your conference fee, and it all goes to ALS research. You can find out more at Mish’s Conference. And for the two people left out there who don’t know John Hussman, he runs the Hussman Funds and writes his brilliant commentary at www.hussmanfunds.com.

As I left last night the movers were packing up the last boxes to take to storage. My staff members Mary and Shannon have been supervising the move while I just keep working and every now and then agree to throw away more accumulated material (I won’t say junk!). I am going to take advantage of a perfect day here in BA and do a little touristy browsing. It has been years since I was in the cemetery here in the Recoleta, and it is just a block away. I fly out early tomorrow to Salta, meet up with my old friend Tony Sagami, and then drive up the magnificently scenic canyon to Cafayate.

I think we will somehow make it to Bill Bonner’s Estancia early next week, along with Doug Casey, David Galland, and Olivier Garret. It’s way back in the Andes on about 200,000 acres of god-forsaken high desert. I am told it is breathtaking and have been wanting to get there for a long time. It may turn into the longest time I have been without internet in a decade. We will see what the withdrawal symptoms are like. Though I have to confess, I do have close to a thousand pages of miscellaneous reading on my iPad, not to mention 20 books. I think I can cope.

Have a great week; I know I will.

Your letting it all soak in analyst,

John Mauldin, Editor
Outside the Box

subscribers@mauldineconomics.com

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