RCM Editorial: Should Ben Bernanke Be Reappointed? And Other Questions on Bloomberg TV's, 'No Visibility Ahead'

RCM Comment: Today on Bloomberg TV a promotion is running urging viewers to watch the 7:00 pm show, No Visibility Ahead: Predicting What's Next, during which a moderator will question a panel about the current economic situation and the credit crisis. This panel will include the likes of Jack Welch and Meredith Whitney. I imagine this will be an interesting forum, however, in the promo the group dances around a key question and since they are unwilling to give a straight answer I will jump into the breach. Admittedly, it is easier for me to voice my opinion in this post than on national TV, but I hope I would have the integrity and moxie to answer this question on any medium.

The question: Should Ben Bernanke be reappointed to Fed chairman when his term is up?

While others dance I will stand like a Rodin and say emphatically, NO. Those of you who have been reading this blog for the last few years and/or have spoken with me know that since Ben took over as chairman we have been concerned. We contended that an academic who was known as "Helicopter Ben" was a perilous appointment. We voiced our concern when Ben decided, in March of 2006, to stop the government's reporting of M3. We took this as a clear sign of Ben's willingness to devalue the US$ and we launched our Fortune's Favor Precious Metals fund in August of 2006 to benefit from this direction. During a time of rampant free credit Bush appointed a free credit junky. Many metaphors come to mind to describe the situation, but I think the arsonist and the fire will suffice.

If the desire is to further destroy the value of the US$, send treasury bond prices plummeting / rates soaring and lead us headlong into massive hyperinflation then by all means reappoint Ben Bernanke. As investors we welcome the continued policies of Ben as we have a clear road map to success through our commitment to Gold, Silver, energy and other commodities. But as patriots of this country and believers in the fundamentals established by Alexander Hamilton and our forefathers we urge the administration to appoint someone who will attempt to right the ship.

The following are a few stories that may shed some light on the effect of the current administration's policies as well as Ben's actions:

GMT:

The rising cost of insuring debt is impacting treasuries too. The cost to hedge against losses on $10 million of Treasuries is now about $100,000 annually for 10 years, up from $1,000 in the first half of 2007. These rising insurance costs have helped push up treasury yields in the last few months. Worse still, the rising costs of insuring against government defaults will undermine faith in dollar. After all, the CDS market is telling us that 10-year treasury notes have become 100 times riskier in the last two years.

Jim Sinclair:

Remember hyperinflation is NOT an economic event, it is a currency event.
If you study market history you will see the glaring truth that the Weimar experience would not have happened if German debt markets were not used as a vehicle to heavily short the Weimar Mark.

It was the Weimar mark short sellers that created the Weimar hyperinflation just as the OTC derivative shorts will cream the US dollar with the unavoidable effect being hyperinflation.
I know of what I speak. About the above there is no doubt. There is no real argument to the contrary and you can count the number of those outside of our community on one hand who understand how hyperinflation is created."

Dave from Denver on the real deal…
More fantasy housing numbers and prior revisions

New home sales were reported to be up .3% in April, HOWEVER, March numbers were revised from +.6% to -3%. That's a huge revision. MOREOVER, new home sales plunged 34% compared with a year ago.

More disturbing yet, Americans fell behind on their mortgages and foreclosures hit a record pace in the 4th quarter. Mortgage delinquencies hit 7.9% of all loans, the highest level since 1972. Prime delinquencies are now higher than subprime delinquencies. This statistic should completely terrify everyone, as the prime mortgage market is 10x the size of the subprime/alt-a market.

News that Moves: Dangerous Divergence, Bond Auction Spin

RCM Comment: I posted a challenge yesterday and as yet only one taker. I received an email from Gary Rosenthal (a/k/a, Dad) labeling the stories correctly. So, is the contest over? Should I send him the prize? I think the answer has to be, no, on account of the proverbial apple and its proximity to the tree perhaps disqualifying Dad. So, Tim, Greg, Bunny, Philippe and everyone else: I know you are out there. Give it a shot; the prize awaits.

Global Money Trends Magazine:

At the same time that TLT (ETF of US Treasuries) and the US$ Index having been trending lower, indicating that foreign investors are dumping US-assets, global commodity and stock markets, were moving in the opposite direction, trending higher, amid what’s been dubbed a “green-shoots" rally.

When the two asset classes move in opposite directions for long periods of time, characterized by tumbling bond prices, and rising stock markets, this phenomenon is dubbed a “dangerous divergence.”

RCM Comment: Well said by GMT. Trade the rally? Yes, but don't stay too long and recognise the cracks in the wall. Today's action could be one of those signs:

BONDX Nice Going (-03/32 3.560%)
The $35B 5-yrs went at 2.310% with a 2.32 bid-to-cover and indirect take of 44.2%, the outing was solid. The results were against an average 2.13 cover over the past 16 auction since the start of 2008, and a 29.2% indirect bidder take. The market had been looking for a solid showing, and while this was less impressive than the 2-yrs, that was to be expected. The market had been looking for a draw of 2.33% plus and liked the lower yield. The 2-to-5-yrs were able to pull out new highs on comparatively decent volume for the 5-yrs. (Please see Bond page for charts and more)

This is the story that ran at 1:12pm today. The spin as you can see is positive, but the bond market price action after the news is deadly. Bonds are selling off hard and equity prices are suffering. This is a key relationship that must be respected.

News that Moves: Consumer Confidence, Foreclosure Face-Lift, Dallas Fed President...Can You Label These Stories Correctly?

RCM Comment: For today's read I have put together a selection of stories for your amusement. One story is a fantasy, one a horror and one a Greek tragedy. Let's make this Audience Participation Day. The first person to send me a comment labeling the stories correctly will receive a genuine Rosenthal Capital Management polo shirt. Good luck...


ECONX Consumer Confidence Picking Up
The Conference Board's Consumer Confidence Index for May increased sharply to 54.9 from 40.8 in April. The May number is the highest since last September, but still trails the 58.1 reading seen a year ago. The index for May showed that consumers are feeling much better about the outlook... The Expectations Index, which drove the overall reading for May, surged to 72.3 from 51.0 in April and is well ahead of the 47.3 reading from a year ago. The Present Situations Index, meanwhile, moved up to 28.9 from 25.5 and is still well below the year-ago reading of 74.2. Looking six months out, a larger number of respondents than in April feel business conditions will be better (23.1 vs. 15.7) (Of course, these same people had no idea the economy would collapse when this reading was taken a year ago), that more jobs will be available (20.0 vs. 14.2) and that income will increase (10.2 vs. 8.3). Strikingly, fewer respondents have plans to buy a home (2.3 vs. 2.6). Also, it is believed the inflation average 12 months hence will be 5.6% versus 5.9% in April...


Face-lift for foreclosure prevention - Washington Post
Washington Post reports the Obama administration is attempting to revive a stalled government foreclosure prevention program that could restore equity to hundreds of thousands of borrowers whose home values have plummeted. After eight months, the program, known as Hope for Homeowners, has helped just one borrower secure a more affordable loan. President Obama signed legislation last week simplifying and lowering the cost of the program for lenders and borrowers. Lenders that participate also are eligible for incentive payments from government bailout funds. Most striking is that Hope for Homeowners has attracted unexpected backers: Investors who had refused to consider the program's requirement that they forgive some of a borrower's mortgage balance if the home is worth less than is owed, known as being underwater, are now trumpeting that provision. "Institutional investors that own securities backed by mortgages are extremely keen to write down principal in exchange for the borrower refinancing into a Hope for Homeowners loan," said Tom Deutsch, deputy executive director of the industry group American Securitization Forum.


Dallas Fed President says don't monetize the debt - WSJ
WSJ reports Dallas Federal Reserve Bank Richard Fisher says he is always on the lookout for rising prices. But that's not what's worrying the bank's president right now. His bigger concern these days would seem to be what he calls "the perception of risk" that has been created by the Fed's purchases of Treasury bonds, mortgage-backed securities and Fannie Mae paper. Mr. Fisher acknowledges that events in the financial markets last year required some unusual Fed action in the commercial lending market. But he says the longer-term debt, particularly the Treasurys, is making investors nervous. The looming challenge, he says, is to reassure markets that the Fed is not going to be "the handmaiden" to fiscal profligacy. "I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program." The very fact that a Fed regional bank president has to raise this issue is not very comforting. It conjures up images of Argentina. And as Mr. Fisher explains, he's not the only one worrying about it. He has just returned from a trip to China, where "senior officials of the Chinese government grill[ed] me about whether or not we are going to monetize the actions of our legislature." He adds, "I must have been asked about that a hundred times in China."