The markets — stocks, bonds, gold, and commodities — tumbled after Ben Bernanke gave his most explicit signal yet that the Fed plans to end its easy-money policy of quantitative easing as “soon” as late 2013.
Long-term Treasury bond rates rose to 3.3% and the dollar advanced on the news, while stocks fell more than 2%, and gold and silver plunged more than 5%.
This response is typical overreaction by investors. It brings to mind the fall in a company’s stock price after it issues new shares because it is expanding.
Actually, Wall Street should be applauding higher interest rates and the end of easy money. It means the economy is finally back on its feet and no longer so dependent on artificial stimulus by the government. Fed Chairman Ben Bernanke predicted that the unemployment rate will fall to 7.3% by the end of this year, and the economy, reflected by the Gross Domestic Product (GDP), will grow at a 2.6% clip by the end of this year, and more than 3% next year.
If this rosy scenery holds up, stocks could be setting up for a big rally in the second half of 2013. That’s a big if, given the high level of government intervention in the economy — higher taxes, ObamaCare, EPA regulations, etc.
The Austrian Indicator: What is It Predicting Now?
Among economists, Keynesians watch consumer spending and government stimulus to determine where the economy is heading. Right now, they’re pessimistic, because the deficit is falling. Chicago economists look at the money supply and quantitative easing. Right now, the monetary base is going up dramatically at a 47% clip due to quantitative easing; the money supply (M2) is growing at about a 5% rate. So, Chicago economists are upbeat.
Austrian economists, of whom I am partial, focus on the structure of interest rates, which determines the direction of the business cycle.
In my new book, “A Viennese Waltz Down Wall Street,” I focus on the yield curve as a way of measuring the structure of interest rates. I call it the “Austrian Indicator.” It’s an excellent tool to decide if the economy and the stock market are going up or down.
The yield curve is the relationship between short-term interest rates and long-term interest rates.
Normally, long-term interest rates are higher than short-term rates. But when short-term rates suddenly spike higher than long-term rates, watch out. That suggests a credit crunch and an economic crisis.
Economists call it an “inverted yield curve.” Indeed, only two times have we witnessed an inverted yield curve in the past 20 years: in 2000 and in 2007. Guess what? Both times the United States suffered a recession and a bear market on Wall Street.
What is the “Austrian indicator” saying now? As the chart below indicates, the yield curve is positive. In fact, the yield curve is getting more positive. And that’s positive for the stock market. I see no sign of a credit crunch anywhere. So I remain bullish on stocks, following this sell-off.
Rising long-term interest rates suggests that the bond market is predicting more inflation down the road. The Federal Reserve controls short-term rates through the Discount Window and seems determined to keep T-bills and other short-term rates under 1%. But if inflation comes back strong, the Federal Reserve may not succeed.
Announcing my New Book
I am happy to announce my new book, “A Viennese Waltz Down Wall Street: Austrian Economics for Investors.”
Here are the highlights:
O Why does the “Austrian Indicator” do a better job of anticipating recessions and market tops?
O Why have gold and silver become superior inflation hedges since Nixon closed the gold window in 1971?
O How can we distinguish between genuine prosperity and artificial prosperity?
O Are we heading for another stock market crash? Will the dollar collapse?
O Where is the next asset bubble?
O What are the dangers of the “gold bug syndrome”?
This book will help you become a better investor. It contains chapters on Menger, Böhm-Bawerk, Mises, Hayek, Schumpeter, Kirzner, and Rothbard. Plus, enjoy chapters on Keynes, Irving Fisher, Milton Friedman, and many colorful figures in the financial world.
How to Get an Autographed Copy at a Special Discount
“A Viennese Waltz Down Wall Street” is a 260-page quality paperback published by Laissez Faire Books, and retails for $24.95. There are two ways to obtain a copy. One is by joining the Laissez Faire Book Club, where you receive a free e-book (such as mine) every other week or 26 e-books a year, plus other benefits, for only $10 a month or $99 a year.
Or, if you want an autographed copy, call Eagle Publishing, 1-800/211-7661, and pay only $20, plus $4 for shipping and handling. Be sure to mention the code WALTZ. All copies ordered through Eagle will be autographed. Call today! (By the way, I will be speaking at FreedomFest on my new book and will moderate a panel “Austrian Economics for Investors” with advisors who use Austrian economics to be successful investors. Don’t miss it!)
You Blew It! Obama Spends $100 Million to Go to Africa
“Spending $100 million for the President to go to Africa is getting great bang for the buck.” — Deputy National Security Advisor Ben Rhodes
Wasn’t the federal government supposed to be going on a diet, amid the fight over the sequester? Apparently not, with President Obama, his wife and entourage taking a weekend trip to South Africa, Senegal and Tanzania. Indeed, the journey initially included a safari. When the Washington Post raised the issue of the cost of the safari — which would have required Secret Service snipers around to protect the Presidential party — that part of the trip was dropped.
Still, the weekend visit will entail 56 support vehicles, dozens of Secret Service agents, and military jets and ships to the continent of Africa — not counting Air Force One. The total cost amounts to $100 million.
Is all of this spending really necessary?
To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.