June 21, 2013
By Steve Blumenthal
This week, I discuss four relevant thoughts:
- Fisher and Volcker – Some common sense exists
- China – Japanese-style deflation
- Italian Showdown with Germany over Euro is Near
- One more to celebrate – Stephen Mittel
Dallas Fed President Richard Fisher
“I argue that the Fed has no hope of moving the economy to full employment, despite having pulled out all the stops on the monetary front, unless our fiscal authorities get their act together. Those economic agents with the wherewithal to expand payrolls and put the American people back to work must have confidence that our fiscal authorities and regulation makers—the legislative and the executive—will reorganize the tax code, spending habits and the regulatory regime so that the cheap and abundant money we at the Fed have made available to invest in job-creating capital expansion in the United States is put to use. Until then, I argue that the Fed is, at best, pushing on a string and, at worst, building up kindling for speculation and, eventually, a massive shipboard fire of inflation.
I note that in his speech of last Wednesday to the Economic Club of New York, former Fed Chairman Paul Volcker highlighted that managing the supply of money and liquidity “to accommodate misguided fiscal policies, to deal with structural imbalances, [or] to square continuously the hypothetical circles of stability, growth and full employment” was a risky proposition for the Federal Reserve and warned that in attempting to do so, the Fed “will inevitably fall short”. He even referenced “pushing on a string”. And he added that, “The risks of encouraging speculative distortions and the inflationary potential—[note the word “potential”, not “present instance”]—of the current approach plainly deserve attention”. I am in complete agreement with Mr. Volcker. I urge you to read his speech if you wish to understand my personal concerns about the present course of monetary policy.”
If you missed it in last week’s On My Radar – here is the link to Fisher’s Canada speech.
Former Fed Chairman Paul Volcker
“The Federal Reserve, any central bank, should not be asked to do too much to undertake responsibilities that it cannot responsibly meet with its appropriately limited powers,” Volcker said. He said a central bank’s basic responsibility is for a “stable currency”.
“Credibility is an enormous asset,” Volcker said. “Once earned, it must not be frittered away by yielding to the notion that a little inflation right now is a good a thing, a good thing to release animal spirits and to pep up investment.”
“The implicit assumption behind that siren call must be that the inflation rate can be manipulated to reach economic objectives,” according to Volcker. “Up today, maybe a little more tomorrow and then pulled back on command. Good luck in that. All experience demonstrates that inflation, when fairly and deliberately started, is hard to control and reverse.” (Bold emphasis mine)
Here is the link to Volcker’s speech at the Economic Club of New York. Click here for the link to the CNN article.
China – Japanese-style deflation
“Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis. They (China) have replicated the entire US commercial banking system in five years,” said Charlene Chu, the agency’s senior director in Beijing.
“The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem and potentially into a Japanese-style deflation.”
“There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, what the quality of assets is, and this undermines signaling,” she told The Daily Telegraph. Here is the link to the full article.
- My two cents (“SB”): money moves quickly from shore to shore. It is not just Fed QE that we need to focus on. China replicated the entire US commercial banking system in just five years. Wow! And Japan, EU and UK – all printing. Especially Japan. Keep a close eye focused on escalating currency tensions.
Italian Showdown with Germany over Euro is now
Italy’s simmering revolt against Germany, austerity and its own ultra-European elites is coming to a head again, in a reminder that the deep clash of interests between the euro’s north and south remains as bitter as ever. Read the full article here.
- SB: A world struggling to find its way out of debt, irresponsible spending and unmanageable entitlements. We borrowed from tomorrow and tomorrow has become today. Austerity in Europe is slowing growth and increasing the debt load it hoped to reduce. Massive currency creation in the US, China, and now Japan. Europe is in recession. We’ll find our way; however, it will be bumpy.
Stephen Mittel
Another great one graduates. It’s been an emotional few weeks for me as another great one passed away. I owe much to Steve Mittel – “Tell him it’s his godfather and put him on the phone”. The first time it happened, Linda shot me a puzzled look, but I knew it was Mittel. Godfather indeed. I smiled each time. I think he was everyone’s godfather. He had a great heart, fun sense of humor and a powerful kind way.
Every few months he’d check in and he wanted to know how I was doing. “How’s business,” he’d say. I would ask him a question or two and listen intently. One time he told Linda he was Donald Trump. Another time Alan Greenspan. Linda caught on quickly.
Mittel co-founded Montgomery Securities and in his later years ran a private hedge fund. During the summer of 1982 I was Montgomery’s first intern. It was two weeks on the floor of the NYSE, four weeks on the trading desk next to Mittel in San Francisco and a week on the Chicago exchanges. I was hooked! There was no single class at Penn State that could have taught me so much in such a short period of time.
Mittel put me under his wing and coached me all along the way. I am endlessly grateful. Go find Len and grab a cold beer with dad – I need you on the board.
For years we have offered a summer internship program. It’s my way of paying it forward. In fact, PJ (now CMG’s President) was our first intern. He was then a strong student athlete at Carnegie Mellon. Next year we’ll expand our internship program and name the program in honor of Mittel -The CMG-Mittel Internship Program. Let me know if you have a super smart student interested in Finance. We’ll begin looking at applications for next summer later in the year.
Have a great weekend,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax
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