POITOU, FRANCE – Yesterday came word that the European Central Bank followed through, just like the Fed.
After $2.7 trillion in “stimulus,” it has officially taken its foot off the pedal.
No more bond purchases by the end of the year.
It follows the Fed in returning to “normal” monetary policy.
The announcement scarcely made the headlines. The media knows what keeps the public engaged – reality TV and fake news, mostly. Not central bank monetary policy.
On the front pages, it’s the Trump Show, 24/7… and performances are always sold out.
Many of our readers love it. They’re convinced that America’s president is a genius who will Make America Great Again. No need to read the back pages or wonder exactly how he’ll do it.
Typically, they write to say that we “don’t understand him.” Or that “he has done more in 18 months than Obama did in eight years.” Or that, since the other choice was Hillary, our only hope is to “get behind the president.” Or, “Finally, our side is winning… What’s wrong with you?” [Read more in today’s Mailbag.]
It must be as puzzling to readers as it is to us. How could we resist the charm of The Donald? How could we fail to fall under his spell?
Some readers think that there must be a hidden agenda. “You’re a closet liberal…” wrote one. “You’re one of the swamp critters,” wrote another, while a third accused us of “being part of the Deep State.”
The puzzlement goes both ways. While they can’t imagine why we don’t see the halo over his head, we can’t quite figure out what they see at all.
So to gain perspective, we put the old jalopy in reverse… and try to take another look. We’ll back up to those golden green days… of Gunsmoke and I Love Lucy… back when America really was great.
The real heyday of the American republic was the interwar period between the Korean and Vietnam Wars.
The American economy was booming. It had the biggest trade surplus in the world… the strongest manufacturing sector… the strongest currency… and the highest salaries in the world. And the debt from World War II was being paid down.
Elected in 1952, Dwight Eisenhower ended the Korean War, balanced the budget, reduced U.S. debt as a percentage of GDP by nearly 15% (no subsequent president has even come close), and reduced government spending as a percentage of GDP from 20% to 18% (not even Ronald Reagan was able to do that).
He cut defense spending by 20% in 1956 (though it rose later), the Dow doubled, and personal incomes rose 45%.
Eisenhower also resisted the temptation to throw his weight around overseas.
When Israel invaded Egypt in 1956 – with Britain and France eagerly joining in – he refused to take part. Instead, he teamed up with the Soviet Union and threatened to sell British bonds if the UK failed to withdraw.
Of course, Eisenhower was no saint.
Maybe he should have tried to undo Roosevelt’s New Deal programs. Maybe he should have disbanded the CIA.
But the currents of history were running too strong in the other direction. Still, the hallmarks of his two terms were peace and prosperity, with relatively fewer win-lose deals imposed by the feds.
We should mention that Eisenhower was also ably served at the Fed by William McChesney Martin.
Martin was a Latin scholar from Yale who joined the brokerage firm A. G. Edwards and made full partner two years later.
He gave such a good showing of himself that he was elected to head the New York Stock Exchange at age 31. Then, when World War II broke out, he was drafted and served as a private.
Martin had a simple and modest idea of his mission at the Fed. He sought neither full employment, nor Dow 30,000, nor 2% consumer price inflation.
He neither appeased nor sucked up, neither to Democrats nor Republicans.
Today’s Fed model – based on “dynamic stochastics” – would have been Greek to him… or perhaps, merely ridiculous claptrap.
Negative real interest rates… quantitative easing… and a $4.4 trillion Fed balance sheet – all would have been regarded like a quack, hair-growing elixir… with faint hope and much suspicion.
Instead, the ’50s Fed chief saw his role as simply to “take the punchbowl away” when the party got out of control. (Richard Nixon blamed Martin’s “tight money” policies for his 1960 presidential election loss.)
Looking over our shoulders – back to when we were still riding a two-wheeler – whatever Eisenhower and Martin were doing, it worked.
GDP rose from $355 billion in 1950 to $487 billion in 1960. The rich got richer. The poor got richer, too. Jobs were plentiful. And an ordinary man with an ordinary job could support an ordinary family in a perfectly ordinary way.
(Personal footnote: Our father took off his khakis, got a civilian job in Ft. Meade, Maryland, borrowed $4,000 from a local bank, built his own house, and raised four children. Things went downhill soon after, but through no fault of the Eisenhower administration!)
So you’d think that if you were serious about making America great again, you’d want to emulate Ike Eisenhower rather than George W. Bush or Barack Obama.
You’d want to end wars, not start them. You’d want to balance the federal budget, not run the biggest deficits in history. You’d want to reduce federal spending and cut the Pentagon budget, not increase them. You’d want less government, not more – and less debt, too, not more of it.
That is, you’d want to do the exact opposite of the Bush and Obama administrations.
But when we look out on the comic splendor of the USA in 2018, we see neither Dwight Eisenhower reincarnated in the White House nor a William McChesney Martin redux at the Fed.
Instead, what we see is what Eisenhower warned us against on January 17, 1961 during the president’s farewell address:
As we peer into society’s future, we – you and I, and our government – must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.
What is today’s $21 trillion national debt? It is exactly what Eisenhower urged us to avoid – plundering the future… and mortgaging the precious assets of our grandchildren.
But the old general didn’t stop there. He also saw the Deep State taking shape:
In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.
Why did George W. Bush make up the “weapons of mass destruction” fantasy and attack Iraq after he had promised voters a more “humble” foreign policy?
Why did Barack Obama continue the Middle East military misadventures even after he had pledged to end them?
How come Donald J. Trump – who repeatedly criticized America’s losing wars in the Middle East and promised a new “America First” foreign policy – has gotten fully on board with the entire Bush/Obama program, in which no sparrow can fall anywhere in the world without a push from the Pentagon or the CIA?
Why is the Trump government projected to run $1.2 trillion in deficits – in peacetime, during an economic expansion – anticipating total debt of some $30 trillion within 10 years?
Why is the Fed being run by a disciple of Bush/Obama era Fed chiefs – Bernanke and Yellen – rather than someone in the Martin tradition?
And why would the Pentagon budget be increased, when it could be cut in half and actually improve the safety of the Homeland?
Because Donald Trump is such a genius that his methods are nearly divine… mysterious… inscrutable… and beyond the comprehension of mere mortals? Does he (and apparently many of our readers) see something we can’t?
Or was it General Eisenhower who saw more clearly than any of us?
By Jeff Clark, Editor, Jeff Clark’s Market Minute
The gold stock rally begins today.
I can hear the groans already… “What the heck are you talking about, Jeff? Gold stocks haven’t done anything all year. They didn’t do anything following the Federal Open Market Committee (FOMC) announcement on Wednesday. And with the Fed getting even more hawkish, how in the world can you be bullish on gold stocks?”
Well, let me explain…
The price of gold tends to make an important bottom every year sometime in the April to June time frame. It then usually goes on to rally into August or September. Sometimes, the rallies are small and insignificant – like in 2015, when gold only bounced 4% in the summer. Sometimes, the rallies are HUGE – like in 2013, when the price of gold popped 14% in just two months.
But as you can see from the following monthly chart, gold almost always enjoys a summertime rally…
My concern earlier this week was whether the price of gold bottomed last month when it dipped down to $1,281 per ounce, or whether it would make one final decline following Wednesday’s FOMC announcement.
Gold did indeed fall on Wednesday, but just by $2 – down to $1,299 per ounce. Now, though, with the FOMC announcement out of the way, there really isn’t any other obvious catalyst that could push the price of gold lower. So it looks like the May bottom at $1,281 an ounce was the bottom for gold’s recent decline. The metal should move higher from here.
Gold stocks should move higher as well.
Of course, a higher gold price helps gold stocks. But there’s a more significant reason to expect a gold stock rally: the FOMC just raised interest rates.
It seems counterintuitive. In theory, rising interest rates should be bearish for gold and gold stocks. After all, gold doesn’t pay any interest. So as rates rise, savers will choose to invest in interest-bearing accounts instead of buying gold.
But “theory” doesn’t always work so well in practice.
The financial market is a discounting mechanism. Investors expected the FOMC to raise rates on Wednesday. So they acted on that expectation previously. Any weakness in the gold sector as a result of the interest rate hike was worked into the price of the stocks. Now that the rate hike is out of the way, gold stocks are free to rally.
In fact, that’s what happened the last two times the FOMC raised rates. Take a look at this chart of the VanEck Vectors Gold Miners Fund (GDX)…
The last two times the Fed hiked interest rates were March 21 and December 13. Notice how those dates marked an important bottom for GDX. Gold stocks then rallied sharply over the next month or so.
I expect we’ll see something similar in the gold sector after Wednesday’s rate hike as well.
So like I said earlier… the gold stock rally begins today.
– Jeff Clark
P.S. No matter which direction stocks go, my Market Minute subscribers are always up to date on the trends taking shape – and the best ways to profit from them – hours before the opening bell rings.
Sign up for the Market Minute for free right here… and get your next issue at 7:30 a.m. ET sharp tomorrow morning.
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In the mailbag, dear readers take Bill to task for his criticisms of the president…
I’m probably one of your longest-subscribing and oldest readers/customers (30 or so years). I thought I understood Bill – until today’s Diary. I was already suspicious of government actions before Bill was even born. Why today in particular? Reagan came close, but Trump is the only POTUS in my lifetime that has even dented the bureaucracy in control. Much ink has already been spilled, so a rehash of his actions is not necessary. Trump has the huevos to talk in plain English and tell the “swells” what I and the rest of the “deplorables” have always wanted to say to those elitists.
– Joe M.
Don’t pass out a bunch of claptrap from your European wedding friends about how clueless the Trump team is. We voted for him because he could conceive of large projects and get them done. The events of the past 18 months/two weeks/yesterday prove that we were right before one even compares the candidates’ skill sets. POTUS is a big job. It is not a social statement or an honorarium for saving another from their indiscretions. Get over your elitist attitude and accept the fact that Mr. Trump is your president.
– Jeff O.
If not already, you, too, will grow to love our President Trump. History will, in all probability, proclaim him as one of our greatest presidents ever – if not the greatest. Just you wait, Mr. Bonner, just you wait…
– Helma B.
It never dawned on me until recently that you were such a strong supporter of Hillary. Just imagine where we would be if she had gotten elected.
– Danny T.
But others share kudos for our editor’s pointed critiques…
Kudos! This reminded me again why I always look forward to the next Diary entry.
– Opher L.
Dear Bill, no matter what “they” say, many of us still adore you and your writings… Keep your comments coming.
– Robert B.
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