Gold News

A Well-Intentioned Arsonist

A reappointment to complete the destruction of the US Dollar...

, nominated by US president Obama for a second term as Fed chairman, is a well-intentioned arsonist, writes Dan Denning in the Australian Daily Reckoning.

Bernanke inherited an American and global economy built on an upside down pyramid of debt, with a very small asset base. When the entire edifice began to collapse in 2007, the Fed chairman was slow to react. But by the end of 2008, the Fed had slashed its interest rates to zero, and expanded its balance sheet to over $2 trillion.

The Fed accepted toxic collateral from banks in exchange for US Treasury bonds and notes. It set up new liquidity and credit facilities to keep over-leveraged financial firms afloat. And it began monetizing mortgage and Treasury debt by creating new Fed money to support the US housing market and the criminally reckless spending policies of the US government.

Everything else in the financial markets flows, in one way or another, from the Fed's actions. Commodities first inflated, then deflated, and are now slowly inflating again as the US Dollar is systematically weakened by the Fed's actions. Investors are forced to speculate as well, but if there's one good result from the Fed's campaign to save housing by destroying the Dollar, it's that investors have begun to realistically evaluate their alternatives outside the greenback and dollar-denominated assets.

Emerging markets? Maybe. Energy? Probably. Precious metals? Definitely, starting with gold.

What about commercial property or retail stocks? Probably not. Scratch that. Definitely not! Property group and retailer Westfield announced a $708 million net loss for the first six months of the calendar year. The good news is that met expectations by analysts. The bad news is that it doesn't really matter what analysts expect: that's a $708 million net loss.

If Westfield were married to America, it would ask for a divorce. Nearly one third of its revenue comes from its 55 U.S. shopping malls. But the company said sales per square foot at its US properties fell by 6.2% from the same time last year. Conversely, sales at its Aussie properties were up 5.1%.

The company also took a $2.9 billion write down on asset valuations. Par for the course. Many of the assets purchased with debt at the height of the credit boom are deflating. It could have been an even larger write down, but the company booked a $932 million gain on financial instruments. We'll investigate just what those were and get back to you on it.

Retail is a terrible business to be in during a recession. Australia, backed by $50 billion energy deals and a committed faith in property, sports a lot of consumer confidence. That backs retail sales. But don't forget the primary economic and social trend right now: people are reducing their debts. They are cutting back, becoming more frugal, and learning to live within their means.

Of course, we think this is happening. But it could be totally wrong. Maybe the credit cards are finding their second wind and consumers are gearing up for one last credit bender. But our suspicion is that you are in the middle of a generational/cyclical shift in the attitudes toward debt and that this is generally bad news for retail stocks, let alone financials.

Good luck Ben Bernanke. "There's a lot of ruin in a nation," Adam Smith once quipped. Four years is not much time in the scheme of things. But the Fed can ruin a lot. Watch it try.

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Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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