Betting on Bernanke

Two simple numbers point the way for Gold Prices...

WE DON'T MUCH like numbers here at The Daily Reckoning, writes Bill Bonner in his daily email.

You can't trust numbers. But we follow a few of them anyway. Like 107.01, for instance. Or 12.70.

The first number above was for the Dow on Wednesday. The second was for gold. They show us what happened in the day's trading. And on Wednesday, for example, the first number was negative. The second was positive.

Not that there aren't a lot more interesting, provocative numbers around. But we only follow the big picture here. And those two numbers tell us most of what we need to know. Or at least, they give us a good starting point.

The Dow number is going down because investors are worried. That's why the gold number is going up. What if these Cereal Revolutions get out of hand? What if they spread to Saudi Arabia? What if the price of oil keeps going up?

"Gasoline at $4 a gallon?" asked a headline this week. What would gasoline at $4 a gallon do to the US economy we wondered. Ben Bernanke, who would probably make a fine high school math teacher, knows nothing about economics. He thinks all he has to do is to add more money and the whole "recovery" picture will be complete. Investors will see their stocks go up. Employers will hire. Shoppers will shop. Bakers will bake more. Shoeshine boys will start slapping the leather. Wheelwrights will...well, never mind.

But then, the puzzle pieces change shape. He pumps in money. The price of oil goes up. And food. And the Arabs, who depend heavily on grain imports, get themselves worked up. And then the price of oil goes up more. And stocks begin to fall. And US consumers pay more for gasoline...

...and suddenly, the picture is not at all what the Fed chairman had hoped for.

But wait. It gets worse. Look at a third number: 220. It's what the big Japanese securities firm, Nomura, thinks the price of oil could reach, thanks to the Cereal Revolutions.

And maybe they're right. Gaddafi is no Mubarak, say the papers. When he says he'll fight...he could mean it.

And others are getting ready for a fight too. Saudi Arabia is trying to head off trouble. And reports tell us that China is worried and increasing its security measures.

And what about France? And the USA?

Have we lost our mind? Not entirely.
 
"I'll give you a prediction," said a smart French woman with whom we dined last night. "What's happening in North Africa will soon be happening in France."

"And if you look at how wealth is distributed in the US," said a companion, "it is really amazing. Something like 95% of the population lives below what we would consider the poverty level here in Europe. I don't know how they live. It's only the extremely high earnings of the other 5% that makes the average seem normal. And almost all the new wealth created in the last 10 years has gone to a tiny percentage of the population.

"You and I may know that Ben Bernanke and the US monetary policies are largely responsible for the wealth has been concentrated in the hands of the rich. But the man on the street has no idea. He just thinks it is wrong. And unfair. What is really amazing is that he hasn't already begun a revolution..."

We were quoted in The Wall Street Journal last week. "Gold is a bet against the Fed," we said.

Gold is now firmly over $1400 an ounce. The correction seems to be over. But frankly, we were disappointed. We were hoping for a deeper correction that would shake out the speculators and discourage the Johnny-come-lately investors.

Didn't happen. Instead, the Gold Price barely went down at all. Less than 10% (from vague memory). Hardly a correction.

We wanted lower Gold Prices so we could buy more. Because, if there were ever a sure-fire, under-priced wager here's one: betting that the Fed will err.

You can understand the power of that bet just by taking the other side for a moment. Who, in his right mind, would bet that the Fed won't err? Thanks largely to the Fed and other central banks, the crisis that began 4 years ago with the bankruptcy of subprime lender Countrywide Financial was never resolved. Instead, the problems were largely increased. The private sector still has far too much debt. Now, the public sector is headed for bankruptcy too. It is only a matter of time before new crises arise and intensify.

Ben Bernanke has never given the slightest indication, hint or wink to suggest that he has any idea of what is really going on or that he understands how an economy really works. At every point over the last 5 years, his analysis has been incorrect. His predictions have been wrong. And his policies have made things worse.

You want to bet on Ben Bernanke? Yes, thanks...we'll take that bet.

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