Happy Anniversary!

Greenwich, 29 August 2011.

The Caloen International portfolio is up 8% year to date.

After losing 4% in Q1, the fund lost an additional 3% in the last two weeks of the second quarter.
In those two weeks, global markets had one of their strongest short term rallies even though US consumer confidence was nosediving.
Then, sentiment turned on a dime.
So did the portfolio’s performance, helped by its high exposure to gold miners and short positions in cyclicals and emerging markets.

The S & P is now back to the levels of one year ago when Chairman Bernanke announced his renewed intention to monetize the US government debt.
Happy anniversary.
Indeed, the stock market is celebrating today.
QE 2 has done wonders for traders.

But why is Chairman Bernanke so serene?
Didn’t he forecast 4% GDP growth thanks to his printing prowess?
Doesn’t he wonder today why it did not materialize?
Doesn’t he wonder why the economy has continuously decelerated since his last Jackson Hole speech?
Is he questioning his models?

Those are rhetorical questions, of course.
Chairman Bernanke knows very well what stands in his way.
The problem is democracy.
As he puts it: “The country would be well served by a better process for making fiscal decisions.”
The economy slowed down in the first half of the year because of the acrimonious debate in Washington about the debt!
QE 2 would have worked if it were not for these politicians debating trivial issues.
Can we not go back to the good times when Congress blindly agreed on spending trillions of dollars?

Anyway, one should not look back.
Ben Bernanke is forecasting strong long term growth and that is good enough for traders.
The man who predicted 4% growth, a new era of “Great Moderation” and a renewed wealth effect after the last failed experiment, is still taken seriously.
And he is here to stay.
That’s the advantage of not having to face elections or shareholders.
Federal Reserve Chairmen are chosen for their competence by the president.
That’s the way it is.
Too bad if we cannot always expect presidents to be so judicious in their choice as when Carter chose Paul Volcker.

Let’s finally face it.
The Federal Reserve is an un-American institution.
It is undemocratic and elitist.
It has also seriously discredited the dollar, our national treasure.
Next we might as well turn Princeton University into a mandatory school that teaches our brightest minds to all think alike before joining any administration.

Fortunately we are not Europe or Japan.
This is unlikely to happen.
It may take another sell-off in the markets, but we will have to reform our monetary system.
When that time comes – and it cannot come early enough – we will be well advised to turn to the Founding Fathers’ intentions.
We are always well advised to do that.

In the founding years of the Republic, Hamilton knew the Constitution forbade the government from issuing money itself.
That’s why he thought, a bit naively, that a privately owned bank would be immune to political pressures.
He had the “moral certainty” that any government that had the power to print money would resort to it in the end, rather than levy taxes that would make it unpopular.
The US government, Hamilton reckoned, had shown its wisdom “in never trusting itself with the use of so seducing and dangerous an expedient.”

Today’s Fed fools nobody.
It has become a branch of government by volunteering to monetize the public debt.

Where does that leave the economy today?
Well, we have now moved from a “better-than-expected” economy to an “it-could-be-worse” stagnation.
Or is it stagflation?
Bernanke predicts lower inflation…

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