Notes From Underground RE-RELEASE: Remember, Ben Bernanke is a ’37er and He Promised Milton Friedman

In light of the FED‘s FOMC STATEMENT and convoluted forecasting yesterday, we’re reissuing an oldie from June 2, 2011. We’ll be back Sunday night but for now, the ’37ER is doing his work.

Tomorrow comes the most important data point for the markets as the BLS releases the monthly unemployment report. Yesterday, the market was abused by the ADP employment info, which was much weaker than expected and lead to a selloff in all asset classes. A quick gaze upon the closing CQG quote board lent credence to the line from Apocalypse Now: “I love the smell of deflation in the morning.” Of course, I jest as I substitute DEFLATION for NAPALM but the use of either causes major destruction. The ADP data was able to cause so much angst because it followed very weak housing and manufacturing numbers released during the previous week. The CONSENSUS for Friday’s UNEMPLOYMENT REPORT is for: NONFARM PAYROLLS of 155,000; the jobless rate to hold at 9.0%; and average hourly earnings to show a gain of 0.2%.

Again, the emphasis will be on private sector jobs created as it seems that state and local governments will continue to be a drag on job growth. Also important will be manufacturing jobs to see if the weakened DOLLAR is beginning to have an impact of U.S. exports and whether American firms are moving some production back to the U.S. because of the higher costs of imports. If the NFP comes in at CONSENSUS I think the EQUITIES will rally because of the damage done by the ADP report Wednesday. Even a number of 100,000 with a steady unemployment rate should see the S&Ps try to rally as tepid growth will keep the FED in the easing game.

The recent economic weakness is providing Chairman Bernanke with the cover to maintain an “EXTENDED PERIOD” for the FED and to keep the inflation hawks detaloned. Mr. Bernanke is what is known as a 1937er in that he marks that year as the FED and U.S. Treasury combining to make a grave error by reining in fiscal spending while removing liquidity from the financial system. Those twin errors have been attributed as bringing about a severe recession that prolonged the pains of the “GREAT DEPRESSION.”

In a speech at Milton Friedman’s 90th birthday celebration, Bernanke told the father of monetarism: “YOU’RE RIGHT. WE [THE FED], DID IT. WE’RE VERY SORRY. BUT, THANKS TO YOU, WE WON’T DO IT AGAIN.” Friedman and Schwartz in their landmark work, “THE MONETARY HISTORY OF THE U.S.,” came to place a great deal of blame on the economic actions of 1937 as prolonging the severity of the depression. Make no mistake about it, BEN BERNANKE is a ’37er. The significance of this is that if the CONGRESS were to really enact some fiscal austerity while the economy is showing signs of weakening, Chairman Bernanke will do everything in the FED‘s power to prevent a repeat of that dreadful year in U.S. monetary history.

The markets may sense DEFLATION as the economy slows but the FED will pull out all stops to prevent a renewed downturn. The BONDS and NOTES have been warning of a second leg down as they have defied the opinions of some of the best fundamental analysts in the world, which is why I always advise using technicals as the tool to tell traders when they are right. Readers of NOTES FROM UNDERGROUND have not been short the U.S. DEBT markets even though I have stated that the 2-year TREASURY is the most overvalued asset in the universe. In the time period of a TREASURY RALLY, the 2/10 curve has flattened by 25 basis points as the financial markets were sensing the renewed economic weakness. If job growth begins to weaken badly, then the pressure of a very fragile HOUSING MARKET will become even more troublesome and push the FED to even more aggressive action.

It is Bernanke’s promise to Friedman that keeps the DOLLAR weak and the support for the GOLD. It seems that we are coming to some type of change in the weak DOLLAR risk-off algo. It is Thursday night and the EURO is up on the week while the U.S. EQUITIES are down. If it continues, the markets will be warning us that a sea change is developing. Remember that the news from EUROPE continues to be troubling and as of Thursday night the haven status is not in play. Yes, Greece, Portugal, Ireland, Spain and Italy are still a concern but we will always have 1937.


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7 Responses to “Notes From Underground RE-RELEASE: Remember, Ben Bernanke is a ’37er and He Promised Milton Friedman”

  1. JediTrader Says:


    Great post….the deflationary spiral is a terrible nightmare event.

    I apologize if this is out of line… but any advice on landing a trading role in Chicago? I want to be on the buy side of investing ideally in a prop trading role or for a hedge fund etc.

    Thanks for any help!

  2. arthur Says:

    good summary of your thought. I know your expertise in Japan. What do u think about this article “The Myth of Japan’s Failure”

  3. yra Says:

    Arthur–I read it and was not impressed and my son Tobias who is very,very knowledgable about Japan was critical of the piece–but the best reply can be found by going to Read the piece for a very sound critique .

  4. arthur Says:

    I read it. Thank you so much !!!

  5. Sunday Breakfast Links | Points and Figures Says:

    […] Some more analysis of the Federal Reserve statement. […]

  6. yra Says:

    Jedi–I always look to help .Maybe some people reading this blog will look to get in touch with you.You have posted many thoughtful responses and hopefully someone will have noticed and reach out to an aspiring global macro trader–for in my opinion the world is lacking in global macro traders and analysts–so anybody with employment knowledege let JEDI know.–Thanks Yra

  7. JediTrader (Bruce Rodriguez) Says:


    Thanks for the response… it really means a lot!

    My name is Bruce Rodriguez and I graduated from the University of Illinois Urbana Champaign in 2009 with a bachelor’s in economics and a double minor in business and classical civilization. Please feel free to connect with me on LinkedIn here…

    Also, my email is Please reach out and I can send anyone my resume and cover letter!


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