Posts Tagged ‘Ben Bernanke’
Notes From Underground: Everybody Is Talking At Me, Can’t Hear a Word They’re Saying (Only the Echoes of the Bonds)May 21, 2013
This week has been loaded with FED OFFICIALS filling the airwaves with thoughts about ending QE or just tapering, with the markets left to discern how, when and how much. Today, the NY FED President presented a speech at the Japan Society in New York City, titled, “Lessons at the Zero Bound: The Japanese and U.S. Experience.” President Dudley compared and contrasted the mistakes made by the Japanese and U.S. monetary authorities and what they had been able to learn from each other. The speech was not critical about recent Japanese monetary moves, which infers that the FED is very comfortable with current BOJ policy. The NYFRB president does tell seem to support Chairman Bernanke in being a ’37er, meaning the FED cannot allow the mistakes made in 1937 by the U.S. Treasury and Federal Reserve Board to recur. This belief emphasizes that deflation is the most powerful variable that can disrupt the political economy.
Notes From Underground will resume Thursday night. I wanted to issue an old piece from the day after the Jackson Hole Symposium of August 2012. It refreshes where were then and looking at the world now. Yes, we’ve reissued this piece before, but once you reread, you’ll see it’s still wildly relevant.
I also want to remind my readers: Bernard Connolly will be on with Rick Santelli this Thursday morning on the Santelli Exchange. It takes place between 10-10:30AM CST. Enjoy (and click on link below to read the post)
Now that the FED has provided the U.S. and world financial system with a suit of liquidity, it is trying to figure out how to reduce the amount of material. The word “TAPER” is not my favorite for it fails to define what I believe is the goal of the FOMC. Who cares if the FED reduces it security purchases? That is not the problem. If the economy has any real traction the current balance sheet of more than $3 TRILLION should be quite sufficient to keep interest low. The dilemma is how to remove the LIQUIDITY without causing a collapse in Bernanke’s beloved PORTFOLIO BALANCE CHANNEL.
The last two days has seen two of the world’s key central banks deliver fresh interest rate decisions and there was very little in way of surprises. In a salute to the philosopher Isiah Berlin, I have noted that Chairman Bernanke is a HEDGEHOG and President Draghi a FOX. A hedgehog is one who “views the world through a single defining idea.” The economy is slowing, unemployment is high, inflation is low, so it is appropriate for the FED to buy and continue buying Treasury debt. You say it is not having the desired effect? Buy more. In yesterday’s FOMC statement, the FED noted that ”… FISCAL POLICY IS RESTRAINING ECONOMIC GROWTH.” The meaning of this is that Washington is acting irresponsibly, thus the FED needs to possibly INCREASE its bond and mortgage-backed securities purchases. Whatever it is, QE IS THE ANSWER.
The initial check with no move on interest rates was offered by the Reserve Bank of Australia as it held its overnight lending rate steady at Tuesday’s meeting. The Aussie 2/10 curve flattened a bit after the meeting and the Aussie two-year note continues to trade at a lower interest rate than the official overnight rate of 3%, yielding just 2.88%. Many readers have asked about the impact of yield curves on equity prices and I will deal with this on an ongoing basis. For an immediate example, if the Aussie curve continues to stay flat I will venture to say that over the course of the year the Australian stock market will underperform. That doesn’t mean that it won’t have synchronized rallies with other developed markets, just by year’s end it will underperform other equity markets. If the RBA acts to cut rates and reset the curve on a more positive slope, the outcome, of course, should be of a better equity performance. To paraphrase Max Planck: Good trading and analysis advances one funeral at a time.
Notes From Underground: #Irony … Carmen Reinhart Says “Do Not Take Size As An Indicator of Importance”; Harry Rheems DiesMarch 21, 2013
Okay, you must have some fun amongst the idiocy of the Eurocrats. It seems that the best intentions of last Friday night’s decision to sacrifice the pawns in the game have done exactly what I thought the ill-conceived plans would accomplish. For 10 billion euros of bailout capital the fallout has been large drops in equity values. The capital losses are small compared to embarrassment facing the European policy makers. In a Bloomberg article by James Neuger, “Europe Plays I-Didn’t-Do-It Blame Game on Cypriot Deposit Levy,” it seems that German FM Schaeuble, France’s FM Moscovici, Spain’s FM Guidnos and even Finland’s FM Urpilainen all claim that they were opposed to taxing the guaranteed deposits of under a 100,000 euros. They all seem to point to the ECB and IMF as wanting the “bail-in.” This is a classic example of what my friend Andy Schreiber used to say: “Success Has Many Fathers, Failure Is But An Orphan.” The Cypriot situation is a situation that punches way above its weight. Carmen Reinhart, an economist I cite regularly on financial repression, silenced the talking heads on CNBC when she claimed that, “Do not take size as an indicator of importance.”
Yes, another day and the markets had to try to understand the significance of Cyprus. The newswires were filled with analysts claiming this was a “tempest in a teapot” and that the doomsayers were blowing the Cypriot problem into a pseudo crisis. Again, a world that is highly leveraged is subject to a “single spark starting a prairie fire” and the fear of contagion and an electronic bank run are very real if the major policy makers don’t invoke the trust of the electorate and investors. The perceived actions by IMF Director Lagarde (the joker) and the liquidationist mentality being thrust from Berlin and Chancellor Merkel (the thief) have created a situation where European bank depositors are nervous, especially so in the peripheral banks. THE MAIN COMPONENT OF THIS UNCERTAINTY WAS THE MOVE IN THE FRONT MONTH EURIBOR CONTRACTS,AS THE JUNE 2013 FELL 10 TICKS ON A DAY WHEN OTHER INTEREST RATES WERE LOWER. NOTHING SAYS BANK FEARS THEN A COUNTER MOVE IN THE EURIBOR AND LIBOR MARKETS. An increase in bank yields with equity markets falling is a sign about the fear in the bank deposits market. It seems that the policy makers that are leading the previously “revered” TROIKA (IMF,European Commission and ECB) have initiated fear for a mere pittance.
Friday night Chairman Bernanke delivered a speech on long-term interest rates at the Annual Monetary/Macroeconomics Conference sponsored by the San Francisco Federal Reserve. The basis of his remarks was that the Fed would continue to maintain its robust monetary accommodation because any early extraction may result in the economy slowing and thus the Fed would have to move to extend the period of aggressive Fed action. It is always important to remember that Ben Bernanke is the main ’37er in the realm of preventing an economic relapse to the deflationary impact of deleveraging. When I say that Chairman Bernanke is a ’37, it refers to the pledge the chairman made to Professor Milton Friedman at the esteemed economist’s 90th birthday party. Bernanke said the Fed made a huge mistake by tightening rates and reserve requirements in 1937 while the U.S. Treasury was instituting an austerity budget at the behest of Secretary Andrew Mellon. It has been Bernanke’s belief that the Fed’s actions coupled with a badly flawed fiscal policy sent the U.S. back into a very severe recession.
As expected, the G-20 communique was more insipid blathering about global growth, BIS capital regulation and the enactment of some new macroprudential regulations to ensure global financial tranquility. To reflect on the lack of consistency in this communique, let me quote from point 20: “We welcome the OECD report on addressing base erosion and profit shifting and acknowledge that an important part of fiscal sustainability is securing our revenue bases.” This is pure nonsense for it reflects the great divide that exists between the old line powers of the G-7 and the more broad-based and emerging economies found within the structure of the G-20.The old line (developed) economies want to preserve their tax bases so as to have enough revenue to maintain previous promises of retirement and pension programs for their aging populations.