Notes From Underground: THE BANK OF THE UNITED STATES (THE FED) … That is the REAL Jackson’s HOLE

The week ahead will be waiting for the words of wisdom from Ben Bernanke and his take on where the U.S. is at and where the economy is possibly going. THERE WILL BE NO QE3. IT IS NOT BECAUSE OF RICK PERRY BUT BECAUSE QE2 IS A FAILURE BY ANY METRIC. THE YIELD CURVE IS FLATTER; UNEMPLOYMENT HASN’T IMPROVED; AND THE BELOVED PORTFOLIO BALANCE CHANNEL IS A NON-EVENT– AS MEASURED BY THE S&P/BOND RATIO–FOR THAT BELOVED INDICATOR IS BACK TO WHERE IT WAS AT LAST YEAR’S BERNANKE BLOCKBUSTER SPEECH. What did we get for the $600 BILLION in asset purchases. I know things would’ve been much worse. The FED has locked itself in to a two-year zero rate policy so it makes Bernanke’s task very difficult as the FED has expended a great deal of good will and has very little to show for its effort.

Granted, last week’s problems largely emanated out of Europe as the most “important” European meeting since Yalta resulted in a big YAWN. Sarkozy and Merkel seem to have very little understanding what the real problems in the European financial system are so each failed summit brings a more negative reaction from the markets. Chancellor Merkel was saying during the weekend that Europe didn’t need a DEBT UNION but a STABILITY UNION. I know what a DEBT UNION requires but I am lost in trying to define the concepts of a STABILITY UNION.

Does a STABILITY UNION mean that the EFSF will be granted more funding to support the beleaguered SOVEREIGN DEBT markets of the peripheries? Does a STABILITY UNION mean that some EUROPEAN entity will secure the financial system even without a centralized fiscal authority? Merkel is talking but her rhetoric raises more questions than answers.

THE EUROPEANS ARE INVOLVED IN A CREDIT CRISIS and yet there seems to be little understanding of how to resolve it. The European BANK STOCKS got hammered last week as investors are fleeing for fear of a credit crisis spinning out of control and there doesn’t appear to be a lender of last resort to backstop the system. Yet Merkel insists on STABILITY without defining what that means and what policies are needed for a successful outcome. If Europe believes that the Americans are going to come to provide financial support, they will be greatly disappointed as Bernanke has a difficult time explaining U.S. monetary policy to the politicians looking to make the FED a 2012 election issue. The world waits to see if the Europeans are listening to the cries of a banking system in search of aid. Maybe Trichet will find this as another opportunity to raise rates!

A quick hitter: The August 19 online issue of the New York Sun had an editorial titled, “Waiting For De Gaulle.” It is worth a read as it looks back at the French President’s concerns about the U.S.’s ability to debase the DOLLAR. It cites a speech that De Gaulle gave in 1965 and the U.S. reaction to the French concerns about the GUNS and BUTTER of LBJ. Remember that the Kennedy and Johnson years were policies that were crafted by the BEST and BRIGHTEST.

It is difficult to appeal to the words of De Gaulle, but when he is right he is right. As the editorial says, we must remember that Bernanke by his own admission is mystified by GOLD. It is always interesting to see how little respect global policy makers have for markets yet the whole concept of THE PORTFOLIO BALANCE CHANNEL, which is to support equity markets. However, relying on the concept of the wealth effect or “animal spirits” mystifies most of the world but certainly not the GOLD market! BERNANKE GOLD PRICES ARE MYSTIFIED BY FED POLICY.

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12 Responses to “Notes From Underground: THE BANK OF THE UNITED STATES (THE FED) … That is the REAL Jackson’s HOLE”

  1. Peter Says:


    excellent missive.

    SocGen is leveraged 50:1. That means that it has 50 in assets, 1 in capital and 49 in borrowed money.

    I ask myself this:

    Peter, out of 50 decisions that you have made, how many have been wrong and cost you money.

    Answer: Far more than 2.

    So, SocGen, with its geniuses and computers, can it achieve a success rate of better than 99% – only 1 wrong answer for every 100 postulated.

    The same thesis can be put to every bank. How long can anyone walk on water – ok, if the water is is 5 cm deep. Ok, if the State is sliding a board just under the surface to support you. But, what happens when you are walking on water and you get hit with a 2 meter wave. That is what the world is facing with the banking system right now. There is not a contingency fund on the plant to rescue the banks.

    Liquidate as much cash as possible into gold and silver and prepare for the worst. The day of reckoning came and went last week.

  2. EricH Says:

    It will be interesting to see how the can is kicked down the road the next few months and Yra covering this grand game.

    Besides Gold telling the truth, we can learn a lot on how to delay the inevitable. It’s like a favorite sports team or athlete who you know will blow it in the end, but hope otherwise. Oh, who am I kidding Europe is like Brett Favre!

  3. USIKPA Says:

    “… as the most “important” European meeting since Yalta… ”

    liked that!

  4. Joe Says:


    I think the gold market signals that they know central bankers all too well.

  5. arthur Says:

    GMO’s Jeremy Grantham manifesto:

  6. rohrintl Says:

    Dislocated concepts and dissembling are indeed the stock in trade of clueless bureaucrats. Excellent observations (as always) on the deficiencies of them making it up as they go along… like ‘Stability Union’ (???!)

    And little doubt the US is on the same path unless we get the major change we are hoping for in 2012 (even with a lot of further damage by then.) The dilemma with all these quasi-socialist pols is that they can’t even imagine real solutions anymore, because their whole frame of reference is the Statist Quo.

    The last global point relevant to your comment is from a cartoon a foodie friend of mine posted to his website. It was a letter from the sausage makers being presented to a legislator demanding an apology. I suppose under current circumstances the same goes for finance ministers and central bankers.

  7. Tuesday Breakfast Links | Points and Figures Says:

    […] are supposedly waiting for Bernanke’s speech at Jackson Hole. I don’t think they should expect […]

  8. JediTrader Says:

    I have been very bullish gold over the last 2 years and think it has been one of the most no brainer trades out there simply for the flight to safety…. and sticking with the trend. Although my view on gold has not changed necessarily, I do believe that we are entering the uncharted highs that would leave me more cautious – enough to be employing various hedging strategies with risk collars or outright puts.

    Although I think the gold trade merits this attention from the market given an US sovereign debt, a eurozone credit crisis, unstable US equity markets, and the potential for another global downturn….. I cannot help but think this market may be entering what Mr Greeenspan calls an “irrational exuberance” stage. Either way – a trend is a trend until it is not….

    Anyone know of an accurate historical chart of real gold prices – adjusted for inflation?

  9. jt Says:

    With respect to QE2. You know that it didn’t work, I know that It didn’t work, but does Ben Bernanke know that It didn’t work?
    He may think it created 3 million jobs (jobs that existed but would have been lost). Or he thinks it wasn’t big enough. I expect something out of Jackson’s hole.

  10. yra Says:

    JT–how do you argue a counter-factual.If 3 miilion jobs were crated or saved–how do we know.He may say what else the FED has at its disposal –the biggest speech out of Jackson Hole may be trichet.

  11. yra Says:

    Jedi–nice work on the GOLD.Is GOLD a bubble–NOOOOO–it is merely the repository of the world’s angst and safe haven status—just have to wonder if the EUITIES are ever going to join the world of safe haven status.For those who argue the DOUBLE-DIP I believe we never left the first recession–but I don’t work at the NBER

  12. JediTrader Says:


    Thanks. I don’t want to say Gold is a bubble, I just think it is starting to get overly crowded and entering a stage where it can potentially be a bubble. And personally I plan on taking advantage of the downside to gold over the next 5 years.

    Regarding equities I would not want to be involved in any index. This is where I would have to take the microscope to my global macro view and find an opportunity in a particular sector and identify an attractive micro play. Off the top of my head I think I would do a lot of research in the financials sector. Don’t really care what the talking heads are saying on fast money because at the end of the day that sector and specific firms such as a JPM have a higher probability of being around in 10 years than not. I think an entry now is premature and would do more research but could potentially put on a position within the next 6-12 months….this would be a position trade that would probably stay on 3-12 months.

    Also, am looking to get long GS during the selloff caused by Lloyd’s new hire…. if there is anything i learned during GS’s case in 2010 it is that these huge name firms can get away with anything…. so buy the dips caused by poor practice rather than poor fundamentals.

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