Jobless claims, GDP, consumer sentiment … all meaningless as the Bernanke speech at 9 a.m. CST takes precedence. The financial world awaits to hear if the FED CHAIRMAN will deliver another gift like last August’s Portfolio Balance Channel speech. While QE2 did not commence until November, the groundwork was laid in August and the plan delivered at the September FOMC meeting. The markets well understood that the intent of Jackson Hole precipitated the equity market rally that began in September.
The recent sharp correction in the global equity markets has lent credibility to the argument that Bernanke will deliver another gift to the equity markets and provide the fuel to raise stock prices. While some analysts anticipate a QE3, others are predicting a replay of either a “twist” or else an effort to cap the long end of the CURVE. Both efforts have been used before as the FED capped long rates during the 1940s and effected the curve in the early 1960s. While these tools are certainly available to the Bernanke FOMC, I doubt that the Fed chairman will use either of these methods or begin a new QE program for it would be a waste of monetary power that may be needed in the future.
The FED has already announced its plan of holding overnight rates at close to zero for the next two years making the twist unlikely as raising short rates to twist longer rates lower would undo the effort to hold rates low on the short end. The tool to hold long rates below a proscribed level could work but is unnecessary at this juncture as notes and bonds are already very low. QE3 would bring criticism from many high level analysts and the FOMC already had three dissenting votes at the August 9 meeting. Also, Mr. Bernanke has to be leery that RON PAUL HAS LEGISLATIVE OVERSIGHT OF THE HOUSE SUB-COMMITTEE TO WHICH THE FEDERAL RESERVE HAS TO ANSWER.
I am not discussing the rantings of Texas Governor Rick Perry, I am referring to Ron Paul who has real power to make Bernanke accountable and miserable. It seems that the FOMC took the high road in its last statement by taking an aggressive stance for a defined period and thus putting the responsibility on the executive and legislative branches to affect a credible stimulative policy. It is time for Bernanke to free himself and the FED from the “GREENSPAN PUT” and allow FED policy to work and to stop being concerned with the stock market. If Bernanke avoids the “PORTFOLIO BALANCE CHANNEL” discussion, it will be a breath of fresh air for monetary policy. Hey BEN, turn off CNBC and enjoy the beauty of the Grand Tetons. The machinations of Wall Street will always be with us.
Quick Hitter: The most important speech my well be delivered on Saturday by Jean Claude Trichet. The ECB president has made two mistakes by raising overnight rates during the European credit crisis. As the equity values of Europe’s banks have been crushed and the fear of a Lehmanesque type of banking debacle rising, it will be important to hear if Trichet has any plans to aid the troubled banks by moving to push for a higher level of money for the EFSF.The buying of troubled sovereigns by the ECB also needs to be enhanced so as to remove funding pressures arising from greater haircuts on the troubled sovereigns. I am sure that Trichet is getting an earful from the gathering of the world’s top monetary policy makers. Will Trichet attempt to raise his stature as he nears the end of his ECB Presidency. November 1 is quickly approaching.
Quick Hitter Two: If Bernanke stands pat I believe it will be necessary to see what levels of support hold for equities. Does the DOLLAR get a rally as QE3 does not materialize and the focus returns to Europe? And, of course, how will the barometer of global angst, GOLD, react to no more QE. If GOLD were to continue this weeks selloff, then we will know that the latest leg up in GOLD was to the immediate fears of a new QE plan. However, if Trichet were to deliver a major speech on ECB plans of increased bond purchases, GOLD will have a new impetus to reassert its safe haven status.
Tags: Bernanke, Dollar, ECB, EFSF, Fed, FOMC, GDP, Gold, Jackson Hole, portfolio balance channel, QE2, QE3, Ron Paul, Trichet
August 26, 2011 at 8:45 am |
As always your assesment of world and macro events is spot on!!!
This is why you’re blog is mandatory reading for all my clientele!
FYI..You’re only one of 2 or three people that regularly appear on CNBC that is sentient. Dalio,the Pimco boys, Buffett to name a few.
I only turn the sound back on when you’re on!
August 26, 2011 at 10:51 am |
Agree with Whitewave – The only 3 CNBC people I turn on the sound for are Yra, Yra and Yra!
August 28, 2011 at 6:05 pm |
I would argue that the problem in the US is more fundamental and entails seeing the linkage between domestic and foreign policies; this is the speech Bernanke should have given:
We have reached a level of political irresponsibility over the past 35 years, and specifically over the past decade, where we can now quite realistically see the possible collapse of the U.S.-centric world order as the U.S. is allowed to decay from within. If you, the Washington policy-making elite, do not want this to happen, then you must change course in a more fundamental way—in domestic terms–than Washington has done since Lincoln made ending slavery the moral foundation of the Civil War and—in international terms—than Washington has done since Roosevelt defeated isolationism and took us into WWII.
Domestically, you must personally sacrifice your class interests as the representatives of the rich and powerful by reorienting U.S. financial and tax policies to put the interests of the low and middle classes first. This will entail policies that will severely punish non-productive investment strategies, that will strictly regulate with harshly applied criminal penalties both the banking and mortgage industries, that will re-create a highly progressive tax structure, that will heavily tax carbon use, that will make the ownership of expensive vacation homes prohibitively costly, and that will transfer excess wealth rapidly into the hands of the poor. Such a revolutionary set of reforms will obviously be feasible only in an environment in which real political power is transferred from the rich to the average voter, and will thus entail such political reforms as public financing of elections and legislative steps to encourage rather than discourage third parties.
Internationally, Washington policy-makers must accept that their primary job is to manage the U.S. on behalf of the whole population, i.e., to ensure quality education, plentiful jobs doing productive work, a healthy civil society, political inclusiveness, civil rights, quality health care. Their primary job cannot be the pursuit of global empire. The empire must go. The U.S. must eliminate most of the U.S. military budget, cutting back from some 40% of total global military expenditures to perhaps 10% of total global military expenditures, a budgetary shift that will have the enormous benefit of forcing the U.S. to emphasize moral leadership, if any leadership at all, rather than leadership through force. The global U.S. military base structure will disappear, and wars of choice will no longer be launched by the U.S. against the wishes of the majority of mankind.
The bottom line is simple: either you, the rich and powerful, must agree to go on a diet and live life in the U.S. as part of rather than as parasites on American society or America as we know it will disappear. We, the American people, can no longer afford to pay the bill for your lifestyle.
August 28, 2011 at 6:51 pm |
William deB Mills: this is a very well stated point but as my long time readers know I do not engage in the politics of Washington but there is much in here that readers of Notes will find comfort in—That is part of my discussion in tonight’s new piece about Bernanke beggining the necessary movement to shut off Wall Street and run monetary policy for the country.Your points are wll taken and worthy of one of the great orators of America—William Jennings Bryan.The country has been turned upside down when it is Thomas Hoenig and Richard Fisher raising the flag of sound money and Dudley and Rosengren of the Eastern Banks continually beating the drums for easy money—we will not be “DROWNED IN A SEA OF PRINTERS INK”–ok not worthy of the “CROSS OF GOLD”.