Notes From Underground: Even Chairman Bernanke Doesn’t Believe the Projections … On the Other Hand

The FED provided the markets with everything and nothing at the same time. The FOMC STATEMENT was little changed from the last meeting although it wasn’t short of qualifiers. In discussing the HOUSING SITUATION the FED added the word “DESPITE” in noting signs of improvement the housing sector remains depressed. The FED wants to make sure that housing needs to be for more robust before the siren of all clear sounds (hence the word DESPITE). The FED noted that “STRAINS in global financial markets continue to pose significant downside risks to the economic outlook.”

In the March FOMC STATEMENT, the FED noted that the STRAINS HAVE EASED. The “have eased” language is gone from today’s release. Yes, I am parsing words but with the FED all qualifiers are important. So after several reads and Chairman Bernanke’s press conference, the FED has plenty of cover to maintain present policy until late 2014. Adding to Mr. Bernanke’s concerns is the fact that he mentioned the FC PHRASE. Not that one but FISCAL CLIFF in discussing the problems the economy will face in the event CONGRESS fails to attain some level of responsibility in dealing with the coming tax increases after the November elections.

Ben Bernanke is very aware of the impact of tax increases on the fragile state of the economy and seems to cast aside the PROJECTIONS. It seems that other FED BOARD MEMBERS left fiscal policy out of their projections, which render the outlook during the next two years as WORTHLESS, or as I will continually criticize, ASSUME A CAN OPENER.This FOMC STATEMENT AND PRESS CONFERENCE WERE A MEDIA EVENT AND OFFERED LITTLE ELSE.

***Quick Hitter: The Reserve Bank of New Zealand announced their rate intentions this afternoon and left rates unchanged at 2.5%. Governor Bollard did raise the concern that the KIWI was overvalued relative to recent declines in commodity prices (MILK) and if prices stay low, and the KIWI STRONG, the RBNZ will move to impact the currency’s value. The problems of Europe are a concern as the slowdown is impacting all commodity producers. All nations are concerned about the growing problems in the PERIPHERIES of EUROPE and have cover to keep rates low. This week the Bank of Canada, the FED and the RBNZ all pointed to the fragile state of the global economy–regardless of what was going on in their domestic economies–to maintain the accommodative policies that have supported the GLOBAL PORTFOLIO BALANCE CHANNEL.

***The economic data continues to be mixed as DURABLE GOODS was very weak. The argument for all the number crunchers will be how much economic activity was brought forward by the very warm winter in the nation’s heartland. This is something to pay close attention to for if growth was brought forward (think CASH FOR CLUNKERS) then the FED will have every reason to extend OPERATION TWIST. The FED‘s effort at OT will not be deemed a QE program but an effort to lengthen duration and keep mortgage rates very low. The problem will be that the markets will deem an extension of OPERATION TWIST as the FED being more concerned about the economy’s strength then has previously been revealed.

Again, the FED‘s use of the “DESPITE” qualifier to describe the housing market hints at the coming need for further TWIST. The coming months will place weight upon data releases as the official period of Operation Twist is set to expire at the end of June. Add the politics of Europe  to the mix and the financial markets can expect great volatility. The FED did little to PROJECT ANY CLARIFICATION UPON THE GLOBAL MORASS.

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5 Responses to “Notes From Underground: Even Chairman Bernanke Doesn’t Believe the Projections … On the Other Hand”

  1. kevinwaspi Says:

    Excellent job of parsing words. Despite the lip service (again today in the press conference) given to “transparency” at the Fed, the effort is still (at best) a “work in progress”. That said, we shouldn’t be surprised with the durables report (hat tip again, Yra) as your cash for clunkers example is very fitting. Anyone within earshot of me over the past 12 months had heard the forecast of what “stealing from the future” the accelerated cost recovery gimmicks (expiring at 12-31-11) would do to future (read 2012-2013) CAPEX. We are now seeing that impact, and probably will continue to see sub-par capital spending. Last, John Taylor hit this nail square on the head in the Barron’s interview Saturday. Our enlightened leaders just cannot understand that temporary policy actions seldom bring the desired result, and often bring unintended ills. I guess that is why we all love 2+2=5!

  2. yra Says:

    Kevin–thanks for the thoughts and it is interesting how some people in the seat of power pull out John Taylor as needed–otherwise they just dismiss him out of hand when he disagrees

  3. Hank Moody Says:

    Yra, great job cutting through the noise here as usual! Also, good points Kevin.

    Stanley Drukenmiller also made a similar point at the recent Grants conference, that Federal deficits are bringing forward tomorrow’s earnings to today and so corporate earnings look more compelling than they really are. Clearly this has a knock on to capital spending and investment. Something which will be a definite side effect of the FC, as business confidence pulls back and agg demand contracts. With this dynamic in mind Yra/Kevin, I see more expansion ahead in 2013 (in this version of alternate futures). Which form they’d pursue is another question entirely.

    Also would love to hear your take on Copper over the medium-long term Yra? Have you looked at any of the reports on the supposed significant supply in China given speculators taking physical delivery to get LCs to fund other projects?

  4. Yra Harris Says:

    Hank–good post and the copper was going to be a theme tonight as the rally is perplexing to say the least–I will write about it sunday.First thought is –how can copper rally when the world looks like its heading back into a deleveraging position.Also,did you happen to listen to the most intelligent financial plumber at the Grants conference–James Aitken? Most brilliant guy in understanding the credit pipes

  5. Hank Moody Says:

    Yes, thanks I am looking forward to your thoughts. Please excuse my incorrect apostrophe above (it was 4 in the morning here in Aus).

    What Aitken said makes me a very big fan of Hugh Hendry’s thesis, your 5/30 flattener, and possibly a butterfly structure around front months on treasuries – I think there is value there as nobody is betting rates go lower.

    Aitken’s insights are those which few men would have the network and informational flow to construct, he really gets the machine. I understood the notion that banks would have to repay into there capital bases as asset prices fell, given they re-hypothecated on the way up, but Aitken gave me the colour!

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