Notes From Underground: Will the Weak Retail Sales Force Bernanke to Reveal the New Power Tools?

Today’s RETAIL SALES report was far weaker than anticipated. With Bernanke testifying to CONGRESS (Senate on Tuesday, House Wednesday), will the FED Chairman reveal anything to the “FOOLS ON THE HILL” as the knives will be out as politicians need to be seen as pressuring the FED for the voters back home. As previously reported, the June’s FOMC MINUTES revealed, “Several participants commented that it would be desirable to explore the possibility of developing new tools to promote more accommodative financial conditions and thereby support a stronger economic recovery.”

The retail sales number and the ramping down of the second quarter GDP number may force the FED’s hand. What tools the FED may have is mere conjecture, but as a long-time proponent of lowering the IOER (Interest on Excess Reserves) and seeing its recent impact on European credit markets, I am becoming more skeptical. In private discussions over the last year, some critics of my view on the ZERO IOER policy have implored that the impact would be negligible. If banks are hoarding reserves because of economic uncertainty, the lowering of the rate by 25 BASIS POINTS will not be enough to begin the process of generating velocity to the vast amount of bank funds.

Again, Bernanke had better be opening up the MILWAUKEE POWER TOOL BOX FOR THE CONTINUED WEAKENING ECONOMY IS GOING TO NEED FAR MORE POWERFUL TOOLS. That old hand saw and plane are just not up to the job.

Will Bernanke wait for the FED meeting on AUGUST 1 and the FOMC STATEMENT release? Without the uncertainty in Europe and the problems developing with the GRAIN MARKET, Chairman Bernanke may want to hold his firepower until he sees more of the impact from EUROPE AND CHINA and the U.S. AG SECTOR. Let the EQUITY MARKETS EAT CAKE!

***There was little news over the weekend, but one piece that caught my attention was an interview with BUNDESBANK PRESIDENT Jens Weidmann. The most powerful banker on the ECB board said he sees Italy on “a good path” and that just the need for lowering borrowing costs is not a reason for financial aid. This is very important for it summarizes the German position nations have to do as much as they can to convince markets of their financial rectitude in order to lower borrowing costs.

Just throwing money to the different stressed sovereigns does little more than allow present DEBT HOLDERS to offload their exposure to the taxpayer. The Germans want lenders to bear some of the cost of refinancing the banks and sovereigns. It is interesting that Weidmann did not mention Spain for as reported in this BLOG for the LAST TWO YEARS, SPAIN IS A FAR BIGGER PROBLEM. For the record on the GLOBAL TWO YEAR GOVERNMENT RATES:

Swiss: -57bps

Denmark: -37bps

Germany: -6bps

Austria: -5bps

Netherlands: -4bps

Finland: -1bp

It is very difficult to determine the value of debt in such a globally distorted market. U.S. 2 years are +22 basis points and yet the U.S. is considered a haven! Anybody buying the SOVEREIGN DEBT OF THE DEVELOPED NATIONS IS EITHER PREPARING FOR A DEPRESSION OR IS A REAL EXAMPLE OF RICHARD DENNIS’S  SLOWER FOOL THEORY.

A reminder to the readers of Notes From Underground:

The Slower Fool Theory from page 205 of Inside The House of Money; sourced from New Perspectives Quarterly, Fall 1987
We are palying a variant of the Greater Fool Theory which should be called the Slower Fool Theory. According to the GFT, investors buy things they know to be worth a lot less than they cost, on the hope that they can find a greater fool to sell to. It is not such a great strategy since there are not enough fools to go around.
Following the SFT….my plan….is to be faster than the other fools holding [similar positions] and liquidate before the oncoming economic Armageddon devastates them…. To the extent that everyone  believes the crisis is sometime in the future and somebody else’s crisis, the game is viable.
Unfortunately, the future will arrive…and it will be a discontinuous leap for investors specifically and the economy generally into illiquidity, panic, and chaos. I suspect many people’s investment are not much different from mine. Keep buying that paper even though it is no good [while preparing] to head for the safe harbor.
So the catastrophe is out there lurking, probably happening sooner than later, and probably nastier than we can understand…….Prosperity will last only as long as the SFT of…..investing lasts. Maybe I will liquidate my investment…..a little earlier than I planned….The other fools might be a little faster than I thought. I would hate to be caught with the right theory and the wrong position.
And we wonder why 2+2=5—NOTES FROM UNDERGROUND

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5 Responses to “Notes From Underground: Will the Weak Retail Sales Force Bernanke to Reveal the New Power Tools?”

  1. Kevin Says:

    Hi Yra
    With a policy-driven market I think analysis using game theory could be more useful than evaluating economic data points. I think Bernanke’s biggest risk is announcing QE3 and not getting the expected positive response from risk assets. A blocked “portfolio balance channel” would be a problem that could only be solved by huge direct risk asset purchases, and it may be a bit soon for that.

    With the S&P within 4% of it’s 4 year high, and very low corporate bond yields, it would be a big risk for him to provide any clarity now on future QE. However continued weak economic data without any imminent response from the Fed would engender some fear and allow risk assets to sell off. A plummiting market and growing recession fears then create the ideal environment for further QE enabling Ben to save the day again (or at least having a higher probability of the QE3 programme being regarded as successful)…

  2. Jerry thoel Says:

    the slower fool theory ;I love that …Fall of 1987,
    written before or after the crash???

  3. yra Says:

    Kevin–right on target—i think we will hear exactly what you say–the Portfolio Balance Channel is alive and well and merely peering over the FISCAL CLIFF

  4. Danny Says:


    Do you have a sense for the relative popularity of buying negative yields to express a view that the EURO will break-up vs. buying negative yields as a safe haven from risk assets?


  5. yra Says:

    Danny–probably both but also the need for quality for the repo market–the combination I believe is driving a great deal of this

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