Notes From Underground: In a Room of Academic Modelers, the Woman From Kansas Shows Some Backbone

The FED‘s statement today showed no surprises and the vote even was the same as Kansas Fed President Esther George voted NO in opposition to further monetary accommodation by the monetary authorities. James Bullard of the St.Louis Fed voted with the severe majority as did Chicago Fed President Charles Evans. The Bullard vote did not surprise as he has shown a pragmatic edge over the last several years but the consensus vote by Charles Evans was surprising. President Evans has been the most vocal proponent of increased Fed action over the last year when he was a non-voting FOMC member. Today’s negative number on the GDP should have provided Mr. Evans with a perfect excuse to push for a larger FED asset purchase program. At least Ms. George votes in a consistent manner with her rhetoric. The FOMC release opened with this phrase”… suggest that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.” Again, as in years past, it is a spate of bad luck that has caused last quarters slowdown. Before it was the Tsunami in Japan which Bernanke termed “bad luck.”

More troubling for the GDP data is that it failed to jive with Monday’s release of the DURABLE GOODS data, which was very robust and after “stripping out the herky jerky transportation sector, orders rose a small but still solid 1.3% as bookings for military orders surged.” The military part of the durable goods surged because orders were brought forward because of the fear of the SEQUESTRATION offered by the fiscal cliff crisis. Yet today’s GDP was reported as weak because of the large cut in defense spending. The GDP data may be revised upwards during the next two months but if this week’s unemployment report is weak the FED will be on the edge as not being aggressive enough. To help ensure employment growth consistent with its mandate  the Fed said: “The Committee will continue purchasing additional agency mortgage-backed securities of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.” So maintain the course.

More importantly was the FOMC‘s making it very clear that …”the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.” This sentence is very significant for many pundits assume that highly accommodative means active QE. The FED makes it clear that zero interest rates are also deemed to be highly aggressive as a policy. Three trillion on its balance sheet with interest rates locked at a zero base is very accommodative. It certainly seems that the equity markets have come to understand this concept and the currency markets are catching on to the FED‘s intentions.
***There was a misleading headline in one of the generic financial newswires yesterday, “Swiss banks lose old taste for GOLD.” The banner would lead one to think that Swiss banks were selling their gold, which is totally non-germane to the story. As the story was revealed in the FT, it is about the move by UBS and Credit Suisse to try to get their clients to “take direct ownership of their gold in so-called ‘allocated’ accounts, with the bank simply acting as a custodian.”
When clients gold is held in ‘unallocated’ accounts’ the clients gold appears on the balance sheet of the bank, which means that the banks have to hold reserves against the balance sheet asset, causing the banks a capital cost. By acting as a mere custodian and just vaulting the gold, the Swiss banks earn a fee on the value of the gold held in storage. There will be no sales of gold by the banks but a question that might arise will be about the amount of gold available for the lending market. The banks will not be able to lend custodial gold so I am left to wonder if their will be any impact on the shorts in the markets as borrowed gold gets called away. I’m not sure if this holds but a discussion is certainly warranted.

***The Reserve Bank of New Zealand (RBNZ) kept rates steady but noted concern about the KIWI‘s recent strength. “The high currency is directly suppressing inflation on traded goods, and is undermining profitability in export and export competing industries at the same time, the labour market remains weak and fiscal consolidation is dampening growth.” NZ Governor Wheeler is hoping that global growth is strong enough to relieve the pressure from a very strong currency. All in all it is confusing. If inflation is too low and the currency too strong, CUT THE RATE.



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5 Responses to “Notes From Underground: In a Room of Academic Modelers, the Woman From Kansas Shows Some Backbone”

  1. asherz Says:

    If you buy gold from some of the exchanges and ask for delivery, it may take you several weeks to get delivery from their warehouses. However if you own gold and store it at the New York Fed and ask for delivery of some of it, it may take a little longerr…like seven years. UBS and CS advising their clients to hold their gold in allocated accounts may not be a bad idea. Is there enough bullion behind all the paper gold trading? Does the emperor have clothes?

  2. yra harris Says:

    Asherz thanks–but any thoughts on the possible effect of the lease market

  3. asherz Says:

    Yra-If some of the leased or hypothecated or re-hypothecated gold is called back, it will cause chaos in the gold market.I think that there is not enough underlying commodity to cover all the paper that is trading. Germany’s move, preceded by smaller calls (Libya, Venezuela, and Ecuador) and followed by the Netherlands, is a seminal event in this market IMO. I believe many others will follow which will cause a breakdown in the market. Calls for inventory count at 44 Maiden Lane and Kentucky will get louder.

  4. Alex Says:

    Whatever the case Ira/Ash, something stinks when the agreement is to take back the (German) Gold over the next 7 years (or is it 9). When it comes to Gold these days, it seems the games never stop….

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