Notes From Underground

Some follow-through from yesterday: The DAX,Dow and Russell 2000 closed below their 200-day moving averages but it is early in the week so while a negative it is not definitive of any sustaining activity. Just another effort to be attentive to global developments. The Chinese markets were under assault last night, which led to a selloff in copper and silver prices although GOLD remained firm. Some analysts maintain that the selling in copper and silver was due to having meet margin calls with account collateral being liquidated. I have no argument with that analysis but if so silver should regain itself above 15.10 and GOLD should rise above its recent highs. If China’s recent market developments is the onset of global deflation the world’s central banks will be forced into renewed crisis mode and the precious metals will again be viewed as a “reliable haven.” Let the market be your guide for theory confirmation and have your technical levels ready especially for GOLD resistance.

Tomorrow the FED releases the minutes from its July meeting and algo readers will be set to search for key words, and, of course, the talking heads will be parroting the output of the algo readers. I propose that we go from using key word algos to using the wisdom of Talmudic scholars and employ gematria, providing each letter in the FOMC statement with a numerical value of one through 26, add up the numerical equivalents to discover what the FED really means. This is just another view to try to understand the mythology of FED omniscience.

In a timely piece, the FT published an op-ed from the originator of FED infallibility and the cult of personality, Sir Alan Greenspan titled, “Higher Capital Is A Less Painful Way to Fix the Banks.” This is from the man who famously quipped: “If you think you understood what I said, I must have misspoke.” The “maestro”suggests that Dodd-Frank is overkill and what is needed is increased capital ratios to prevent another major financial crisis. Greenspan is basically parroting the solution offered up by then-FDIC Chair Sheila Bair. But that is not my criticism of Mr. Cult of Personality. It is this line from his piece. In making his point he says: “Had Bear Stearns and Lehman Brothers continued as capital-conscious partnerships, a paradigm under which both thrived, they would probably still be in business.”

This is a very disingenuous statement for it was under Greenspan’s guidance that the repeal of Glass-Steagall took place, leading to the end of partnerships on Wall Street. In reply to the repeal of Glass-Steagall, I had a letter to the editor published in the FT August 30, 2002 criticizing the repeal of Glass-Steagall, which was originally titled, “Greenspan is a Moral Hazard”:

Sir, John Plender (“How banks got in a mix”, August 21) correctly identifies the systemic dangers that accompanied the passage of the Graham-Leach-Bliley act. The repeal of Glass-Steagall has pushed the US banking system to the brink of “moral hazard”. The conglomeration of all financial services under one roof has entangled banks in numerous ethical conflicts. Additionally, Graham-Leach-Bliley has made several institutions so large that the Fed cannot allow them to fail.

A single institution’s deep involvement in every facet of financial dealings does not create greater synergy but greater risk. These large, private profit centres know they are too big to collapse. This realisation adds great uncertainty to the entire financial landscape. Rewarding private profits while socialising the risk is a pathway to disaster. Glass-Steagall should never have been repealed without a bank forfeiting its right to Federal Deposit Insurance Corp insurance.

My point is to just stress my distaste for the cult of personality that pervades the realm of financial journalism and even more importantly the sense of infallibility granted to policymakers. The FED can expend “unlimited cash” pursuing something that has high possibility of failure.

Today the St.Louis Fed released a white paper questioning the efficacy of the Fed’s QE policy. The results of the St. Louis Fed’s research will be argued for months to come but the point is that the FED is revered by the media for infallibility but as the “white paper” suggests that is just a construct of a genuflecting media. In a direct quote from the research of Stephen Williamson, the St.Louis Fed Vice-President states:

“But as for spurring inflation,reducing employment or otherwise generating sustained economic activity, the results, particularly for QE, are at best mixed.” Further, “There is no work, to my knowledge that establishes a link from QE to the ultimate goals of the Fed–inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation.”

The critical point is that FED policies do not have infallibility guarantee because at the end of the day, ECONOMICS DOES NOT HAVE THE CERTAINTY OF ROCKET SCIENCE.

***Tomorrow the German Parliament votes on the approval of the package for the terms of the recent Greek bailout. Passage is guaranteed as the opposition Social-Democrats will support Chancellor Merkel. The critical issue will be how many of Merkel’s party members decide to oppose the Chancellor, setting the stage for the rise of anti-Euro sentiment in the country. Even more important for markets will be how the Dutch parliament votes on the conditions of the bailout. It is rumored in some circles that the Dutch parliament may oppose the bailout causing a no-confidence resolution which will send negative ripples throughout the Europe Union. This is the Dutch and not the taciturn austerity promoting Germans. Pay attention.

Tags: Alan Greenspan, copper, Fed, FOMC minutes, Glass-Steagall, Gold, Janet Yellen, QE, silver

This entry was posted on August 18, 2015 at 8:33 pm and is filed under Fed, Regulation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.