Notes From Underground: The FED … Unsafe at Any Ultra-Low Rate

Last week, in the middle of gorging our material senses, Janet Yellen was responding to a letter from Ralph Nader, a well known consumer advocate who took the Bernanke and Yellen to task for keeping interest rates too low, resulting in asset inflation for Wall Street and the very wealthy while MAIN STREET was “rewarded” with zero interest rates and almost NO returns on passive, low-risk credit channels. Yellen repeated her third grade teacher tutorial about how savers have indirectly have benefited because of the bounty of jobs available for them and their children and grandchildren and they should stop complaining because home prices have increased to pre-crisis levels in many parts of the country–all because of the wonderful work of the FED and its QE programs. (Even as Carmen Reinhart and other top-level economists have criticized the FED for prolonging FINANCIAL REPRESSION in order to insure against inflation staying below the FED‘s self-imposed mandate of 2 percent.)

Mr. Nader was not happy with the answer but as long as the MEDIA and Wall Street worships at the shrine of FED OMNIPOTENCE, financial repression is a disease without a benefactor. Mr. Nader challenged the auto industry 50 years ago with his muckracking about the Chevrolet Corvair in his book, Unsafe At Any Speed. Now it is the FED that is being challenged for its role in allowing the über wealthy to ride the Autobahn in high-powered luxury while the middle class is providing the fuel for a very bifurcated recovery, resulting in widening wealth disparity.

In the weekend Financial Times, John Dizard  wrote an insightful piece: “Under the Shadow of Quantitative Easing Investors Should Party Like It Is 1788.” Dizard notes a problem in Europe that “… the ECB and its member banks’ QE is leading to the insolvency of life insurers and defined benefit pension plans. This is no longer a worst-case scenario, but the most likely outcome of the present policy course.” While Dizard focuses mainly on the defined benefit pensioners in Europe, the issue of underfunded pensions is a problem in the U.S., from sea to shining sea. The Portfolio Balance Channel brought forward by Ben Bernanke in his 2010 Jackson Hole Speech has brought vast wealth to Wall Street  and hedge fund managers but have left the scarred investors on Main Street underwater in terms of their pensions. What average investor was willing to turn over their wealth to the equity market after the debacle of 2008-2009?

Many of the public pension funds have remained in very conservative-based portfolios in deference to a LIABILITY DRIVEN INVESTMENT [LDI] program, which has to meet future pension obligations and cannot be overweight to a high-risk portfolio and suffer through the vicissitudes of a stock market correction of extended duration. Ms. Yellen again left unanswered the question of severely underfunded pension obligations as a result of FED-induced financial repression. Like any politician, Ms.Yellen chooses to leave that problem to her successor.

***Tonight the reserve Bank of Australia [RBA] announces its Official Cash Rate and it is expected to maintain the present rate at 2%.The time of the release is 9:30 p.m. CDT. With the Aussie dollar versus the U.S. dollar very close to last month’s RBA meeting I have no problem with the consensus as the Aussie interest rates have the probability of a rate cut at a mere 4 percent. The only reason RBA Governor Stevens may see room to cut the OCR is because of recent strength of the AUSSIE DOLLAR against the KIWI, its main trading partner. At last month’s meeting I suggested that the Aussie/Kiwi had good support levels at 1.0525 on the cross, which held. The Aussie/Kiwi traded over 110 today, an increase in Aussie value of 4 percent. A key component in tonight’s RBA statement will be whether or not Governor Stevens cites the value of the Aussie dollar as a concern for the RBA for last month there was no mention of the Aussie’s value and markets believed that was bullish the Aussie dollar for it was the first time in many meetings that the RBA did not reflect on an overvalued currency.

If the RBA returns to the theme of concern about a strong AUSSIE the currency will be sold but look for support levels as there as there is rhetoric BUT NO CUT. The Aussie dollar still has some relative value based in its massive three-year correction and some of the highest interest rates in the developed world. Also, if there is no legal mandates emanating from the CLIMATE CONFERENCE taxing mineral and energy extraction it will be a positive for the Australian economy and natural resource investment. Check the charts and look for the lowest risk entry point if all three of these issues come into fruition.

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5 Responses to “Notes From Underground: The FED … Unsafe at Any Ultra-Low Rate”

  1. Asherz Says:

    Spot on with your remarks on increasing unfunded pension liabilities. The Pension Benefit Guarantee Corp (PBOC) created 40 years ago will go the way of Social Security and Medicare. And let’s not forget the life insurance companies as assumed returns in their portfolios have been greatly impacted by Fed policy. What will their balance sheets look like when the markets take away the punchbowl from the Fed and the algorithm boys (How is that for a reversal of roles of who is the host and who is imbibing? McChesney Martin must be turning over in his grave.)

    • Chicken Says:

      Some insurance companies have book of more than while others less than 1

    • Joe Says:

      Wow. I’m not the only one who remembers how much LBJ hated McChesney Martin.

      As for under funded US pensions, will it be the public sector pensions the Fed first bails out via purchase of state and local bonds? It worked for the mortgage industry, why not retirement obligations? How could there possibly be any downside in this era of new normals?

  2. Chicken Says:

    “Ms. Yellen again left unanswered the question of severely underfunded pension obligations as a result of FED-induced financial repression.”

    Add to the mix an inflation target for the double whammy hug.
    “I need a refueling. I need your kiss. Come on now and. Plant it on my lips.”

  3. Chicken Says:

    10yr shorts were certainly flattened today, PMs selling seems to have eased a little too.

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