On the Santelli Exchange, me and Rick discussed the very weak ISM non-manufacturing and its impact on the FOMC. The surprise weakness sent PRECIOUS METALS soaring, the DOLLAR lower, BONDS AND EUROPEAN SOVEREIGNS HIGHER and EQUITY MARKETS moderately higher. The FED is under the microscope from so many analysts but the surprise of the day was the OP-ED piece by Professor Larry Summers in the Washington Post. Summers put an academic gloss on the erudite review of Jackson Hole but this sentiment is key: “My second reason for disappointment in Jackson Hole was that Fed Chair Janet Yellen, while very thoughtful and analytic, was too complacent to conclude that even if average interest rates remain lower than in the past, I believe that monetary policy will, under most conditions, be able to respond effectively. THIS STATEMENT MAY RANK WITH FORMER FED CHAIRMAN BEN BERNANKE’S UNFORTUNATE OBSERVATION THAT SUBPRIME PROBLEMS WOULD BE EASILY CONTAINED,” [emphasis mine]. This is a harsh assessment from a fellow academic, but more importantly it is a stinging criticism of the FED’s forecasting history.
Posts Tagged ‘Ben Bernanke’
I’ve been staring at this image and keep thinking about the three living Fed Chairmen that sat on the stage April 7 and the fourth that was teleported from Washington, D.C. I was thinking about the replies to weak questions posed by the moderator and better questions from the audience. I thought about the question I would have asked first. I would have asked each Fed Chair what they had thought about the role of GOLD in the post-Bretton Woods global financial system. Ben Bernanke famously opined that he didn’t understand GOLD but seemed very comfortable visualizing a role for BITCOIN. Yellen has never openly stated her concern about the barbarous relic. Back in the 1960s, Alan Greenspan wrote a serious paper for the Ayn Rand society on the important role of GOLD in a global system and more important for the impact of GOLD for a democratic capitalist world.
Everybody is talking at me and I can’t hear a word they’re saying, only the echoes of mismanaged policy. The academics are out and about, making the case as to why they are right and markets are WRONG, although Professor Summers gives much more credibility to the wisdom of markets than Bernanke or Fischer. The reason that this is important for traders and investors is that in the past six years, risk pricing has been based on the positive outcome of Fed policy.
One of the great movies of the 1960s asks who is more insane: Those in the asylum or those who create wars? The present state of central banking can lead one to ask the same question about the overseers of FIAT CURRENCY and those who make investment decisions based on the policies of those academics so in love with their economic models. As the Bernanke victory tour rolls on, the fallback position of the recent anointed savior of the global financial system poses the counter-factual of, “What if we hadn’t acted by embarking on a massive liquidity injection? Aren’t you all satisfied that the unemployment rate is hovering around the defined level of full-employment?”
In late April I wrote a blog post titled, “Why Bill Gross Is Right and Wrong.” I noted that Bill Gross’s call on selling German bunds was inherently correct but the French OATS–the French 10-year note, would be the more profitable sale. The yield differential at the time was 23 basis points but with the news out of Europe on Friday, the differential widened to 38 basis points. The area of concern for me is that with Germany maintaining twin surpluses–trade and budget–the ECB QE program would enhance the demand for German assets in a world of diminishing supply. The French budget and current account deficits, as well as a trade deficit, means the underlying fundamentals of the French economy are much weaker than Germany’s.
As we come to the Memorial Day holiday, the markets are still focused on Greece; the Fed’s desire to raise rates (or not); the ECB and its new policy of front loading its bond purchases to deal with the low volume of the summer months; China’s slowing growth; and the regular array of global macro concerns from politics to the continued role of central bank liquidity programs and the continued impact of QE on global asset prices. Tonight, the Bank of Japan will announce its interest rate decision and it seems that Governor Kuroda will keep the present policy in place: NO RATE CHANGE AND NO INCREASE IN ASSET PURCHASES.
UPDATE: Congress has added a new mandate to the Fed’s responsibilities. Every Sunday during the NFL season the FED will have control of the official balls for all NFL games because the central bank has proved it will never let anything deflate.
Last Thursday, former Fed Chairman ” surprised” the investing public and announced he was adding a second quiver to his “bagged trophies” and taking on a consultancy with PIMCO to complement his other consultancy with Citadel. Mr. Bernanke claims he can work for investment funds because it does not conflict with his previous role as the key supervisor of too big to fail banks. The former chairman is an active blogger but I assume his blogging will cease when he becomes active with his new employers. Yet on April 30, Ben wrote a post on the WSJ’s Editorial Page Watch. The BLOG was criticizing the WSJ for its editorial, “The Slow-Growth Fed.” In the BLOG Bernanke takes the WSJ editorial board to task for criticizing the Bernanke Fed for overdoing QE and its failure to stimulate GDP. Bernanke takes cover by arguing that the WSJ has been wrong in its forecasting because it has argued on its op-ed pages that the FED’s QE policies were going to cause a “… breakout in inflation and a collapse in the dollar since 2006….”
It is the day before the beginning of the IMF and G20 meetings in Washington,D.C. In preparation for dissecting the communiques that will be released this weekend it is important to digest some of the key data and speeches that have forced the markets to rethink some of its previous certainties.
The most important interview held on ACCESS JOURNALISM TV was the Squawk Box interview with former FED Governor Kevin Warsh. When I say access journalism I mean: The compromises journalists must make in order to have access to sources and places that would be denied them. For years mainstream financial media would treat Alan Greenspan with great deference and the result was a cult of personality that led to the “oracle” falling in love with a flawed policy. If Sir Alan was attacked it may mean that he would never grant another interview to the offending media outlet. The same holds for the Bernanke and Yellen Fed,e specially as the mainstream media wants access to Fed officials and to be invited to all the relevant press conferences. So my point is this: It took a former Fed official to attack the policies of the FOMC for the established media has not the gumption to challenge those sitting on the throne of power. Kevin Warsh criticized the present policies from multiple perspectives:
- Policy cannot be based on what is happening on our ticker machine. “The Fed should be focused on what’s happening three or four years out…” This is a justified criticism and certainly pertains to James Bullard. It was October 15 that the St. Louis Fed President spoke out about a new round of QE in an effort to the counter the sell off taking place in the equity markets. Bullard’s comments caused the massive rally in the bond markets and eventually led to the beginning of the recent six month rally in stocks. Fed policy cannot be a minute-to-minute, day-to-day, month-to-month affair;
- Central banks need humility. The Fed has provided the impetus for all the world’s central banks to embark on QE even though the exit strategy is uncertain and its outcomes not riskless. FED Chair Yellen suffers from the effects of the “taper tantrum” and now the “dollar tantrum” for these have caused the Fed to be fearful of any misstep. If the FED raises rates and the DOLLAR has a sizable rally the FED worries about headwinds for the economy. As Warsh so elegantly stated: “The financial markets have Fed Chair Janet Yellen’s number.” This is a very dangerous development for as Warsh argued, “The tail is wagging the dog”;
- Most importantly ,markets are not setting rates but rather central banks. This is in direct contradiction of what Ben Bernanke posted on his blog yesterday. Bernanke wrote, “The bottom line is that the state of the economy, not the Fed, ultimately determines the real rate of return attainable by savers and investors. The Fed influences market rates but not in an unconstrained way; if it seeks a healthy economy, then it must try to push market rates toward levels consistent with the underlying equilibrium rate.” Warsh believes that the Fed and other central banks have to give the market a chance to determine rates and not be afraid of every selloff in equity markets. The May 2013 taper tantrum was a classic example of the FED being afraid of the market beginning to set a real rate of interest based on underlying market forces. A real-time example of the flaws in Bernanke’s post is the level of interest rates in Germany. Today German unemployment made a new low and housing prices are rising as the weak euro strengthens all segments of the German economy. It is because of the ECB policy that interest rates in Germany are artificially low by any economic metrics. Therefore, central bank policy and not market dynamics are instrumental in determining interest rates and financial outcomes.
In summation: Kevin Warsh took the FOMC to task for policy flaws, which is something the new blogger on the block Ben Bernanke will never do. The Bernanke blog will be educational but don’t look for it to be an honest voice in the discussion of Fed and central bank policy. The previous Fed Chairman cannot criticize the Board he was so instrumental in constructing.