Futures are currently experiencing a stunning moment of weakness, something not seen unless the entire Liberty 33 trading crew is at Scores. The culprit according to the three sober traders we could track down is the recently unembargoed speech to be delivered by the Bernank tomorrow in Frankfurt. In it, not too surprisingly, the inkmaster considers revealing details of his most recent DNA sequencing result to prove once and for all, that he is not the antichrist. More relevantly, what Bernanke has done to defend his reputation is to claim that QE will work, and that everything is really mercantilist China's fault, and the Fed is just woefully misunderstood. In other words nothing that has not been said before many times, just another overture which will likely precipitate a prompt round of Chinese retaliation in the form of accelerating trade wars, to be followed by further commodity price inflation in the US, leading to another ramp in Chinese inflation, etc. China now will have no choice but to either hike rates (which will pretty much end of the tech bubble), remove even more excess liquidity (real estate bubble burst) or merely export another $20 billion of crap to the US each month, pretending nothing happened (leading to more QE in the US). As Albert Edwards summarized so well earlier, the global game of chicken will continue until either China's or America's population decides it has had enough of being treated like a experimental gerbil in the endgame of failed economic chess.
Some choice quotes from Bernanke's speech:
On how the US's slower growth rate is threatening America compared to the rest of the world:
Since the second quarter of this year, GDP growth has moderated to
around 2 percent at an annual rate, less than the Federal Reserve's
estimates of U.S. potential growth and insufficient to meaningfully
reduce unemployment. And indeed, as figure 4
shows, the U.S. unemployment rate (the solid black line) has stagnated
for about eighteen months near 10 percent of the labor force, up from
about 5 percent before the crisis; the increase of 5 percentage points
in the U.S. unemployment rate is roughly double that seen in the euro
area, the United Kingdom, Japan, or Canada.
Of particular concern is the substantial increase in the share of
unemployed workers who have been without work for six months or more
(the dashed red line in figure 4). Long-term unemployment not only
imposes extreme hardship on jobless people and their families, but, by
eroding these workers' skills and weakening their attachment to the
labor force, it may also convert what might otherwise be temporary
cyclical unemployment into much more intractable long-term structural
unemployment. In addition, persistently high unemployment, through its
adverse effects on household income and confidence, could threaten the
strength and sustainability of the recovery.
On the USD exchange rate:
The foreign exchange value of the dollar has fluctuated considerably
during the course of the crisis, driven by a range of factors. A
significant portion of these fluctuations has reflected changes in
investor risk aversion, with the dollar tending to appreciate when risk
aversion is high. In particular, much of the decline over the summer in
the foreign exchange value of the dollar reflected an unwinding of the
increase in the dollar's value in the spring associated with the
European sovereign debt crisis. The dollar's role as a safe haven during
periods of market stress stems in no small part from the underlying
strength and stability that the U.S. economy has exhibited over the
On Bernanke's view that despite hopes for decoupling, the US is still the most critical driving force and should be allowed to get whatever it desires. If that means an export-led boost (and a low USD) so be it.
Fully aware of the important role that the dollar plays in the
international monetary and financial system, the Committee believes that
the best way to continue to deliver the strong economic fundamentals
that underpin the value of the dollar, as well as to support the global
recovery, is through policies that lead to a resumption of robust growth
in a context of price stability in the United States.
Bernanke's direct attack on China:
Given these advantages of a system of market-determined exchange rates,
why have officials in many emerging markets leaned against appreciation
of their currencies toward levels more consistent with market
fundamentals? The principal answer is that currency undervaluation on
the part of some countries has been part of a long-term export-led
strategy for growth and development. This strategy, which allows a
country's producers to operate at a greater scale and to produce a more
diverse set of products than domestic demand alone might sustain, has
been viewed as promoting economic growth and, more broadly, as making an
important contribution to the development of a number of countries.
However, increasingly over time, the strategy of currency undervaluation
has demonstrated important drawbacks, both for the world system and for
the countries using that strategy.
On Bernanke's virtuoso performance on the the world's smallest violin:
The current system leads to uneven burdens of adjustment among
countries, with those countries that allow substantial flexibility in
their exchange rates bearing the greatest burden (for example, in having
to make potentially large and rapid adjustments in the scale of
export-oriented industries) and those that resist appreciation bearing
And a direct confirmation of Edwards' assumption that by allowing commodity price super inflation, Bernanke is in essence forcing China to revalue as the chairman knows that while the US may be expericing surging food prices, China is getting that too, and then some.
Third, countries that maintain undervalued currencies may themselves
face important costs at the national level, including a reduced ability
to use independent monetary policies to stabilize their economies and
the risks associated with excessive or volatile capital inflows. The
latter can be managed to some extent with a variety of tools, including
various forms of capital controls, but such approaches can be difficult
to implement or lead to microeconomic distortions. The high levels of
reserves associated with currency undervaluation may also imply
significant fiscal costs if the liabilities issued to sterilize reserves
bear interest rates that exceed those on the reserve assets themselves.
Perhaps most important, the ultimate purpose of economic growth is to
deliver higher living standards at home; thus, eventually, the benefits
of shifting productive resources to satisfying domestic needs must
outweigh the development benefits of continued reliance on export-led
Bernanke's conclusion for how to spank China:
it would be desirable for the global community, over time, to devise an
international monetary system that more consistently aligns the
interests of individual countries with the interests of the global
economy as a whole. In particular, such a system would provide more
effective checks on the tendency for countries to run large and
persistent external imbalances, whether surpluses or deficits. Changes
to accomplish these goals will take considerable time, effort, and
coordination to implement. In the meantime, without such a system in
place, the countries of the world must recognize their collective
responsibility for bringing about the rebalancing required to preserve
global economic stability and prosperity. I hope that policymakers in
all countries can work together cooperatively to achieve a stronger,
more sustainable, and more balanced global economy.
And by global economy, Bernanke of course means banker interests. Also, where he talks about other stuff, all Bernanke really means is that China should unpeg already goddamit, so that the $5 trillion in debt that has to be rolled in 2 years can start getting inflated already, cause we are cutting it close, and only China is staying in the way. Next up: China's response. Might be time to stock up on Rare Earth Minerals again.