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Fed Bailing Out Pension Plans?
Michael Babad of the Globe & Mail reports, Why the Federal Reserve only tweaked its game plan:
The
Federal Reserve held its benchmark lending rate steady this afternoon,
but announced plans to buy long-term Treasury securities amid signs of
a fizzling recovery and mounting fears of deflation. The central bank
said it will use its mortgage-bond holdings to buy the paper, while at
the same time still rolling over the other Treasury securities it holds
as they mature. “The pace of recovery in output and employment has
slowed in recent months,” the central bank's policy-setting panel said.
The move is seen as a small step. Here's what some economists think:
- "With
recent economic data, including the ever-important jobs report,
showing a slowing in the pace of U.S. economic activity, the Fed has
moved its near-term stance away from potential withdrawal of monetary
stimulus, towards the possibility of easing further. The decision to
reinvest the proceeds of previous purchases of mortgage-backed
securities in longer-term Treasury securities is an important signal of
this change in stance. From a policy of passive balance sheet
contraction, the Fed has opened the door to further monetary stimulus.
Moreover, by purchasing Treasuries as opposed to agency debt, the Fed
has made evident its preferred path should future easing become
necessary." Toronto-Dominion Bank senior economist James Marple- "The
Fed gave a token nod in the direction of market worries by committing
to reinvest principal payments from agency debt and agency
mortgage-backed securities in longer-term Treasury securities ... This
is a short-term confidence measure to offset what would have otherwise
been post-statement prospects for a modest near-term market shock that
was being priced in during the course of the day. But such a measure
will do absolutely nothing to the real economy." Derek Holt and Gorica Djeric, Scotia Capital- "This
action likely signals that the Fed is prepared to take further steps
should its economic outlook deteriorate further. The Fed noted that the
pace of recovery in the economy and employment has 'slowed in recent
months,' and that the recovery 'is likely to be more modest in the near
term than had been anticipated.' However, it did not indicate a change
in its medium-term outlook, suggesting it still believes policy is
about right to reduce unemployment and prevent deflation." BMO Nesbitt Burns senior economist Sal Guatieri- "The
Fed's decision today to start reinvesting the proceeds from maturing
agency and [mortgage-backed securities] holdings into Treasury
securities is a largely symbolic gesture, designed to reassure the
markets rather than boost the economy. Its MBS holdings aren't scheduled
to mature for at least another 10 years and the maturity distribution
of its much smaller holdings of agency debt are pretty evenly spread
over the next 10 years. Basically, all the Fed will be doing is
reinvesting the returned principal from mortgages that are prepaid
earlier than scheduled." Senior U.S. economist Paul Ashworth, Capital Economics
The Fed is also worried about underfunded public and private pension plans. Last Monday, I wrote a comment on how the Fed is feeling states' pension pain and noted:
Let
me repeat what I've often stated, the Fed's policy is geared towards
banks, keeping rates low so they can borrow cheap and invest in risk
assets all around the world. The Fed is hoping that reflation will
translate into mild economic inflation, thus avoiding any prolonged
deflationary episode which will hit banks' and pensions' balance sheets.
The reflation trade is alive & kicking, which is why smart money continues to buy the dips in equity markets. The doomsayers keep warning us that another disaster far worse than 2008 is on its way, but they've been wrong.
Nothing has changed after this latest announcement
except that the Fed is more determined than ever to reflate risk assets
using all their tools at their disposal. While some are queasing over quantitative easing, the reality is that Fed is sending a strong message that it's prepared to do whatever it takes to fight deflation.
And
let's not kid ourselves, deflation would destroy banks, pension funds
and the individual retirement accounts of millions of people. That's
why I wasn't surprised with today's announcement.
The
liquidity tsunami will go on as long as the threat of deflation
persists. Don't try to fight the Fed because you'll always end up on the
losing side of the trade. Lots of portfolio managers and hedge fund
managers sitting on the sidelines, are underinvested. Expect them to
come back in as another bout of performance anxiety grips them.
And mark my words, there will be more bubble trouble down the road, but we don't have to worry about this just yet. I see good things too, especially in the solar sector, where a secular bull market is in its early stages (Note: many ways to play this theme, including semis and inverters).
While everybody is dissecting the Fed's latest move ad nauseam, I keep
things simple. The Fed will do whatever it takes to reflate risk assets
to shore up banks' and pensions' balance sheets, and bring about mild
inflation to the economic system. Are there risks to QE 2.0? Sure there
are, but the bigger risk is if they do nothing at all.
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Leo, Look at the tape. The market hates QE2. Just the thought of it makes me sick, and now we have to watch the Fed buy $20b notes every month.
You see this as good. I see this as death throws. You think it will end well. I think it will end badly.
Bruce,
You're a smart guy but if you believe that equity markets are really selling off on the news of QE, then you have no idea what's going on today. Big hedgies are playing this market like a yo-yo, scooping up shares using HFT, and they will bring it right back up. Watch next week.
Anything that increases the power and economic stranglehold of the central government (and incidentally, provides short-term economic advantages to Leo, the long-term consequences be damned) makes Leo a happy statist minion.
Japan tried to reflate for 20 years now and failed, with every tailwind for most of that time.
They did 6 years of explicit QE. They did 10 stimulus packages, averaging 7% of GDP each, over the last 9 years. The only thing they accomplished was to piss away a massive budget surplus. Perhaps a credit bubble (which, in this case happened to manifest as a real estate bubble) really IS the bubble of last resort.
What reason, other than faith, would lead one to believe that the Fed would succeed? The only way out of this is to reflate real wages, which then leads to its own set of problems.
And, once again, last time I'll ask this week (because it's a rhetorical question): Can anyone name a single instance in human history where debt monetization worked?
This time reflation will be global..watch, I predict everyone will jump on the QE bandwagon. Keep buying the dips on risk assets.
So Leo, why did they do nothing yesterday? Uncertainty and dissent can kill or delay this smooth, lifesaving intervention you believe in. We will need SPX at 700 before everyone gets scared enough to spend enough to inflate this fucker.
Buying dips because you believe BB will print you and your entire profession out of trouble is indeed simple.
Leo, I agree with your first paragraph but not the conclusion you come to in the second. Take a look at the volume "buying the dips". Does that look like smart money to you?
Yes the Fed and all other CBs are desperate to reinflate as they have been since September 2008. That, to me, is obvious. What isn't obvious is your conclusion that they will succeed. I, for one, have been stating since RTC 2.0 turned TARP was first "leaked" to CNBC on that infamous Thursday afternoon to produce the mother of all short squeezes (ah, GS puts, I hardly had time to get to know you) that their plan will fail even if we go to QE 9.0. Take a look at Japanese stocks and tell me how well that plan worked out for them.
sounds like the man is long
When something - in this case the banking system, pension "investments" and retirement pipe-dreams, all Ponzi - is unsustainable enough to find itself balanced on the edge of a cliff, it deserves to be PUSHED.
And, ultimately, the Fed can't do anything about it. It can only, to a limited degree, affect the timing.
After a credit boom, deflation is inevitable. It results from bankruptcies and rsultant writeoffs of debt (which is money). So money is destroyed by debt writeoffs. While this is inevitable, it is also intended: who benefits from bankruptcies? Not the homeowners who can't make their mortgage payments; not the regional banks which are taken over by the FDIC; not the taxpayers who are left holding the bad debt that the FDIC forgives. NO, the big winners are the TBTF banks that get to buy up the smaller banks for pennies on the dollar. Only after the deflation process has done its work will the inflation begin. But wait for it, because the inflation is being baked into the cake now.
actually a bankruptcy does not destroy money. If you go to a bank and get a loan, they give you check, your loan is an asset on the bank's balance sheet, and the check you spend into the economy which turns into cash on another bank's balance sheet.
What a bankruptcy does is destroy the asset on the lending bank's balance sheet, which lowers its capital which makes it not able to create as many new loans. Its money creating potential is diminshed.
Actually paying back the loan over time decreases the amount of money.
The banking system has what 4% of its assets in the form of "equity"?
For the system as a whole Assets=Liabilities?
So - when you have a lot of bankruptcies - you shrink the aggregate balance sheet of the banking system right? Liabilities have to go down as much as the Assets.
Sure - a small part is absorbed by the tiny little entr called "equity" - but you are not correct that bankrupcies on a large scale will not affect the amount of "Money"(ie. Liabilities) in the system.
Paying off a 6 year 8% loan 18 months after walking out of bank with check chokes off very much future interest income for said bank that held the note.
Be damned to pay bank 8% on 10,000 dollars while my savings account made maybe .35%
Poof. Paid off, no debt. Bank needs to figure out other ways to make money now.
Maybe I accumulate money and be a bank myself collecting above prime rate interest.
And that is simply to wait for the next 40 years or so until all the aging pensioners die off and the plans are terminated until all are closed with no new people being accepted into the plan as a condition of hire.
When they stop the Pension train and then scrap the entire thing eventually a new generation will grow up and go to work never hearing about this special pension as a benefit.
That way they will all be free. But it will take a while.
in this corner deflation
and this corner the fed
steel death cage match ..
If the banks are big holders of Treasuries, and the Fed buys them up, prices will rise and the banks win again.
Maybe this is a ploy to get the money out of the banks and back on the streets through lending.
But, what's to prevent the banks from borrowing at 0% and then turning around and buying more Treasuries?
Well... that was a stated intention under QE1... and the money didn't go to lending... it went into reserves (and in that case of many banks, Tresuries).
The ploy, as I perceive it, involves the Fed using ZIRP and it's own Treasury purchases at the long end of the curve-- as a tool to internally fund the massive finanicing the Treasury so badly needs at low cost. Why? Because no creditor nation in their right mind will want to own it.
While the primary dealers and banks will no doubt be the initial holders in this overpriced massively subsidized piece on Ponzi paper, eventually they'll pawn it off to those want seek "safety and liquidity". Ha. The Fed isn't keeping rates low to help you refinance, they are keeping them low to stretch the duration of Turbo Timmy's portfolio-- and buy the lugnut more time.
Hey... and if they build and average portfolio duration of more than 5 years... it eventually becomes someone else's problem.
Methinks the bubble is going to pop before than time, though...
"The Fed will do whatever it takes to reflate risk assets to shore up banks' and pensions' balance sheets, and bring about mild inflation to the economic system."
What!? Why hasn't the stock market been on an upward trend then? The fact is central banks globally are currently doing their level best to be prudent, starting from a low benchmark admittedly.
And anyway, what makes you assume the USD is riskless?
Stocks not only refuse to go up, but bonds are also quite telling. As long as rates keep plunging, the bond market tells us this is a depression.
Pensions look like the greatest ponzi scheme ever ?
http://mediamatters.org/blog/201008100044
Leo, in the past I have hated your
views, BUT I have been constructing
a set of models of economics for my
personal use and in them I find your
analysis of "Fed View" to be spot on.
In the short term, the Fed will
influence the system, but in the long
term, the Fed lost any control they
had at the onset of deflation.
As I see things, the financial world
exists in parts, but our financial
language is used to describe it as a
whole. I think this results in very
confusing thoughts and
communications.
Thanks for your efforts and thanks
to everyone at ZH. I am trying to
figure it out and get a better foot
hold.
this is my favorite quote.
The markets always want more stimulus, always want more ease, always want low interest rates," he said. "We all have the view that lower interest rates mean things will get better, and you have that pressure across the economy."
wall street runds the fed, this is just more bank bailout.
http://www.huffingtonpost.com/2010/08/10/thomas-hoenig-top-fed-off_n_670212.html
Thomas Hoenig, Top Fed Official, Warns Fed Risks Repeating Past Mistakes Zero is an emergency rate -- it is not a rate that will sustain long-term growth," Hoenig said. "It will create imbalances, and imbalances are what caused this last crisis, and that's what we want to avoid. Everyone knows zero is unsustainable."But a particularly pernicious effect of a zero interest rate policy is what it causes investors and savers to do,
"If you don't do that, what you do is you impede [the recovery]. For example, if you have banks and you say banks aren't lending and there is an issue with demand for loans. But think of it on the supply side.
"If I can go into the market and borrow funds at the Fed Funds rate of almost zero, and then re-lend that to the federal government in 10-year securities for 3 percent, and am also told that that margin will be secure, what will I do with my money? I'm going to get a guaranteed return.
"You encourage that, rather than say, 'Alright, what kinds of loans can we make, how do we do it, and let's look more broadly.' So those are the subtle issues that we need to work our way through."
I suggest reading the whole article.
The Thomas Hoenig quotes are spot-on. People need to get it in their heads that ZIRP is far from normal-- its an emergency rate. This rate has been maintained for an amazing 18 months... and counting. Why would the Fed maintain emergency rates and a puffy balance sheet in the context of what they perceive as "recovery"?
Oh... on top of that, we've been witness to almost $2 trillion in Fed monetizing shopping spree, direct government injections in TBTFs, $800 billion in fiscal stimulus and a money funnel going through AIG, Fannie and Freddie.
Given all that... we are now one the verge of another economic flirtation with recession and deflation. This is the Fed in "emergency mode".
All that QE buys is time-- and for a very narrowly targeted set of beneficiaries, to boot. While the Fed is fixated on elevating the value of risk assets at all costs, they STILL do not come close to addressing the core issue of credit contraction. It's understandable what the Fed is trying to avoid... but their objectives miss the mark. Badly.
Unfortunately for them, the issue isn't contained to the good 'ol USofA. The danger of QE is that creates a whole new set of global imbalances-- and along the way, it's done little else in real economic terms. At some point, the Fed will lose control over this asset inflating process.
Until that time, the Fed can take this so called "liquidity" and continiune to play a game-- a game where the active participants are leaving in droves. In the process, they are doing WAY more damage to the market structure than anyone currently realizes.
But perhaps Leo is correct in one respect. The approximately $30 billion per month that is "purchased" under QE-Lite will make its way to the roach motel that is our banking system... and eventually the primary dealers and algo players can continue the skim and churn these proceeds risk assets. But this has all the makings of the largest imbalance in history (18 months of ZIRP can do that)... and just about any material random financial event can lead to a very fast unwind.
Nope. I'm staying the heck as far away from these markets as possible. The weakening fundamentals don't support it, and the narrowing list of active players are all wolves in sheeps clothing.
What if the interest rate is designed
to make us think that the Fed and
the big banks are separate entities?
What if their self interests and their
very survival are so tightly tied
together that they are functionally
ONE and if we don't see the truth,
'How can we function well?'
If they want a higher stock market on the cheap, take the cap gains and dividend tax rate to zero. Permanently.
The congress critters could extort the PEs and IBs in exchange for campaign contributions in advance of this election, then publicly float the idea as a benefit to public pensioners and unions. When the S&P rises 10% on the news, voila, big effing presser with barney f-f-f-f-f-ranks and Nobama doing a circle jerk under the flashing pulse of a chinese fireworks display. Public is super super happy with rise in stocks.
Repubs would be unable to bitch. I would make money. BAM!
Okay, but only if you hold the stocks for at least 10 years.
Short-term cap gains will be bumped to 50%...because HFT's and Golden Paratroopers can suck me dry.
In the summer of 2008, I sat in a meeting with a well known strategist who said the same thing, don't fight the all powerful fed. The S&P was at 1500 at the time. You don't appreciate the causes of what has happened and so will be the last to realize your pension clients are all going to take benefit haircuts.
read Jim Rickards, dummy.
“If you have deflation so that the price level goes down, you just got an increase in your real standard of living. If everything you buy is less expensive, your standard of living just went up, it’s exactly the same thing as getting a raise. But it’s even better because the government can’t tax it. The government has not figured out how to tax an increase in the standard of living due to deflation.”
...And so when the Fed fights deflation they’re not doing the citizens a favor, they are doing the banks a favor and they are doing the Treasury a favor. So it’s really it’s really important to understand where the Fed is coming from here, they don’t want to see people get tax free increases in their standard of living...So the Fed is really kind of fronting for the banks and the Treasury when they fight deflation.”
“Who says that you can print all of this money and you’re just going to get mild inflation? Who says you are not going to get hyperinflation?...Well, this is a dynamically unstable process and the example I would give would be Weimar Germany in the early 20’s.”
They're also doing the public sector a favor, whose salaries + pensions depend on steady if not increasing tax revenues. Otherwise, pension consultants such as Leo have to advise their clients work harder, contribute more or take on greater risk in order to meet obligations.
Inflation socializes the dirty work.
The Fed has a plan? Thank goodness. For a while there, it looked like they were just making it up as they went along.
More making it look good on paper BS. Snag is, without actual dividends and cash flow, those assets will have to be sold to actually give the geezers money. That should about flatten their prices.
I believe the federal reserve causes more harm than good.
And inflation would NOT???
I challenge you, clueless Leo, to show me ONE post-gold standard example of such a thing happening. I, on the other hand, can give you countless examples of inflation and hyperinflation doing precisely what you fear from the boogeyman of deflation.
Face it: meaningful deflation happening under our purely fiat monetary system is nothing more than a myth and/or a lie. It is impossible. Inflation and hyperinflation inevitably follow from governmental profligacy and reckless financial overspending. Stop believing the pro-establishment Keynesian bullshit already! But being Canadian, I know that you have a kneejerk need to implicitly believe in authority and the State (no matter how corrupt and sociopathic they may be).
We don't have a fiat MONEY system. We have a fiat CREDIT system. The road to hyperinflation first leads to deflation. When they panick, start printing more useless credit and people get very nervous about the pools of 'money', then velocity will pick up and voila, hyperinflation will follow. It is not all that difficult. Read Weimar, they printed for several years without inflicting inflation. Then velocity of money picked up and it was game over.
+1
A lot of Canadians have a healthy disrespect for the States.
"And let's not kid ourselves, deflation would destroy banks, pension funds and the individual retirement accounts of millions of people. That's why I wasn't surprised with today's announcement."
And you think today's announcement does anything to stop the great destruction of credit?
Like a snail farting in a hurricane.
It's truly scary that you manage pensioners money. Pity them, really.
" The Fed will do whatever it takes to reflate risk assets to shore up banks' and pensions' balance sheets, and bring about mild inflation to the economic system."
This is probably right. Our ruling class is all-in and has been for years.
"Sure there are, but the bigger risk is if they do nothing at all."
To them, perhaps. To the nation, no. They have made a mess of things by credit and asset inflation over the past two decades. The way to fix that is: (1) Continue to inflate debt and assets and let someone else solve the problem when it is a lot worse; or (2) Allow deflation to sort out the mess. Option one has been chosen over and over since the early 90's. That got us where we are.
That said, you are correct that our rulers will try their utmost to run up the deficit, the money supply, nominal asset values and to grab control over as much of our income and assets as they can, so long as we let them. When we protest, they pass bills giving Obama a switch to shut down the internet. That's just what rulers do until they have consumed the host. They can't help it. They are rulers.
One of my favorite passages in the Bible is in 1 Samuel 8:10. The Israelites have cried out to God for a King so they can be like other nations. God agrees to annoint a king for Israel; but instructs the prophet Samuel to tell the Israelis about the consequences:
"These are the rights of the king who will rule over you. He will take your sons and put them to use in his chariots, on his horses or running in front of the chariots. He can appoint the for his use as commanders of thousands or commanders of fifties, to plow his ground or reap his harvest, or to make his weapons of war or the equipment for his chariots. He can take your daughters to become perfumers, cooks and bakers. He can take your best fields, vineyards and olive orchards to give them to his servants. He can take a tenth of your flocks , and you yourselves can become his servants. When that day comes, you will cry out because of the king you've chosen for yourselves but the lORD won't answer you on that day."
Things really don't change that much. Add a little class on derivatives and the ancient jews would have picked it up real fast. As would the advantage to the King of regulating and taxing them.
+100
Didn't you get the memo? No God stuff here. Can't believe you weren't junked!
Good post, btw. Babel was built by a king.
simple solution to pension fund woes - buy Solar stocks.