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Four (easy) Pieces
Ben’s got his head in the sand?
The WSJ reported on the Fed’s (AKA:Bernanke World) reaction to the significant rise in long term interest rates since the 11/3 announcement of the policy:
Federal Reserve officials were unfazed by a rise in long-term interest rates at their December policy meeting.
Unfazed? I don’t think this is true at all. The backup in
LT yields is exactly what the Fed doesn’t want. I think they are
crapping in their pants over this development.
Fed
officials have argued that bond yields would be even higher and
financial conditions tougher if the central bank hadn't started the
purchases.
“Look at the graph guys; it’s QE that done it” is all I can say.
Fed officials noted that the tax-cut compromise between President Barack Obama and congressional Republicans had likely pushed rates higher by putting upward pressure on the budget deficit.
Baloney! Here’s the graph. Rates did not go up in the last weeks of
December when the tax plan was approved. The Fed is blaming Congress for
the bond market blow out? Weasels.
QE2 has created great uncertainty. We are six months (functionally five) away from the program's end. No one has a clue what will come next.
Uncertainty like this ALWAYS increases long-term bond yields. There are
really only two possible explanations for the Fed’s refusal to
acknowledge that QE2 has directly contributed to rising bond yields:
(I) They have absolutely no clue what is going on
in the bond market. They have not read word one of the thousands of
articles that have connected the dots between QE2...Uncertainty…Higher
yields.
(II) They are lying to us.
I have never made the mistake of underestimating the Federal Reserve.
Some of the brightest/best connected people in the world of finance are
involved. They know exactly what is going on in great detail. They are
keenly aware of all information that is made public regarding their
activity. They speak with a broad spectrum of financial players
including all the big banks, the primary dealers and the big
bond-holders inside and outside of the United States. I don’t think they
are clueless at all…..
An interesting (to me) side-story in China
A tax-lawyer friend sends me this note on the issue of transfer pricing in China.
Re PRC and inflation, they have been ramping up enforcement of tax
rules that back-stop their capital controls to combat movement of hot
money contributing to inflation. The tax rules are transfer-pricing,
which govern the pricing of related party transactions, since those are a
way to move money from one country to another, but keep it in the
economic group. Evidence that PRC will try to combat hot money and
inflation, which isn't to say they'll actually succeed!
From China-Briefing comes this on the transfer pricing issue:
Representative
offices in China may find themselves having to comply with China’s
transfer pricing regulations for the first time in the upcoming annual
audit period. ROs and other foreign investments must now start to
prepare their accounts for the year 2010 and to have these fully
prepared for submission no later than the end of April 2011. Negotiations after audit submission have little chance of success.
These are significant regulatory changes. They will alter the way
business is done for foreigners in China. Profits for some companies
(car companies) will fall as a result. I read this as just more evidence
that China is pulling out all the stops to combat inflation. What does this mean? The inflation problem is bigger than we think and growth is going to slow.
A break in the weather?
50-year weather records are being set around the globe. Rainfall in
Australia/California is at the 50 year mark. The European weather has
set the same records. It’s true for all of Asia and most of South
America as well. Why now? For me it is La Nina. This change in pacific
water temperature drives all weather patterns. It too is at a 50 year low. This chart show the current extreme condition:
These time elapses show how the hot water just slammed into Asia in the last few months.
Looking at the long term ENSO chart you see the rapid switches between
El and La conditions. The cycles always end with blow out weather
conditions. The violent storms suck the heat from the water and with
that a new cycle begins. The next ENSO report is on Jan 7. I’m betting
the cycle broke and with it the weather extremes.
Social Security: Terrible 10’; questionable 11’; a thought on NFP
The full year (including adjustments) came it at $49 billion in negative cash flow. In June I wrote about my expectations. My conclusion back then: "This translates to a~$50b deficit for the full year."
The raw numbers for January’s payroll tax and expenses are out. Nothing new. Revenues down, expenses up.
January is always a surplus month as taxes come in. The YoY is down
again however. The full year cash flow will be in the red again this
year. I am projecting $35b of negative cash flow. (SSA forecast is -4b)
I look at the payroll tax data in the context of the Non Farms Payroll numbers. Does the data from SSA have any predictive information on this critical monthly statistic? Not with any precision; has been my experience (and frustration) to date.
With that as a caveat, I have looked at this and concluded that the ADP
report this morning suggesting a 300k increase in payrolls is
overstating the number. We shall see soon enough.
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As you might know, I laud much of your writings for ZH.
One theme for goldbugs this past year was on the large increase of retail buying of gold in PRC and the gombit's encouragement of that activity. It seems as though the goomint invites this as a way to mop up a fair amount of hot cash and to sequester it in gold hoarding. The PRC goomint will likely confiscate it just as will happen in the USA if they need it for their higher purposes. It might not be something as messy as outright door to door thefts, but more like fantastically high cap gains taxes as will happen in the USA.
Thanks for the followups on SS and the related schemes. I get more from you than the rest of the usual commentary from all of the MSM.
Why does everyone think the Fed ends with the Bernank? For God's sake - he's one guy. A very convenient guy to throw under the bus and take all the blame for a "failed" monetary policy. Believe me, it is more or less going down as planned. Let's see more articles about his handlers. [tin foil hat off]
While your comment rings true, there's still a big part of me both waiting for, and rooting for, the bus.
Honk honk. Will the next chairman (or lady) be any different?
Hell no. But a bus vs. pedestrian contest always makes great video for YouTube. Maybe even CNN.
Bruce,
Is it possible on the first of your four pieces, that the Fed has lost control? This global economy is a complex system, and there are sure to be nonlinearities in it. When yields started going up, my take is that this is the signal for a runaway. I think the Fed won't put the control rods back in fast enough, because no one wants to quench the reaction that might reboot the economy. But I'm still seeing dead quiet on some fronts of the services economy (no one spending from October to now, so hard for me to get excited that all is well). We are stalled, but the reactor that is monetary policy is about to go critical. Kapow.
Q: Does Bernanke think we are stupid?
A: Yes.
Q: Unlike economics, is physics a science?
A: No. Physics is philosophy regarding nature sometimes finding solace in non-judgemental, fact based observations oft clouded with faulty Syllogistic logic.
Q: Is economics a science.
A: No. It is merely a study of economic interactions amongst men. That descriptions of such other than the most fundamental and basic may be considered predictive is fallacious. "Truths" underlying economic beliefs rest upon individuals implicit and explicit socio-political moral and ethical values.
Q: Why in the world do "advanced" societies place such weight and dependency upon a few individuals anointed as wise beings in an art form not far advanced past numerology or weather forecasting?
A: Dunno.
Where are you getting these monthly payroll tax numbers? Results for January, released already on Jan. 5? Sounds, err, fishy.
The numbers published by the SSA are current to November 10. They say $51.07b total income and $59.42b total expenditure, vs $51.56b income, $57.27b expenditure in Nov 09. So you've got the trend right, anyway.
ADP can't really be checked with payroll tax data because ADP doesn't publish its numbers prior to seasonal adjustments. You'll just have to wait for BLS tomorrow.
Ouch! You think I'm selling air?
SSA released its estimate for Jan 2011 revenues today. A screen shot with the link details. FYI they do it every month, I have written about it in the past, the estimates are pretty good (mostly small revisions)
The proper procedure is as follows:
Ready, Aim, Fire
Not:
Ready, Fire, Aim
Be guided accordingly
Note: I'm having #$@&* problem with the image. In the mean time the link is:
http://www.ssa.gov/cgi-bin/taxreport.cgi
"I have never made the mistake of underestimating the Federal Reserve."
Underestimate? I say we get with the program, he wants to monetize debt? Let's not let him do a little, when he likes. let's start a movement to force the fed to buy all outstanding government debt. If that SOB is going to take us all to hell, I say we take him with us. What we up to 14 trillion, that should take all of 12 key strokes and we can get on with it.
Come on you punk ass bernank, you want to see how far we will go, let's get printing, bitch.
The myans were right... trouble in 2012 Dec..
End the Fed..... go ron paul....
this last storm in SoCa was not a typical Alaska cold front dropping down, instead it was a southerly flow, not really part of any system. it is weird, a La Nina fall and an El Nino winter? well typically El Nino hits hard in late spring.
the snow level was reportedly going to drop as low as 1000' around the LA area. the ground is so dry however that in nonburned areas the soil is just now reaching saturation. oddly some plants which do not do well in cold winters, like plumeria, are still blooming, we had roses until last week. and some deciduous varieties refuse to go dormant. i always think they know something we don't.
after 25 years, this december is the first where the mountains surrounding the san fernando valley are snow capped! I ve never seen that in my life. ever. cajon pass but deepr and lower than ive seen it....you can see snow on the mountains that surround the main of los angeles metro. i used to run and mountain bike and rock climb those hills. also noticed the spring rains in the fall??? wtf! insane amounts of persistent rain seattle style for days, not normal, on the other hand, the haiti and/or chili quakes supposedly moved the axis by maybe 4 inches from where it was, not 4 degrees, 4 inches, the other shoe to drop...I see all these volcanoes and earth quakes around the ring of fire especially, and i cant decide if all these movements are adding stress or releasing pressure on the major fault that runs right up beneath beverly hills and sunset and hollywood and into the valley. we keep dodging it and i cant decide if that's good or bad. i love bruce's stuff, who else talks about that shit like that. he's co-mvp of this site. today right up there are phx rsrch, banzai, dream team.
http://www.iris.edu/seismon/
most of the earthquake action has been down around Calexico/Mexicali. the USGS has their own website, which is even better. You feel a shake late at night, you log on and bingo they report the location and intensity within a few minutes.
Bernanke said he is 100% confident they can handle inflation, and he probably watched himself on TV, so the rise in rates doesn't bother him at all.
The cliff is hidden and when he sees it, it will be beyond breaking distance.
Good call on the pop in the usd, hope you cleaned up.
My bet is for record cold through 2011 based on Katla's beltch.
Must go now and find more wood in case an ice storm takes out the power. Carry on.
yawn ....
complacency ....
scratch....burp....
Unlike physics, economics is not a science. Any four pieces can attempt to make sense of the situation but only philosophically.
I think they are trapped in a cave and watch shadows on the wall.
Shadows and dust my friend, shadows and dust.
Mr Lennon Hendrix,
+10^10.
Fundamental truth.
What ever happened to Nobel Laureate Dr. Robert C. Merton ? I haven't seen his name in the news lately.
After you give your citizenship award out. You have to ziplock their mouths or else they'll say something stupid and you lose your investment.
Which is why we don't hear anything out of Obama lately. Everytime they use krugman it's the freaking titanic watching a failboat video being rescued by the failcrane.
MIT?
http://www.youtube.com/user/CollegeBinary#p/u/8/q34MHpBu0Oo
How much would you like to bet - go to weatherbill.com http://bit.ly/ihVgUX
IMO most of January will be in the record books for freezing bone chilling icey cold from coast to coast (ex South FL)