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A "Tell" From Bernanke - Long Live the Carry Trade
I did a piece on
Saturday about Central Bankers and the words they use to influence
markets and economies. I said, “Beware the Subtleties”. I ended with
the following regarding announcements in the coming year from the
Federal Reserve:
“We’re going to get a ton of the ‘subtle’ stuff. It’s the subtle stuff that worries me. That will move markets too.”
One day later and the first example of Fed Speak 2010 is available.
Chairman Bernanke gave a speech Sunday morning in Atlanta. It was long
winded. It did not read well either. Possibly being in the audience and
watching the slides may have helped. After all he is the Man of the
Year. See if you can wade through this.
My read of the speech was that it was (A) an attempt to defend Federal
Reserve monetary policy decisions during the critical years 2002 – 2006
and (B) a suggestion that the absence of regulatory oversight was the
primary source of the housing bubble that occurred during that period.
On the issue of the, “Just right” monetary choices made in this period the Chairman concluded:
“policy during that period--though certainly accommodative--does not
appear to have been inappropriate, given the state of the economy and
policymakers' medium-term objectives.”
And on the need for the regulatory side of the equation to be the front line force on Bubbles he ended with:
“we have strongly advocated financial regulatory reforms, such as
the creation of a systemic risk council, that will reorient the
country's overall regulatory structure toward a more systemic approach.”
But what scared the pants of me was the following:
If adequate reforms are not made, or if they are made but prove insufficient to prevent dangerous buildups of financial risks, we must remain open to using monetary policy as a supplementary tool for addressing those risks--proceeding cautiously and always keeping in mind the inherent difficulties of that approach.
Put these together. Bernanke is trying to convince us that bubbles are
not caused by monetary inflation. He is so convinced of this that he
will delay, for as long as possible, the return to ‘normal’ monetary
policy. He will only use monetary policy as a tool if all other
regulatory efforts have been exhausted.
2010 is an election year. That being the case it is unlikely that any
legislative steps will be initiated that would have any meaningful
impact on the formation of future bubbles. Bernanke knows D.C. and
knows ’10 is a dead year. So he throws this out on the first day of
this year and says, “I’ll wait to revert to normalcy and give you
legislators a chance”. What are the chances we get this Systemic Risk Council thing up and running anytime soon? About zero. But Ben is prepared to wait while that runs its course.
This is the weakest possible a position a Central Banker could take.
Mr. Bernanke believes that monetary policy should be used only as a
last resort measure when economic bubbles are forming? I think Mr.
Bernake just gave us a “tell.” This speech was a way for him to validate the choices he has already made. Ben will not be taking away the punch bowl anytime soon.
And we thought the CARRY TRADE was dead.
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Robo always has the best pics. good show, sir.
good post and great calls, Bruce ... but I respectfully submit that anyone who thinks Uncle Ben / Hanky Panky and Tiny Tim fools, ought rethink their logic / reasoning before roundly proclaiming such; no matter how easy and universally held as tautological.
99.99999% of the public understandably believes such and i'll just proffer up a paraphrasing of the most classic / timeless Rummyism: ‘ you started with an ILLogical premise and Logically followed it to an ILLogical conclusion.'
bob resurrected: Trichet looked at an F'ing chart and realized that your handle and the DX/ Uncle Buck have something in common. period.
There is no exit strategy....empty threats giveth Ben.
the carry trade yayas will be getting wacked because Australia's interest rate is unsustainable in this environment. Perhaps I should keep this to myself until I have finished positioning myself accordingly. So when will that be? As gold and other commodities correct you should expect AUD to suffer more so. The RBA is bent on keeping inflation in check artificially by bolstering interest rates. But flashback to 2006 in the US when bernanke jacked up the interest rate causing the first pawns to drop in the mortgage thrifts sector, history rhymes. Debt growing at a 4.3% clip for 40 years has been out pacing GDP for quite some time. Households due to government intervention via the first time buyers program have finally surpassed the the US household debt to income ratio. One not only has to consider the interest rate on USD but the sustainability of the interest rate on the contra currency.
Relax reload - johnny
Disclosure: short AUD/USD.
Since you're on the Aussie subject and the recent US policy mistakes relating to real estate, check this out. Aussie real estate investors (retirees and poms), watch out.
http://www.debtdeflation.com/blogs/2009/12/29/it’s-debt-debt-debt-for-...
Granted this is FedSpeak, where as Bruce points out the devil always takes up residence in the details, but it seems to me a rather clear statement that the printers will continue in full operation in a ZIRP environment until hell freezes over, since the time to enact Ben's condition to the cessation of "extraordinary monetary policy measures", that of "adequate reform," has long since expired. He said the policy in 2002-2006 was correct - Greenspan acted properly. He said it was not the Fed that failed, but rather the regulators (overlooking that the Fed is a regulator.) He does not mince words, or equivocate. This is as clear as it gets, folks. "All available tools" will be employed aggressively until further notice, on Ben's watch. This is the message you are supposed to get from this meandering speech.
No wonder the equities are rocking higher today - 2010, here we come and we're open for business, baby. In 2010, we will test further the limits of tolerance of the Empire's reserve currency - how far will it stretch before snapping, or is its capacity all but infinite? Scottie to Captain Kirk: "She's gonna blow, Cap'n!"
'Systemic Risk Council'? Hmm... Isn't that what the Fed is supposed to be? Aren't they supposed to watch out for systemic risks?
But I also want to say that I don't need to even listen to Bernanke's language, subtle or not. There is nothing that the guy has ever said or done that would make a person think he is capable of anything but the most accomodate monetary policy imaginable.
Why? Seriously, why? What have they told him?
http://www.marketwatch.com/story/trichet-trusts-us-sincerity-on-strong-d...
Apparently strong is a relative phrase, and he refused to identify what the dollar would be strong relative to!
Not gold, not commodities, but it will be strong vs other currencies!
Saw this on C-Span. Applause!
Some years, he hit very well for a pitcher. And he was an excellent pitcher.
IMO, he doesn't always get it right but he isn't afraid to lay it on the line when he thinks a subject needs address.
Do we need a FED?
One fundamental problem is that Congress, left to their own devices a century or so ago, created occasional economic problems all by themselves. Right now, some in congress are talking tough about changes in the system but as with the case of Barney Frank, they aren't behaving the way they are talking.
Perhaps we need a periodic dissolution for a few years of the FED in its present form with mandate for periodic examination of reinstatement.
I can only see the proverbial rock and hard place. Monetary policy is sometimes referred to as "pushing on a string." Well, that is what is happening here. This economy is not picking up, just look at the construction spending release this morning. Try as hard as they might, the banksters just can't make people spend more money. Liquidity or no liquidity, it's the end of the line.
Cursive:
If I believe that the latest leg of the "bubble" and subsiquent rash of bankruptcys and foreclosures was created by money that wasn't really there but was borrowed, then where is that segment of the population going to get money to spend? Anticdotal information is that the banks are not lending even into economically viable situations.
Should I raid my retirement to support an economy that is short, not 10s of thousands (or 100s of thousands) but 10s to 100s of billions?
And what do you think I should spend money on? I already have my retirement abode. Maybe a new computer?
I would much rather put people to work repairing the infrastructure or training for that portion of the population that can be trained.
The money for that can only come from higher taxes.
Traveling over the holidays, and reflecting on decades past, I am sorry to say that our population not only has some obesity issues but are glutenous in their expectations.
Sen. Bunning (R-KY) to Fed Chair Ben Shalom Bernanke "You Are the Definition of Moral Hazard"
www.youtube.com/watch?v=FvgdX58Ii7c
Thanks, Market Truth. Bunning spoke truth to power.
If you look closely at Ben he actually smirks after the Sen. calls him a moral hazard. Wow, the arrogance!
ZIRP is to Bernanke as crack is to a crack head.
What are the chances a Systemic Risk Council, up and running, makes any difference at all?
It will simply serve as a buck-passing and responsibility deflector for Helicopter Ben. Window dressing...
that's some funny shit Robo!
Shouldn't the "king of the world's" hands be a bit higher? He is, after all, king and she is but a commoner.
hilarious
Love this
Reminds me to get out my Mr. Lloyd PotatoHead kit for sale next Xmas. With the Lloyd eyes, lips, nose , and shiny pate I can amuse myself by making some money for a change.
Some Goldman employee doesn't like this. Thanks for the laugh man! I didn't even get it at first.
"Subtle"
http://www.youtube.com/watch?v=VSwWy4E6I04&feature=related
"Subtle"? Really?
Bernanke puts the blame on the regulators and defended the Fed's policies, there is nothing subtle about that.
Well then at least he took responsibility, from my point of view. I'm sure his blaming of regulators was not meant to appear that way. However, the Fed did regulate banks/BHCs during the period in question and banks/BHCs did write success-proof mortgages during same period and then resell same to others (which is a factor in this whole debacle). Bernanke stated it was lax regulatory oversight with regard to "exotic" mortgages that caused this, ergo he admitted culpability. Again, probably wasn't intended this way and most folks probably won't follow the logic I just did to arrive at my point of view.
That's a mighty long road to arrive at what might be an admission of culpability. Most people will pull over and nap before arrving at that desitnation. And he knows that. Ben is an accomplished re-fabricator of reality.
"re-fabricator of reality"...love it. Best new phrase of 2010!
Fully agree. I do believe, at least in this case, he does not believe his own lie but is highly confident (with good reason) that most will.
I agree with this piece. A mitigating factor is still oil however. High gasoline prices are very bad for the Dems. And Bernanke is doing everything possible to send oil skyrocketing.
I saw part of this speech on Bloomberg last night. This douchebag basically said that the Fed was not responsible for the housing bubble. I don't even think he blamed Wall Street. If I remember correctly he blamed "speculators". Even Greenspan admitted that the policy caused the bubble. What is Bernanke smoking? It is time to End The Fed.
In retrospect I think the message is moreso for Congress. Don't legislate the Fed. It wasn't us. I can't wait until it becomes an issue of survival. Somebody will screw something up so bad that there will be people stabbing themselves in the back. Then the battle of the bigger dicks begin. Bernanke just whipped his out. Whose will be the biggest?
LOL......And who will whip out the bigger slong ??
Why Mister Efficient Market, of course, my Good Doctor !!
Let's hope so Rainman. :)
Yeah, I heard an NPR radio show this weekend, the Ira Glass show, talking to an economic prediction consultant that has a big model and they looked at a large spike in oil prices, and out popped high unemployment for years...not surprising.
I'm not a believer in peak oil but it doesn't take much to spike oil prices, even with oil-filled tankers lined-up for miles, if Israel/Iran flare, if Pak destabilizes, terrorism in middle east, Nigeria, Saudi Arabia etc...
You're right about Bernanke. However, the best thing to have happened for the dollar is the intervention by the BoJ to competitively cut its rates to below those of the Fed.
The BoJ wants the yen to be the primary funding currency; that way the dollar regains some of its losses via short covering, and the yen weakens allowing Japan some rest from its deflationary woes.
The best thing that could have happened, has. We have a remarkable benefit right now of competitive carry trades.
Long live the carry trade!