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A Very Critical Bank Of America On The Fed's Third Mandate, And Why BofA Is Not Bullish But "Bubblish"

Tyler Durden's picture




 

Ever since the advent of QE2, few if any, sellside analysts employed by Too Big To Fail banks have dared to voice a negative opinion of the Chairman's third mandate, that of raising stock prices (for obvious reasons: nobody will bite the hand that feeds them trillion in taxpayer bailout money). Which is why we continue to believe the BofA credit strategist Jeffrey Rosenberg is one of the few men standing who dares to call it how it is. In his latest piece, Rosenberg lays out what is the most harshly (yet diplomatically) worded criticism of QE we have read to date. "In our view, the longer term problem with such a strategy is that in delaying the adjustment to the root causes of the credit crisis, namely excessive leverage in the economy and financial markets, the essential vulnerabilities from that excessive leverage remain. What triggers their realization again is the inflationary shock leading to an interest rate shock that undermines the cheap cost of that debt that currently enables its maintenance." As for the implicit assumption that savings and wealth are inversely correlated, Rosenberg points out the glaringly obvious: "Inflation erodes the value of those savings and decreases their standard of living." The only option left: "Lowering the value of savings creates a powerful incentive to take on investment risk to maintain the real purchasing power of those savings." And while everyone getting aboard the investment ship at the same time is a horrible idea when it happens in one country, it is a guaranteed disaster waiting to happen when it occurs at the global level. Which is precisely what has happened: "Today, we see that same pattern again at play. But this time, it’s not limited to just the US Fed policy. Globally, central banks are pursuing coincident easy money policies. And even in Emerging Markets where the inflation fears stand most acute, the policy rate increases are just keeping  up with inflation increases. The result: global negative or zero real policy rates." The entire global "economy", which really means stock market, is now one timebomb, just waiting for the first central banker error-induced 'crack' to appear in the windshield, following which the destruction will be unprecedented.

From Jeffrey Rosenberg:

Monetary policy goal: raise stock prices?

The Fed pursues a dual mandate: maintain stable inflation consistent with maximum employment. The Fed’s justification for QE2 in this context, to help raise stock prices, would seem at the least surprising. Yet, the Fed now understands the critical role asset prices play in the functioning of the real economy. Figure 5 below highlights the strong and persistent inverse  relationship between savings and wealth.


The destruction of wealth during the financial crisis fed a collapse in spending that led to a real economy recession. So the quickest way back to recovery? Reflate the assets to bring back the confidence. And so far that strategy has worked. In our view, the longer term problem with such a strategy is that in delaying the adjustment to the root causes of the credit crisis, namely excessive leverage in the economy and financial markets, the essential vulnerabilities from that excessive leverage remain. What triggers their realization again is the inflationary shock leading to an interest rate shock that undermines the cheap cost of that debt that currently enables its maintenance. If that happens before debt levels can be brought down then the future adjustment in debt will extract even a greater burden. Those remain our longer term concerns, as we recently summarized (see nearby links). For now however, don’t call us bullish, call us “bubblish”.

 

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Wed, 02/16/2011 - 23:21 | 969016 Dr. Richard Head
Dr. Richard Head's picture

NO!  This time it's different.  The Fed is now able to spread the risk through out the world  

Wed, 02/16/2011 - 23:57 | 969100 william the bastard
william the bastard's picture

Don't bogart ..that..joint..my freend...roll meee. ..another one... jess...like ...the other one...

Thu, 02/17/2011 - 03:54 | 969442 Michael
Michael's picture

I uploaded a new Youtube video I made.

FOX News Deception CPAC Official Uncut Announcements 2010 Vs 2011

http://www.youtube.com/watch?v=X5Mx5MZqgPk

Thu, 02/17/2011 - 08:52 | 969591 Dr. Richard Head
Dr. Richard Head's picture

You stalking me WTB?  You are bubblelicious.

Thu, 02/17/2011 - 05:25 | 969494 AllenX
AllenX's picture

In variety and quantity, the natural resources of the United States probably exceed those of any other nation, with the possible exception of the former Soviet Union. The United States is among the world's leading exporters of coal, wheat, corn, and soybeans. The struggling economy needs a lot of alternatives to get it up and recover. A person has only to take a look on the web to see a brand new harvest of financial online businesses that match every little situation. Persons might get free from jail by using a loan to pay their bail bond agency, (See http:bailbondlenders.com). The planet today is just going loony with all this. Sit back and watch the public figures that are ordering everybody to just spend his or her personal savings trying to keep the economic system running.

Thu, 02/17/2011 - 06:45 | 969521 Franken Stein
Franken Stein's picture

What about Canada? Largest producer of uranium. Largest exporter of oil to the US. Sure the US produces a lot of Agricultural goods but that means shit when they totally rely on energy imports. The American energy industry has been completely destroyed by the environmental and big oil lobbies. What was the US trade deficit again?

OT: Wondering about peoples opinion of where Canada is going moving forward? Housing is definitely a problem but I can't see the situation in Canada being worse then the US.

Wed, 02/16/2011 - 23:26 | 969022 TomJoad
TomJoad's picture

 

"...waiting for the first central banker error-induced 'crack' to appear in the windshield, following which the destruction will be unprecedented."

Whew! I was worried there for a minute.

 Thank god central bankers never make mistakes.  

All bow before the almighty Bernank.
Surprising thing here is that the guy works for B of A.
Jump! You Fuckers!

 

Thu, 02/17/2011 - 00:25 | 969026 Impetuous
Impetuous's picture

"In a world in which you did not have distortions, in which you did not have government stepping in and distorting the rate at which people save or not, the right saving rate is whatever all the people of the community simply want to save."

 

Thu, 02/17/2011 - 01:16 | 969293 topcallingtroll
topcallingtroll's picture

Very good point. This is where we ultimately need to end up. Lord make Benny chaste and non interventionist, but not just yet.

Thu, 02/17/2011 - 06:17 | 969507 4ndy
4ndy's picture

Milt was drinking the same kool-aid as most economists. They actually thought that economy is real-deal. Maybe they should wake up from their wet dream.

Thu, 02/17/2011 - 10:08 | 969803 tom
tom's picture

No, not exactly, it's the rate that savers and borrowers can agree on.

Thu, 02/17/2011 - 17:49 | 971847 Monday1929
Monday1929's picture

No, the savings rate, not the rate on savings.

Wed, 02/16/2011 - 23:28 | 969031 Rick Blaine
Rick Blaine's picture

Not to worry...

All we need is an ever-increasing number of suckers and/or money injected into the markets to ensure that everything/everyone will end up OK.

Such a system is clearly sustainable.

Wed, 02/16/2011 - 23:34 | 969051 tmftdoyle
tmftdoyle's picture

It is not to hard to understand the lunacy in "Dr." Bernanke's strategy. The core of capitalism is its savers who provide the base funding for all value added risk taking. Yet our esteemed fed's policies are punitive to one group, our savers. Assbackwards as I have ever seen. So we go back to the core question: Is he an idiot or the most mild-manner doctor evil ever to grace our pantheon of public servants.

Thu, 02/17/2011 - 00:24 | 969162 newworldorder
newworldorder's picture

Bernanke is not an idiot. He is simply at the end of a long fincial rope with no more room to maneuver. He started with a strategy of financial asset reflation and has come to realize that reflation is required on a global scale almost to infinity. There is no turning back. He must continue to print and monetize for the foreseeable future, or the whole ponzi crashes.

Interestingly, this has never been tried before. The written laws of economics are well known, but he is in uncharted territory. He must engage in behavioral economics, - anything to prevent the truth of our current condition penetrating the thick and addled skulls of the average American.

Thu, 02/17/2011 - 08:57 | 969602 narapoiddyslexia
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Sometimes I feel sorry for The Bernankster. There he sits, trying to navigate the Titanic amid myriad whirlpools any one of which can suck him down, and all the while he has only one lever which speeds the Titanic up or slows it down but cannot steer it from side-to-side. He must be in denial. How can he function, otherwise?

Wed, 02/16/2011 - 23:35 | 969055 gwar5
gwar5's picture

Subprime stock market, crash ahead.

Betcha Goldman Sachs already has inside info on when to play the short 

Thu, 02/17/2011 - 02:55 | 969392 AllenX
AllenX's picture

-Service and Security. Every traveler wants to have a place to stay where their safety is secured and are being served well. Cheap hotels may not have the extravagance and high-priced utilities a 5-star hotel may offer but service is always good and available for any customers need. -Health concern is a factor that travelers becomes picky about the place they want to stay in. Every cheap hotels standards to follow required to them by health authorities. Even cheaper hotels are complying to these health and cleanliness standards for government policy and customer satisfaction too.

Wed, 02/16/2011 - 23:40 | 969070 Yen Cross
Yen Cross's picture

Bof A is reckless. Market diversifcation is limited. I bought C a while back. Will reload on the neckline around 4.78.

Wed, 02/16/2011 - 23:58 | 969106 Bad Asset
Bad Asset's picture

BAC has a milllion deliquent loans in their "shadow inventory" via Countrywide, which is about half of the loans they had to take from them.  Good luck with that.

Wed, 02/16/2011 - 23:49 | 969088 alien-IQ
alien-IQ's picture

Why do I get the feeling that the chart in this article uses the term "wealth" where it should instead be called "Debt"....But then again...in this system...debt = wealth. A reasonable person might call this insane.

Thu, 02/17/2011 - 00:42 | 969215 ToddGak
ToddGak's picture

The debt of one is the wealth of another.

Thu, 02/17/2011 - 06:24 | 969510 4ndy
4ndy's picture

:D +1. The base of capitalism in short.

Thu, 02/17/2011 - 08:42 | 969575 snowball777
snowball777's picture

Only if they can actually collect.


Wed, 02/16/2011 - 23:53 | 969096 arkady
arkady's picture

Thank god for Schiff, David and Jeff Rosenberg - sanity in an insane world.

Love the joooooos.

Thu, 02/17/2011 - 00:07 | 969123 chumbawamba
chumbawamba's picture

When the fuck are people finally going to start withdrawing their money from this stinking corpse so that it can finally decompose?

And why haven't these mother fuckers been sued out of existence yet?

Again, not rhetorical questions.

I am Chumbawamba.

Thu, 02/17/2011 - 00:31 | 969182 newworldorder
newworldorder's picture

Because the Banking Cartel always protects its own, especially after Lehman. There will not be any selective take-down of individual cartel members. The system will stay up as currently configured until and unless something happens to force the entire system to crash and shut down.

Thu, 02/17/2011 - 01:12 | 969285 barliman
barliman's picture

 

Chumba,

        Same answer to both questions - because Jamie Dimon will kneecap anyone who tries. Seriously.

barliman

P.S. This isn't Watergate. These are serious people. Anyone who is big enough to make a difference with either action, knows they can be wiped out in milliseconds.

Thu, 02/17/2011 - 06:28 | 969512 4ndy
4ndy's picture

I wonder if a run on bank would be even possible. I would expect Blackwater goons standing in front of Wall Street and all those mafia banks and shoot every breathing,moving,talking thing.

Thu, 02/17/2011 - 00:21 | 969156 Mr Poopra
Mr Poopra's picture

 Bubblish?  You mean rubbish.

Thu, 02/17/2011 - 00:46 | 969224 mcguire
mcguire's picture

rubblish..

Thu, 02/17/2011 - 00:28 | 969175 Trimmed Hedge
Trimmed Hedge's picture

Yikesahootie!

How can people even sleep at night while saving only 1-10% of their income during the past 30 years?

Although I'm far from being a high-earner, I'm able and fortunate enough to save much more than that.

And I still feel every day that it's not enough.  : (

Thu, 02/17/2011 - 08:45 | 969580 snowball777
snowball777's picture

Dimon, Pandit, and Moynihan agree.

We need your reserv...err...deposits...now.

Thu, 02/17/2011 - 00:34 | 969192 GottaBKiddn
GottaBKiddn's picture

Rosie says, "Globally, central banks are pursuing coincident easy money policies." All the central banks doing the same thing? Just like Benschlomo? Like a choreography? 

And earlier he said, "Inflation erodes the value of those savings and decreases their standard of living."

Does anybody really believe that the central banks would act in unison to erode (read, transfer) the value of people's savings and move the value up to the top of the pyramid, thereby leaving those at the bottom to squirm in lower standards of living? Without someone coordinating this dance?

Thu, 02/17/2011 - 01:12 | 969274 topcallingtroll
topcallingtroll's picture

Playing beggar thy neighbor and trying to inflate one's way out of problems is what the banks are doing. It is not a coordinated conspiracy. It is the banks acting individually. They are all doing the same thing, trying to avoid a stronger currency, but they arent cooperating. The central banks are actually fighting each other, trying to get an advantage.

Thu, 02/17/2011 - 00:37 | 969201 Hedge Jobs
Hedge Jobs's picture

the FED's 4th mandate: Lowering living standards

Thu, 02/17/2011 - 00:43 | 969216 bob_dabolina
bob_dabolina's picture

I think Tim Geithner should step down and be replaced by Joe Cassano. This thing is taking wayyyy too long to burn down, let's pick it up a  little.

Thu, 02/17/2011 - 03:20 | 969416 Coldfire
Coldfire's picture

+1

Thu, 02/17/2011 - 00:46 | 969222 Josh Randall
Josh Randall's picture

Zombies -- they ruin a good recovery

Thu, 02/17/2011 - 00:55 | 969230 topcallingtroll
topcallingtroll's picture

Ben doesnt beleve he is delaying the resolution of the rebalancing and exvessive leverage. He believes he is facilitating it and slowing it down enough that we dont face a deflationary spiral. Deleveraging in consumer and real estate debt is happening, voluntarily and involuntarily. Everybody with debt, the majority, is being given time and a subsidy to restructure the debt at the expense of savers. And, as far as dollar devaluation being a bad thing, it is actually necessary that we become poorer and trade gets rebalanced. We also need devaluation to let foreigners pay part of the price of the readjustment. Congress must start to get the budget under control to make this work. The majority of the people being debtors it is understandable that in our type of govenment that we will err on the side of inflation because it may harm the fewest people. I dont see how tight money and deflation is better for the average poor person. Of course a rentier's concern such as that expressed by this BofA analyst would be about dollar devaluation, but only a minority are on a fixed income and save money. The worry about dollar devaluation is a worry mostly of the well off who are served by this analyst and his bank.

Thu, 02/17/2011 - 04:49 | 969479 Judge Smales
Judge Smales's picture

Good post topcaller. When you've spent a lifetime as a thief, as these banksters have, the last thing you want is devaluation and a reduction of spending power for the fruits of your theft.

They would love a good long bout with deflation in order to buy up -- at pennies on the dollar, naturally -- anything they have yet neglected to steal. Colossal fortunes will be made.

In the meantime, they won't particularly care about the effects of deflation on us proles. After all, our dollars would have more buying power, too, if only we could get our hands on some dollars.

During the depression, you could buy anything you wanted, and prices weren't out of control. Why? Because so few people could get their hands on dollars in the first place, there was less competition in the market place.

In that environment, if someone needed to liquidate their holdings -- say, an apartment building with 8 units -- for a million dollars, a potential buyer could say, "You better take $250,000, because if you make me come back tomorrow, my offer will be $175,000. What say you? Tick-tock."

And that's how a lot of thiefs will get even richer this time, too.

Thu, 02/17/2011 - 08:59 | 969604 Bobbyrib
Bobbyrib's picture

I junked both topcallingtroll and you. To read your posts and actually think you believe that it is wrong that people who saved money during the last ridiculous credit bubble economy profit during this economic downturn is troubling to say the least. One way or another the market (housing and stock) will bottom. Bernanke is just delaying the inevitable crash that is bound to be a lot worse and crush the faith of the citizens of this country worse than last time.

Thu, 02/17/2011 - 00:51 | 969232 mcguire
mcguire's picture

future extraction of debt will extract even a greater burden?  look, the volker shock cannot happen again.. the option of 'interest rate shock' is kaput.  no, it is very clear, we are going to war.. break out the 'war time economics' textbooks, the rules are completely different... 

Thu, 02/17/2011 - 00:52 | 969235 mcguire
mcguire's picture

*future adjustment..

Thu, 02/17/2011 - 00:51 | 969236 New Revolution
New Revolution's picture

He's a mild-mannered Dr. Evil.   That's why they gave him the job.   He's an Edomite.   He is a traitor, not only to America, but the world.   Same with Blankfein, Dimon, Geithner, Yellen, right on down the line....   Sure they're doing 'gods' work, but their god is somewhat different from the Judeo-Christian concept of 'God' the rest of us generally refer and defer too.  

So the Chairsatan of the FRB is not an idiot, he might well be a fucking a$$hole, and he's definitely a piece of shit,... but he's not an idiot.

Thu, 02/17/2011 - 01:31 | 969311 anonnn
anonnn's picture

"...the root causes of the credit crisis, namely excessive leverage in the economy and financial markets...".

This piece is a typical misdirector by BOA employee...maybe straight from the defense attorney hive.

The root cause is more accurately the foxes in lawless charge of the henhouse.

Cf. As if the root cause of the Titanic sinking was hitting an iceberg...when in fact it had to do with ignoring iceberg warnings and speeding recklessly at night thru known presence of large ice floes, [another vessel prudently stopped until daylight]. Proving recklessness and deliberate ignoring of warnings from other vessels, however, is most difficult to prove in court with non-cooperating witnesses.

 

Thu, 02/17/2011 - 01:47 | 969331 Milton Waddams
Milton Waddams's picture

Bernanke is hoping that:

investor class stock gains + government largess + emerging global middle class consumption can substitute for developed middle class reduction in consumption.
Thu, 02/17/2011 - 08:48 | 969583 snowball777
snowball777's picture

By consumption....do you mean TB?

Mmmmm....contagion....<cough><cough>

Thu, 02/17/2011 - 01:51 | 969332 trav7777
trav7777's picture

the rate policy is intended to force people to lever...the credit base must grow

Thu, 02/17/2011 - 02:56 | 969393 AllenX
AllenX's picture

I assume you know alot about the topic. The $700 billion Troubled Asset Relief Program is in its waning years, however one man who was anticipated to stay the course is out, reports Reuters. I found this here: Top TARP auditor Barofsky resigns as banks struggle to repay Neil Barofsky, inspector general of TARP and the top financial industry bailout auditor, handed Obama his resignation letter. Barofsky did not reveal why he is leaving his post. His final day in office is March 30.

Thu, 02/17/2011 - 03:04 | 969407 poydras
poydras's picture

Short of an economic miracle, the US is unable to close the output gap.  Devaluation is once again the selected path.

 

"When the fuck are people finally going to start withdrawing their money from this stinking corpse"

 

Old habits die hard I suppose.  Look at the UK.  Short term rates are over 3% under inflation.  How messed up is that?

Thu, 02/17/2011 - 03:47 | 969433 Coldfire
Coldfire's picture

Biting the hand that feeds. Reminds me of the saying about old pilots and bold pilots. Truth has always been a dangerous commodity in the post-Bretton Woods Ponzi scheme known as global finance. But in its terminal stages, never has so much depended on keeping the shared illusion alive. This is a continuing existential crisis for the banks and their bankrupt sovereign clients. Maybe Rosenberg has got the pictures with the goat, the dead girl and the live boy. Because he has that sort of reckless fearlessness about him. But to say it on welfare queen Bank of America's dime? Despite the diplomatic delivery and obligatory equitard bullposture, that is practically like taking a dump in the main lobby of the Marriner Eccles Building. Lèse majesté, at least.

Thu, 02/17/2011 - 08:19 | 969561 johnQpublic
johnQpublic's picture

odd parallel that "crack in the windshield " thing

did you know your windshield is a structural component of your car?

its why cracks grow...torsional flex of the entire vehicle go after the weak spot

Thu, 02/17/2011 - 08:31 | 969566 Seasmoke
Seasmoke's picture

seems like alot of people have been laying down the groundwork for covering themselves when the SHTF the past few weeks

Thu, 02/17/2011 - 08:43 | 969578 cjbosk
cjbosk's picture

"How can people even sleep at night while saving only 1-10% of their income during the past 30 years?

Although I'm far from being a high-earner, I'm able and fortunate enough to save much more than that.

And I still feel every day that it's not enough.  : ("

 

Hey shaved hedge, er I mean Trimmed.  Whoop-de-do!  YOu in middle school or something.

 

Anyhow, good post, love Rosenberg, all 1000 of them Jews!

Thu, 02/17/2011 - 09:29 | 969653 Snidley Whipsnae
Snidley Whipsnae's picture

Benny doens't want to reduce the 'output gap'. To do so would signal to the bond market that inflation is approaching from cost-push, and bond purchasers would demand higher interest rates. Hence the term bond vigilanties.

Across the developed countries an enormous number of jobs that existed for those without great minds and great education have gone the way of the Dodo Bird. First in Ag, then Manufacturing. So what is left to employ people that have been replaced by rotots and technology and competition from workers abroad that work for lesser wages? Nothing.

Hence the governments develop ever more 'social programs' and government jobs. The govs are acting as employer of last resort. Should gov workers 'output' be added to the GDP?

Meanwhile GDP is reconfigured and includes all sorts of tricks to allow it to look like a meaningful stat, but it really isn't. Capitalism in the developed world has come to rely on the FIRE sector to maintain the facade of a healthy economy...and recently even the FIRE sector has been laying off scads of excess workers as well.

Few people realize that many of the lost jobs in developed economies are permanently lost, the jobs that were lost are not coming back. Jobs in small services,ie, pizzas, lawn care, nail salons, etc, are dependent on citizens having jobs and being willing to spend some excess income. Former employees on unemployment comp no longer have the excess income to spend in the small services sector so the sector dries up. This is bad because small business IS/WAS the largest creator of jobs.

Marx, though wrong about many things, understood that the output gap problem would arise within capitalism and that technology would render many employees redundent.

What does this ramble have to do with Benny and his central bank cohorts printing lots of fiat currency? Not much... but printing is one of the few tools available to CBs. When you only have a hammer everything looks like a nail... Besides, if there is no way to fix the unemployment problem, why not make money for the bankster clan while saying you are attempting to fix an unfixable problem?

This is not going to end well for anyone, including the FIRE sector.

 

 

Thu, 02/17/2011 - 10:40 | 969922 tom
tom's picture

"In our view, the longer term problem with such a strategy is that in delaying the adjustment to the root causes of the credit crisis, namely excessive leverage in the economy and financial markets, the essential vulnerabilities from that excessive leverage remain. What triggers their realization again is the inflationary shock leading to an interest rate shock that undermines the cheap cost of that debt that currently enables its maintenance."

This is exactly what I've been talking about, calling it delayed deleveraging. With the current loose monetary policy, the Fed manipulates the cost of credit by lending cheaply (currently to the government, previously to banks and homeowners). The availability of the Fed's subsidized credit drives down market rates. This has persuaded a lot of people and companies to stay in, refinance, roll over or take on new debts, which, in the absence of the credit subsidy, they would have defaulted on, retired, or not borrowed. I don't dispute that without the Fed's credit subsidy, output and employment would have fallen further. But we would now be recovering much faster and more sustainably, with higher savings and lower indebtedness.

The sustained/increased debt loads that people and companies have been persuaded to carry are now like a huge weight dangling over the economy, held up by the Fed's credit subsidy. But as inflation rises, the Fed will have to let the weight come down. The first stages of that are likely to be merely a reduction or elimination of the Fed's credit subsidy: the end of QE. The second stage will be actual tightening, where the Fed calls in its past lending, driving up the cost of credit. Fundamentally weak economies do not hold up well to tightening. This economy under this debt pile will get crushed.

Mon, 03/14/2011 - 00:16 | 1048884 AllenX
AllenX's picture

Benny doens't want to reduce the 'output gap'. To do so would signal to the bond market that inflation is approaching from cost-push, and bond purchasers would demand higher interest rates. Hence the term bond vigilanties. If you do not know your credit score, or do not think it matters, you could be cheating yourself. From the vehicle you drive to the house you live in, your credit rating has a critical impact on the outcome. Getting on the right track starts with a review of your credit rating so you know where you stand.

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