Almost exactly 8 years after Greenspan's now infamous "conundrum" comments about the unprecedented persistence of low, long-term interest rates, Bernanke is now "puzzled" at the dramatic rise in interest rates following his recent Taper remarks. Have no fear though, just as Greenspan noted, "I'm reasonably certain we would not automatically assume that it would mean what it meant in the past, " Bernanke said today that the "sharp rise in rates", was not about the Taper but "due to other factors, including optimism about the economy." Perhaps more importantly, today for the first time someone, not Hilsenrath of course, had the guts to ask Bernanke the hardest question: is the Fed's "Stock not Flow" worldview broken, and was it wrong all along? Of course, the implications of the Fed being wrong on this most critical aspect of monetary theory opens up a hornet's next of Pandora's boxes: just what else is the Fed wrong about, and how much will Bernanke be "puzzled" when one by one all of his flawed theories are revealed to be nothing but religious dogma.
The economic and asset bubble in Japan burst in 1990, at roughly the same time as its demographic structure reached a tipping point. As UBS' George Magnus notes, the working age population began to fall, marking the start of a relentless rise in both the total and old age dependency ratios; and, he adds, a comparable phenomenon occurred in the US and Europe between 2005-2010. On current trends, Magnus warns, China will replicate at least the demographic part of this phenomenon between now and 2016, against a backdrop of rising concern about the structural nature of the slowdown in economic growth, along with rising credit intensity, indebtedness, and misallocation of resources.
Who though that a term we coined over a month ago would suddenly get so much airplay: why, it was none other than billionaire hedge fund investor David Tepper who said days later (and just in time to top tick the market) not to fear the taper, that it is a bullish sign. Looks like it wasn't. But at least Tepper sold everything he had to sell by now so someone is happy. As for what happens next, nobody still has any idea, although the first, and so far best, post-mortem of Bernanke's predicament comes from SocGen, whose opionion is simple enough: FOMC on track for September tapering.
One word can describe performance across all asset classes today: clobbered. Stocks tumble, Commodities slide and Bonds crash, with the 5 year suffering the biggest intraday percentage jump in yields... ever! And why? Because Bernanke confirmed what everyone thought they knew, namely that the Fed will start tapering (how else can the Fed match the reduction in gross Treasury issuance at auction without taking over the private market entirely) eventually. Or at least that's what the market read between the Chairman's lines. In reality, Bernanke himself is more dazed and confused than anyone out there and just like Europe, is making it up one day at a time.
It seems the Fed head is confident that we are on our way back (despite cutting forecasts) - well he should be given his efforts - but as the following chart shows, arguing that downside risks have diminished seems not to fit too well with macro reality...
Things are escalating quickly... with US Treasuries beginning to look a lot like JGBs: the 5Y soared +18bps to the highest since August 2011, the 10Y +13.5bps touches 2.32% widest since March 2012, 30Y +8bps, and credit markets are getting monkey-hammered. There is no joy in Newport Beachville.
With markets now showing their true colors (pricing in the inevitable beginning of a taper), the next hour or so of double-speak and talking out of both sides of his mouth may well be the most important in the career of Ben Bernanke.
- *BERNANKE: FOMC MAY `MODERATE' PACE OF PURCHASES LATER IN 2013
- *BERNANKE SAYS FED MAY END PURCHASES AROUND MID-YEAR 2014
- *BERNANKE SAYS FED WILL EASE QE PACE IF ECONOMY IMPROVES
- *BERNANKE SAYS PURCHASE REDUCTION REPRESENTS FOMC CONSENSUS
Perhaps the biggest red flag in today's FOMC release is the quarterly economic projections which improved from March with the Fed expecting better GDP and employment, offset by lower core and PCE inflation from 2013 all the way to 2015: whether this is sufficient for Bernanke to determine a need to taper the monthly $85 billion flow will be explained during the 2:30 pm press conference.
FOMC Hints No Taper Despite More Optimistic Forecast, Bullard Is Second Dissenter - Redline ComparisonSubmitted by Tyler Durden on 06/19/2013 - 14:02
The much-anticipated statement of the most powerful body in the world is upon us -
- *FED MAINTAINS $85 BILLION MONTHLY PACE OF BOND BUYING
- *FED SAYS LABOR MARKET SHOWS `FURTHER IMPROVEMENT'
- *FED SAYS DOWNSIDE RISKS DIMINISHED SINCE AUTUMN
- *BULLARD, GEORGE DISSENT FROM FOMC STATEMENT
Ding Ding: we now have a new dissenter in addition to Esther George: James Bullard. And - as usual - there's a little in there for everyone aside from the fact that the rose-colored glasses view on the economy suggests that they will be, in factm, tapering at some point soon, which the market is not very happy with right now...
While bond markets are selling off (in anticipation of 'Taper'?), and equity markets are flat; it seems the equity market hedgers are not afraid anymore. After rising notably last week, VIX futures are being hammered lower as we head into the big announcement. Profit-taking on vol curve steepeners or a picture of complacency?
With 45 minutes left to go, only one thing matters: what does Goldman think (the other issue of whether Jan Hatzius shared a meal with Bill Dudley at the Pound and Pence will remain unknown until the next batch of Dudley daily "minutes" are released in a few months). So for all those scrambling for an edge in a centrally-planned world, here it is, via Goldman's Francesco Garzarelli : "Turning to today’s FOMC announcement and press conference, our US Economics team expect Chairman Bernanke to stick to the same message on ‘tapering’ of bond purchases used in previous pronouncements on the matter, but also emphasize that reducing the expansion of the balance sheet does not imply that the Fed is anywhere close to hiking rates. We think this is broadly what bondholders are also expecting to hear."
It seems yet another conspiracy theory has become conspiracy fact thanks to a Chinese whistleblower. While the shrodinger-like nature of Chinese data has been keeping the market guessing for the last few years, the disconnects between hard-data (e.g. electricity production) and government-supplied surveys have been, at times, ridiculous (leaving aside the un-manipulated craziness of arbitrage-driven trade data). As the WSJ's China Real-time reports, in an unusual move, the National Bureau of Statistics – clearly frustrated with the lies, damn lies – has recently outed a local government it says was involved in a particularly egregious case of number fudging, providing rare insight into just how we’re being deceived.
Three years ago we wrote "On The New York Fed's Editorial Influence Over The WSJ" in which we observed, courtesy of declassified documents by the Sigtarp exposing the involvement of then-Goldman and New York Fed director Stephen Friedman in relation to his infamous purchase of Goldman Stock so well memorialized by none other than Jon Hilsenrath (a story which made him a Loeb award finalist when he actually did investigative work instead of merely convey messages from the Fed), just how extensive the relationship between Jon Hilsenrath, the WSJ and the New York Fed was. But instead of regurgitating all the minutae covered in the original post (read it here), we will cut to the chase and present the declassified emails between the WSJ team in April/May 2009, and the NY Fed's Calvin Mitchell, then-EVP of the Communications Group, as well as the Fed's internal involvement of the FRBNY's General Counsel Thomas Baxter. We have highlighted the NY Fed "suggestions" - they are self-explanatory.
The following three minutes of absolute perfection uttered by CNBC's Rick Santelli is dangerous for anyone living in Kyle Bass' "intellectually dishonest" alter-world of denial and "unicorns and rainbows" as the Chicagoan goes off on the ignorance of everyone in these so-called markets. When every talking head is bullish and the world is going so great that we should all "buy stocks," Santelli demands we ask Bernanke - "what are you scared of," that keeps you pumping this much money into the system for this long? Simply put, Santelli's epic rant is the filter that every investor (or member of the public) should be viewing financial media and the Fed today (or in fact every day).