Fed's Fisher Says "Investors Have Beer Goggles From Liquidity", Joins Goldman In Stock Correction WarningSubmitted by Tyler Durden on 01/14/2014 14:40 -0400
"Continuing large-scale asset purchases risks placing us in an untenable position, both from the standpoint of unreasonably inflating the stock, bond and other tradable asset markets and from the perspective of complicating the future conduct of monetary policy," warns the admittedly-hawkish Dallas Fed head. Fisher goes on to confirm Peter Boockvar's "QE puts beer goggles on investors," analogy adding that while he is "not among those who think we are presently in a 'bubble' mode for stocks or bonds; he is reminded of William McChesney Martin comments - the longest-serving Fed chair - "markets for anything tradable overshoot and one must be prepared for adjustments that bring markets back to normal valuations."
The eye of the needle of pulling off a clean exit is narrow; the camel is already too fat. As soon as feasible, we should change tack. We should stop digging. I plan to cast my votes at FOMC meetings accordingly.
Most are aware of Alan Greenspan’s 1966 essay - written when he was an acolyte of Ayn Rand - in which he sang the praises of the gold standard. Obviously, that early work would later prove awkward for Greenspan, as he held the reins of the fiat money engine known as the Federal Reserve. However, a reporter for Barron's unearthed a copy of Greenspan’s NYU doctoral dissertation, which he took great pains to bury, showing that when his professional ambition wasn’t involved, Greenspan could understand perfectly well (a) the virtues of a commodity money and (b) the dangers of a housing bubble. If the Austrians are right in laying the blame for the housing bubble on Greenspan’s loose monetary policy following the dot-com crash, then Greenspan can’t plead ignorance: He knew what he was doing.
After last week's economic fireworks, this one will be far more quiet with earnings dominating investors' attention: US financials reporting this week include JPM and Wells Fargo tomorrow, BofA on Wednesday, GS and Citi on Thursday, BoNY and MS on Friday. Industrial bellwethers Intel (Thurs) and General Electric (Fri) are also on this week’s earnings docket. On the macro front, this coming week we have two MPC meetings - both in LatAm. For Brazil consensus expects a 25bps hike in the policy rate. For Chile consensus forecasts monetary policy to remain on hold. Among the data releases, one should point out inflation numbers from the US (CPI and PPI), Eurozone, the UK and India. We also have three important US producer and consumer surveys - Empire Manufacturing, Philadelphia Fed (consensus +8.5), and U. of Michigan (consensus 83.5). Among external trade and capital flow stats, we would emphasize US TIC data, as well as current account balances from Japan and Turkey. Finally, the accumulation of FX reserves in China is interesting to track as it provides an indication of CNY appreciation pressure.
With no major macro news on today's docket, it is a day of continuing reflection of Friday's abysmal jobs report, which for now has hammered the USDJPY carry first and foremost, a pair which is now down 170 pips from the 105 level seen on Friday, which in turn is putting pressure on global equities. As DB summarizes, everyone "knows" that Friday's US December employment report had a sizeable weather impact but no-one can quite grasp how much or why it didn't show up in other reports. Given that parts of the US were colder than Mars last week one would have to think a few people might have struggled to get to work this month too. So we could be in for another difficult to decipher report at the start of February. Will the Fed look through the distortions? It’s fair to say that equities just about saw the report as good news (S&P 500 +0.23%) probably due to it increasing the possibility in a pause in tapering at the end of the month. However if the equity market was content the bond market was ecstatic with 10 year USTs rallying 11bps. The price action suggests the market was looking for a pretty strong print.
Is it all about expectations about tapering, again?
It has been commonplace to speak of central bank independence - as if it were both a reality and a necessity. Discussions of the Fed invariably refer to legislated independence and often to the famous 1951 Accord that apparently settled the matter.  While everyone recognizes the Congressionally-imposed dual mandate, the Fed has substantial discretion in its interpretation of the vague call for high employment and low inflation. It is, then, perhaps a good time to reexamine the thinking behind central bank independence. There are several related issues.
- First, can a central bank really be independent? In what sense? Political? Operational? Policy formation?
- Second, should a central bank be independent? In a democracy should monetary policy—purportedly as important as or even more important than fiscal policy—be unaccountable? Why?
- Finally, what are the potential problems faced if a central bank is not independent? Inflation? Insolvency?
Technical outlook for the several of the most actively traded currencies.
President Obama has just nominated Lael Brainard as a Fed Governor, Jerome Powell to his second term and most notably, Stanley Fischer (ex Head of the Bank of Israel) as Vice-Chairman of the Fed. "These three distinguished individuals have the proven experience, judgment and deep knowledge of the financial system to serve at the Federal Reserve during this important time for our economy,” Obama said in statement. Bear in mind that Fischer is skeptical of forward-guidance (as we note below) which is soon to become the Fed's main weapon to jawbone markets.
Stanley Fischer's term as governor runs through 2020 (vice chair through 2018), Brainard's term through 2026 and Powell's through 2028!
Tenure anyone? We are sure they will still do a great job...
While we have been told again and again that there are no asset bubbles - although th emost recent FOMC statement referenced concerns over small-cap mulitples and covenant-lite loan issuance - it seems the Fed's Jeff Lacker just let slip some ugly truthfulness...Answering questions after a speech proclaiming growth ahead and rising inflation, he said:
- *LACKER RELUCTANT FOR FED TO 'PRICK' ASSET-PRICE BUBBLES
Well there it is. There are asset bubbles? But Lacker - who has been anti-QE to some extent - knows that if the Fed moves to actually do anything about it (other than jawbone), it's all over. Perhaps as more realize the transition from a Bernanke Put to a Yellen Collar has occurred, there will be no need to jawbone any longer.
Risks surrounding the looming release of the latest jobs report by the BLS later on in the session failed to weigh on sentiment and heading into the North American open, stocks in Europe are seen higher across the board. The SMI index in Switzerland outperformed its peers since the get-go, with Swatch Group trading up over 3% after the company said that it expects good results for 2013 at operating profit and net income level. At the same time, in spite of stocks trading in the green, Bunds remained better bid, with peripheral bond yield spreads wider as market participants booked profits following the aggressive tightening observed earlier in the week amid solid Spanish bond auctions, as well as syndications by Ireland and Portugal. Fake Chinese trade data failed to boost Chinese stocks, which dropped anoter 0.7% and is just 13 points above 2000 as Shanghai remains one of the world's worst performing markets since the financial crisis. The yoyoing Nikkei was largely unchanged. All eyes today will be fixed on the headline streamer at 8:30 when the latest nonfarm payrolls report is released.
Last week, Grant Williams reviewed the equity markets in an attempt to see how equity investors managed to scamper through 2013 with the friskiness of puppies when all about them lay doubt and potential disaster. His answer - of course - quantitative easing. This week Williams takes a deep dive into bonds and bullion in an effort to comprehend how the bond market managed to navigate the same 12-month period and see what can be learned about 2013 in order to forecast for 2014. The effect on the Fed’s balance sheet is plain to see - a very steady, predictable line; and markets love steady and predictable. So what happens when the 'predictability' ends...? The guardians of the global economy are relying on numerous logical fallacies to continue their path to oblivion...
A month ago, we showed a chart of median household income in the US versus that just in the District of Columbia. The punchline wrote itself: "what's bad for America is good for Washington, D.C." Today we got official verification that Bernanke's wealth transfer in addition to benefitting the richest 1%, primarily those dealing with financial assets, also led to a material increase in the wealth of one particular subgroup of the US population: its politicians. According to the OpenSecrets blog which conveniently tracks the wealth of America's proud recipients of lobbying dollars, aka Congress, for the first time ever the majority of America's lawmakers are worth more than $1 million.
In 1970, when 11% of adult Americans had bachelor's degrees or more, degree holders were viewed as the nation's best and brightest. Today, with over 30% with degrees, as the WSJ notes, a significant portion of college graduates are similar to the average American - not demonstrably smarter or more disciplined. Furthermore, declining academic standards and grade inflation add to employers' perceptions that college degrees say little about job readiness. As we noted recently, change is coming as more and more realize college may not be worth it. Educational entrepreneurship offers hope that creative destruction is coming to higher education. The cleansing would be good for a higher education system still tied to its medieval origins - and for the students it's robbing.
While Ford and GM struggle somewhat, demand for the eilte-of-the-elite Bentley is soaring. As BusinessWeek reports, 2013 saw the firm sell 10,120 vehicles worldwide - dominated by the Americas - a 19% rise over 2012. Coincidentally, since Fed policy went extreme, Bentley has seen double-digit growth rates each and every year leading to the best performance in its 95-year history. As BusinessWeek ironically notes, it requires no small amount of consumer confidence to roll away in a Bentley Mulsanne, which has a sticker price just shy of $300,000.
"Remember the Greenspan/Bernanke put?" BNP's Julia Coronoado asks, well "welcome to the Bernanke/Yellen collar." As some expected, Coronada notes that there was substantial discussion in the December FOMC minutes about concerns about financial stability stemming from QE, and the role it plays alongside progress on their dual mandates in making monetary policy decisions.This implies a shift in the Fed's reaction-function. Simply put - the Fed will react to falling asset values that destabilize economy "and" asset values that rise too far and too fast or are fueled by leverage that may put economy at risk.