Words matter, and the Fed’s words matter more than anyone’s. But this is the classic mistake that academic economists always make – the quasireligious belief in theory over practice, in the triumph of bloodless ideas over the market’s fang and claw. Woodford’s ideas are sweet music to the enormous egos of the academics who control the Fed: you can save the world just by stating your brilliant policy intentions. Your words will become self-fulfilling prophecies as the markets shape themselves in expectation of your mighty deeds. And so what do we get? Horror shows like Bernanke’s press conferences last summer or Yellen’s press conference last week. If the Fed was surprised by the rotten tomatoes thrown up on the stage last year, they ain’t seen nothing yet.
Chart 1 proves it is crystal clear that every time the US Federal Reserve acts to "save us" from one crisis, it directly sows the seeds for an even bigger crisis in the future.
When you ponder the implications of allowing a small group of powerful wealthy unaccountable men to control the currency of a nation over the last one hundred years, you understand why our public education system sucks. The average American has experienced a fourteen year recession caused by the monetary policies of the Federal Reserve. Our leaders could have learned the lesson of two Fed induced collapses in the space of eight years and voluntarily abandoned the policies of reckless credit expansion, instead embracing policies encouraging saving, capital investment and balanced budgets. They have chosen the same cure as the disease, which will lead to crisis, catastrophe and collapse.
As promised, the Johnson/Crapo bill has finally arrived. There are 442 pages of legal mumbo jumbo, guaranteed to cure all forms of insomnia and those suffering from low blood pressure. The agencies have been providing cheap financing to borrowers, courtesy of the Fed. The agencies have been providing cheap and bullet proof insurance for bond investors, courtesy of the Treasury. The Bill somehow expects some mysterious private capital will come in to insure the first loss position and the Government (including the FOMC) can gracefully exit its role in the mortgage monopoly. That is more than overly optimistic. Can anyone quantify that in dollars as well as mortgage rates? In summary, the Bill is going to increase mortgage compliance costs. It will confuse, rather than clarify, the mortgage application and approval process. It is a disaster. Fortunately, we suspect the Bill has no chance of passing in its present form.
Apparently China did not get the memo that the Fed's apologists are furiously scrambling to packpedal on Yellen's "6 month" guidance in virtually all media outlets. The is the only way to explain why Vice Minister of Finance Zhu Guangyao said overnight that "the U.S. Federal Reserve will begin boosting interest rates within six months after exiting “unconventional” monetary policy, and that will have a “significant impact” on the U.S. and world economy, as Market News International reported earlier. Zhu told China Development Forum this weekend “we believe a the Fed meeting this October, the exit of their quantiative easing will complete." In other words while the spin for public and algo consumption is that the Fed will continue placating those long the stock market until everyone's price target on the S&P 500 is hit and everyone can comfortably sell into an ever-present bid, China is already looking for the exits. But while the end of QE appears a given, at least until the market realizes there is no handover to an economy that is a moribund as it has ever been in the past five years, and the Fed has no choice but to untaper and return with an "even more QE" vengeance (it certainly won't be the first time - just recall the "end" of QE1, QE2, Op Twist, etc), a bigger question surrounds whether China, already sliding in credit contraction and suffering a plunging stock market with its housing sector also on the edge of a bubble bust, is about to take over from the Fed and proceed with its own stimulus program. The answer is no.
The red flags contained in the national and global headlines that have come out thus far in 2014 should have spooked investors and economic forecasters. Instead the markets have barely noticed. It seems that the majority opinion on Wall Street and Washington is that we have entered an era of good fortune made possible by the benevolent hand of the Federal Reserve. Ben Bernanke and now Janet Yellen have apparently removed all the economic rough edges that would normally draw blood. As a result of this monetary "baby-proofing," a strong economy is no longer considered necessary for rising stock and real estate prices. But unfortunately, everything has a price, even free money.
With Bernanke gone, the remaining Fed members knowing full well they will be crucified, metaphorically of course (if not literally) when it all inevitably comes crashing down, are finally at liberty with their words... and the truth is bleeding out courtesy of the president of the Dallas Fed, via Bloomberg.
- FISHER SAYS QE WAS A MASSIVE GIFT INTENDED TO BOOST WEALTH
We wonder how President Obama, that crusader for fairness, equality and all time Russell 200,000 highs, will feel about that? In the meantime, just like the Herp, QE is the gift that keeps on giving.. and giving... and giving... to the 0.001%.
Despite the total collapse (flattening) in the Treasury yield curve in the last 2 days, Citi's FX Technicals group is convinced that we have seen a turn in fixed income that will see significantly higher yields in the years ahead and notably higher yields by this yearend also. Furthermore, they believe this will initially come from the belief in a continued taper, and the curve will initially steepen (2’s versus 5’s and 2’s versus 10’s). This normalization, they add, will be a good thing - QE encourages misallocation of capital and poor business decisions which has a negative feedback loop into the economy - but add (as long as yields do not go too far too fast like last year).
Once again there has been little fundamental news or economic data this morning in Europe with price action largely driven by expiring option contracts. In terms of key events, Putin says Russia should refrain from retaliating against US sanctions for now even as Bank Rossiya discovered Visa and MasterCard have stopped servicing its cards, and as Putin further added he would have his salary sent to the sanctioned bank - the farce will go on. Continuing the amusing "rating agency" news following yesterday's policy warning by S&P and Fitch on Russian debt (was that a phone call from Geithner... or directly from Obama), Fitch affirmed United States at AAA; outlook revised to stable from negative, adding that the US has greater debt tolerance than AAA peers. Perhaps thje most notable move was in Chinese stocks which rallied overnight after major domestic banks said to have stopped selling trust products which were blamed for encouraging reckless borrowing and diluted credit standards. Speculation of further stimulus and the potential introduction of single stock futures also helped the Shanghai Comp mark its biggest gain of 2014 closing up 2.7%.
Yellen’s press conference was panned by some as confusing and ambiguous. The press conference was not as “boring” as some have stated, because the FOMC (represented by Yellen) now appears to be struggling between theory and practice. This marks a significant shift from the majority of members who had almost entirely been relying on models (theory). The one thing that seemed perfectly clear is that the Fed plans to continue to unwind the QE program barring some type of disaster. After that, we will all have to reassess and see how things unfold...“Theory is when you understand everything, but nothing works. Practice is when everything works, but nobody understands why. When theory and practice are untied, nothing works and nobody understands why.”
Why Mainstream Economists Like Krugman Are So WRONG and So DANGEROUS
"We never should have painted ourselves so deep in this QE corner in the first place," chides David Stockman, "because the whole predicate [of Fed policy] is false." The author of The Great Deformation holds nothing back in this brief 3-minute primer of everything is wrong with the American economic system (and the CNBC anchors definitely did not want to hear). "We are already at peak debt and forcing more into the economy didn't work," and won't work as is merely funds Wall Street's latest carry trade to nowhere and fiscal irresponsibility in Washington. Simply put, "the private credit channel of monetary transmission is busted," so the Fed is exploiting the only channel it has left - "the bubble channel."
Concerns about Fed "over-optimism" admissions and shortening the time from taper to rate-hike sparked a major algo-surging risk-off dump in US equities... but that 1% dip was bought with hands and feet as reassuring figures emerged on screens to pat traders heads gently. Stocks bounced but then faded into the close as Yellen's first press conference saw the worst market performance since Bernanke's May Taper hint. Bonds had a bad day... massive bear-flattening occurred on the release with 5s30s -12bps (5Y +16.5bps, 30Y +4.5bps) to 19-month lows. The USD was smashed 0.75% higher - its biggest gain in 7-months. Gold (and silver) dropped (down 4% on the week) as copper short-squeezed up to key resistance after early significant weakness.
Yellen's Fed Tightens ($10bn Taper) And Loosens (Lower For Even Longer); Blames Weather - Full Statement RedlineSubmitted by Tyler Durden on 03/19/2014 14:02 -0400
As expected Janet Yellen's first FOMC statement showed another $10bn taper (more tightening according to Jim Bullard) but the wordy shift from quantitative thresholds to "we'll know it when we see it" qualitative guidance is relatively dovish (despite improved economic outlooks):
- *FOMC SEES `SUFFICIENT UNDERLYING STRENGTH' IN ECONOMY
- *FOMC SAYS IT WILL LIKELY REDUCE QE IN `FURTHER MEASURED STEPS'
- *FED: LOW TARGET RATE APPROPRIATE FOR CONSIDERABLE TIME POST-QE
- *MORE FED OFFICIALS SEE AT LEAST 1% FED FUNDS RATE END OF 2015
- *FED DROPS 6.5% JOBLESS THRESHOLD FOR RAISING FED FUNDS RATE
While Bernanke's last meeting appeared full of disagreement; this time less so (as Plosser and Fisher appeared not to dissent). Full redline to follow.
Pre-FOMC: S&P Futs: 1873.5, Gold $1337, 10Y 2.712%, USDJPY 101.65