A new opportunity to play "What's wrong with this picture" arose recently, with Larry Summers’ recent speech at the IMF and Paul Krugman’s follow-up blog. The two economists’ messages are slightly different, but combining them into one fictional character we shall call SK, their comments can be summed up "...essentially, we need to manufacture bubbles to achieve full employment equilibrium." With this new line of reasoning, SK have completely outdone themselves, but not in a good way. Think Jamie Dimon’s infamous “that’s why I’m richer than you” quip. Or, Bill Dudley’s memorable “but the price of iPads is falling” excuse for increases in basic living costs. Dimon and Dudley managed to encapsulate in single sentences much of what’s wrong with their institutions. Yet, they showed baffling ignorance of faults that are clear to the rest of us.
That the Fed has a problem is increasingly well known - despite the blather from the mainstream media that QE monetization can continue ad infinitum. Their problem, of course, is running out of government-provided liabilities to monetize (as deficits shrink and their ownership of the entire Treasury complex surges). They face other problems (as we have noted before) but the admission that they are boxed in would have major ramifications in the market's faith. So, how does the Fed, faced with the knowledge that they have created asset bubbles, broken the bond market, and are boxed in by their own excess still meet the market's undying desire to keep the flow going? Bill Dudley just, perhaps inadvertently, dropped a hint of the next 'market/scapegoat' for monetization - Student loans.
Considering Jan Hatzius and NY Fed's Bill Dudley are close Pound & Pence drinking buddies, when it comes to assessing what the Fed "meant" to say, one should just throw the embargo-minutes penned Hilstanalysis in the garbage and just focus on what the Goldman chief economist thinks. His summary assessment: the minutes were relatively neutral, March is the most likely first taper date although "December is still possible."
Two-and-a-half years ago, none other than the Fed's Bill Dudley explained why the inflating price of food was nothing to worry about because iPads were dropping in price (to which an audience member, rightly, exclaimed - "I can't eat an iPad"). Fast forward to today, and it seems, based on the highly scientific chart below, that the growth of food stamps (the benefit provided to members of our society that need caramel macchiatos or liquor - oh and food) correlates uncomfortably closely with the demand for iPads. Perhaps, Bill Dudley was right after all - we can eat our iPads...
What Carl giveth, Carl can taketh away. We have warned for a month that credit markets have been decompressing (amid saturation) even as stocks went only one way. The S&P has hit almost its LABIA-based Fed fair-value and VIX/VXV hit extreme complacency levels so we were primed for a fall so it's ironic that Icahn pricked the bubble (at least for one day). More ironic still was CNBC's dismissal of his warning "as he is not a market timer" - when they wait with baited breath for his next 'buy AAPL' tweet. Bill Dudley's economic bullishness (and hawkish policy talk) also weighed on stocks. Credit was weak from the start - even as equities broke to new records; Treasury yields slid all day (with a small bounce higher after Europe closed). The USD's early weakness retraced to unch by teh close - rallying from the US open (but EURJPY was a big driver of weakness in stocks). Commodities did not bounce - all flushed lower around the European close and never recovered as stockd dumped.
Somehow, Fed head Bill Dudley has managed to encompass the entire "we must keep the foot to the floor" premise of the Fed in one mind-bending sentence:
- *DUDLEY SEES 'POSSIBILITY OF SOME UNFORESEEN SHOCK'
So - based on an "unforeseen" shock - which he "sees", and while there are "nascent signs the economy may be doing better", the Fed should remain as exceptionally easy just in case... (asteroid? alien invasion? West Coast quake?)
Goldman's (and NY Fed's) Bill Dudley: "I am not yet convinced that breaking up large, complex firms is the right approach. In particular, these firms presumably exist, in large part, because there are scale or network effects that allow these firms to offer certain types of services that have value to their global clients. These benefits might be lost or diminished if such firms were broken up. In addition, the costs incurred in breaking up such firms need to be considered. Finally, the breakup of such firms would not necessarily result in a significant reduction in overall systemic risk if the resulting component firms were still, collectively, systemic. "
Remember: what Goldman wants, Goldman gets. The only question is whether Jan Hatzius and Bill Dudley have had their talking point convergence meeting over a tasty lobster club sandwich at the Pound and Pence already today...
After seven months of investigating Goldman Sachs' legal and compliance divisions, former NYFed examiner Carmen Segarra found numerous conflicts of interest and breach of client ethics (specifically related to three transactions - Solyndra, Capmark, and the El Paso / Kinder Morgan deal) that she believed warranted a downgrade of Goldman's regulatory rating. Her bosses were not happy, concerned that this action would hurt Goldman's ability to do business, and, she alleges, they urged her to change her position. She refused, and as Reuters reports, she was fired and escorted from the building. “I was just documenting what Goldman was doing,” she said. “If I was not able to push through something that obvious, the [NY Fed] certainly won’t be capable of supervising banks when even more serious issues arise.”
Almost 3 years ago we noted the oddly hubris-full confidence of Ben Bernanke of his ability to "exit" from the experimental extreme monetary policies:
"You have what degree of confidence in your ability to control this?" Bernanke: One hundred percent.
But last night we got the truth from Fed's Dudley, who more realistically stated:
Dudley: "Exit from these unconventional set of policies is certainly feasible... But we do have to be a bit humble about what we don’t know."
So which is it? Who do you believe?
As further explained (confounded) by Bill Dudley as part of his speech earlier today, the Fed is pushing on with its Fixed-Rate Reverse Repo test, which while supposedly is meant to assist the Fed in extracting liquidity from the market once the mythical balance sheet unwind begins, what it really does is set a level the playing field for banks and non-banks, by disintermediating their collateral eligibility, and in the process collapsing the spread between the IOER and General Collateral rates. It will likely have many more side effects, now that non-banks can compete with banks for the Fed's IOER, all of which will be largely unexpected and as the impact on collateral bifurcation moves from the purely theoretical to the real world.
Much attention has fallen on the Fed's recent announcement that a new fixed-rate, full-allotment overnight reverse repo facility is in the works (so much so that both shadow banking experts Singh and Stella have opined on the issue). It appears that despite the Fed's "best efforts" at communication, not enough clarity has been shed on the topic. So here is Bill Dudley's explanation.
There was a time, long ago, when some still believed the myth that the Federal Reserve, and the selection of its Chairman, were supposed to be apolitical and impartial. Luckily, that was a long time ago, because otherwise some may question not only the logic, but the motives, behind what the media reports is an aggressive push by White House officials to "muster support among Democrats on the Senate Banking Committee to back Federal Reserve Vice Chair Janet Yellen," according to Reuters which cited three sources said on Friday, laying the groundwork for her expected nomination to the Fed's top job. If the White House is suddenly intent on picking Mrs. Yellen (or is that Mister?), one wonders just how diluted her "runner up" credibility at the Fed would be, since it has been made quite clear she was continuously Obama's B (or lower) grade choice to head the Fed, with Summers at the very top. And of course, a just as important question is how even more diluted is Obama's credibility and political brand if a few ultra-liberal Senators can impose their choice for next Fed head over that of both Larry Summers, of the "Committee to save the world" and the president himself.
I am writing to withdraw my name for consideration to be Chairman of the Federal Reserve.
It has been a privilege to work with you since the beginning of your Administration as you led the nation through a severe recession into a sustained economic recovery built on policies to promote employment and strengthen the middle class. This is a complex moment in our national life. I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interests of the Federal Reserve, the Administration, or ultimately, the interests of the nation’s ongoing economic recovery. I look forward to continuing to support your efforts to strengthen our national economy by creating a broad based prosperity and to reform our financial system so that no President ever again faces what you and your economic team faced upon taking office in 2009.
With the case for the next Fed chairman having devolved to the most ridiculous of decision trees, such as Nancy Pelosi's "it would be great to have a woman", because apparently gender diversity trumps everything in the eyes of the California democrat, the choice of Bernanke's successor is now more nebulous than ever. It has certainly not been aided by the periodic floating of the Larry Summers trial balloon, especially as originating from the Fed's WSJ mouthpiece who one week presents Summers as the favorite and the next skewers his chances. However, one person for whom the Summers vote is essentially a done deal with 90% odds, is Scotiabank's Guy Haselmann. Here is his logic.