In economics the chicken must always come home to roost. Man can only live beyond his means for so long. Bernanke’s reputation hinges upon the market not tanking as his successors close up the spout of gushing currency. The endpoint is coming. When it happens, the house of cards will tumble down. And with it will come the livelihoods and hopes of many. With every boom there is a bust. It’s an immutable fact of government intervention into the economy. As Bill Bonner writes, articles full of lavishing praise for Bernanke will begin appearing in coming weeks. Writing puff pieces on state bureaucrats is often a high-paying gig. But they all reveal a particular trend: celebrating the wise achievements of someone empowered to govern society. When businessmen are praised in print, their accomplishments are chalked up as minor victories reserved for the few. When the selfless man of charity is given his due, the praise is mild. When a lord of government sees the pages of a major periodical, it’s the kind of brown-nosing that would make a teacher’s pet uncomfortable. For now, Bernanke will bask in exaltation. But his just deserts are coming. You can bet $4 trillion on it.
Backdrops conductive to crises can drag on for so long – sometimes seemingly forever - as if they’re moving in ultra-slow motion. Invariably, they lull most to sleep. Better yet, such environments even work to embolden the optimists. This is especially the case when policy measures are aggressively employed along the way, repeatedly holding the forces of crisis at bay. In the face of mounting risk, heightened risk-taking and leveraging often work only to exacerbate underlying fragilities. But eventually a critical juncture arrives where newfound momentum has things unwinding at a more frenetic pace. It is the nature of such things that most everyone gets caught totally unprepared. Now, Bubbles are faltering right and left - and fearful “money” is heading for the (closing?) exits. And, as the global pool of speculative finance reverses course, the scale of economic maladjustment and financial system impairment begins to come into clearer focus. It’s time for the marketplace to remove the beer goggles.
There are definite limits to what QE can do. Now that even Bill Dudley and other Fed officials admit that the Fed doesn’t understand QE, it’s only a matter of time before the market begins to crumble.
The firm that advises its former employee Bill Dudley on how to run the New York Fed, speaks. Goldman's bottom line: bad jobs report, the weather was at fault (and apparently all those economists who had expectations of a 200K print were unaware it was cold out there until today) but the Fed will still taper by another $10 billion in January.
Well, it took three years, but finally the Goldman Sachs-based head of the New York Fed, Bill Dudley, admitted what we all knew. From a speech just given by NY Fed's Bill Dudley at the 2014 AEA meeting in Philadelphia:
"We don't understand fully how large-scale asset purchase programs work to ease financial market conditions"
Or, in other words, "we still don't know how QE works." It just does (thank you Kevin Henry). And this coming from the people who want their word to become equivalent to gospel in a time when QE is being phased out and replaced with forward guidance. Luckily, at least the Fed knows all about how "forward guidance" works.
Procuring physical gold seems to be a rather problematic and time-consuming process, as the Bundesbank is learning. Yesterday Buba head Jens Weidmann told Bild that gold valued at €1.1 billion has been repatriated so far. Putting a weight to this number: to date the Bundesbank has received shipments of a paltry 37 tons of gold from its existing storage place in either New York or Paris to Germany: "The gold reserves of the country will be stored in Frankfurt because it has a special storage with the corresponding equipment,” said Carl-Ludwig Thiele, a Bundesbank board member. The repatriated amount over the course of all of 2013 represents just over 5% of the total stated target of 700 tons, and is well below the 87.5 tons that the Bundesbank would need to repatriate each year if it were to collected the 700 tons ratably ever year in the 8 year interval between 2013 and 2020.
Since the bank that decides what happens at the NY Fed, and by implication, at the broader Federal Reserve system, is none other than Goldman Sachs, it would be informative to read what none other than Goldman thinks of Ben Bernanke's thesis advisor Stanley Fischer, formerly head of the Bank of Israel, as the next vice chairman - as he is now actively rumored to become shortly. Conveniently, here is just such a Q&A from Goldman's Jan Hatzius - the man who feeds Bill Dudley all his economic and monetary insights over lobster sandwiches at the Pound and Pence.
In “Why the Fed Won’t Taper in December,” we pretended to write the first paragraph of the Federal Open Market Committee’s (FOMC) statement for next week’s meeting. By thinking about the likely mix of upgrades and downgrades to its assessment of the economy, which is the crux of that paragraph, we argued that we can find clues to policy decisions. Our results tell us to expect a deferral of the committee’s tentative plans to taper its securities purchase program. You may suggest, though, that economic data doesn’t always tell you what the FOMC will do. Because we agree, we’ve also taken a different approach: listening to Fedspeak and working through the math on the committee’s consensus view. This, too, leads us to think there won’t be a taper this month. Here’s our math, starting with the biggest QE supporters and ending with Chairman Bernanke...
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. "