Federal Reserve Bank

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.

Why Mainstream Economists Like Krugman Are So WRONG and So DANGEROUS

In case you misunderstood and judged the market's reaction to Janet Yellen's first FOMC statement, the ultimate Fed mouthpiece is out with a few clarifying words (well 712 words posted in under 4 minutes). The Wall Street Journal's Jon Hilsenrath clarifies "The Fed stressed it has not changed its plan to keep interest rates low long after the bond-buying program ends," and added further that "the Fed said explicitly for the first time that it likely would keep short-term rates lower than normal, even after inflation and employment return to their longer-run trends." While noting a bigger consensus of members around a 2015 rate 'liftoff', Hilsenrath is careful to point out that the Fed also blamed the weather for not having a clue.

On account of the clear decline in the growth momentum of the US price index, many economists have concluded that this provides scope for the Fed to maintain its aggressive monetary stance. Some economists, such as Chicago Fed head Charles Evans, even argue that the declining trend in the growth momentum of the CPI makes it possible for the Fed to further strengthen monetary pumping. This, 'they' believe, will reverse the declining trend in price inflation and will bring the US economy onto a path of healthy economic growth. We suggest that contrary to Evans miracles, a strengthening in monetary pumping will only deepen economic impoverishment by allowing the emergence of new bubble activities and exacerbate existing bubble activities.

There are three things that are often spotted, widely believed, and actively sought after with little evidence they actually exist:  Big Foot, Ghosts and Economic "Soft Landings."  Over the past 159 years, there is not much evidence that an economic "soft landing" has ever occurred.  However, it is not without precedent that as the economy reaches the latter stage of the growth cycle that the words "soft landing" are uttered by economists and Federal Reserve members. Why do we bring this up?  Bihnamin Appelbaum, via the New York Times, recently interviewed John Williams, the President of the Federal Reserve Bank of San Francisco, who stated: "John Williams, president of the Federal Reserve Bank of San Francisco, is feeling pretty good about the economy. He is ready to continue the Fed’s retreat from bond-buying and forward guidance. And he says he’s optimistic that this time, the Fed will manage to produce a soft landing."

The Fed is playing a very dangerous game here. It was way behind the curve on deflation and economic weakness going into the crash of 2008. Today, it continues to worry about deflation when the clear signs show that inflation is already on the rise.

If the U.S. economy is getting better, then why are major retail chains closing thousands of stores?  If we truly are in an "economic recovery", then why do sales figures continue to go down for large retailers all over the country?  Without a doubt, the rise of Internet retailing giants such as Amazon.com have had a huge impact.  Today, there are millions of Americans that actually prefer to shop online. But Internet shopping alone does not account for the great retail apocalypse that we are witnessing.  In fact, some retail experts estimate that the Internet has accounted for only about 20 percent of the decline that we are seeing.  Most of the rest of it can be accounted for by the slow, steady death of the middle class U.S. consumer.  Median household income has declined for five years in a row, but all of our bills just keep going up.  That means that the amount of disposable income that average Americans have continues to shrink, and that is really bad news for retailers.

This is about as funny as it gets, and certainly no commentary needed.

"For 50 years or so the federal government has deliberately and to an increasing extent misstated probable future budget deficits. Democrats and Republicans are guilty. The White House is guilty. And so is Congress. Private firms that deliberately misrepresent their financial statements in this fashion would be guilty of a crime… The magnitude of the misrepresentation is breathtaking."

- Former St. Louis Federal Reserve Bank President William Poole.

The mirage of prosperity created by massive levels of debt has begun to show it foundational cracks. Without increased levels of personal savings, production and investment there is little ability to achieve stronger economic growth. While we can certainly "hope" for something different, there are some basic laws which are insurmountable. The physics of debt is one of them.

We at the Fed are the platonic guardians of the global financial system.  And our logic is undeniable….

There appears to be a somewhat interesting controversy afoot in explaining the reason for the emerging markets panic and in establishing a solution for it. The approach of Gavekal would simply like to keep the Ponzi scheme of past years rolling forward.

On December 24, we posted an update on Germany's gold repatriation process: a year after the Bundesbank announced its stunning decision, driven by Zero Hedge revelations, to repatriate 674 tons of gold from the New York Fed and the French Central Bank, it had managed to transfer a paltry 37 tons. This amount represents just 5% of the stated target, and was well below the 84 tons that the Bundesbank would need to transport each year to collect the 674 tons ratably over the 8 year interval between 2013 and 2020. The release of these numbers promptly angered Germans, and led to the rise of numerous allegations that the reason why the transfer is taking so long is that the gold simply is not in the possession of the offshore custodians, having been leased, or worse, sold without any formal or informal announcement. However, what will certainly not help mute "conspiracy theorists" is today's update from today's edition of Die Welt, in which we learn that only a tiny 5 tons of gold were sent from the NY Fed. The rest came from Paris.

With the market more bullishly positioned, more euphoric, and more levered than almost any time in history, it is perhaps worth "pondering" what some of the risks to this optimism could be...

Forensic Asia, a Hong-Kong-based reserch firm issued a "sell" recommendation on HSBC on the basis of "questionable assets" on its balance sheet. As The Telegraph reports the analysts involved actually worked at HSBC for 15 years and suggest the ginat bank could have overstated its assets by more than £50bn and ultimately need a capital injection of close to £70bn before the end of this decade. "HSBC has not made the necessary adjustments, during the quantitative easing reprieve...The result has been extreme earnings overstatement, causing HSBC to become one of the largest practitioners of capital forebearance globally... This charade appears to be ending."