The new policy of unlimited quantitative easing is an experiment. If those theorists of insufficient aggregate demand are right, then the problem will soon be solved, and we will return to strong long-term organic growth, low unemployment and prosperity. I would be overjoyed at such a prospect, and would gladly admit that I was wrong in my claim that depressed aggregate demand has merely been a symptom and not a cause. On the other hand, if economies remain depressed, or quickly return to elevated unemployment and weak growth, or if the new policy has severe adverse side effects, it is a signal that those who proposed this experiment were wrong.
Whether the optics of a jobs-related target for the Fed's QEternity are election-based public relations, from-the-heart sentiment of an ivory tower academic neck-deep in the reality of his failed ethos, or well-intentioned more-of-the-same Krugmanite 'we need a bigger boat' print til-we-stink policy; it is relatively clear that the Fed has changed course. The longstanding problem at the Fed has been that while each policymaker more or less agreed that guiding policy by a rule made sense, they could not collectively agree on the rule. Morgan Stanley's Vince Reinhart notes perfectly that at its September meeting, the Fed effectively evaded the issue by setting QE off in a general direction, much in the same way Columbus pointed his three ships West and expected eventually to land in India. The history books admire the audacity of a man with a vision. Columbus sailed in the direction toward the known world’s end. Of course, he also sailed further than expected and landed on a completely different continent than planned. If the Fed has not acted consistently over the past few meetings, how will market participants infer future action?
America Was Founded on Courage ... What Hapened?
From The Last Sane Person At The Fed: "More Easing Will Not Lead To Growth, Would Lead To Inflation"Submitted by Tyler Durden on 09/15/2012 13:17 -0400
There are two key sentences which explain why there is now only sane voice left among the FOMC's voting members (recall that back in December 2011 we explained that more QE was only a matter of time now that the Doves have full control). From Jeffrey Lacker: "I dissented because I opposed additional asset purchases at this time. Further monetary stimulus now is unlikely to result in a discernible improvement in growth, but if it does, it’s also likely to cause an unwanted increase in inflation.... Channeling the flow of credit to particular economic sectors is an inappropriate role for the Federal Reserve. As stated in the Joint Statement of the Department of Treasury and the Federal Reserve on March 23, 2009, 'Government decisions to influence the allocation of credit are the province of the fiscal authorities.'" That, however, is no longer the case, as the only real branch of 'government', accountable and electable by nobody, going forward is that located in the Marriner Eccles building, named ironically enough, for the last Fed president who demanded Fed independence, and who was fired by the president precisely for that reason. It is in this building where the central planners of the New Normal huddle every month, and time after failed time, hope that "this time it will be different" and that wealth can finally be achieved through dilution of money.
"It's never different this time." Ray Dalio's recent discussion at the Council for Foreign Relations is probably the most in-depth access to his 'model' explanation of the way the world works we have encountered. From bubbles to deleveragings and how the inter-relationships of various cycles bring about consistent trends and corrections; the full-length discussion, succinct interview with Foreign Affairs, and full readings are perhaps more useful than ever as we tread Wile E. Coyote-like off the edge of traditional monetary policy and encounter apparently different environments that in fact have occurred in perhaps alternate ways again and again over time. Great weekend viewing/reading on the three ways out of the panic-crisis that the Fed clearly believes we are in and the inevitability of his findings that "in all deleveragings, in the end they print money."
What the Fed did was actually much more than QE3. Call it QE3-plus... a gift that will now keep on giving. The new normal of bad news being good news is now going to be more fully entrenched for the market and 'housing data' (the most trustworthy of data) - clearly the Fed's preferred transmission mechanism - is now front-and-center in driving volatility. I don't think this latest Fed action does anything more for the economy than the previous rounds did. It's just an added reminder of how screwed up the economy really is and that the U.S. is much closer to resembling Japan of the past two decades than is generally recognized. It would seem as though the Fed's macro models have a massive coefficient for the 'wealth effect' factor. The wealth effect may well stimulate economic activity at the bottom of an inventory or a normal business cycle. But this factor is really irrelevant at the trough of a balance sheet/delivering recession. The economy is suffering from a shortage of aggregate demand. Full stop. It just perpetuates the inequality that is building up in the country, and while this is not a headline maker, it is a real long term risk for the health of the country, from a social stability perspective as well.
Against what seemed logical (given the assumption that Bernanke would save his limited ammo for a weaker market/economic environment), Bernanke launched an open ended mortgage backed securities bond buying program for $40 billion a month "until employment begins to show recovery." That key statement is what this entire program hinges on. The focus of the Fed has now shifted away from a concern on inflation to an all out war on employment and ultimately the economy. However, will buying mortgage backed bonds promote real employment, and ultimately economic, growth. Furthermore, will this program continue to support the nascent housing recovery? Clearly, the Fed's actions, and statement, signify that the economy is substantially weaker than previously thought. While Bernanke's latest program of bond buying was done under the guise of providing an additional support to the "recovery," the question now is becoming whether he has any ammo left to offset the next recession when it comes.
"Everything will collapse" is the consequence Gloom, Boom, & Doom's Marc Faber sees from the Fed's latest 'stimulus' (and the fallacy and misconception of how money-printing can help employment). In a wondrously clarifying interview on Bloomberg TV this morning, Faber explained why he was 'happy', since "the asset values of his holdings will go up" but as a responsible citizen he is worried because "the monetary policies of the US will destroy the world." It truly is class warfare under a veil of 'its good for you' as he notes: "the fallacy of monetary policy in the U.S. is to believe this money will go to the man on the street. It won't. It goes to the Mayfair economy of the well-to-do people and boosts asset prices of Warhols." Congratulations, Mr. Bernanke.
Bernanke took the plunge yesterday by embarking on QE3 or what would be better described as “Currency Debasement 3”. Improving the U.S. job market and therefore economy was the reason given for the extremely radical measures. However, the scale of the open ended monetary commitments suggests the Fed is worried about another Great Depression and an economic collapse. The move was described as "stunningly bold" by some analysts as it is "open ended" with Bernanke pledging to print or electronically create, with no time limit, an extra $40 billion every single month until the labour market improves. This is the frightening vista we have been warning of for some time. It means that should the US economy enter a recession and or depression, which still seems very likely, that the Fed will continue printing money and debasing the dollar thereby leading to dollar devaluation and inflation - potentially virulent inflation on a par with or worse than that seen in the 1970's. We had long said that QE3 was inevitable - the question was when rather than if. Indeed, we had said that given Bernanke's closeness to Wall Street we expected that QE4, QE5 etc. were likely. The "open ended" nature of this new round of QE as enunciated yesterday means that the Fed could if it wished or believes it is necessary print unlimited quantities of dollars.
The Punchline In His Own Words: Bernanke Advocates Blowing Asset Bubbles As The Antidote To DepressionSubmitted by Tyler Durden on 09/13/2012 16:02 -0400
If there was one absolutely must see moment exposing everything that is broken with the Fed's brand new policy of QE-nfinity, it was this exchange between Reuters' Pedro da Costa and the Chairman. It explains, beyond a reasonable doubt, that the only goal the Fed now has is to reflate the stock market bubble to previously unseen levels, to focus on generating jobs although not for everyone but only for Wall Street, consequences be damned, because by the time the consequences arrive, and they will (just recall that subprime is contained) they will be some other Fed chairman's problem. Bernake's term mercifully runs out in January 2014.
From financial pundit extraordinare Brian Wesbury, as of March 1, 2012: "The bottom line is that even though Bernanke wants to make the case for QE3, he can’t. In fact, better news on the economy has cut the Fed off from doing more massive easing projects. In the end, we believe the Fed has finally run out of justification for its excessively easy monetary policy. As the quarters ahead unfold, the prospects of more ease will continue to wane. This is good news for stocks – which do not do well with accelerating inflation – but, it is bad news for gold. Gold is done….and so is the Fed." Oops.
With 20 minutes to go, we thought it timely to see the script (perhaps) for the frivolity to come. It seems like the fate of the known world is predicated on the words of a bearded academic this afternoon and whether you believe he must or must not LSAP us to Dow 20,000 (and Gold $2,000) in the next few weeks - even as the economy and jobs tail-spin - there are many questions, which Goldman provides a platform for understanding, that remain unanswered (and more than likely will remain vague even after he has finished his statement). Their expectations are for a return to QE and an extension of rate guidance into mid-2015 (and everyone gets a pony) but no cut in IOER.
In the last 30 days (since August 13th), platinum has risen by 18.9%, silver by 18.7%, palladium by 18.4% and gold by 7.6%. All remain well below their nominal record highs (see charts) and more importantly well below their inflation adjusted highs. All will most likely continue to rally especially if the Fed announces QE3 today as investors turn to precious metals to hedge substantial money printing by governments and the real risk of future inflation. "The Euro bailout measures and the opening of the monetary policy floodgates by the central banks are likely to result in higher inflation in the medium to long term," says today's Commerzbank commodities note. The strikes and violence in South Africa's gold and platinum industries are supporting and may contribute to higher prices. Machete-wielding strikers forced Anglo American Platinum, the world's No.1 platinum producer, to shut down some of its operations in South Africa, sending spot platinum to a five month high of $1,654.49.
- Italy Says It Won't Seek Aid (WSJ)... and neither will Spain, so no OMT activation, ever. So why buy bonds again?
- European Lenders Keep Ties to Iran (WSJ)
- Fink Belies Being Boring Telling Customers to Buy Stocks (Bloomberg)
- Dutch Voters Buck Euro Debt Crisis to Re-Elect Rutte as Premier (Bloomberg)
- China's Xi cited in state media as health rumors fly (Reuters)
- China vs Japan: Tokyo must come back 'from the brink' (China Daily)
- Manhattan Apartment Vacancy Rate Climbs After Rents Reach Record (Bloomberg)
- Well-to-do get mortgage help from Uncle Sam (Reuters)
- Princeton Endowment Expected to Rise Less Than 5% in Year (Bloomberg)
- Protesters Encircle U.S. Embassy in Yemen (WSJ)
- US groups step up sales of non-core units (FT)
By now everyone knows that the WSJ's Jon Hilsenrath is spoon-Fed information directly by the Fed. Even the Fed. Which is why everyone expected the Fed to ease last time around per yet another Hilsenrath leak, only to be largely disappointed, invoking the term Hilsen-wrath. Sure enough, it took the market only a few hours to convince itself that "no easing now only means more easing tomorrow", and sure enough everyone looked to the August, then September FOMC meetings as the inevitable moment when something will finally come out. So far nothing has, as the Fed, like the ECB, have merely jawboned, since both know the second the "news" is out there, it will be sold in stocks, if not so much in gold as Citi explained earlier. Regardless, the conventional wisdom expectation now is that tomorrow the Fed will do a piecemeal, open-ended QE program, with set economic thresholds that if unmet will force Bernanke to keep hitting CTRL-P until such time as Goldman is finally satisfied with their bonuses or unemployment drops for real, not BS participation rate reasons, whichever comes first. As expected, this is what Hilsenrath advises to expect tomorrow, less than two months from the election, in a move that will be roundly interpreted as highly political, and one which as Paul Ryan noted earlier, will seek to redirect from Obama's economic failures, and also potentially to save Bernanke's seat as Romney has hinted on several occasions he would fire Bernanke if elected. Here is what else the Hilsenrumor says.