The only numbers that matter today are 16000, 4000 and 1800: those are the Fed's closing targets for the Dow Jones, the Nasdaq and the S&P. Following last night's Chinese euphoria which saw the Shanghai Composite surge by 2.87%, or up 61.4 to just under 2,200 on renewed hopes for Chinese reform by 2020, the Fed's price targets should all be quite easily achievable. And not even the rising home prices in 69 out of 70 cities year over year, and 65 over month - the same as last month, with new nome price inflation at 0.6% overall and 0.8% for the first tier cities, was able to put a dent in the reflationary spirits in the Mainland. Additionally, news that China would join the US and Europe in "adjusting" its GDP calculation method, which would add R&D expensing into the bottom line, and as a result boost the overall number, is, well, helping things. Finally, with today's POMO a rather whopping $3-$4 billion, it is only a matter of time before all three of the previously noted psychological resistances are promptly taken out by the Fed's open markets desk.
"We already live in a financial economy in which the debt and capital markets exceed the value of the real economy by far," Marc Faber explains to Germany's Finanzen100, "and that's before the current formation of bubbles." His most ominous warning, and one that fits perfectly with the seeming insanity of Federal Reserve (and all developed market central banks) is that "the next time a bubble bursts, then the capitalist economic system as we know will falter."
Dispassionate discussion of the investment climate.
One of the biggest lies in finance is this perpetual deception that inflation is good. Ben Bernanke, the current high priest of US monetary policy, recently remarked that it’s “important to prevent US inflation from falling too low.” Well of course, we wouldn’t want that, would we? Just imagine the chaos and devastation that would ensue if the cost of living actually remained… you know… the same. One shudders at the mere thought of price stability.
Two days ago, when we posted ""Frustrated" Liquidity Addicts Demand Moar From BOJ As Nikkei Rally Stalls", we suggested that more QE from the Bank of Japan is just around the corner (and likely to take place as early as April) as the only real "driver" behind Abenomics, the surge in the stock market had stalled for nearly 6 months. 48 hours later, and 700 points in the Nikkei higher, the realization that indeed more QE is coming has swept through the market like wildfire. So what will the Bank of Japan's expansion of quantitative easing look like, when supposedly only $75 billion per month amounting to a whopping 70% of all new issuance, is not enough? According to Goldman "the BoJ could take the lead in this reallocation process by notably increasing its purchases of risky assets, such as ETFs and RIETS, or even outright equities – say purchasing a wide range of Japanese equities by index weight." It may get even better: "the BoJ is likely to consider more unorthodox policy to push up inflation expectations" - like paradropping NGDP, better known as paradropping yen (a move Yellen herself is now contemplating as we previewed back in September).
Maybe 2015 will be the year of the collapse. Our entire economy runs on debt creations, vis-a-vis financialization, since we import $500 billion a year more than we export. 2015 is the year when increasing debt results in ZERO GDP growth. The end of the line. But that won’t stop the Federal Reserve and the criminals in Washington. Enjoy what time we have left before it all collapses. The Keynesians that are busy trying to turn the magic levers in our economy right now still aren’t getting the message, more than two years later: government spending can’t make the economy grow. Until they stop trying (and racking up immense, almost unfathomable amounts of debt), things are likely to continue to get worse.
How is inflation of 2% acceptable? Why is this base assumption never challenged? At this rate, in 10 years you’ve lost roughly 20% of your purchasing power. And during the average worker’s lifetime, they will see a 40-60% decrease in purchasing power.
In response to questions from members of the Senate Banking Committee at her confirmation hearing, Janet Yellen emphasized the need to maintain a highly accommodative stance of monetary policy in light of the disappointing economic recovery. Her comments were broadly in line with what Goldman would have expected, and by-and-large were very similar to statements made by Chairman Bernanke in the past; confirming moar of the same blindness to bubbles, lots of tools, and over-optimism.
The soon-to-be-confirmed Mr. Chairwoman had plenty to say - none of which came as a great surprise. Overall we scored her comments 32 Dovish to 18 Hawkish (which fits with all pre-conceved ideas about the size of her index-finger in relation to the 'print' button). A few cherubs include:
- *YELLEN SAYS BENEFITS OF QE STILL EXCEED THE COSTS
- *YELLEN SAYS QE `CANNOT CONTINUE FOREVER'
- *YELLEN DOESN'T SEE ASSET BUBBLE IN HOUSING PRICES
- *YELLEN SAYS QE IS NOT AIMED AT HELPING TO FINANCE U.S. DEFICIT
- *YELLEN: NO ONE HAS A GOOD MODEL ON WHAT INFLUENCES GOLD PRICES
She covered fiscal policy, regulation, gold, income inequality, and bubbles; but it was her admission late in the Q&A that "real" unemployment is around 10% that perhaps leaves the most room for moar...
Yellen is the head of the San Francisco Fed. There is a lot of misinformation about her on the web, but the fact of the matter is that she is a career academic with absolutely zero banking experience or business experience.
It would appear that much of the rally yesterday (and early overnight) was driven by hope (and confirmed relief) that Fed chair nominee Yellen is not about to take on a substantially less-dovish tone in today’s testimony in an effort to garner the support of the more hawkish elements of the Senate Banking Committee. There was a great deal of confirmation bias in the market's move and interpretation but, as BofAML notes below, this may be misplaced. The more important part of today’s testimony is yet to come in the Q&A session - where we will hear likely more unscripted thoughts from the QEeen at her Senate confirmation this morning.
- Yellen to defend Fed's ultra-easy monetary policy (Reuters)
- Japan growth slows on global weakness (WSJ)
- Eurozone third-quarter growth falters (FT)
- Fed Debates Its Low-Rate Peg (Hilsenrath)
- Yellen: Economy Still Needs Fed Aid (WSJ)
- ‘Obamacare’ launch fiasco rouses sceptics (FT)
- DoubleLine's Gundlach says U.S. equities 'only game in town' (Reuters)
- Indian Inflation Exceeding Estimates Adds Rate-Rise Pressure (BBG)
- HUD Said to Fail in Bid to Sell $450 Million of Mortgages (BBG)
- Boeing machinists reject labor deal on 777X by 67 percent (Reuters)
Japan growth cut in half, Europe growth cut by more than half, but none of that matters: today it will be all about the coronation of QEeen Yellen, who testifies before the Senate Banking Committee at 10am. Not even Japanese finance minister Aso's return to outright currency intervention warnings (in addition to the BOJ's QE monetary base dilution), when he said that Japan must always be ready to send signal to markets to curb excessive and one sided FX moves and it is important that Japan has intervention as FX policy option, which sent the USDJPY back up to 100 for the first time since September 11 made much of an impact on futures trading which after surging early in the session following the release of Yellen's prepared remarks, have now "tapered" virtually all gains. Certainly, the follow up from Europe doing the same and also warning it too may engage in QE, has been lost. Which is odd considering the entire developed world is now on the verge of engaging in the most furious open monetization of virtually everything in history.
Hunting season is off to a good start this week, and I’m not just talking about deer hunting. It seems that former Fed officials declared open season on their ex-colleagues. First, Andrew Huszar, who once ran the Fed’s mortgage buying operation, let loose in yesterday’s Wall Street Journal. Huszar apologized to all Americans for his role in the toxic QE programs. And then today, the WSJ struck again, this time with an op-ed by former FOMC Governor Kevin Warsh. Warsh is a former Morgan Stanley investment banker whose 2006 to 2011 stint on the FOMC spanned the end of the housing boom and the first few years of “unconventional” policy measures. After such a solid grounding in the ways of the Fed and Wall Street, he recently morphed into a critic of the status quo. His criticisms are welcome and we believe accurate, but they’re also oh so carefully expressed. They’re written with the polite wording and between-the-lines meanings that you might expect from such an establishment figure. He seems to be holding back. So, what does he really want to say?