Monetary Policy

The Fed is promising once again to pound nails with the only tools in its toolbox, a saw and a chisel. The "nails" the Fed is trying to pound down are unemployment and deflation. Needless to say, whacking these big nails with a handsaw and a chisel is completely useless: they can't get the job done. The Fed claims all sorts of supernatural powers to sink nails at will--"unconventional monetary policy," quantitative easing, money dropped from helicopters and so on. But all it really has are two tools which have no positive effect on unemployment or the real economy.

1. The Fed can manipulate interest rates to near-zero
2. The Fed can shove "free money" to the banks

That's it. That's all the tools the Fed has in its toolbox. Let's consider what these tools accomplish in the real world.

Something is different this morning. Whether it is the aftermath of yesterday's inexplicable 10 Year auction demand spike, or more explicable plunge in the ECB's deposit facility usage, or, the fresh record low yield in the supreme risk indicator, Swiss 2 Year bonds, now at under 0.5%, market participants are realizing that the status quo is changing, leading to fresh 2 year lows in the EURUSD which was at 1.2175 at last check, sliding equity futures (those are largely irrelevant, and purely a function of what Simon "Harry" Potter does today when the clockworkesque ramp at 3:30pm has the FRBNY start selling Vol like a drunken sailor), and negative yields also for German, French, and Finland, with Austria and Belgium expected to follow suit as the herd scrambles into the "safety" of the core (which incidentally is carrying the periphery on its shoulders but who cares about details). Either way, Europe's ZIRP is finally being felt, only not in a way that many had expected and hoped and instead of the money being used to ramp risk, it is further accelerating the divide between risky and safe assets. Look for the Direct take down in today's 30 Year auction: it could be a doozy.

Just because Bernanke did not explain everything in the post-FOMC conference, here is more:

• A FEW FOMC MEMBERS SAID MORE STIMULUS WOULD PROBABLY BE NEEDED
• SEVERAL ON FOMC SAID FED SHOULD STUDY `NEW TOOLS' FOR EASING - C5 Galaxy??
• FOMC PARTICIPANTS SAW MODERATE GROWTH LIKELY IN COMING QUARTERS
• FOMC AGREED `IT WAS PREPARED' FOR FURTHER ACTION AS APPROPRIATE
• FOMC SAW `UNUSUALLY HIGH' UNCERTAINTY FOR JOBLESS, GROWTH
• SEVERAL OTHER FOMC MEMBERS SAW ACTION NEED IF ECONOMY WORSENS

Well, more stimulus was needed, and we got it in the form of Operation Twist 2. Nothing new, but algos need their flashing read headlines.

Erste Group's Ronald Stoeferle, author of the critical "In gold we trust" report (2011 edition here) has just released the 6th annual edition of this all encompassing report which covers every aspect of the gold space. What follows are 120 pages of fundamental information which are a must read for anyone interested in the yellow metal. From the report:  "The foundation for new all-time-highs is in place. As far as sentiment is concerned, we definitely see no euphoria with respect to gold. Skepticism, fear, and panic are never the final stop of a bull market. In the short run, seasonality seems to argue in favor of a continued sideways movement, but from August onwards gold should enter its seasonally best phase. USD 2,000 is our next 12M price target. We believe that the parabolic trend phase is still ahead of us, and that our long-term price target of USD 2,300/ounce could be on the conservative side."

Today's release of the FOMC's minutes should be helpful in gauging the near-term monetary policy outlook. Goldman's Jan Hatzius (who just cut his Q2 GDP outlook to a way below consensus +1.3%) believes they will confirm his expectations, for the July 31-August 1 meeting, of an extension of forward rates guidance to 'mid-2015', but no move to further asset purchases yet (not expecting NEW QE until late 2012/early 2013). In the minutes, Hatzius notes four specific issues to focus on: how many FOMC members expect further eventual easing, and in what form; how close the committee was to either doing more or less than Twist 2 at the June meeting; how much discussion there was of qualitative changes in the forward guidance; and how much more negative the Fed staff has become about the economic outlook. In other words, the minutes may provide more information about whether the weak data that have arrived since June 20 - another subpar payroll gain of just 80,000 and sharp declines in high-profile business surveys such as the manufacturing ISM and the Philly Fed - are likely to be sufficient to trigger additional moves.

Prepare to have your minds blown courtesy of what is easily the most astounding chart we have seen in a long, long time, prepared by the economists at the, drumroll, New York Fed, which finds that absent what the Fed calls "Pre-FOMC Announcement Drift", or the move in the S&P in the 24 hours preceding FOMC announcements, the S&P 500 would be at or below 600 points, compared to its current level over 1300. The reason for the divergence: the combined impact of cumulative returns of in the S&P on days before, of, and after FOMC announcements. But, but, fundamental, technical, coffee grinds, Finance 101, Oprah Winfrey, Jim Cramer and Econ 101 analysis (in declining order of relevance and increasing order of voodoo) all tell us this is im-po-ssible? Because if the Fed is right about the Fed induced drift, it is all about, you guessed it, easy money. 

Josh Barro of Bloomberg has an interesting theory.  According to him, conservatives in modern day America have become so infatuated with the school of Austrian economics that they no longer listen to reason.  It is because of this diehard obsession that they reject all empirical evidence and refuse to change their favorable views of laissez faire capitalism following the financial crisis.  Basically, because the conservative movement is so smitten with the works of Ludwig von Mises and F.A. Hayek, they see no need to pose any intellectual challenge to the idea that the economy desperately needs to be guided along by an “always knows best” government; much like a parent to a child.  CNN and Newsweek contributor David Frum has jumped on board with Barro and levels the same critique of conservatives while complaining that not enough of them follow Milton Friedman anymore.

To put this as nicely as possible, Barro and Frum aren’t just incorrect; they have put their embarrassingly ignorant understandings of Austrian economics on full display for all to see.

Who Are the Biggest Manipulators of All?

The price of Brent crude oil has jumped rapidly back over $100 (above Friday's highs) on news of a complete shutdown of Norway's oil production after labor talks failed. Coupled with more hopes and dreams of the so-far ineffectual Chinese monetary policy easing, it seems that all the bullish lower-oil-prices-as-a-tax-cut arguments become entirely reflexive as every time we see oil prices drop on global growth questions, so the central bank puts provide just the ammo to remove that benefit as they BTFD in every correlated risk asset - and Oil seems the 'cheapest' of those in the last few weeks.

The sole driver of risk in the past 3 years has been nothing but continued pumping of liquidity into markets by central banks: aka the Global Central Bank Put. How does this look visually? The below summary charts showing global balance sheet expansions should blow everyone's minds.

When that canned remarks by Fed Doves is all that is left as a hope-based upside "risk catalyst", as was just defined by Citi's Steven Englander, things are really sad for those who have to justify their excess testosterone by trading every uptick (Econ Ph.D. dissertation on the topic most certainly in progress).

The Great Recession and the poor job market has stressed the middle class to its limit.   However, the seeds have long been sown from the poor fiscal and monetary policy implementation.

A preview of the key events in the coming week (which will see more Central Banks jumping on the loose bandwagon and ease, because well, that is the only ammo the academic econ Ph.D's who run the world have left) courtesy of Goldman Sachs whose Jan Hatzius is once again calling for GDP targetting, as he did back in 2011, just so Bill Dudley can at least let him have his $750 million MBS LSAP. But more on that tomorrow.

Japan's core machinery orders were expected to post a modest -2.6% drop. Instead they had a worse collapse than anything seen in the aftermath of the Fukushima disaster, plunging by a stunning 14.8% . And the kick in the groin cherry on top was the current account surplus plunged by 62.6%: consensus forecast: -14.5%. The Japanese economy has once again ground to a halt, only this time it has no earthquake or nuclear explosion to blame. This time it is the entire world's fault, where demand has collapsed proportionately. As a reminder the BOJ expanded its QE yet again on April 27. Must be time for another QE because this time will certainly be different after more than 30 years of failures.  It is time for those brilliant central planners Ph.D's to do engage in more of the same insanity that Einstein warned about decades ago. And incidentally this is not a joke: on Thursday the BOJ is expected to ease yet again. As a reminder, the BOJ already buys ETFs, Corporate Bonds, and REITs. What's left: gold?

It should come as no surprise to anyone that major commercial banks manipulate Libor submissions for their own benefit. As Jefferies David Zervos writes this weekend, money-center commercial banks did not want the “truth” of market prices to determine their loan rates. Rather, they wanted an oligopolistically controlled subjective survey rate to be the basis for their lending businesses. When there are only 16 players – a “gentlemen’s agreement” is relatively easy to formulate. That is the way business has been transacted in the broader OTC lending markets for nearly 30 years. The most bizarre thing to come out of the Barclays scandal, Zervos goes on to say, is the attack on the Bank of England and Paul Tucker. Is it really a scandal that central bank officials tried to affect interest rates? Absolutely NOT! That’s what they do for a living. Central bankers try to influence rates directly and indirectly EVERY day. That is their job. Congresses and Parliaments have given central banks monopoly power in the printing of money and the management of interest rate policy. These same law makers did not endow 16 commercial banks with oligopoly power to collude on the rate setting process in their privately created, over the counter, publicly backstopped marketplaces.