In the fall of 1996, John Cassidy arranged to interview Paul Samuelson in his office at M.I.T. for an article he was writing on the state of economics. He began by asking Samuelson whether he was still a Keynesian: "I call myself a post-Keynesian," Samuelson replied. "The 1936 Model A Keynesianism is passé..." He recalled attending an event that was held in Cambridge, England, in 1986 to mark the one-hundred-and-fiftieth anniversary of Keynes's birth. "Everybody was there. And they all stood up and said, 'I am still a faithful Keynesian. I am still a true believer.' I was a bit rude. I said, 'You remind me of a bunch of Nazis saying, I’m still a good Nazi.' It’s not a theology: it’s a mode of analysis. I think I am a different Keynesian than I was ten years ago."
The following is a list of key events to watch over the next several weeks and months – events that could have bearing on how the euro sovereign debt crisis evolves.
I attempt to craft something that has a chance of working.
Okay, the Fed's recent decision to boost its monetary stimulus (a.k.a. "money printing," "quantitative easing," or simply "QE") by another $45 billion a month to a combined $85 billion per month demonstrates an almost complete departure from what a normal person might consider sensible.
To borrow a phrase from Joel Salatin: Folks, this ain't normal. To this I will add ...and it will end badly.
- Our markets are now truly broken; they don't send accurate price signals anymore
- Markets are now just a giant and rigged casino, where a relative handful of big firms and other tightly coupled players are gaming their orders to take advantage of this flood of money
- Expect the Fed balance sheet to quickly expand by an additional $3-4 trillion, resulting in runaway inflation and a possible currency crisis
Imagine a stock - best for the hypothetical exercise is probably a tech stock - rising for 12 years without interruption. A net gain every year, sometimes a small one, sometimes a bigger one, but nicely compounding at an annual yield of more than 17.13% (that's a devilish 666.67% in 12 years). What would people say about this stock? Would there be a steady stream of negative press trying to dissuade people from buying it? We somehow doubt it, although almost every investment that has seen a great deal of appreciation has its detractors (and sometimes they are right). When it comes to gold, one could certainly debate the merits of buying it at what appears at least on the surface as a high price. Gold bulls can only profit from examining bearish arguments, in order to see if they have merit.
The Richmond Fed's Jeffrey Lacker, a 2012 voting member of the FOMC, who has so far been the sole objector to the Fed's policy of exiting a hole by continuing to dig deeper, has released his traditional "good cop" response to Bernanke's QE4EVA plan. The highlights: "I disagreed with the Committee’s decision to continue purchasing additional assets to stimulate the economy. With economic activity growing at a modest pace and inflation fluctuating close to 2 percent — the Committee’s inflation goal — further monetary stimulus runs the risk of raising inflation and destabilizing inflation expectations....Deliberately tilting the flow of credit to one particular economic sector is an inappropriate role for the Federal Reserve....I have dissented previously against the use of date-based forward guidance, and I supported the decision to drop such language at the December meeting....monetary policy has only a limited ability to reduce unemployment, and such effects are transitory and generally short-lived. Moreover, a single indicator cannot provide a complete picture of labor market conditions. Therefore, I do not believe that tying the federal funds rate to a specific numerical threshold for unemployment is an appropriate and balanced approach to the FOMC’s price stability and maximum employment mandates." Of course, his objection is duly noted, and summarily rejected and forgotten.
The longer you delay needed “radical measures,” the more private investors will be able to sell “their toxic paper without haircut to governmental bailout funds, and then hightail.”
A.M. Kitco Metals Roundup: Gold Drops Below $1,700 Following another Mysterious Price Drop in Asian Trading
Gold set for dramatic correction: hedge fund manager
Markets getting back to some normality with the Periphery still recovering, although less today after the auctions, Bunds 5 wider on the week, Italy 10, but Spain 7 tighter across the curve from last Friday. Equities and Risk oblivious to that anyway and synching with the US. Getting difficult to find something crisp out there with reduced news flow and volatility. Excitement to be found in the US on FC developments, now that Greece, Spain and Italy are seemingly off the table and that the FED has moved to QE4.
"When It's Sleepy Time Down South" (Bunds 1,35% +1; Spain 5,38% +4; Stoxx 2622 -0,2%; EUR 1,308 +40)
Here, for your comparative studies analytical viewing pleasure, is the current recession recovery in context. Across activity indicators, consumer behavior, labor market developments, and housing & construction, there is a little here for everyone. From vehicle sales to disposable income and from durable goods to industrial production, it seems grading this economy's performance is a matter of 'see no evil, hear no evil, speak no evil'.
No one wants to mention that the Fed Chairman has changed the rules of the game in the middle of the game but there you are; a backsliding Federal Reserve Bank whose statements are only crafted for the moment and future moments may be brief; we just don’t know. Apparently we have transitioned to a “whatever is convenient” policy at the Fed and we all should bear that in mind when assessing probable actions. When money talks, nobody pays any attention to the grammar. The Treasury issues, the Fed prints money and buys, the cost of financing for the country is incredibly low and the yields for investors are paltry. In the risk markets there will now be a demand as instigated by the Fed, that overwhelms the supply of new issuance. Between the coupons paid and the maturities for 2013 the figure is about $1 trillion in excess demand more than estimated forthcoming supply. Given the 36% loss in wealth that took place in America during the 2008/2009 period the odds of an asset allocation shift out of bonds and into equities is de minimis in my opinion and so the “Great Compression” will continue.
The economic data dump trifecta has been released, with updates on claims, retail sales and PPI. The end result was a nearly even beat/miss split.
Gold fell nearly 1% in illiquid markets in Asia overnight. Some traders may have decided to take profits on the short term long the FOMC announcement trade. Gold bullion prices had already ran up to $1,723 in the 2 weeks prior to the policy statement. Overnight, as prices fell below the 100-day moving average at $1,705, stop-loss selling was triggered which pushed prices lower quickly. Yesterday, the Federal Reserve took the bold, some would say reckless step, of linking its monetary policy to unemployment, creating concerns that the U.S. dollar will be debased even more in the coming months. The US Federal Reserve will keep interest rates at close to zero until unemployment falls below 6.5%. This is a historic and very radical change to monetary policy. It is the first time a large central bank has ever tied its interest rate policy directly to one facet of the economy – unemployment.
- Bernanke Wields New Tools to Reduce Unemployment Rate (BBG)
- Home Seizures Rise as Banks Adjust to Foreclosure Flow (BBG)
- EU Backs Release Of Greek Aid (WSJ)
- Democrats Confident They Have 'Cliff' Leverage (WSJ)
- Americans Back Obama Tax-Rate Increase Tied to Entitlement Cuts (BBG)
- Goldman flexes tentacles: Treasury open to Carney radicalism (FT)
- Launch Fuels Asia Security Concerns (WSJ)
- BOJ’s Unlimited Loan Program Seen Open to Use by Hedge Funds (BBG) - there are Japanese hedge funds?
- Abe Set to Face Manufacturing Gloom as Japan Contracts (BBG)
- US and UN condemn N Korea rocket launch (Guardian)
- Eurozone agrees common bank supervisor (FT)
- Berlusconi Adds to Italy Turmoil by Signaling He’d Step Aside (BBG)
Why the lack of follow through? Because, according to preliminary desk talk, just as we predicted yesterday now that the Fed has reengaged the QEasing machine, the ECB will too have to intervene and ease on its own once again to push the EURUSD lower (as otherwise the internal devaluation for most European countries will be simply unbearable). Which means one thing: the time to drag the Spanish insolvency out of cryogenic sleep is coming, and if Rajoy still refuses to request a bailout, he will get some much needed assistance from Frankfurt to make up his mind, allowing the ECB to inject hundreds of billions into the market and in doing so to keep up with the Fed or else risk dropping too far behind in the global race to debase (with a footnote that in Europe, a drop in the currency always raises redenomination risk now and going forward).