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Bernanke - Post Schumer Gaffe

Bruce Krasting's picture





 

I'm adding myself to the long list of folks who have commented on NY Senator Chuck Schumer's choice of words to Bernanke the other day:

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Schumer is a political hack. He wants the Fed to do ‘something’ today that would give the economy a lift heading into the election. Chuck knows that the Legislative side can’t/won’t do a thing before November, so he begs Ben to light another monetary fire to help the Democratic cause. Chucky boy is an ass.

I doubt that Bernanke listens to the noise from Senators very often, but Chuck’s words got a lot of press. I'm wondering what Ben is thinking. Schumer has brought politics into the outcome of the August 1st Fed meeting. Whatever Ben decides to do, he will be accused of partisan politics.

There are many scenarios for the August Fed meeting:

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I) Do nothing 
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Arguments For:

a) The economy stinks, but it is not in a crisis. More “crisis monetary measures” are not justified.

b)  With the 10-year already at 1.5%, the Fed can’t accomplish anything by pushing rates a few basis points lower.

Arguments Against:

The election and related political considerations will absolutely tie the Feds hands after the August meeting. The next chance for the Fed to “do something” will be in late November. If Bernanke wants to buy some insurance, he has to do something in August.

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II) Extend the ZIRP language past 2014

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Arguments For:

I can’t think of any.

Arguments Against.

Because there is no substance to this, there is a very strong likely hood that the markets will take a few seconds, and then puke. Bernanke knows this. He doesn’t want to lay an egg.

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III) QE3 – $600B LSAP targeted to Agency Mortgage Bonds

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Arguments For:

a) This is what the market wants to see. Failure to do QE3 will disappoint, Ben does not want to disappoint.

b) This a is “populist” approach. Ben can say that he is doing his best to allow homeowners to ReFi and prospective buyers to get a record low rate.

Arguments Against:

a) This is an “all in bet”. Even Bernanke has been questioning the efficacy of additional QE of late.

b) Senator Shelby and Speaker Boehner will say, “The Fed is printing money to play politics!”

c) Bernanke’s critics will go wild.

d) There is absolutely no certainty that another big LSAP will do a damn thing.

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IV) QE3 - $250B LSAP targeted to Agency Mortgage Bonds
 

Arguments For:

A small QE would create less political backlash. Ben could argue that he is being “moderate” and will, as always, be willing to do more if this modest monetary “bump” proves to be inadequate.

Arguments Against:

a) A “half a loaf” is going to fail miserably. Bernanke wants monetary policy to jack up stocks, as he thinks this creates jobs. Stocks would nose dive if this is the result. Bernanke understands this.

b) Both Blues and Reds would be upset. Schumer will be pointing at Bernanke and saying, “He didn’t do his job!” At the same time Ron Paul would be calling for Ben’s head on a platter.

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V) Something Else – A cut in the deposit rate from a 1/4% to a 1/8%
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Arguments For:

a) This appears to be a modest step. As such, it would be less susceptible to criticism.

b) The small change in the deposit rate would achieve something that Bernanke has been shooting for a long time. Returns on short-term money would go negative. Three and Six month Bills would certainly be negative. One-year paper would trade around flat.

c) Germany and Switzerland are already in negative territory. Other, smaller bond markets like Finland and Sweden are also in the red. For the US to follow suit would not be that big a surprise. Bernanke could blunt critics by saying he had done less than Europe - an 1/8th in the US versus 0% for the ECB.

d) The change to negative yields, (regardless of how small), will force money to move around. There are trillions in money market funds, Trillions in short term Treasury paper, and trillions more on corporate balance sheets. All of this is now going to be looking at negative returns.

e) With the first rungs of the yield curve in the bucket, the longer maturities would be dragged down. The Ten-year would move toward 1%. This result would be similar to the (hoped for) outcome of a large LSAP.

f) Bernanke could still say, “The Fed has more it could do”, as the deposit rate could be cut again (to zero) at some point.

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Of these options, I believe that #V has the greatest probability of occurring.
 

I hope that the Fed sits tight, and does nothing. But that seems unlikely. Bernanke knows that the economy is now decelerating, and that his hands get tied after the August meeting. So “something” is more likely than “nothing”.

It’s hard to predict what might happen if Ben pushes rates into negative territory. It could end up resulting in an orderly market transition from cash, to high-risk securities like stocks and junk bonds. The virtuous cycle of higher stocks leading to higher spending and more jobs might be the result. But I doubt it.

Arguments Against:

a) The knee jerk reaction to negative rates might be positive, but in a short period of time the market will come to realize that negative rates are not going to force people (more) into dividend stocks. Quite the opposite, it will scare the crap out of them.

b) This is not good for the banks (who cares); but the financials are still a big chunk of the S&P.

c) This move will likely cause more “unwanted inflation”. If China or India is faced with negative returns on their reserves, they might be inclined to just buy commodities with the billions of cash they are sitting on. Prices of grains, beans, copper, coal and oil come to mind. Gold would be on the list as well.

d) If three-month bills went from +8bp to -7bp you might think that it wouldn't matter. The change is so small on a relative basis. I think of it as stepping off the edge of a cliff.

The entire global financial system is based on fiat money and the presumption that the money has “value” as a store of wealth. Nearly every action by the Fed over the past few years has led to the debasement of money. In the final stage, the issuers of  money debase it to the point where it is no longer desirable to hold. I see the move to negative rates across the globe as a tipping point, one that will be damn hard to reverse once undertaken.

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Fri, 07/20/2012 - 23:49 | Link to Comment One eyed man
One eyed man's picture

Openly pressuring Bernanke to "ease up" makes it less likely that he will actually do anything of substance. He wouldn't want to tarnish the Fed's carefully polished image of independence by appearing to cave in to political pressure.

I think Bernanke's hands are pretty much tied until after the election. Provided of course, that the economy continues to stumble along in this foggy gray never-never land somewhere between expansion and recession. But even if Bernanke's hands are tied, his lips can still move and perhaps he might do a little bit of jawboning as a minor concession to Sen. Schumer and his party.

Of course if the economy were to suddenly nosedive, all bets are off and Bernanke would be free to do something major.

Fri, 07/20/2012 - 19:26 | Link to Comment SwingForce
SwingForce's picture

Nice job Bruce! How about a picture of BOZO? This story is pivotal.

Fri, 07/20/2012 - 15:15 | Link to Comment Sigep0612
Sigep0612's picture

Reagan came into office the Fed debt was $900 B.  Today $16T.    The past 30 years has been a joke.  As a nation we have promoted growth while increasing debt.  Think about it.  Let's increase entitlements without increasing the ability to pay for the increase in spending.  Let's just print more $$$.  It's like uppyville saying..."look at me...I have a $1million dollar house."  The fact that he owes $1.1Million on his house doesn't fit into his cranium.  The fact that when he's broke he opens up another credit card. Hmmmm? 

Everybody wanted $1 flip flops and we couldn't product them that cheaply in the US so we said " Hey China...make these things for us."   China produced the flip flops and just about everything else and we bitch because they took our jobs away.    If Obma/Fed/IRS took away tax subsidies the actual price of goods would be reflected and the US economy would crash.  If taxes were to increase to pay for those subsidies, the economy crashes.   The Repubs won't stand for a tax increases and the Dems won't stand for spending cuts. The name name of our country starts with the word United....?  

How many people do I run into that say..."Gee I hope things get better next year"   What?  How?  People are looking for a government solution when there is none so they can go about living their life the way they are currently living.   Are you kidding me?  We're screwed.  If my prism is off...someone needs to enlighten me.  Otherwise, deflation is on the horizon and hard assets and soup are the only things on the menu. 

       

Fri, 07/20/2012 - 15:02 | Link to Comment joebren
joebren's picture

Fri, 07/20/2012 - 15:02 | Link to Comment joebren
joebren's picture

Fri, 07/20/2012 - 14:22 | Link to Comment f16hoser
f16hoser's picture

Poor Uncle Benny. Damned if you do, Damned if you don't. Federal Reserve has run it's course. Time to burn it down!!!!

Fri, 07/20/2012 - 14:24 | Link to Comment f16hoser
f16hoser's picture

Sc-humor is a Faggot..... Probably why him and Obummer get along so well.....

Fri, 07/20/2012 - 14:16 | Link to Comment roadhazard
roadhazard's picture

When Obama was elected Schumer took him down to K Street for his new  corporate suit fitting.

Fri, 07/20/2012 - 18:21 | Link to Comment roadhazard
roadhazard's picture

Romney is getting more $ from Wall Street than Obama. I'd post a link but what difference does it make.

Fri, 07/20/2012 - 14:00 | Link to Comment rsnoble
rsnoble's picture

Welcome to Hell.

Fri, 07/20/2012 - 12:48 | Link to Comment CVfriendship
CVfriendship's picture

It's rather frightening when you look at Schumer's past and his ENTIRE resume is political positions (since he was 23)..good thing Harvard undergrad and law school educated him to be a politician... 

Being a "product of one's environment" never stood so true.  The theatre that is put on by these career re-election-salary-based people is ludicrous.  Compensate them via results (like a....business!), put strict term limitations on each seat, and put this political contribution and lobbying farce under much tighter limits. 

It’s not mine, but I love saying it.  “If you can’t protect it with an assault rifle…don’t invest in it nowadays”.  So I’m buying a Redwood, people practically protect them for you!

 

Fri, 07/20/2012 - 12:48 | Link to Comment UrbanBard
UrbanBard's picture

Something is not being mentioned: The FED is not sitting on its hands, now. I'm not talking about Operation Twist, either. The FED has been doing massive Dollar / Euro swaps: over $3.2 trillion in nine months. This is what has been propping up insolvent European banks and the various bailout proposals.

 

Can this last? No, the swaps are intended to keep things stable through the election. And they are not working. The economy is anemic. This why Shumer is demanding QE. But, QE on top of the Dollar / Euro swaps is hyper inflationary. But, I'm not sure that Bernanke knows this.

Fri, 07/20/2012 - 12:45 | Link to Comment negative rates
negative rates's picture

If it were not 4 that table, he would have fallen flat on his face.

Fri, 07/20/2012 - 12:36 | Link to Comment dcb
dcb's picture

I don't beleive the assumption that is given that qe helps an economy. this never seems to be questioned. I know according to what it was suppossed to do it hasn't done that, and GW and others have written extensively on the subject.

Schumer is about the biggest receiver of wall street donations in the senate, so that explains a lot. a subject you don't bring up is his list of donors.

Lots of Qe doesn't seem to be working for the UK, but they have had above target inflation for a long time, and the people (besides the bankers) are getting killed. Qe is to keep asset prices inflated so those that work in the markets are direct beneficiers of the policy. it also help to keep bank assets inflated so we can't see that tthey are insolvent.

if assets drop, and margin calls happen, bank equity drops, over leveraged banks shown to be insolvent. rather simple.

I'd argue that Qe is a net looser for the majority of the american public

Fri, 07/20/2012 - 12:26 | Link to Comment johnjkiii
johnjkiii's picture

Benny will do nada. He is just now figuring out that he's been wrong all along and since he never, ever understood the problem in the first place, he has no concept of any alternatives. If shithead gets re-elected, he will use his new flexibility to monetize and Benny will go along because he is now a hollowed out shell. If mitthead gets elected we can look forward to 4 years of austerity which will also fail to solve the problem. Either way, rates will stay low for several years because history shows us that this is what happens when debt ridden societies implode. The trick for all of us is to figure out how to survive financially. Arguing over which route we take to hell is the fools game.

Fri, 07/20/2012 - 11:39 | Link to Comment lamont cranston
lamont cranston's picture

I think it was Rush Limbaugh who said, "The most dangerous place in the world is to be between Chuck Schumer and a live TV camera."

Fri, 07/20/2012 - 14:52 | Link to Comment WillyGroper
WillyGroper's picture

I can't stand Flush, but that was damned funny!

Fri, 07/20/2012 - 11:18 | Link to Comment Uchtdorf
Uchtdorf's picture

OK America, we've let the elites have their way with us for nigh unto 100 years now. You see the mess we've gotten ourselves into as a result of giving them the helm. Will you now, finally, stand up and recover your God-given rights? 

Fri, 07/20/2012 - 12:33 | Link to Comment sunnyside
sunnyside's picture

I will, through the veil.

Fri, 07/20/2012 - 11:26 | Link to Comment viahj
viahj's picture

only the hungry stand up in significant numbers and are willing to take real action.

Fri, 07/20/2012 - 11:09 | Link to Comment BeetleBailey
BeetleBailey's picture

Chuck "The Fuck" Schumer is the biggest piece of SHIT Senator in Congressional history. This asshole needs to go jump in a vat of boiling oil.

That the stupid voters of New York keep electing this total ASSHOLE means the voters of New York are insane.

FUCK YOU SCHUMER YOU SHITHEAD!

Fri, 07/20/2012 - 11:05 | Link to Comment piceridu
piceridu's picture

Thank BK, thta prety much lays it all out. It's kind of like waiting for the end of the Mayan calendar.

Fri, 07/20/2012 - 11:01 | Link to Comment DeadFred
DeadFred's picture

The Fed's change in action and wording happened right around the time there was a high level US Chinese meeting with some hard words and finger wagging by the Chinese. At the time I wondered if our Asian 'friend' put out some behind the scenes ultimatums. The Fed has only done sterilized purchases since then. If there was an ultimatum the Fed will do nothing and the market will cave in. I have nothing beyond a hunch and reading between the lines to back this up but pretty much my full account (such as it is) will be backing it up in a couple weeks

Fri, 07/20/2012 - 10:58 | Link to Comment Flakmeister
Flakmeister's picture

A fair analysis Bruce....

Whatever passes for dry powder nowadays must be carefully rationed out...

Will food prices stay his hand?

 

Fri, 07/20/2012 - 10:41 | Link to Comment Snakeeyes
Fri, 07/20/2012 - 10:56 | Link to Comment Assetman
Assetman's picture

Perhaps Chuckie should consider getting off his entitled Senatorial ass and help legislate a compromise that gets us out of this fiscal cliff mess.

Of course, we know the D's and the R's will never let that happen.

Yet we vote for these entitled fools each and every election.

 

Fri, 07/20/2012 - 11:13 | Link to Comment DeadFred
DeadFred's picture

The electoral process is now controlled by a Diebold subroutine

Has the incumbent dipped his wick in any 12 year old girl scouts?

True- Continue, False- re-elect incumbent

Are there photos?

True- Elect challenger, False- re-elect incumbent and arrange for an 'accident'

Fri, 07/20/2012 - 10:31 | Link to Comment onlooker
onlooker's picture

Another reason to move from NY. Maybe to a state with no Schumer and no income tax.

Fri, 07/20/2012 - 10:45 | Link to Comment steve from virginia
steve from virginia's picture

 

If the politicians weren't inept they would not have this problem. However, they all belong to the 'prosperous past', like the character in the Springsteen song, they long for the glory days of high school.

Better leadership by the current (brain dead) bunch would have made it unnecessary to prod the central banker. There really is nothing for Mr Bernanke to do, he cannot 'print money', he cannot pull rabbits out of a hat, he's already lost too much credibility (get it? Credit = credibility?) and does not have any effect on the cost of money.

 - Deflation sets the price of (so-called) risk-free 'assets' to zero (or less). This is well known, Fisher described it in 1933.

 - Fuel prices money. Right now money represents fuel-using-activities. Coming soon is money representing the fuel itself. We are almost there. The outcome is nasty. Whether Bernanke understands this is uncertain. He is a very smart dude but says little about energy, the rest of the establishment lies through its teeth about energy. 

 - When money represents energy the various currencies will sort themselves out (or the reverse will happen as with the euro) and the winner will fall out of circulation (hoarded). The other currencies will simply vanish or will buy goods OTHER THAN fuel. Energy availability will plummet, to meet the amount of 'good currency' in circulation available for fuel purchase.

Think about how much cash is in circulation right now (not e-money) and you get the idea how much fuel will be available. Circulating money will be the way fuel is rationed (if not directly by way of fuel cards) the same way credit-access rations fuel now. Needless to say there will be no credit at all.

This is the straitjacket that central banks and treasuries face and there is almost nothing they can do about it. If they 'adjust' (depreciate) their currencies they won't be able to swap them for fuel. Having a swap-able currency means having one that is as scarce and hard to find as a one-armed violin player. 

US produces 1/3d of its consumption but a cash regime would cut fuel availability to less than 1/3d of of that or 10% (roughly) of current. With current near- 100% dependency on petroleum fuels for agriculture there is a very real threat of crop failures and famines in the US. The last time there was non-petroleum agriculture in this country there was 1/3d the current population and almost 100x as many farmers, most of whom were highly experienced.

There is a far better chance of crop failures and starvation in countries that depend on external credit, imported fuel and F/X flows. Pakistan could see its population completely wiped out and India could lose half of its 1.4 billion in a matter of weeks or months, particularly if coupled with a diminished or failed monsoon. There are simply no food stocks available to shift to needy areas in sufficient quantities ... to feed billions. Fuel poverty would restrict the ability of nations to replenish the stocks or create new ones. We are near- or at a food limit.

Central banks are simply not equipped to handle problems like this.

This could happen next week but probably not as it largely is a matter of public perception. The odds of this happening within the next five years: 100%.

 

Fri, 07/20/2012 - 11:01 | Link to Comment Flakmeister
Flakmeister's picture

SFV,

precisely, Brent, aka the new Fed Funds target determines the setting on the liquidity spigot...

PS Always enjoy your comments...

Fri, 07/20/2012 - 10:28 | Link to Comment Atlantis Consigliore
Atlantis Consigliore's picture

"Get to Work Printing and You didnt build that;  Pimps,  throw all the pimps out.  25 M business go on capital strike lay everyone off and stick it to NY  no money center banks, no cards, and no ny broker firms,   F them

Fri, 07/20/2012 - 10:14 | Link to Comment San Diego Gold Bug
San Diego Gold Bug's picture

Great article Bruce!  I am linking this to my website of the company I started............oh I forgot, Obama said that I did not build my own company "someone else built it".  What a "DB" and a traitor!

 

Fri, 07/20/2012 - 10:10 | Link to Comment Hohum
Hohum's picture

It's really interesting that Schumer had no effective opposition when he last ran for re-election.  I guess most NYers like the banks.  And why not?  They're big employers ;)

Fri, 07/20/2012 - 11:24 | Link to Comment Thisson
Thisson's picture

This is exactly right.  The money Wall Street brings into NYC is huge, and helps to fund so many other things.

Fri, 07/20/2012 - 11:09 | Link to Comment De minimus
De minimus's picture

What passes for news in New York is what the leftists would like to see nation wide and they have nearly succeeded. If all you get from your news and informational sources is left wing dogma, propaganda and indoctrination, you will tend to discount any other information because it doesn't fit your mind set and conditioning.

The only time you question these is when you are directly affected by events which the left is unable to explain, and can be seen as the liars that they are. Hard to do because lying is what they do, 24/7/365. If you are like me, you eventually realize these things and remove your support for both the ideas and concepts they present and the people presenting them. You also begin to realize that the original lie/s that brought you to these conclusions and actions, were only the tip of the iceberg. At that point, you begin to make the connections that were heretofore unnoticed but so blindingly obvious, to the clear mind.

Mr.  Schumer is both an opportunist and a committed leftist/Marxist. He knows all about the lies being spoon fed to the people and helps to construct and support many of them. People like him, if he gets his way, will be those who used to ride around in Zils in the old Soviet Union, while everyone else was forced to walk.

Fri, 07/20/2012 - 11:26 | Link to Comment Thisson
Thisson's picture

I don't think Shumer is a liar.  He's simply a liberal/progressive who honestly believes in these stupid policies.

Fri, 07/20/2012 - 10:04 | Link to Comment DUNTHAT
DUNTHAT's picture

If Bernanke does one thing that smacks of political favoritism, the FED is doomed.

Bernanke knows this.

Besides, Shumer wasn't pleading for Obama's ass, he was doing the bidding of the Big Banks of which he has been thourghly bought and paid for.

Fri, 07/20/2012 - 11:20 | Link to Comment viahj
viahj's picture

uhmm, the big banks own the Fed as well.  Schumer was doing it for pre-election facetime and to save the party position in Congress.  Congress is the focus, not the White House. 

Fri, 07/20/2012 - 10:11 | Link to Comment fonzannoon
fonzannoon's picture

Bruce do you really think Bernanke believes he can create jobs? Do you, at this point, really still think earnings matter?

Fri, 07/20/2012 - 11:05 | Link to Comment Bruce Krasting
Bruce Krasting's picture

Yes, Bernanke thinks he can create jobs via monetary policy. He wakes up everyday convinced that this is so.

 

I think that monetary policy options have already been exhausted and further efforts will bring little fruit and collateral damage.

 

As to earnings, they still matter. We might get evidence of this tonight when FB announces its earnings (or the lack of them).

At $29, FB is 90X's trailing PE. They better show a number that will prove that the forward PE is nothing close to this number, or else......

Fri, 07/20/2012 - 12:03 | Link to Comment fonzannoon
fonzannoon's picture

I struggle with wondering if Bernanke is dangerous because he is stupid or dangerous because he isn't.

As for earnings it seems so obvious that FB earnings can't match the expectations. I don't see how anyone will be surprised if they don't.

Much respect for you Bruce, and thanks for keeping the dialogue open with us.

Fri, 07/20/2012 - 10:03 | Link to Comment semperfi
semperfi's picture

After you have painted yourself into a corner, what are your options?....

a) stay there until the paint dries, long enough to where you have to piss yourself

b) walk across your just completed work, messing it all up

Not a good result either way.

Fri, 07/20/2012 - 11:33 | Link to Comment Nobody For President
Nobody For President's picture

Or bust a hole in the wall and crawl out.

Fri, 07/20/2012 - 10:02 | Link to Comment the not so migh...
the not so mighty maximiza's picture

Good article. 

Fri, 07/20/2012 - 10:59 | Link to Comment Assetman
Assetman's picture

Bruce is consistently good... I don't agree with him on everything (LIBOR), but he's always an enjoyable read.

Fri, 07/20/2012 - 10:00 | Link to Comment zero19451945
zero19451945's picture

Negative nominal rates are the green light to go all-in on gold. The US dollar will actually cost you money to hold? Fuck that shit.

It's a huge sign that the system is disintegrating.

Fri, 07/20/2012 - 09:29 | Link to Comment Getting Old Sucks
Getting Old Sucks's picture

If they succeed in getting the trillions of savings into equities, TPTB will steal it all.  The equities market is all that's left holding up the house of cards.  It will crash someday and then everyone save TPTB are broke.  Then everyone, save TPTB will be dependant on the government which sets up execution of the Executive Order for government take over of all industry, labor, and resources, stripping TPTB of most of their wealth also.  Walla, the new totalitarian socialist government of the USSA.

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