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The Fed’s Con Appears To Be Working But The Curtain Is Rising On The Third Act

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The Fed’s Con Appears To Be Working But The Curtain Is Rising On The Third Act

Courtesy of Lee Adler of the Wall Street Examiner

In today’s conomic news, the mainstream media focused on the disappointment surrounding the FOMC Minutes, the massaged and sanitized fairy tale about what the participants said at last month’s FOMC confab. The market was shocked! SHOCKED! that most of the members saw no need for additional QE, unless things got worse. I had concluded that a couple of months ago based on the fact that every time QE speculation arose, not only did stocks rally, but so did energy and other commodity prices. The commodity vigilantes, I thought, would tie the Fed’s hands. That and the fact that the conomic data was coming in relatively perky, at least in terms of the headline data, made it highly unlikely that the Fed would do any more money printing.

But here’s the thing. The minutes are fake. They are fabricated, false, phony, and sterilized garbage, designed for public consumption. To put it bluntly, they’re propaganda. They are what the Fed and Wall Street casino owners want you to think. They are a blatant attempt to manipulate the behavior of market participants through the use of clever turns of phrase. The Fed wants the market to go higher, but it doesn’t want commodities to go with it, so its story line is that the conomy is healthy enough to continue growing without more QE. That gives traders reason to continue buying stocks, and no reason to buy commodities, which everyone “knows” go up when the Fed prints, in spite of Bernanke’s denials. And besides, commodities are up for other reasons, not anything Ben did, according to Ben.

That’s what these “minutes” are about, self justification and market manipulation. We won’t know the real story until February 2018 when the Fed will release the transcripts of this year’s FOMC meetings. Why do they hold them back for at least 5 years? Because the Fed thinks that you can’t handle the truth. The problem is that you can and they just don’t want you to know what it is, because if you did, you’d be able to make informed investment decisions. The decisions the Fed wants you to make are to buy stocks, bay and hold Treasuries, and sell commodities. They tailored the minutes accordingly, so that the headlines would elicit the desired response. They think that they’re Pavlov, and we’re the dogs.

Admittedly, I have not yet read the minutes (I will for this weekend’s Fed Report), but I have read the news headlines. Those headlines are what the Fed-Wall Street-Media-Industrial Complex wants you to think, so you really don’t need to read the minutes. Rest assured that the Fed got the propaganda it wanted. The market reaction it wanted it hasn’t yet gotten, yet, but the Fed is betting that it will, and therein lies the rub. The Fed doesn’t always get what it wants. If traders decide to sell the Dow off 200 points in response to this news, then the next morning, the Fed’s ventriloquist dummy, Jon Hilsenrath, will float another QE3 trial balloon in the Wall Street Urinal.

So we’ll just have to see how traders respond. As for what the Fed really thinks, sorry, that will have to wait 6 years.

Meanwhile, the other datapoint the conomists focused on today was February Factory Orders. This is an item based on a Census Bureau monthly survey of a tiny sampling of US manufacturers that extrapolates that sample into a total dollar estimate of new orders and other metrics. The Bureau reports both the seasonally adjusted result and the actual result, also known as not seasonally adjusted. The only number the pundits and media pay attention to is the seasonally adjusted, fictional number. That’s just wrong, but that’s the way it is. It gives us the opportunity to look at the actual data and know what’s really going on, rather than the smoothed fiction that the Wall Street mouthpieces present on a silver platter as if it’s the grail.

The headline number for February was a 1.3% month to month increase, seasonally smoothed. That was a miss. The conomic consensus was for a gain of 1.5%. But this is a minor item in the conomic firmament–durable goods orders out the week before are more important–and the pundits managed to spin it as bullish anyway. The bullishness is wild and universal, nary a contrarian to be found in the pages of the Murdoch, Bloomberg tout sheets.

The headline number isn’t always wrong or misleading, and as it turns out, the actual, not seasonally adjusted gain in February was impressive, up 4.7% from January and up 10.6% over February 2011, both in real terms adjusted by CPI inflation. The 4.7% monthly gain compared with a decline of 0.7% in February 2011. Over the prior 10 years, monthly changes in February ranged from last year’s -0.7% to a high of +4.9% in February 2004. Any way you slice it this was a good number. Did the warm weather in February have anything to do with that? Certainly, but it’s impossible to say how much. If it pulled demand forward from March and April, we’ll see that in the next month or two.

I thought it would be interesting to overlay the ISM’s not seasonally adjusted New Orders Index on the chart of new factory orders. I am using the factory orders not seasonally adjusted data, but adjusted for inflation in order to see the real change in unit volume over time. The ISMsurvey should lead the Factory Orders. The ISM data is for March. It turns out that the correlation with the between the ISM New Orders Index, and the 12 month rate of change in the Commerce Department’s New Factory Orders data is pretty close. Lately, however, the ISM data suggests greater weakness than has been showing up in the government data. Who’s right? I don’t know, but as with the ISM and the 50 line on its chart, an annual change in factory orders of more than 1 to 2%, tends to correlate with an ongoing uptrend in stocks. It will be time to start worrying when the growth rate closes in on zero. That has correlated with a topping process in stocks.

Real Factory Orders NSA Chart- Click to enlarge

Real Factory Orders NSA Chart- Click to enlarge

Manufacturing activity lags stock prices. By the time new factory orders go negative, stocks will have already gone through their first leg down.  Consumers and businesses take their cues from the stock market, and the stock market takes its cues from the Fed.

Everybody thinks that Dr. Bernankenstein’s monster alphabet soup experiments, and Henry Paulson’s TARP saved the world from conomic collapse. The fact is that they caused, or at least exacerbated the conomic collapse. Take the manufacturing orders data as an example of how that unfolded.

Fed, Stocks, and Factory Orders Chart- Click to enlarge

Fed, Stocks, and Factory Orders Chart- Click to enlarge

The manufacturing conomy was doing just fine until Bernanke stopped feeding the Primary Dealers and actually starved them out early in 2008. He did that by paying for his crazy alphabet soup programs with cash from the Fed’s System Open Market Account. In selling and redeeming Treasuries from the SOMA he radically shrank the cash levels in Primary Dealer accounts, rendering them  unable to maintain orderly markets. The dealers are, after all, not just market makers in Treasuries. They run all the markets, stocks, bonds, commodities, futures, options, everything. They are the big mahoffs of all the markets, and Ben is their banker and bagman.

Paulson's Bravura Panic PerformanceSo manufacturing  was doing just fine in 2007 and 2008 until stocks broke down. Stocks broke because of the combination of the Fed starving out the Primary Dealers in late 2007 and the first half of 2008, followed by Henry Paulson’s bravura panic performance before House and Senate committees, convincing Congress to fund the $700 billion TARP. Bernanke was best supporting actor at those hearings.

Faced with the testimony of the two dynamite strapped suicide extortionists, Congress caved, and the Treasury raised that money in a few short weeks in September and October 2008. That forced the dealers (and others) to absorb $100-200 billion a week of new Treasury supply at a time when the Fed had already cut their balls off. They were in no position to absorb anything.  The Fed had taken their manhood and all their cash.

In order to perform their function as Primary Dealers and absorb that part of the new Treasury supply not purchased by others, the dealers had no choice but to liquidate stocks. Because most economic units, both individual consumers and businesses, base their purchase decisions on the stock market, when it cratered that was their signal to consumers and business to be scared, be very scared, and hunker down in fear in their mental bunkers.

Manufacturing orders were still very strong in June 2008. They didn’t collapse until after Bernanke and Paulson triggered the panic.  In October 2008, they collapsed on the heels of  the Bernanke-Paulson Panic.

The Fed finally figured it out in February 2009, and it started a radical program of pumping hundreds of billions into the accounts of the Primary Dealers with QE1. The stock market and manufacturing orders rebounded almost immediately. When the Fed experimented with withholding funds in mid 2010, stocks plunged and manufacturing activity stalled. Double dip fears exploded and the Fed resumed pumping cash into dealer accounts.

Flash forward to today and the Fed is again on hold, although its MBS replacement purchase program helps to keep the dealers liquid. The effect of that program on dealer accounts is not reflected in the SOMA, but it does send cash to dealer accounts. The effects of the program on stock prices are clear.

The issue now is when will the Fed make its next catastrophic blunder. Just by tapping the brakes on the SOMA, it is creating conditions for another swoon. It is trying to hold back commodity prices while getting the benefit of conomic growth. The problem is that that growth is a second order bubble effect of the rising stock market. If they don’t feed the market, they won’t get their conomic growth. If they do feed the market, commodity prices will explode upward, and that will eventually put a stake in the heart of growth. For now, manufacturing activity is on a growth track. On the surface it appears that the Fed’s propaganda and manipulation is working, but in truth Bernanke has laid the groundwork for the Fed’s next blunder, panic move,  and massive dislocation.

 

Stay up to date with the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, along with regular updates of the US housing market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Don't miss another day. Get the research and analysis you need to understand these critical forces. Explore Wall Street Examiner's Professional Edition – try it risk free for 30 days!)

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. This article may be reposted with attribution and a prominent link to the source The Wall Street Examiner. 

 

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Wed, 04/04/2012 - 16:12 | 2317464 Fiat Money
Fiat Money's picture

" The minutes are fake. They are fabricated, false, phony, and sterilized garbage, designed for public consumption. To put it bluntly, they’re propaganda. They are what the Fed and Wall Street casino owners want you to think. They are a blatant attempt to manipulate the behavior of market participants through the use of clever turns of phrase. The Fed wants the market to go higher, but it doesn’t want commodities to go with it, so its story line is that the conomy is healthy enough to continue growing without more QE. That gives traders reason to continue buying stocks, and no reason to buy commodities, which everyone “knows” go up when the Fed prints, in spite of Bernanke’s denials. And besides, commodities are up for other reasons, not anything Ben did, according to Ben.

That’s what these “minutes” are about, self justification and market manipulation. We won’t know the real story until February 2018 when the Fed will release the transcripts of this year’s FOMC meetings. Why do they hold them back for at least 5 years? Because the Fed thinks that you can’t handle the truth. The problem is that you can and they just don’t want you to know what it is, because if you did, you’d be able to make informed investment decisions.  __ The decisions the Fed wants you to make are to buy stocks, bay and hold Treasuries, and sell commodities. __

They tailored the minutes accordingly, so that the headlines would elicit the desired response. They think that they’re Pavlov, and we’re the dogs.

...Manufacturing activity lags stock prices. By the time new factory orders go negative, stocks will have already gone through their first leg down. Consumers and businesses take their cues from the stock market, and the stock market takes its cues from the Fed.

Everybody thinks that Dr. Bernankenstein’s monster alphabet soup experiments, and Henry Paulson’s TARP saved the world from conomic collapse.  __The fact is that they caused, or at least exacerbated the conomic collapse.__ Take the manufacturing orders data as an example of how that unfolded."

   So far, quite excellent.  But: 

"The manufacturing conomy was doing just fine until Bernanke stopped feeding the Primary Dealers and actually starved them out early in 2008. He did that by paying for his crazy alphabet soup programs with cash from the Fed’s System Open Market Account. In selling and redeeming Treasuries from the SOMA he radically shrank the cash levels in Primary Dealer accounts, rendering them unable to maintain orderly markets. The dealers are, after all, not just market makers in Treasuries. They run all the markets, stocks, bonds, commodities, futures, options, everything. They are the big mahoffs of all the markets, and Ben is their banker and bagman.

So manufacturing was doing just fine in 2007 and 2008 until stocks broke down. Stocks broke because of the combination of the Fed starving out the Primary Dealers in late 2007 and the first half of 2008, followed by Henry Paulson’s bravura panic performance before House and Senate committees, convincing Congress to fund the $700 billion TARP. Bernanke was best supporting actor at those hearings."

Yes, it is quite amazing,  2008 is looking like "relatively sane and sober" given the 4 years of FIAT MONEY printing FrankenDEBTenstein that the Bernank has been printing ever since. 

However, this analysis fails to mention the REAL ESTATE BUBBLE,  and the COLLAPSE OF ALL BANKS  linked to it.    See Michael Hudson's  (not the K.U. professor) excellent book, "THE MONSTER" about how Lehman, Bear-Stearns, GS, ML  (et al)  encouraged the insanity in writting loans EVERYONE KNEW would NEVER be paid off, but they were "SECURITIZED" and SOLD OFF,  FIRST - giving banksters their commissions and bonuses up front, long before the loan failures.   

   (And, as Hudson writes, those really "in the loop" then wrote/purchased CDS credit DEFAULT SWAPS to play the down side of their own s*** loan-writing... then, of course,  GS  & other INTENTIONALLY WROTE s****  MBS  (mortgage backed securities),  INTENDING THEM TO FAIL, not long term, but near-term!   because now the CDS became their prime "profit maker" -

(see "AIG as the Vampire Squid's cash cow to be milked... and then slaughtered.)   

Wed, 04/04/2012 - 15:50 | 2317405 ebworthen
ebworthen's picture

Looks like Mittens Zombie is being launched into "Albatross 2012" flight.

The perfect distraction for those who think politics matters in our Kleptoligarchy.

Another four years of O'bummer; NDAA, elimination of paper and coin currency, and "Ctrl-P$" from Ben - and the indentured servitude of the U.S.S.A. populace will be cemented.

The FED path has been chosen and will continue until collapse.  Another military conflict will only increase FED control hand-in-hand with their TBTF bank masters and government cronies.

It will be epic theater, though a tragedy.

Wed, 04/04/2012 - 15:19 | 2317331 skepticCarl
skepticCarl's picture

Pretty well-written rant, Lee.  Thanks.

Wed, 04/04/2012 - 15:07 | 2317304 the grateful un...
the grateful unemployed's picture

i see the Fed differently. i see a bureaucracy, beholding to the political truth of the moment, including the moment which is about to pass, and the moment about to rise to prominence. these distinctions are necessary because we know since Reagan that political candidates indulge in foreign and economic policy ahead of the elections in ways that preemptively shape those events. for instance congressional GOP leaders would like to force a debt ceiling crisis before the election. some were sure Bush was crashing the economy in 08 to create a new crisis and suspend the elections, or at the very least to poison the ground for the favored Democratic replacement. who crashed the market preemptively in 2008 is still a big question, and Ben knows the answer. he may not know exactly why, (who was that fellow who played the film producer in White Hunter Black Heart, when the director called him a liar, he said "if I always told the truth I'd be a bar of soap by now.."

and perhaps Obama was forced to keep Ben's secret as part of the deal. Obama was allowed to take office the following Jan after the head conservative justice screwed up the oath of office. there are no small matters when it comes to power. the two Bush sisters made a statement to the Obama girls, quote "enjoy the time you are in the WH, FOUR years goes by quickly.." there's more snark in politics than a cable TV teen comedy.

like Mongo in Blazing Saddles, Bernanke "just pawn in game of life.." meanwhile we're not sure Obama has his attention. and of course his loyalty is for sale to the highest bidder, the next President. and when does a fed chief say, "screw you, I'm listening to what the next guy wants?" well Obama looks like a shoe in, so that should any backstabbing moves on hold. and Obama is just a bureaucrat too, which makes you wonder, who is watching the store?

 

Wed, 04/04/2012 - 13:22 | 2316945 knukles
knukles's picture

Strangely enough, the gist is the same as was my take late last night as I was nodding off....
WTF?
There is no decent economic self sustaining recovery under way (in the classic sense of a recovery which ain't happened yet... considering said "recovery" has to date been sub post war long term growth trend) and just as soon as the data begin to reweaken (think 2010, 2011, repeat wash rinse) then it'll be QE whateverthefuck and off we'll go to the races....
Again
This shit is getting tiring.
Which is what they want to have happen, the desired result, drain, beat and convince one into submission that all's well, move along, keep the ponzi and theft ahead full speed.  Sheeple. 
Work makes free.

Wed, 04/04/2012 - 13:04 | 2316873 Paracelsus
Paracelsus's picture

Nothing about Ron Paul in the news,strange....

Nothing about Fukushima in the news,strange....

Nothing about the Blitzkrieg about to hit Iran,strange....

Thank God the news isn't controlled and manipulated .

If (when) gas goes over $5 a gallon,try chaining a rottweiler to your petrol port on your SUV.

Wed, 04/04/2012 - 12:58 | 2316849 RobertBrusca
RobertBrusca's picture

This is the most fanciful account of effect of the Fed on the the market I have ever read.

Are you aware that economy was imploding, bankers were not lending and the Fed as not the cause of that?

The Fed programs were a reaction to all that.

The Fed does not control the funds in dealer accounts??!!

I get being contrary but not this.

Thu, 04/05/2012 - 09:31 | 2319115 fuu
fuu's picture

This is the most fanciful account of the effect of the Fed on the the market I have read since RobertBrusca's last post.

Wed, 04/04/2012 - 10:56 | 2316385 rrrr
rrrr's picture

Bernanke has more power over your wealth than you do.

Wed, 04/04/2012 - 14:53 | 2317270 the grateful un...
the grateful unemployed's picture

he controls the money, he does not control the wealth

Wed, 04/04/2012 - 12:09 | 2316638 strannick
strannick's picture

Humpty Dumpty has seized the throne

Wed, 04/04/2012 - 14:17 | 2317171 sodbuster
sodbuster's picture

The inmates are running the asylum.

Wed, 04/04/2012 - 10:48 | 2316347 Shizzmoney
Shizzmoney's picture

Now China squawking about the Fed not only printing cash....but that cash NOT being kept into the US economy (b/c obv those that want the cash to be printed, TBTF, are keeping it offshore). 

http://t.co/I6oEK8DJ

Funny the Chinese banking heads are starting to sound more like Andrew Jackson by the minute.

Wed, 04/04/2012 - 10:54 | 2316381 Chief KnocAHoma
Wed, 04/04/2012 - 09:04 | 2315935 Hungrypirana
Hungrypirana's picture

"Admittedly, I have not yet read the minutes (I will for this weekend’s Fed Report), but I have read the news headlines." 

Read the minutes and get back to me.

Wed, 04/04/2012 - 10:19 | 2316213 DeadFred
DeadFred's picture

When he does read the minutes the chance he needs to recant what he said is about 0.001%. If You believe those minutes are an accurate portrayal of the Fed's thoughts let me tell about this nice bridge I have for sale...

Wed, 04/04/2012 - 08:41 | 2315889 Sean7k
Sean7k's picture

"The issue now is when will the Fed make its next catastrophic blunder."

Another pundit that doesn't get it. This was a typical central banking move that transferred massive amounts of wealth to the bankers. The withdrawl of capital from the monetary system is their easiet ploy. They then proceed to create massive new debt to bail it out and "save us". They win going in and coming out.

Crashing markets kills the investors not in the circle. The nouveau riche are castrated. The people pick up the tab. 

There will never be sensible markets until the FED and ALL central banks are eliminated. 

Wed, 04/04/2012 - 15:43 | 2316734 ilene
ilene's picture

wonder about that...

Wed, 04/04/2012 - 08:33 | 2315873 Widowmaker
Widowmaker's picture

Bernanke, shut the fuck up and end the TBTF GSEs if life is so good.

Fuck the fed, and fuck the fraud racket they endorse and support against capitalism and the people!

Wed, 04/04/2012 - 08:42 | 2315871 Golden monkey
Golden monkey's picture

"The FED controls the S&P" You made my day Phil (or should I call you Lee?). LMFAO.

If I got a big printer, I wouldn't care the coming inflation.

Isn't gold better than a fancy printer sir?

(Lee is wearing very very clean glasses, isn't he?)

Let's put it straight : Both Nancy and the dumbshit did illegal insider trading. You know it, I know it, they know it.

Now, they're going to get what they deserve.

Wed, 04/04/2012 - 07:55 | 2315777 strateshooter
strateshooter's picture

while ever the market is moved significantly up and down by the FOMC minutes  we are in a fundamentally wek market.

when the market is no longer interested in the minutes (becasue Main st is strong) then we will return to a normal market again.

 

in the meantime..stay out !!

Wed, 04/04/2012 - 07:47 | 2315760 TradingJoe
TradingJoe's picture

See this why I only buy PHYZZZ!

Wed, 04/04/2012 - 07:35 | 2315730 Quinvarius
Quinvarius's picture

Just buy gold.  Everything the Fed does damages the economy and the currency.  Trust the math.

Wed, 04/04/2012 - 07:24 | 2315713 mailll
mailll's picture

When the market goes back down, the Fed will step in and say, "See, you need us after all".  Then they will go back to the same old game they have been playing.  In the meantime, business as usual.  Buying the stocks, bonds, commodities, etc. in stealth.

Wed, 04/04/2012 - 08:34 | 2315875 Widowmaker
Widowmaker's picture

Dont forget no one saw it coming and record fraud-bonuses.

Wed, 04/04/2012 - 08:18 | 2315831 RiverRoad
RiverRoad's picture

They need to pull the market back so they can bring it up for Obama's reelection.

Wed, 04/04/2012 - 07:22 | 2315706 Sutton
Sutton's picture

Like an old casino in Vegas, it's time to implode it.

 

Wed, 04/04/2012 - 07:17 | 2315698 rsnoble
rsnoble's picture

GS "QE3 coming in June". If that isn't a blatant attempt to draw in the muppets I don't know what is. 

So far futures are down, remains to be seen if they are tricked into believing the garbage and buy the dip which should come on about friday lol.  Spend that paycheck!

Wed, 04/04/2012 - 07:09 | 2315688 vmromk
vmromk's picture

Until Bernanke is behind bars, the con will not end.

 

BERNANKE BEHIND BARS.

Wed, 04/04/2012 - 12:09 | 2316640 Common_Cents22
Common_Cents22's picture

That was Gingrich's campaign mistake, he called for ousting Bernanke, that's when the opposition DC insider Romney carpet bombing began on gingrich.  

Dumb Newt, should have kept quiet until at least the general election if not wait until being President before acting on this stuff.

You cannot be honest and win the Presidency, even if you have good intentions.   You must whisper sweet nothings in everyones ear to get elected, then go about your agenda after you get elected.    Take a lesson from the fraud teleprompter reader in chief.

Wed, 04/04/2012 - 12:13 | 2316670 WhyDoesItHurtWh...
WhyDoesItHurtWhen iPee's picture

 

 

 

wrong, Newts problem is Newt.

There, fixed it for you.

Wed, 04/04/2012 - 11:56 | 2316599 YesWeKahn
YesWeKahn's picture

He is behind gold bars.

Wed, 04/04/2012 - 08:28 | 2315859 Vince Clortho
Vince Clortho's picture

This goes well beyond Bernanke, although TPTB may choose to sacrifice some chess pieces if they see fit.

Wed, 04/04/2012 - 09:26 | 2316034 rocker
rocker's picture

The "Banking Cartel of America" lives on. Very well I might say. They Own You if you have debt.

Wed, 04/04/2012 - 13:44 | 2317036 narapoiddyslexia
narapoiddyslexia's picture

BTFD. The article by Jim Rickards linked below strongly implies that if we simply stop spending money, the system will come crashing down. All of Bennie's plans hinge on our spending more money. By my own simplistic BOTE calculation, if 10% of us who make near the average income [not median income] cut our spending in half, we can Bring The Fucker Down, the acronym for which is, of course, BTFD.

http://www.financialsense.com/contributors/jim-rickards/problem-with-fed...

So, stop spending money, or SSM. Thus,

SSM. BTFD.

Why wait till November? We can crash the system from the relative quiet of our own homes.

Wed, 04/04/2012 - 14:11 | 2317147 Commander Cody
Commander Cody's picture

OK, I'm in.  Let's see what happens.

Wed, 04/04/2012 - 07:45 | 2315754 rsnoble
rsnoble's picture

Aren't there other punishments for treason besides "behind bars"? I don't think that's safe enough.

Wed, 04/04/2012 - 14:46 | 2317245 JohnG
JohnG's picture

Death is.

Do NOT follow this link or you will be banned from the site!