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Bernanke Takes a "Leak"
How about Bernanke's communication policy? The most important development for monetary policy in the last four years comes from a planted story in the Wall Street Journal on a Friday night. While I'm not surprised, I'm still disgusted. Press leaks to favorite journalists are no way to run this show.
The WSJ/Hilsenrath article confirms that the Fed is in the process of changing course on it's QE policy. America has reached "Peak QE", from now on it will be downhill for this policy. May will probably be the last month where $85B of securities are sucked out of the market.
The Fed's new plan is to taper off QE over the balance of the year. Unlike the endings of QE1 & 2 the sunset for QE3 will be a bit of a surprise for markets. The stated intention (according to Hilsenrath) is to change the amounts of POMO purchases on a month to month basis. Reading through the lines, I get the impression that Bernanke is going to lower the QE buys one month, but should the markets react negatively, he would increase the purchases the following month in an effort to "rebuild confidence".
I don't see this new policy working at all. It's the predictability of POMO that gives QE it's market clout. When the predictability is replaced with uncertainty, the markets will not like it. What I find particularly galling is that the Fed believes that it can micro manage US (and global) capital markets. The Fed thinks it can reduce QE one month, but if markets swoon as a result it will just turn around and ratchet up the buying the following month. By doing so, the Fed can manage the markets. I say, "Not a chance".
The market's reaction to the Fed's change in policy will be interesting to observe. I expect that there will be some weakness in equities next week. There should be some back-up in rates across the curve, and I think the dollar will move higher (especially the Yen). But I don't see a blowup in the markets. The "Bernanke Put" is still alive for the time being.
The timing of the change in policy is interesting. Bernanke is no dope, he knows what the bond market is facing over the next five months, he knows that the bond calendar is very favorable for a wind-down of QE.
In two weeks the debt limit will be reached. After that date there will be a big reduction of new Treasury debt issued. Under normal conditions, the Treasury would have about $200b of wiggle room on the debt limit before there is a crisis. But in the summer and fall of 2013 the Treasury will reap an additional $60b of revenue from (incredibly) Fannie and Freddie. Based on this, I think the debt limit will not be a problem until sometime in October. So the reality is that over the next six months or so, there will be a shortage of new issue Treasury paper. This fact gives Bernanke the opportunity to reduce QE without a a big sell off in the bond market.
Then there is ZIRP. This policy will continue for a long time yet. The fact that the near-end is pegged at zero means that the long-end can't get out of control. And finally, there is the inflation outlook - this looks to be tame for the next few months.
The ten-year may back-up to above 2% (currently 1.90%), but I don't see 2.5% coming at at anytime in the immediate future. Towards the end of the year, when the debt limit is increased (it will be) there will be a flood of new issue paper and QE will be a non factor. That's when the bond guys will be looking at supply and demand, and running for cover.
There is one element of this that gets a chuckle from me. Last week, two hedge fund guys, Stan Druckenmiller and Paul Singer made comments about the risks of QE and the distortions the policy creates. Paul Krugman jumped all over the hedge fund types who appose more QE in a series of blog posts. (Link and Link)
PK did his best to discredit Druckenmiller and Singer. PK said that those who appose Bernanke are just a bunch of stinkers who are short bonds and want to make money. PK's rant is pretty amusing, he even takes a shot at gold investors. The final line of one of the posts was interesting. PK was attempting to highlight the "greed factor" that he thought was the real reason behind money managers opposition to continuing QE. In his usual snarky way, PK attempted to convince his readers that Bernanke Bashers had to have evil intent, that or they were gay, or suffered child abuse. I thought this line was obnoxious:
So anyway, the phenomenon of Bernanke rage is interesting. It probably has something to do with sexual orientation or childhood trauma, right?
My message to Krugman:
The WSJ article today was planted by Bernanke, and approved by Yellen. Clearly, these two also see that QE is a policy that has high risk and marginal returns. The article confirms what Druckenmiller and Singer were saying. They were right - you were wrong. Do you have the integrity to admit that? Or are you going to suggest that Bernanke also has sexual orientation issues, or suffers from childhood abuse? If an elected official had used these words (even as a nasty joke) they would be called on the carpet. The words "Shit Heel" come to mind.
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Bruce...to your point of Bernanke cycling on and off QE as needed depending on how the market reacts, isn't this the quintessential central banker tactic to acquire assets on the cheap. Imagine having a money printing machine that allows you to drive and crash the market on demand by either starting/stopping the flows. To me, it feels like the final cavitation of the machine whereby the CB tries to suck up as much of the assets as possible before the machine seizes, then reset the system holding a majority of the cards and naturally dictate the terms since they are the majority holder. By luck or design this is how they are always able to win....
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." - Thomas Jefferson
I remember back in the days of LBJ (Lying Braying Jackass) when there was talk of finally mastering the fine tuning of our economy by adjusting interest rates and monetary expansion. Failure was soon admitted but like socialism and vampires the idea never really dies. The way power corrupts may be that those given power believe that they were also given great insight, intelligence, and prescience or that the possession of those qualities was finally recognized by the voters.
It's speaks to the resiliency of mankind, they can get lied to time after time...
And somehow make it back for one last truth...ahem lie.
This may be natural selection in action. Imagine a gene that allows one to ignore reality and see the local warlord/tribal chief/Kenyan president/Fed chairman as be a good guy instead of the shit heel that he is in reality. Such a gene may or may not make one's life happier but it would certainly decrease the chance that one's genes would be removed from the gene pool because of actions taken against the injustices of the rulers. Those of us without the gene and forced to see reality would be unable to see the hope and change others around us saw. I don't know that such a gene exists but if it did it would have a very high selective advantage and you could be certain it would quickly spread through the gene pool of the sheeple.
my post yesterday: forget the facts pay attention to the narrative. the economy is now running under its own power, QE can be scaled down. In this stage of an economic recovery equities outperform gold. the Fed wants to paint an environment which looks like a recovery, which will draw investors into their roach motel stock market.
the market is overbought, it can go higher still, (or hold on to its gains) if the leadership narrows. that means kicking the longs out of gold, and everything else, forcing them to buy Apple or whatever the one must to own stock might be. the may gloom has been defeated, and if the market gets a bit frothy the doves only need to pull back a little on QE. [there's a one two punch to this, first you break up with broad advance by announcing an exit strategy late friday, but wednesdays you buy the futures higher. they come back and the leadership narrows]
these guys are already two steps ahead, worrying about a lousy christmas shopping season, and how a market up 15% when the new normal is probably 2% is going to hold on to the gains. the plan is to make em sell everything they own and buy the one must have stock APPLE, or what have you.
The good news is that PMs will get hammered. I think they're overpriced right now. Benzelbub is about to correct that. Buying opportunities coming soon.
all my research follows the xau:djia ratio. when the number gets low the equity market is the most overbought (.004 in 2000) [i prefer these two indicators because the xau has history and it is less volatile. some analysts use the price of gold, and compare it to the DOW, but thats' apples to oranges.] right now the ratio is around .007. there is no simple answer to what the limits are, because its a ratio. to get to .004 we could go 20K DJIA and 80 XAU. and maybe we'll never see .004 again. and both markets can go either up or down without bothering the ratio at all, but i plan to buy gold stocks the lower this ratio gets, or the longer a bottom in this ration takes to form.
several things about the miners, first forget the price of gold as long as there is demand (and americans own very little gold compared to foreign investors) the miners will process gold, and they have pricing power. they can pass on the added cost of doing business. (as you see right now people want physical not paper) and twenty years of blowback against the fed monetary policy will make a bull market in gold mining. [the DJIA has almost no resource companies except oil, and big oil is really just a utility] in ten years i think you'll see barrick and newmont in the dow.
this is admittedly a long term plan but if i am right the fed and the stock market will jump into the gold mining stocks, [and before they really buy something big, they first trash it, thinking APPLE?]
once the usg is on your side of the trade, you can stop worrying. (well not really). right now they need narrow leadership, so the market is going to be schzoid because each time the market sells and returns the leadership narrows. which is the best way to run a market up on no volume.
you guys need to ditch the logic playbook. look at the end of QE2. Bill Gross was screaming to short treasuries...how did that work out???? Sound familiar? he said that yesterday.
QE2 ended. the market tanked. treasury yields FELL. Gold ROSE and within a month we had operation twist.
They will NEVER end QE. they will create the illusion, via all this bullshit, that they can end it. but we always end up right back in the same place. Your treasury spike is a pipe dream. Not gonna happen. Not till they are ready to unleash hell on earth.
That's why it's called QE4EVA
"They will NEVER end QE".
Correct.
But also correct is that QE will end.
That will be The end.
Value is subjective. You can think whatever you want. In contrast, I think PMs are a great buy at these prices.
$1200's but who's gunna sell?
In other words, A reactionary approach to central planning using tools which have never proven to actually work.
Brilliant.
Milton Friedman style monetarism appears to have no respect at this site (or at the Fed), but I'll give my opinion anyway.
M2 Growth has slowed down a lot over the last 5 months. Maybe things will pick up in the fall, but so far, M2 is schedule to grow about 4-5% this year.
If that continues, an economic slowdown and deflation are on tap - not inflation or a boom - even with continued QE. Using monetary aggregates as a proxy for future growth, I predict that Bernanke will not be slowing down QE any time soon. I would expect it to last (at current purchase rates) at least through Christmas.
Being alone in this opinion generally makes me feel like I must be wrong. But predictions based M2 growth have held up in the past - so who knows.
Well, I think the objection is that printing money doesn't create tangible wealth. That's not to say printing doesn't have effects, which may be both short term positive and long term negative at the same time. Other possibilities also exist. Thanks for expressing your thoughts - we don't want an echo chamber.
Stop it, the "flation" debate is playing into the sociopath/fascist hands as scarcity makes such things irrelevant. If your eCONomic/monetary is not tethered to anything fucking real (hello mark to fantasy accounting) you are simply bullshitting. Yet another cowardly junker, fuck you Krugman!
I didn't know I was aligned with Krugman. Its pretty rare I read his scribles, but when I do, I generally disagree...
It seems to me that the current monetary regime is tied to the productivity of the American economy - ie the production of things people desire in some way.
Granted, that "tying" is a matter of government statistics through the inflation rate. Government is power, power is corrupting. So maybe it won't work - but it still seems real in the sense that the goods and services I consume are real.
I guess I'm still a young naive whipper/snapper, but if my prediction comes true, Bernanke will still doing the same QE 6 months from now, and it will be result of real people doing real things - like getting laid off and having all of their assets fall in Dollar prices.
What does the US economy actually produce besides arms and armies?
What goods are we selling to the world?
unless you junked my comment, I wasn't speaking to you. That which cannot be sustained won't be. There are 7+ billion people on the planet all seeking a better quality of life. This number is still growing, the resources to provide that quality of life are not growing. At the end of the day, there is plenty of demand, trillions upon trillions of paper fucking promises and few physical assets, period. You could be a trillionaire, if the fucking commodity isn't available, you won't be able to purchase/consume it, period. Your predictions are correct with one small change; assets that are not essential to survival/productivity will indeed fall in fiat price. Assets/commodities that are essential to survival/productivity will increase in fiat price.
I thought LIESman was Bernankes favorite bitch. When did Hilsenrath sneak in?
Don't be down wind of the wind-down.
Very good analysis, Bruce. I agree that : a) the WSJ article was an after-hours plant job by the Fed, and b) it is a trial balloon.
On Tuesday I will BTFD !
I'm wondering if an increase in stock index volatility will reignite the PM rally.
Fuck you, Bernanke.
Fuck you, Krugman.
May you both rot in hell.
The ten-year may back-up to above 2% (currently 1.90%), but I don't see 2.5% coming at at anytime in the immediate future.
if Bernanke honestly exits from QE bet everything you have that interest will rise and rise fast. Bernanke can play monthly games with QE to control commodities and most of all GOLD!! However he cannot and will not ever stop QE completely as the interest rates rising will make servicing US debt unsustainable.
My bet is the US Treasury auctions, PDs and the FED will be sophistically synchronized whereby the FED can "suspend" QE on "light auction" months and pick it up again the next month. The PDs can step in on light months to cover and the FED sweeps it up the next month. Besides, is anyone really keeping tabs just what the FED is buying from the PD's anyway?
This fucker, the Bernank, is playing with fire.
He deserves to get burned .
The market, what is left of it, will soon do the job.
He's a witch! BURN HIM!
Bernanke may be tapering off but other central banks are just ramping up. The BOJ is buying nearly as much as Bernanke, and the Yen devaluation pressure is forcing S Korea, Taiwan, etc... to do the same. I expect the Yen pressure to become so great that Germany throws in the towel and allows the ECB to join the mad money printing party. At most, Bernanke's tapering might be an excuse for a minor market correction, nothing more.
It's great that they finally got the budget in order and there wont be anymore $85 billion a month in Fed money. Will that end the purchasing of mortgage backed securities from the banks too? It looks like the sequestor is working.
The sequester isn't even one months worth of monetization. go ahead let interest rates rise, more money will go towards interest(bankers) and less will be available for liabilities, but all of it will come from the taxpayer. Ignorant fucking sheep.
So, the Bernanke is going to let interest rates rise? Bruce, you further confirm your ignorance. Interest rates cannot rise, for if they do, America will not be able to fund it's current budget. Unless of course you really think 1) America will be allowed to hard default 2) a generation of liabilities will go unfunded and not mind. Consequences motherfucker. The Fed is the problem, one could say that they are victums of their own success. But I am being optimistic here.
Laws, I seriously doubt that funding the current budget in the US matters to any in power. Remember the " deficits don't matter' remark? What the US is good for to the PTB is the mainly the military that the citizenry get to support ( like it or not) with their money and blood. The Fed no doubt is one of the problems, as are mostly all bloodsucker bankers around the globe.
It absolutely matters - they need to keep the budget deficit cash flowing to their cronies. This country's politicians do not want to live within their means. I agree with Laws that the Fed will be forced to print more. I think they will ultimately have to buy every treasury bond, because I agree that a hard default isn't as desirable as a soft default via printing.
interest rates will drop, not increase if they actually have the balls to taper/end QE. that is because treasuries are still viewed as a safe haven by morons the world over. If QE tapers/ends the stock market will tank and it may drag down some financial firms. they will blame it on some external event. This event will give them cover to enact QE7 which will be 125 bil a month or something. Rates will rise as everyone front runs the fed and sells the treasuries to them.
As Laws says...same as it ever was.
Optimist. There aren't enough sheep left with money to sink into treasuries if the Fed exits. Bill gross, is on standby however.
"There aren't enough sheep left with money to sink into treasuries if the Fed exits"
I think it's a safe bet that our good fiat friends in Japan will be more than willing to buy, buy, buy.
Only if they are comfortable with a Chinese boycott. How did that work out last time?
Laws you really think it will be different this time? All I see is a temporary stopping of QE, The banks load up on treasuries, market tank, external event blamed (Europe...whatever....it's already been decided whose turn it is on the alter) QE7 announced, banks sell treasuries for a profit and buy stocks cheap.
Granted....if there is any truth to this behind the scenes gold grab, all bets are off.
At the end of the day, little changes for the elite and their birthright manipulation unless there is a war and people start dying. only once people start dying in earnest do these families have to start sweating. otherwise they make sure their children understand the game and know all the "right" people etc. It has been this way since the dawn of human societies. What humanity is dealing with now is on a completely different scale. as far as you or I go, we will have to be the facilitators of any real change in our lives. The gold story is interesting. Think about it this way, let's say we reprice gold tomorrow in order to better represent all the fiat that has been created in the world today. Gold shoots way the fuck up. Great, I say we pay off our national debt to china and everyone else then simply demand that all trade be settled in gold as it used to be. China has a lot of people to feed. At the heart of all this bullshit is trust, no one trusts anyone else and no one is telling the truth, period. Another aspect is compensation, people with skill sets of real value are not being compensated when compared to paper pushers. There is no "successful outcome" from this situation, period. More and more people just simply won't or can't play the bullshit game anymore. Accept it, live your life and build a trustworthy network of business and personal associates. Money is indeed an illusion, this is about power and control, period. The central banks can only control those who play their game, so either front-run their stupidity or stop playing altogether. Nothing else one can really do.
you know me and my optomism. u are dead on correct about Gross.
Interest rates have always fallen when QE was removed in the past. Why should this time be any different?
Even greenspam has said rates must rise ... they are painted into a corner ... so is Japan ... so is ECB
The derbanke jawboning is always prefixed with market conditions provisos, and we all saw (a couple of times already) what that means and what really happens.
This is the usual Fed-Reserve fluff-fellatio that occurs, in the lead up to derbanke going all soft-cock again and hitting the 'Print' button ... due to market conditions, i.e. no recovery.
This was the question in 2009, would the stimulus put the economy back into a stable orbit (recovery), or would it keep falling back into a sub-orbital trajectory (depression).
That liquidity he keeps pumping into the rocket, it's not real rocket fuel.
Dilution is not the solution!
"...not real rocket fuel" gets my vote for line/image o' the day
False, the fed is buying 70% of the new issuance, without that "bid" rates will have to rise considerably. What "market" have you been following? Price discovery has been dead for quite some time.
Answer one question you stupid fuck, if the Fed isn't buying the new issuance, who will? Are you going lend your government money at 8-10% below real inflation rates?
If they can print the money to buy Treasurys, why can't they print the money to pay the interest at any level?
exponential equations are a bitch, once you are printing money (incurring more interest) to cover interest you are done.
Not if the money you print is debt free. Fed could pay interest using debt free, interest free digits. Can never run out of digits. It's an idea anyway, not sure what effect it would have.
I mean... apart from destroying bonds and balance sheets.
LoP,
Generally good point. But maybe stupid Europeans and Asians will lend our government the money.
Asian people buy gold, physical assets and actually save their money. Asian governments do not agree on anything. please, way off. Eurpoeans, meh, the fight was beaten out of them a long time ago. They would like nothing more than to see America follow suit. Fuck em.
Wurd.
Not lookin' to get into a cussin' contest, but here is how I struggle with this subject.
If the Fed stops bidding, rates WILL go up ... unless there is an "event" that goes along with the policy to scare the crap out of everyone worldwide so that all the money comes home to the US.
CONGRESS is the problem right now. Those dipshits are eleccted and the Fed is private. When big players find themselves at odds, they fight, first in back rooms, then in public. If the Fed pulls the carpet out from under the congress, we may actually see changes in fiscal policy.
I could be mistaken, but I see the whole of our fiscal problems in five line items on the federable budget; Interest, Social Security, Medicare, Defense, and mandatory welfare.
Something is gonna give to keep the system up and running, just pick one or two! If they don't get a lid on it somehow, it is game over. We are just argueing about whether it is this year or three years from now.
Back in the day, Volker broke the bank run with 15% or so rates. We can't do that today. However, I do expect we will see something very drastic that will have the same results.
NOW you know why they got all that ammo ... I think the social spending spree is going to come to a halt soon.
Keeping my head down and my rice dry ...
Regards,
Cooter